Securities Snapshot July 26, 2022

Twitter Brings Suit Against Musk in Delaware Court of Chancery Seeking Specific Performance

In This Issue

Twitter Brings Suit Against Musk in Delaware Court of Chancery Seeking Specific Performance; SEC Ordered to Produce Early Drafts of Key Speech Regarding Cryptocurrencies in Ripple Suit; SEC Alleges Insider Trading in “Crypto Asset Securities”; Federal Reserve Vice Chair Calls for Stronger Regulation of Crypto Finance; Northern District of California Dismisses Securities Class Action Against Mobile Gaming Platform; Seventh Circuit Affirms Convictions of Deutsche Bank Metals Traders for Spoofed Trades

In This Issue
In This Issue
In This Issue

On July 12, 2022, Twitter, Inc. brought a civil action in the Delaware Court of Chancery against Elon Musk, the co-founder and CEO of Tesla Motors, Inc., for breach of contract in an attempt to force Musk to complete his purchase of the company. Twitter’s complaint seeks injunctive relief and specific performance of Musk’s $44 billion acquisition of the company, and was filed in conjunction with a motion to expedite the proceedings.

The high-profile litigation arises out of Musk’s bid to buy Twitter for $44 billion, which the company publicly announced on April 25, 2022 upon the parties entering into a definitive agreement. Earlier this month, Musk stated that he was calling off the deal because of concerns over how many accounts on Twitter are false or spam accounts. Twitter then brought suit seeking to force Musk to complete the purchase, and accused him of using the issue of automated bot accounts as a pretext to get out of a deal that was no longer financially beneficial to him.

Specific performance is an unusual remedy that courts rarely impose in a merger context. In this case, however, Twitter specifically bargained for a provision in the merger agreement — and ensured Musk was personally bound by that provision — that would allow the company to seek an order forcing the deal to close, so long as Musk’s financing for the acquisition stays in place. The court could enforce this bargained-for provision and grant specific performance, and require Musk to buy Twitter for the agreed-upon price.

On July 15, 2022, Musk opposed Twitter’s motion to expedite the proceedings, deeming it an “unjustifiable request” because per the merger agreement, its termination date would be automatically stayed in the event that either party files litigation. Musk argued that by virtue of Twitter filing its complaint, the termination date of the merger agreement had already been stayed, rendering moot the supposed need for expedited proceedings and a September 2022 trial date. Musk requested that a trial take place in February 2023.

On July 19, 2022, Chancellor Kathaleen McCormick granted Twitter’s motion, ultimately finding that a delay “threatens irreparable harm to the sellers and Twitter” and that “[t]he longer the delay, the greater the risk.” Chancellor McCormick has scheduled a five-day trial to begin this October.

SEC Ordered to Produce Early Drafts of Key Speech Regarding Cryptocurrencies in Ripple Suit

On July 12, 2022, U.S. Magistrate Judge Sarah Netburn of the U.S. District Court for the Southern District of New York ordered the Securities and Exchange Commission (“SEC”) to produce early drafts of a former SEC official’s speech regarding cryptocurrencies, as well as related communications, to Ripple Labs, Inc. in a securities fraud civil action the agency brought against Ripple, its CEO, and Chairman of its Board of Directors (collectively, “Ripple”).

The discovery win for Ripple is the most recent development in a protracted series of discovery battles between Ripple and the SEC — this time over materials that the SEC argued were shielded from production by the attorney-client privilege. The court granted Ripple’s motion to compel production of the documents, and denied the SEC’s motion for reconsideration on the basis of the deliberative process privilege, a form of executive privilege that protects from disclosure to third parties information showing the process by which a government agency reached a particular decision or crafted a certain policy. Then, after its motion for reconsideration was denied, the SEC wrote a letter to assert its alternative theory, which the agency had only raised as a secondary argument in its previous motion, that the documents at issue were attorney-client privileged. In this latest opinion, the court denied the Commission’s letter motion through which it mounted its renewed attempt to protect from disclosure communications related to and early drafts of a speech made by Bill Hinman (“Hinman”), former Director of the Division of Corporation Finance of the agency.

In the opinion, Magistrate Judge Netburn examined the principles that underpin the attorney-client privilege. The SEC contended that the documents at issue should be protected by the privilege because (1) Hinman sought legal advice in the course of his employment specifically regarding legal issues subject to the SEC’s regulatory purview (i.e., whether and how the agency would regulate cryptocurrency), (2) the documents were kept confidential, and (3) the predominant purpose of the documents was to obtain or provide legal advice. The court disagreed, noting that “the SEC has distanced itself from the Speech to avoid discovery and sought to preclude Hinman’s deposition on the grounds” that the speech reflected merely Hinman’s personal views and therefore was unrelated to the SEC’s position on cryptocurrency issues as discussed in the speech. Magistrate Judge Netburn took further exception with the SEC’s position, reasoning that “[t]he hypocrisy in arguing to the Court, on the one hand, that the Speech is not relevant to the market’s understanding of how or whether the SEC will regulate cryptocurrency, and on the other hand, that Hinman sought and obtained legal advice from SEC counsel in drafting his Speech, suggests that the SEC is adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law.”

Magistrate Judge Netburn rejected as a “tautology” the SEC’s argument that the speech was “purely legal” by virtue of it “address[ing] the securities laws’ application to digital assets” and so therefore any advice regarding the speech was necessarily legal advice. The opinion examined three categories of at-issue documents: (1) documents that analyzed the application of securities law to digital assets; (2) documents in which Hinman sought “comment” from other SEC attorneys, which included legal advice about the legal implications of what Hinman could include in the speech; and (3) documents with both non-legal and “limited” legal edits to final drafts of the speech.

In analyzing the “predominant purpose” of the documents at issue (the early drafts of the speech and the communications related to those drafts), Magistrate Judge Netburn ultimately concluded that the documents’ primary purpose was not to obtain legal advice, and therefore they were not privileged. Despite that the “SEC’s work is intrinsically related to the law and its enforcement,” the court reasoned, advice given by SEC lawyers does not always constitute legal advice. The opinion noted that at oral argument, the SEC suggested that the legal advice contained in the at-issue documents was intended to “educate” Hinman about the relevant legal standards and reasoned that communications primarily designed to inform Hinman about the law, rather than advise the agency in its decision-making, would not be privileged. Finally, the court noted that Hinman testified in his deposition that he circulated the draft of the speech to SEC staff to get their reactions (versus to seek legal advice), which further supported the conclusion that the at-issue documents are not privileged.

The parties will file summary judgment motions later this year in September; the motions are scheduled to be fully briefed by November 15, 2022.

SEC Alleges Insider Trading in “Crypto Asset Securities”

On July 21, 2022, the SEC charged three individuals with insider trading of digital assets via a scheme to trade ahead of multiple announcements regarding crypto assets being made available on a United States-based digital asset exchange at which one individual was a former product manager. In the complaint, the SEC identifies nine “crypto asset securities” (the first time the agency has used this term) that the agency alleges are securities. The SEC also alleges that the individuals orchestrated the scheme more broadly on at least 25 digital assets — 16 of which are not identified — gaining illicit profits of more than $1.1 million. The SEC worked with the U.S. Attorney’s Office for the Southern District of New York and the FBI. DOJ separately announced the indictment of the three individuals on charges of wire fraud and conspiracy to commit wire fraud arising out of the same conduct. Please see Goodwin’s recent client alert for more insights on the potential implications of this enforcement action.

Federal Reserve Vice Chair Calls for Stronger Regulation of Crypto Finance

In remarks at a Bank of England conference in early July, Federal Reserve Vice Chair Lael Brainard highlighted that the crypto financial system is susceptible to many of the same risks of traditional finance, and called for the establishment of regulatory guardrails to protect investors and facilitate responsible innovation in the crypto space.

Brainard noted that the Federal Reserve has been closely monitoring recent events in which crypto investors suffered significant losses, such as the collapse of stablecoin TerraUSD and the 75% drop in the price of Bitcoin over the past seven months. She posited that these events have undercut claims that crypto-assets are a hedge against the risks of inflation or traditional financial assets and “highlight the urgent need to ensure compliance with existing regulations and to fill any gaps where regulations or enforcement may need to be tailored.”

Brainard identified several regulatory protections that will be necessary to address issues it considers to be “serious vulnerabilities” in the crypto financial system and prevent exploitation of investors. First, basic protections for consumers and investors — such as protections against exploitation, undisclosed conflicts of interest, and market manipulation — should be established. Second, regulations must also address gaps in crypto-asset markets that have enabled some businesses in the crypto space to provide financial services similar to those of traditional finance but without being subject to comparable regulatory compliance requirements. Third, like traditional financial institutions, crypto platforms and exchanges must be required to comply with anti-money laundering rules to prevent the use of cryptocurrencies to facilitate theft, hacks, and ransom attacks. Finally, Brainard highlighted the importance of addressing regulatory gaps and adapting existing regulatory approaches to ensure that novel technologies, such as decentralized finance, are not able to evade regulation.

Brainard cautioned that while “crypto has not yet become sufficiently interconnected with the core financial system to pose broad systemic risk,” regulators will need to establish a “strong regulatory framework” to mitigate the risks of increasing bank involvement in crypto finance that “might further entrench a riskier and less compliant ecosystem.”

Northern District of California Dismisses Securities Class Action Against Mobile Gaming Platform

On July 5, 2022, Chief District Judge Richard Seeborg of the U.S. District Court for the Northern District of California dismissed an investor securities class action against mobile gaming platform Skillz Inc., its directors and officers, and underwriters of its secondary public offering. In addressing the plaintiffs’ allegations concerning a series of disclosures made by Skillz in public statements and secondary offering documents regarding the company’s financial condition and business prospects, the court held that the plaintiffs failed to allege that any of the challenged statements or omissions were materially false or misleading, failed to allege scienter with respect to their claims under the Exchange Act, and lacked statutory standing to raise their claims under the Securities Act.

Skillz is a mobile gaming technology company which provides a platform that allows users to play “contests” against each other. The contests can be either paid contests, in which users pay money for a chance to win cash prizes, or practice contests in which users play for free. Rather than develop its own games, Skillz offers a set of software tools and programs that third-party game developers can use to integrate Skillz’s platform into their own games. These games are distributed for free on mobile app stores, and Skillz generates revenue by collecting a percentage of the entry fees for paid contests.

Skillz went public through a December 2020 merger with SPAC Flying Eagle Acquisition Corp., and raised further funds in a March 2021 underwritten secondary public offering. After Skillz experienced fluctuations in its stock price after going public, Several Skillz stockholders began filing class action suits in May 2021. After these actions were consolidated, the plaintiffs filed an amended complaint in October 2021 primarily alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 and violations of Section 11 of the Securities Act on behalf of a putative class consisting of purchasers of Skillz common stock between Dec. 16, 2020, and May 4, 2021. The complaint alleged that public statements made by Skillz in late 2020 and early 2021, and in Skillz’s March 2021 secondary offering documentation were materially false and misleading. The defendants promptly moved to dismiss the complaint.

The plaintiffs alleged that five types of statements or omissions were materially false or misleading in violation of the Exchange Act: (1) failure to disclose declining game downloads; (2) statements about launching in India; (3) statements about userbase engagement and growth; (4) statements about synchronous gameplay; and (5) metrics about decline in revenue per paying user.

The court found that the complaint failed to adequately allege that any of these five alleged misstatements or omissions were false or misleading. First, the court found that Skillz’s statement that its previous most-downloaded titles were “continu[ing] to grow” was not false, because the games were still being downloaded, even if at a lower rate than they were previously. Second, the court found that Skillz’s statements that it was on track to launch in India in 2021 were forward-looking statements protected by the PSLRA’s safe harbor. Third, the court found that statements “touting a ‘stickier, more engaging, and continuously improving’ user experience and a ‘vibrant and growing ecosystem’” to be non-actionable puffery. Fourth, the court found that statements touting the ability of the Skillz platform to enable synchronous gameplay were not false, even though no synchronous games had yet been launched. Because Skillz does not develop games itself, a reasonable investor would view these statements as regarding the capability of the Skillz platform, and not as claiming that synchronous games were currently available. Finally, the court found that Skillz’s decision not to report certain financial submetrics that would have revealed a decline in revenue per paying user did not render its financial statements false or misleading. The court reasoned that the SEC did not require disclosure of these submetrics, and the submetrics would not have revealed a materially adverse trend in the company’s revenues if disclosed.

The court also separately found that these claims were subject to dismissal because, even if the statements were materially false or misleading, the plaintiffs had failed to adequately allege that the statements were made with scienter. The court noted that even the plaintiffs’ strongest alleged misstatements — those regarding the availability of synchronous gameplay — were more likely to be “poorly worded explanations” of Skillz’s products than statements made with fraudulent intent.

With respect to the Securities Act claims — which addressed statements made in Skillz’s secondary offering documentation — the court first found that the claims were subject to dismissal because the only named plaintiff bringing Securities Act claims lacked statutory standing, which is limited to shareholders that purchased shares traceable to the secondary offering. The court concluded that the plaintiffs failed to properly plead statutory standing because they alleged only that the named plaintiff purchased shares on the same day as the secondary offering and at the same offering price, rather than to have bought the shares directly in the secondary offering. The plaintiffs’ allegations were thus insufficient to plead standing given that the shares the plaintiff purchased could have originated prior to the offering.

The court further found that the complaint failed to allege that the two statements challenged only under the Securities Act were materially false or misleading. The plaintiffs first alleged that Skillz misclassified SPAC warrants as equity instead of liabilities in financial statements included in the March 2021 secondary offering documents. The court, however, found that the classification of SPAC warrants as equity was a good faith accounting decision and therefore a non-actionable opinion statement, even though the SEC released guidance in April 2021 stating that SPAC warrants should be classified as liabilities, which prompted Skillz to restate these financials. The court also rejected the plaintiffs’ claim that Skillz overstated its revenues by counting as revenue the spending of free promotional funds given to customers that can only be used on paid contests on the Skillz platform, finding that the financial statements actually explained that these funds were correctly accounted for as reductions in revenue or expenses.

The court dismissed the complaint in its entirety with leave to amend.

Seventh Circuit Affirms Convictions of Deutsche Bank Metals Traders for Spoofed Trades

On July 6, 2022, the U.S. Court of Appeals for the Seventh Circuit Court of Appeals affirmed the convictions of two former Deutsche Bank precious metals traders for wire fraud. The two traders were alleged to have engaged in a complex “spoofing” scheme while working as precious metals traders for Deutsche Bank from 2008 to 2013, in which they placed a total of $2.6 billion worth of “spoofing” orders for precious metals futures which they intended to cancel prior to execution. These cancelled orders influenced the market prices in such a way that the traders were able to obtain more favorable prices on other orders that the traders did not cancel.

In 2018, the traders were indicted on charges of conspiracy to commit wire fraud affecting a financial institution in violation of 18 U.S.C. § 1343, and the indictment was later amended in 2019 to include wire fraud counts. The traders moved to dismiss the indictment, arguing that the conduct alleged in the indictment did not constitute the charged wire fraud offense. The district court denied this motion and the pair were later convicted on most of the wire fraud counts at a jury trial in September 2020. The traders then appealed their convictions.

In their appeal, the traders contended that their conduct did not constitute the charged wire fraud offense for two reasons: first, that their cancelled orders did not constitute a misrepresentation under the wire fraud statute; and, second, even if the cancelled orders did constitute misrepresentations, the implied misrepresentation contained in these orders — that the traders were going to fill and not cancel their orders — could not be material. The court rejected both arguments in turn.

The court noted that in determining whether the traders’ conduct constituted wire fraud, the key issues were whether there was “a scheme to defraud by means of false representations or omissions,” and whether “such false representations or omissions [were] material.” The court found that both of these elements were satisfied. The court first found that placing order on the commodities market with the intent to cancel in order to obtain a more favorable price on other orders was a “scheme to defraud” because the traders intended to inflate or deflate the price of commodities by creating illusory supply and demand. The court then rejected the traders’ argument that there was no “false representation” because the cancelled orders were real orders that the traders had the right to legitimately cancel. Although agreeing that “by simply placing an order, a trader is not certifying it will never be cancelled,” the court found that the orders were “false” because they contained an implied misrepresentation to the public that the traders intended to make the trades, when in fact they had a private intent to cancel the trades.

Finally, the court summarily rejected the traders’ argument that any misrepresentations were not material. The court found that there was “no question the traders’ implied misrepresentations were material,” citing to the testimony of a cooperating co-conspirator who noted that the spoofing “would help Deutsche Bank” while “hurting other market participants.”


Lawyers in Goodwin’s Securities and Shareholder Litigation and White Collar Defense practices have extensive experience before U.S. federal and state courts, legislative bodies and regulatory and enforcement agencies. We continually monitor notable developments in these venues to prepare the Securities Snapshot — a bi-weekly compilation of securities litigation news delivered to subscribers via email. This publication summarizes news from the civil and criminal securities law arenas in a succinct, digestible format. Topics covered include litigation and enforcement matters, legislation, rulemaking, and interpretive guidance from regulatory agencies.

Editorial Board
Jennifer Burns Luz
Meghan K. Spillane

Contributing Authors
Zoe Bellars
Jordan Benson
Viktors Dindzans