2019 Year In Review: Securities Litigation And Enforcement

There was abundant federal securities litigation activity in 2019. Plaintiffs not only continued to file securities lawsuits at record numbers, but repeatedly secured victories in cases on significant issues of law. The tone was set at the top with the Supreme Court's landmark decision in Lorenzo v. SEC.1 There, the Supreme Court clarified, in contrast to its 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders,2 that a person who does not "make" a fraudulent misstatement can nonetheless be held primarily liable for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder for his or her role in disseminating the misstatement. In so ruling, the Supreme Court effectively eviscerated a popular defense in fraud lawsuits since Janus and reaffirmed that the antifraud provisions of the securities laws cover a "wide range of conduct."3

In multiple other cases, federal courts ruled in favor of plaintiffs and established expanded theories of liability for defendants. For example, in North Sound Capital LLC v. Merck & Co.,4 the Third Circuit held that plaintiffs who opt out of a securities class action are not precluded under the Securities Litigation Uniform Standards Act of 1998 (SLUSA) from bringing state law fraud claims in follow-on individual actions, even if federal claims are time-barred. This opens a potentially significant new avenue for plaintiffs to evade heightened federal pleading standards and limitations periods. The Tenth Circuit, in SEC v. Scoville,5 clarified that the SEC and DOJ may avail themselves of the expansive "conduct and effects" test under the Dodd-Frank Act to reach securities fraud defendants whose U.S.-based conduct affects foreign defendants or who commit frauds abroad that affect U.S. investors. Courts also adopted expansive views of a "security" subject to federal antifraud rules and registration requirements, applying the concept to an internet traffic exchange service (Scoville) and a new digital "coin" (Balestra v. ATBCOIN LLC).6

Plaintiffs were particularly successful in achieving certification of classes asserting securities fraud claims. In case after case, courts certified classes where plaintiffs made a threshold showing that stock traded in an efficient market, or the case primarily involved omissions of material fact. In such cases, courts broadly permitted plaintiffs to avail themselves of a presumption of class-wide "reliance" on the fraud (i.e., the Basic and Affiliated Ute presumptions, respectively), and routinely rejected defendants' efforts to "rebut" the presumption through competing expert opinions and statistical analyses purporting to sever the link between the fraud and plaintiffs' losses. In addition, courts virtually shut the door on defendants' efforts under the Supreme Court's 2013 decision in Comcast Corp. v. Behrend7 to defeat class certification by challenging plaintiffs' ability to show class-wide damages.

But 2019 was not a clean sweep for plaintiffs. Although courts routinely quashed efforts to defeat claims on procedural or technical grounds, they balanced this pro-plaintiff stance by closely scrutinizing evidence of fraud—and dismissing claims outright—in several significant cases. Relying on the common law concept of "puffery," the Second Circuit (Gross v. GFI Group, Inc.8 and Singh v. Cigna Corp.9) and the Eleventh Circuit (Carvelli v. Ocwen Financial Corp.10) rejected securities fraud claims on the basis that the alleged misstatements (for example, a commitment to compliance in a company's code of ethics) were too "general" to be actionable. And the Southern District of New York (Tung v. Bristol-Myers Squibb Co.11) and First Circuit (Metzler Asset Management GmbH v. Kingsley12) likewise demanded detailed factual allegations of defendants' "scienter" (intent to deceive), and dismissed multiple suits for failure to establish a "strong inference" of scienter. Collectively, these courts sent a clear message that the paramount question in a federal securities fraud suit is whether fraudulent conduct occurred; if not, cases will be dismissed.

From an enforcement perspective, like last year, the SEC continued to focus on protecting retail investors and cyber issues. Overall, the SEC brought 862 total actions in FY 2019, 526 of which were "standalone" actions brought in federal court or as administrative proceedings.13 While this was a slight increase over FY 2018, a significant number of the standalone actions (95) were brought as part of the Share Class Disclosure Initiative (discussed below), which involved self-reported violations and an accelerated resolution process. Consistent with the agency's focus on retail investors, there was a significant increase in enforcement actions brought against investment advisers and investment companies (191 total actions accounting for 36% of all actions, compared to 108 and 22% in FY 18) and an increase in enforcement actions related to issuer disclosure and accounting issues (up to 92 from 79 in FY 18).14 This past year was also a very active year for Foreign Corrupt Practices Act (FCPA) enforcement for the SEC and the DOJ. Conversely, there were large drops in the number of SEC enforcement cases against broker-dealers (down to 38 from 63 in FY 18) and insider trading cases (down to 30 from 61 in FY 18).15

We discuss these developments—as well as our predictions for 2020—in more detail below.

1. Traits and Trends

   The volume of federal securities fraud class action filings in 2019 remained at near-record highs. During 2019, plaintiffs filed 428 federal securities fraud class actions, surpassing 2017's record high of 413. This was nearly double the average number of filings over the past two decades. There were more than 1,200 filings from 2017 to 2019—a number that accounts for nearly 25% of all of the filings in the more than 20 years since 1997.16

   Contributing to these high levels of filings were plaintiffs' lawyers targeting new industries. If 2017 and 2018 were the years of cryptocurrency filings—which saw the emergence of suits targeting both established currencies and initial coin offerings—2019 may have been the year of cannabis litigation. A notable number of putative class action suits were filed this year, nearly all of which targeted Canadian-based companies that listed their shares on U.S.-based exchanges following Canada's 2018 legalization of cannabis-related products.17 These suits mostly relied on time-tested strategies—claiming, after the announcement of a downturn in performance or unexpected regulatory difficulties, that the company's prior, rosier disclosures were false or misleading. They demonstrated, however, the extent to which an emerging industry can be fertile ground for putative class actions.

   Also responsible for some growth was an increase in parallel filings (whether in both federal and state court or multiple state courts) spurred by the Supreme Court's 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund.18 Cyan held that securities class actions under the Securities Act of 1933 (Securities Act) can be brought in state court and are not removable to federal court, where the Private Securities Litigation Reform Act would provide for more robust procedures for consolidating parallel litigation. From 2010 to 2017, there was an average of fewer than 6 parallel actions filed per year, but in 2019, there were 22. Together, state and parallel filings constituted more than 75% of all 1933 Act filings in 2019.19

   Despite the high overall volume of securities filings, M&A filings were somewhat soft in 2019 compared to recent years, with filings falling from 182 in the prior year to 160.20 Included in this category were a broad range of suits challenging proposed transactions, including claims targeting a board's sales process, conflicts of interest among the directors, and the adequacy of public disclosures.21 It was widely believed that the increase in such filings in 2017 and 2018 stemmed from the Delaware Court of Chancery's 2016 decision in In re Trulia, Inc. Stockholder Litigation,22 which limited Delaware's receptiveness to non-monetary, disclosure-only settlements of actions challenging M&A transactions. From 2017 to 2019—the three years immediately following Trulia—the number of securities filings challenging M&A transactions brought in federal court were more than five times higher than the average from 2009 to 2016.23 Much of that growth was in the Third Circuit—home to Delaware—which saw its M&A filings skyrocket from an average of fewer than 10 between 2010 and 2016 to 127 in 2019. The Third Circuit in 2019 dwarfed the other circuits in M&A filings: compared to its127 filings, all other circuits combined saw only 33, and the next largest circuit was the Second Circuit, with 9.24

   The decline seen in 2019 in M&A filings may, therefore, reflect the federal courts' steady adoption of Trulia's approach in federal jurisprudence. The case of House v. Akorn, Inc.25 is illustrative of this trend. In that case, the Northern District of Illinois rejected a proposed settlement in a putative class action challenging an impeding merger. After the action was filed, the target company amended its proxy statement to moot the plaintiffs' disclosure-based claims. The plaintiffs then voluntarily dismissed their claims in exchange for attorney's fees based on the supposed benefit those disclosures conferred on the shareholders. Echoing Trulia's skepticism of the value of such supplemental disclosures, the court deemed the company's additional disclosures in this case to be "worthless to the shareholders" and exercised the court's "inherent authority" to reject the mootness fee settlement and order plaintiffs' counsel to return the fee award to the company.26 The decision is currently on appeal to the Seventh Circuit.27

   On the regulatory front, the SEC enforcement program continues to...