The Fall 2021 issue of the Shareholder Advocate includes:

• BlackRock’s Move to Let Big Clients Vote their Proxies Offers Boost for Future of Capital Stewardship – Richard E. Lorant
• Biden Accentuates Diversity in Selecting Nominees to Federal Bench – Molly J. Bowen
• SEC Chair Gensler’s Ambitious Agenda Has Wall Street ‘Trembling’ – Richard E. Lorant
• Investors’ Lawsuit Against Wells Fargo Survives Motion to Dismiss Largely Intact – Molly J. Bowen
• The Financial Impact of COVID-19 on Pension Plans – Jay Chaudhuri

Download the Summer 2021 edition of the Shareholder Advocate.

In testimony to Congress and other public comments, Securities and Exchange Commission Chair Gary Gensler has outlined a broad, ambitious regulatory agenda that inspired breathless tabloid-like headlines in normally staid financial broadsheets.

“SEC Chief to Wall Street: The Everything Crackdown Is Coming,” warned an October 8 Bloomberg article that included a list of “Gensler’s Terrible 10: SEC Rules That Make Wall Street Tremble.” An October 5 Wall Street Journal article bore the ominous title, “Gensler Aims to Save Investors Money by Squeezing Wall Street.” From the Financial Times, “Wall Street Beware: The SEC’s Gensler carries a big stick.”

“Crackdown” or not, dozens of new rules are in the works. According to Bloomberg, Chair Gensler has assigned approximately 200 people divided into 50 teams to research and draft the proposed rules. Each team includes lawyers and economists to weigh the proposals’ costs and benefits in compliance with federal requirements. In June, the SEC released its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which contained 49 potential rules: four at the pre-rule stage; 36 at the proposed rule stage; and nine at the final rule stage.

To those who accuse him of overreach, Chair Gensler says he is staying within the “narrow set of chalk lines” that defines the SEC’s mandate “to promote investor protection and facilitate capital formation and that which is in the middle.”[1]

Here is an abbreviated list of some of the most important and controversial new rules under consideration:

• Say-on-Pay Disclosures. On September 29, the Commission proposed enhancing rules that require mutual funds and exchange-traded funds to disclose information about their proxy votes to include how they voted on executive compensation (known as “say-on-pay”). The rule was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
• Clawbacks. On October 14, the SEC reopened comment on another Dodd-Frank Act rule about clawbacks of erroneously awarded incentive-based compensation. Under the new rule, executives would have to “give back compensation paid in the three years leading up to the restatement that was based on … misstated financials – regardless of whether the misstatement was due to fraud, errors, or any other factor,” according to a statement by Chair Gensler. Previously, the lookback period was one year and clawbacks were limited to misconduct.
• Gamification. The SEC has asked for public comment on “digital engagement practices” used by broker-dealers and investment advisors—think Robinhood—to spur retail investor trading. Chair Gensler has said the use of these techniques, known as “gamification,” to get clients to trade stocks more frequently raises potential conflicts between advisory firms and investors. A proposed rule.
• Blank-Check Companies. The SEC’s Division of Corporation Finance is weighing whether to recommend that the Commission require increased disclosures about special purpose acquisition companies, or SPACs. Called blank-check companies because they raise capital via IPOs without specifying which businesses they will buy, SPACs have come under criticism for a conflict-laden structure whereby founders and initial investors profit handsomely even if the combined business—and its shareholders—don’t.
• Modernizing Market Structure. The Commission is exploring whether to modernize rules relating to equity market structure, including “payment for order flow, best execution (amendments to Rule 605), market concentration, and certain other practices.” All these practices have been criticized as creating conflicts that could potentially hurt investors even though they may lower trading costs.
• Climate Risk Disclosures. SEC staff is looking at the possibility of recommending “rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.” Chair Gensler initially said he expected staff to write a proposed rule by the end of the year but later indicated that it would likely take longer. The rule seeks to “make companies’ climate-related disclosures more consistent, comparable and useful to investors’ decision-making,” The Wall Street Journal has said.
• 10b5 Executive Stock Trading Plans. Chair Gensler has asked staff to recommend changes to address abuses of these plans, which insulate public company executives from accusations of inside trading by setting up purchases and sales of company stock on a regular schedule. Changes may require a waiting period between the time the plan is established and when trading occurs, limiting the number of plans executives can have, taking away their ability to cancel trades whenever they’d like, and requiring companies to disclose more about the plans.
• Human Capital Disclosures. A year after former Chair Jay Clayton’s SEC adopted rules in this area, Chair Gensler has asked staff to consider requiring public companies to disclose more data about their workforces, potentially including information on workforce diversity, employee turnover, and the company’s use of part-time and contract workers.
• Cryptocurrency. Chair Gensler told the House Committee on Financial Services October 5 that banning cryptocurrency would be “up to Congress,” but said both crypto exchanges and decentralized platforms should be registered and with the SEC. He also said that stablecoins pose a systemic risk to the economy and that most cryptocurrencies fall under the definition of a security.
• Cybersecurity Risk Governance. Chair Gensler has asked staff to develop proposals for both public companies and investment funds to enhance required disclosures about the risk of cyberattacks, their “cyber hygiene,” and the rules about reporting incidents after they have occurred.

A decision by the world’s largest asset manager that will allow big clients to vote in corporate elections offers a glimpse of a future in which public and Taft-Hartley pension funds could retain their vital role as capital stewards even as their direct ownership of public company stock declines.

Like other money managers, BlackRock currently casts proxy votes on behalf of investors in its funds—a practice has made it difficult for shareholders to successfully challenge policies at annual meetings, since money managers traditionally vote with corporate leadership, if at all. But starting next year, BlackRock said it will give some institutional clients in the U.S. and U.K. the option to vote for themselves or select from a menu of third-party voting policies.

BlackRock told affected clients about the change in an October 7 letter. News reports citing the letter quoted BlackRock as saying the new capability “responds to a growing interest in investment stewardship from our clients” and reflects technological advances. “These options are designed to enable you to have a greater say in proxy voting, if that is important to you,” BlackRock told the clients.

BlackRock said the expanded options would apply to about 40% of the $4.8 trillion assets held in its equity index strategies and another $750 billion in pooled fund assets, or a total of 28% of BlackRock’s $9.5 trillion in assets under management (AUM).

The change in policy comes at a time when retail and institutional investors are buying less company stock directly and more through equity funds, especially passive index vehicles that can give them a low-cost exposure to any market or sector.¹ The shift in underlying stock ownership from asset owners like pension funds to asset managers like BlackRock and from active to passive equity strategies has prompted concerns about capital stewardship because, with notable exceptions, money managers tend to side with management in proxy fights.²

“This is a very big deal on multiple fronts,” said Laura H. Posner, a Cohen Milstein Partner who formerly served as Bureau Chief of the New Jersey Bureau of Securities. “Public and Taft-Hartley pension funds provide an important bulwark against corporate malfeasance because they are willing to selectively engage with the companies they own and challenge them through the proxy process, if necessary. Let’s hope this type of mechanism is adopted as a standard by all asset managers.”

The new policy appears to recognize that some large investors prefer to retain control of their proxy votes despite money managers’ vocal support of incorporating environmental, social, and governance (ESG) considerations into their investment decisions which resonates with some—not all—investors.

But even if asset managers become less reluctant to oppose management in proxy elections on ESG or other issues however, there is little evidence they will use the other tool at their disposal to influence governance of the companies whose stock they own: securities litigation. A 2019 University of Chicago Law Review article found that, over a 10-year sample period, the 10 largest US mutual fund families filed only 10 securities lawsuits over five instances of corporate misconduct.³

“The dismal litigation record that we uncover raises serious questions of whether mutual funds are acting as faithful governance intermediaries for their investors,” wrote the study’s authors. “If mutual funds could create value for investors by engaging in shareholder litigation yet are failing to do so, then they would seem to be failing in their fiduciary obligations to investors.”

With most of money managers’ income coming from fees from corporate clients, it is unlikely they will ever overcome their aversion to initiating shareholder litigation against those same companies.⁴ But BlackRock’s new policy on proxy voting may offer a blueprint for an eventual solution. The same technological advances that enable asset managers to determine their clients’ underlying beneficial ownership of public companies could someday be marshaled to assign litigation rights to those same clients. The result would ensure that sophisticated institutional investors, like public and Taft-Hartley pension funds, continued to hold companies accountable through the private right of action.

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1. A December 2020 report by PricewaterhouseCoopers projected global AUM, which stood at $85 trillion in 2016, to grow from $110 trillion in 2020 to more than $147 trillion by 2025; passive strategies, which accounted for 17% of global AUM in 2016, will make up a quarter of AUM by 2025. “Asset and Wealth Management Revolution: The Power to Shape the Future,” PricewaterhouseCoopers, 2020, available at https://www.pwc.com/gx/en/industries/financial-services/asset-management….

2. For example, a 2017 academic study found that the three dominant index fund players—BlackRock, Vanguard, and State Street—voted regularly with management. According to the same study, the “big three” collectively constituted the largest shareholders in 40% of all companies listed on U.S. stock exchanges and a mind-boggling 88% of S&P 500 corporations—a troubling concentration of ownership and power. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…. There have been exceptions, however. This year, for example, Vanguard, BlackRock, and State Street sided with the major proxy advisory firms and some large public pension funds to support at least two candidates for Exxon Mobil’s board of directors proposed by an activist shareholder dissatisfied with the company’s approach to ESG disclosures and risk management. In the end, three of the candidates were elected over management’s nominees. Big money managers also joined with pension funds in 2020 to reject a proposal that would have imposed forced arbitration on any investors seeking to sue Intuit for alleged securities fraud.

3. “A Mission Statement for Mutual Funds in Shareholder Litigation” by Sean J. Griffith, Professor at the Fordham University School of Law, and Dorothy S. Lund, Assistant Professor of Law at the University of Southern California, The University of Chicago Law Review, 87:1149 2020. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…

4. To cite just one example, Griffith and Lund said that in 2017 corporate pension plans accounted for about two-thirds of BlackRock’s AUM and generate fees that totaled 83% of the company’s revenue. The authors say this “corporate client conflict” give money managers “incentives to cater to the interests of their corporate clients [that] may lead them astray from acting as faithful stewards of their investors’ capital, …” Ibid, p.1212.

By Jay Chaudhuri

According to Johns Hopkins University School of Medicine, the COVID-19 pandemic has now resulted in more than 700,000 deaths in the United States. Aside from the unprecedented number of deaths, the pandemic has also shocked our economy. In the spring of 2020, the stock market dropped dramatically and the unemployment rate climbed to almost 15 percent, the highest level since the Great Depression, as businesses shut down. The twin public health and economic crisis logically raised red flags about the strength of the pillars of our retirement security system, including the Social Security trust funds and defined benefit pension plans.

As an example, last month, the annual Social Security Trustees Report revealed the funds would be unable to pay full benefits in 2034, compared to last year’s estimate of 2035. The estimate reflects the push and pull of the pandemic. On the one hand, the short recession following the first wave of COVID-19 reduced revenue from payroll taxes and contributions to the funds. On the other, the virus’s disproportionate impact on older people resulted in many premature deaths in that age group, cutting future benefit payouts.

Has COVID-19 similarly affected public pension plans? To answer this question, it’s important to examine how the pandemic impacted three areas—investment returns, state budgets, and demographics.

First, public pension plans rely on investment returns for most of their revenue. A recent National Conference on Public Employee Retirement Systems (NCPERS) study found that public pension plans receive 71 percent of their revenue from investment earnings. Even though the stock market tumbled by 34 percent in March 2020, the market subsequently bottomed out late that month before rallying 68 percent for the rest of the year, breaking all records. Not surprisingly, pension plans experienced historical gains. On average, plans saw investment returns of more than 25 percent for fiscal year 2021, the highest annual return in more than 30 years.

Second, public pension plans rely on annual contributions from state budgets. According to the same NCPERS study, public pension plans obtain 22 percent of their revenue from employer contributions carved from state budgets. In this instance, where tax revenues drop, state budgets may fall short on the annual required contribution. Last spring, many states saw their tax revenue decline sharply due to lockdown orders and businesses closures. Specifically, tax revenue for state budgets from April through June 2020 fell by 25 percent compared to the same quarter of 2019. Yet, the doom and gloom about state budgets did not play out. In the end, states collectively received almost the same revenue in 2020 compared to 2019. Two studies by the Pew Charitable Trusts and the Federal Reserve Bank of St. Louis concluded that state revenues for 2020 turned out better than anticipated. More importantly, a Pew study found a significant increase in contributions to pension plans from employers and employees. In fact, “Pew found that for the first time this century, states are expected to have collectively met the minimum pension contribution standard.”

Finally, pension plans use demographic assumptions to determine fiscal impact. In this instance, actuaries ask whether pandemic-related deaths and early retirement of public employees have a financial impact on pension plans. According to the American Academy of Actuaries (AAA), the demographic impacts of both COVID-19 deaths and early retirement remain uncertain. As AAA states, “Even with recent progress developing treatment and vaccines, the long-term impact on mortality is unknown.” With regard to increased retirement, AAA writes that “[i]t isn’t yet clear how strong these trends are, how long they may last, and whether they will have a positive or negative effect on public pension plans.”

In short, COVID-19’s impact on investment returns and state budgets did not result in the severe harm on pension plans some observers predicted. To the contrary, pension plans experienced a once-in-a-generation historic returns and increased contributions, part of a continued trend over the last decade. The last factor of demographic assumption appears to have had very little effect on pension finances in the short-term; however, the long-term impact remains uncertain.

The SEC is doubling down on potential fraud involving special purpose acquisition company (SPAC) transactions. Cohen Milstein attorneys look at the role inside knowledge of potential fraud can play in protecting investors and say the time is ripe for whistleblowers to come forward.

Market enthusiasm for special purpose acquisition company (SPAC) investments has reached unprecedented heights during the last two years, stoking the concern of the Securities and Exchange Commission as it seeks to protect investors in these transactions.

With stepped up SEC enforcement, the timing is ripe for whistleblowers with knowledge of securities law violations to consider providing the SEC with information about potential SPAC securities law violations. Whistleblower’s can be eligible to receive substantial financial awards for providing useful information to the SEC, but would be well-advised to speak in advance with experienced whistleblower counsel.

The Structure, Purpose of SPAC Transactions

SPACs are publicly-traded shell companies that raise money from investors through an initial public offering with the goal of using that capital to merge with or acquire a private operating company, in a transaction known as a “de-SPAC,” that will result in that target company becoming publicly-traded.

SPACs have bfeen around for years but have only recently come into vogue with retail investors. In 2020, SPACs raised over $80 billion, exceeding the total amount they raised in the prior decade, and raised nearly $100 billion more in just the first three months of 2021.

Whistleblowers Can Profit From Protecting SPAC Investors

Since the creation of its whistleblower program in the wake of the financial crisis of 2007-2008, the SEC has consistently extolled the critical role whistleblowers play in alerting the SEC to fraud that might otherwise go undetected. To provide incentives for individuals to come forward with evidence of securities fraud, the SEC will make financial awards to eligible whistleblowers.

By any measure, the SEC’s whistleblower program has been a success. In the last 10 years, it has awarded a total of more than $1 billion dollars to over 200 individual whistleblowers, with half of that total issued in its last fiscal year.

The agency issued payouts to the highest number of tipsters in fiscal year 2021, and the number of whistleblower tips it receives continues to grow, a strong signal that its pace of issuing whistleblower awards will only increase. In October 2020, the SEC distributed its biggest payout to date, which totaled over $114 million.

Who Are Likely SPAC Whistleblowers?

Likely successful whistleblowers on this issue include individuals with critical information regarding violations of the securities laws such as SPAC or target company insiders, consultants or bankers to SPAC transactions, SPAC investors, and even market observers who use their expertise to identify fraudulent conduct.

The SEC’s investigation and enforcement activity can often take a number of years, and the commission will take all reasonable steps to protect the identity of whistleblowers. Even after an award is issued, and for an added layer of confidentiality, whistleblowers who are represented by counsel can submit their information to the SEC anonymously.

Whistleblowers whose information leads to a monetary recovery of over $1 million and who comply with all eligibility and procedural rules of the SEC’s Whistleblower Program will be eligible for a financial award in the range of 10% to 30% of the SEC’s recovery, depending on factors that include the amount and nature of assistance provided by the whistleblower and her or his counsel.

The Time Is Right

The timing is perfect for whistleblowers with knowledge of securities law violations because the SEC has closely monitored the recent explosion of interest in SPACs, has issued guidance for investors, and brought enforcement actions where appropriate.

Its primary concern, highlighted in investor bulletins and other public statements, is that SPAC investors may not be given full and accurate disclosure of SPAC transactions, particularly as to the terms of those transactions and the financial or operational details of target companies.

Animating the SEC’s concern is the divergence of interests between SPAC investors, who profit only when a deal goes well, and SPAC sponsors, who can profit from fees and other incentives even when a deal doesn’t.

The SEC’s public comments this spring were merely a preview of enforcement activity to come. In July, the SEC brought an action against a SPAC called Stable Road Acquisition Corp., its sponsor, its CEO, the target company Momentus Inc., and the target company’s former CEO. The SEC alleged violations of the securities laws from false or misleading statements about the state of the target company’s outer space propulsion technology.

Only a few weeks later, the SEC brought an action alleging that the former CEO of an automobile company that went public in a de-SPAC transaction, Nikola Corp., made false and misleading statements about his company’s technology on social media. Nikola stands out as a cautionary tale for SPAC investors, as the former CEO has since been indicted for fraud and the company’s share price has fallen from $65 to under $10.

Market trends suggest that the SEC’s enforcement activity regarding SPAC transactions will grow, particularly as the enormous sums raised by SPACs will soon result in a race among sponsors to find target companies or risk losing all opportunity for profit.

As product liability lawyers, we know that one of the goals of every product company should be the safety of its users. Many companies take significant measures to ensure they follow this objective in terms of product design, manufacturing, and notification compliance. Occasionally a company may fall short of design standards and safety measures and/or fails to make it right.

Peloton saw significant growth and success during the COVID-19 pandemic. New work and lifestyle demands have necessitated the adoption of different methods of exercise and stress relief, including the creation of in-home gyms outfitted with Peloton bikes and treadmills. Unfortunately for Peloton, they have also realized that a rise in popularity and product demand can lead to a rise in consumer safety concerns. Since October 2020, Peloton has faced three Consumer Product Safety Commission (CPSC) product recalls for three separate products based on three different types of product liability claims.

As the below three recalls show, Peloton has scored a product liability trifecta.

Manufacturing Defect

In Florida, under strict liability, a product is “unreasonably dangerous because of a manufacturing defect if it is different from its intended design and fails to perform as safely as the intended design would have performed.”1 It appears Peloton’s manufacturing is missing the mark.

In October 2020, the CPSC issued a recall on the PR70P Clip-In Pedals fitted on Peloton bikes (sold between July 2013 and May 2016).2 The CPSC received more than 120 consumer reports of pedal breakages, including 16 reports of leg injuries. Five of those injuries required medical care, such as stitches to the lower leg.

This recall was for approximately 27,000 bikes (54,000 pedals). According to Healthline and Reddit, the complaints go back five months to early 2020, when users describe that the pedal “snapped clean off from the arm while I was standing up riding.” The same user posted a photo, demonstrating that the break occurred where the pedal spindle joins the crankset.

Originally published by Taxpayers Against Fraud on September 30, 2021.

If you are an avid movie watcher – as many of us have become over the last two years – it may seem like whistleblowers are very common.  After all, they are heroes of popular films such as The Insider, Erin Brockovich, The Informant, and many others. While they are a popular and constant presence in the media, whistleblowers are not so common in real life.

In the most recent fiscal year, there were only 672 False Claims Act lawsuits filed by whistleblowers (also known as “qui tam” actions”).  In a country with over 255 million adults, this means only 1 qui tam lawsuit is filed for every 380,000 adults.  This low number is nowhere near what the movies may lead one to believe.

Let’s put that number – 672 – in context.  On one hand, fewer people were injured in lightning strikes last year than became FCA whistleblowers.   On the other hand, there were more skunk attacks than whistleblower lawsuits filed.  Nearly twice as many people are drafted by a major league baseball each year than become whistleblowers.  And more than four times as many people were accepted to Harvard as filed a whistleblower lawsuit, although not for lack of trying.

Here’s one more: Guess how many people last year voted for Kanye West for President of the United States.  If you guessed 67,906, you are correct.  More than 100 times more people voted for Kanye than filed False Claims Act cases.

Although whistleblowers are rare, they make an impact. This is not an opinion. As we have documented throughout the last 30 days, fraud whistleblowing works, and it remains the most effective tool in preventing fraud on the government.

Tomorrow we start a new federal fiscal year knowing the amount and potential for fraud in the country is not media hype or a film creation. So we close out our month of Fraud by the Numbers with one simple question. Do we have too many whistleblowers or not nearly enough?

On September 23, 2021, the Delaware Supreme Court issued a decision in United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Mark Zuckerberg, et al. and Facebook, Inc., C.A. No. 2018-0671-JTL, which set forth a “new” demand futility test designed to supplant the use of the Court’s prior Aronson and Rales tests. Demand futility is a key hurdle in most shareholder derivative cases to establish that the plaintiff has standing to pursue the lawsuit. Failure to establish demand futility results in an early dismissal of the case. The Facebook test, as it will be known, cleans up some confusion about how Aronson and Rales are applied, while ensuring that outcomes will stay consistent with what would have occurred under the prior tests.

The Facebook decision sustained a Court of Chancery ruling, which found that plaintiffs failed to plead demand futility in a case arising from the expenditure of litigation expenses and payment of fees when Facebook abandoned plans to reclassify stock. In the Court of Chancery, Vice Chancellor Laster described the Aronson and Rales demand futility tests and how their interpretation had evolved over time. (Del. Ch. Oct. 26, 2020). Vice Chancellor Laster concluded that the two tests no longer had separate utility in light of subsequent court interpretations and the enactment of a statute by the Delaware legislature designed to protect directors from liability for breaching their duty of care. Instead, his decision boiled them down to a single three-prong test. He explained:

Fundamentally, Aronson and Rales both address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf in considering demand. For this reason, the Court of Chancery has recognized that the broader reasoning of Rales encompasses Aronson, and therefore the Aronson test is best understood as a special application of the Rales test. (Citations and quotation marks omitted.)

The Delaware Supreme Court affirmed this approach, and explained from a practical perspective what a plaintiff must establish to show that making a demand would be futile as to a majority of the board. The “new” demand futility test is a three-pronged approach that asks:

1. whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
2. whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
3. whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

“If the answer to any of the[se] questions is ‘yes’ for at least half of the members of the demand board, then demand is excused as futile.”

Notably, while the Delaware Supreme Court described this as a new test, it went out of its way to assuage practitioners that this was not a substantive change, explaining that both demand futility tests “‘address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand’; and the refined test does not change the result of demand-futility analysis.” Later in its decision, the Supreme Court reiterated that Aronson, Rales, and their progeny remain good law.

As a practical matter, we expect that Delaware corporations will latch onto some language in the opinion that reminds plaintiffs that pleading demand futility is no easy task, particularly in light of Section 102(b)(7), which exculpates directors for breaches of duty of care, and cannot be used as a path to expose directors to a substantial likelihood of liability or as a basis for finding demand futility.

Yet, despite likely efforts to make this decision seem like a sea change for stockholders, demand futility may still be established based on particularized pleading of non-exculpated breaches of fiduciary duties. Therefore, we do not see the Facebook decision as a significant change to current pleading practices. Plaintiffs have been cognizant of this heightened burden and plead their claims accordingly. Courts, too, understand that whether to apply Aronson or Rales “does not matter” because “under either approach, demand is excused if Plaintiffs’ particularized allegations create a reasonable doubt as to whether a majority of the board of directors faces a substantial likelihood of personal liability for breaching the duty of loyalty.”. Rosenbloom v. Pyott, 765 F.3d 1137, 1150 (9th Cir. 2014).

For example, Cohen Milstein represented stockholders who were able to establish demand futility in the Wynn Resorts litigation and similarly argued that the particular test applied does not matter. That litigation involved allegations that the company’s former CEO and Chairman, Steve Wynn (“Wynn”), had terrorized, sexually harassed, and sexually abused dozens of employees on company property. The incumbent board of directors were made aware of serious allegations against him, yet failed to stop his misconduct or protect company employees. Even more seriously, the directors were personally obligated to report instances of unsuitability to gaming regulators, yet they failed to act which jeopardized existing licenses and future business opportunities. Instead, the directors allowed Wynn to remain at the helm of his namesake company where he continued sexually harassing employees. In Wynn Resorts, the court concluded that plaintiffs had adequately pled demand futility because the “Board had actual knowledge of serious allegations that Steve Wynn was violating the law” and “faces a substantial likelihood of liability for its knowing and conscious inaction.” (Thomas P. DiNapoli. v. Stephen A. Wynn, et al., Case No. A-18-770013-B, (Eighth Jud. Dist. Crt., Clark Cnty., Nev.) Order Denying Defendants’ Motion to Dismiss/Granting Lead Plaintiffs’ Motion to Strike, Sept. 6, 2018).

In this case, the well-known proverb “the more things change, the more they stay the same” seems particularly apt. The two demand futility tests already had culminated in a reasonably consistent application of demand futility. The Delaware Supreme Court is now blessing what already had come to be.

There’s growing recognition of the need to increase gender diversity in corporate America, but progress has been frustratingly slow, says Laura Posner, partner with Cohen Milstein. But, she adds, an unlikely group of players—institutional investors—is finally having some success in forcing corporations to change.

Women, and Black and Latina women in particular, remain hugely underrepresented on U.S. corporate boards. As of 2020, just 20.9% of Fortune 500 board seats were held by White women and 5.7% were held by Black and Latina women. In 2021, S&P 500 companies tripled the share of new directors who are Black and more than doubled the percentage who are Latino. Still, nearly 80% are White, and about 70% are men.

Studies repeatedly show that increasing board diversity is not only the right thing to do for an organization’s culture, but that it leads to better business outcomes, smarter decision-making, and powers innovation, among other benefits. Companies with a market capitalization of more than $10 billion and with women on their boards outperform comparable businesses with all-male boards by 26% worldwide over a period of six years.

Companies with gender-diverse boards have fewer instances of problematic business practices, such as fraud, corruption, bribery, and shareholder battles, and are associated with more transparent disclosure of stock price information and fewer financial reporting mistakes.

There is growing recognition of the need to increase gender diversity in corporate America, but progress has been frustratingly slow. An unlikely group of players, however, are finally having some success in forcing corporations to change—institutional investors.

Changing the Board Game

In September 2018, California Gov. Gavin Newsom (D) signed a bill mandating that corporations with their “principal executive office” in the state with six or more directors have at least three female directors. In the two years since, there was an increase of 66.5% of board seats held by women. At least 11 other states have enacted or are considering board diversity legislation.

In December 2020, Nasdaq proposed a “comply or explain” rule that the SEC approved in August 2021 (over the objection of the Republican-appointed commissioners) that will result in most companies listed on its exchange to have at least one female director and one director who self-identifies as being part of an underrepresented minority group. The rule also requires companies listed on the Nasdaq to disclose uniform diversity information about their boards of directors.

What is, perhaps, less well known are the efforts institutional investors have taken to force companies to diversify their boards. According to TIAA President and CEO Thasunda Brown Duckett, Nuveen, TIAA’s asset manager, encouraged about 325 of the 450 companies in the U.S. that did not have a single woman on their board to add a female director.

State Street announced earlier this year that it will now vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards; and in 2022, it will vote against them if they do not have at least one director from an underrepresented community.

BlackRock expects to see at least two women as directors on every board. To the extent that it believes a company has not adequately accounted for diversity in its board composition within a reasonable time frame, it may vote against the nominating or governance committee for an apparent lack of commitment to board effectiveness.

Similarly, Goldman Sachs will no longer take a company public without two diverse board members, one of whom must be a woman, and JPMorgan Chase will generally vote against the chair of the nominating committee when the issuer does not disclose the gender or racial and ethnic composition of the board.

The New York City Employees’ Retirement System will generally vote against members of a nominating or governance committee if the board lacks meaningful gender, racial, and ethnic diversity, including, but not limited to, any board on which more than 80% of directors are the same gender. Institutional investors have also increased their focus on diversity data, with ISS, Glass Lewis, Calvert, SSGA, and others pressing for greater DEI-focused disclosure, and demands that the SEC issue regulations mandating unform DEI disclosures.

The Role of Institutional Investors

Institutional investors also have been forcing board change on a case-by-case basis through shareholder derivative litigation alleging toxic workplace cultures due to discrimination, retaliation, and gender and racial bias. Through litigation and ultimately settlement, these companies have been forced to not only completely revamp their DEI initiatives and discrimination, harassment and retaliation policies, procedures and oversight functions, but also to change the composition of their boards.

For example, in the Wynn Resorts derivative action—litigation led by the New York State Common Retirement Fund and the New York City Employees Retirement System—Wynn Resorts agreed to split the CEO and chair position, make a stated commitment to 50% board diversity, and to use a Rooney Rule to require interviews of diverse candidates. (The Rooney Rule is an NFL policy that requires any team with a head coaching vacancy to interview at least one diverse candidate.)

In the wake of shareholder actions led by the state of Oregon arising out of allegations of sexual misconduct at L Brands Inc., the newly spun-off Victoria’s Secret board is now composed of nearly all-women directors (six out of seven directors) and half of the Bath & Body Works Inc. independent directors (the new name of L Brands) are women.

Efforts to diversify boards are long overdue, but the gains we are finally starting to see—however slow—are bound to have a positive impact on company culture and performance across the country. That listing exchanges and institutional investors have become engaged players in the push for such governance reforms is a promising sign of what is to come. Over time, it is likely that these entities will require even higher levels of diversity, bringing more perspectives to boardrooms and greater value to shareholders.

Read Board Diversity Is Critical to Protect Shareholders, Bottom Line

Released on July 26, 2021, Federal Deception Law, Chapter 9, “The Federal False Claims Act and Other Whistleblower Laws,” National Consumer Law Center Digital Library, was updated by Cohen Milstein’s Gary L. Azorsky and Jeanne A. Markey, Co-Chairs of Cohen Milstein’s Whistleblower / False Claims Act practice, with the assistance of Raymond M. Sarola, Of Counsel. The updated chapter addresses federal and state False Claims Act whistleblower protections, as well as whistleblower protections under the SEC, CFTC, IRS and DOT programs, the rights of relators under the FCA, FCA litigation procedure, mandatory arbitration requirements, remedies, and exemplar cases by industry.

9.1.1 Introduction

The federal False Claims Act (FCA) imposes liability on entities and individuals that make false or fraudulent claims to the government for payment for services and products, or that improperly avoid an obligation to repay overpayments to the government. Although FCA cases have traditionally been used to file claims against government defense and health care contractors and suppliers, they arise as well in other areas—such as insurance, housing, government entitlement programs, government loan programs, and environmental and labor laws—that offer potential use by consumer lawyers.

Unlike almost all other fraud statutes or common law causes of action, the FCA, with its unique qui tam provisions, allows private individuals to file and prosecute a lawsuit in the name of the United States. Because FCA cases are brought on behalf of the government, the individual whistleblower plaintiff—or “relator”—need not suffer any personal harm to bring the action. By authorizing suits in these situations, the FCA offers a tremendous opportunity for individuals and organizations to remedy and prevent fraud and other marketplace conduct that harms the government.

The FCA empowers individuals and organizations with knowledge of fraud against the government to file lawsuits to recover damages and penalties for the government. Its express intent is to encourage qui tam suits by giving consumers the tools and incentive to represent the government in actions against those that falsely bill the government for services or goods.

As powerful a tool as the FCA is, the inexperienced practitioner should also recognize its challenges. The Supreme Court has noted that “[t]he False Claims Act’s qui tam provisions present many interpretative challenges,” such that it may not always be possible, even for the Supreme Court itself, “to make them operate together smoothly like a fine tuned machine.”

The outline for Chapter 9 The Federal False Claims Act And Other Whistleblower Laws follows:

9.1 Background

9.2 The Rights of Relators and the Government Under the False Claims Act

9.3 Elements of an FCA Case

9.4 The False Claims Act’s Litigation Procedures

9.5 The False Claims Act Claims on Behalf of the Government Should Not Be Subject to Arbitration Requirements

9.6 Remedies

9.7 Financial Incentives Available to the Relator

9.8 Examples of False Claims Act Cases

9.9 The False Claims Act’s Whistleblower Protection

9.10 State False Claims Acts

9.11 Other Statutes That Give Rewards to Whistleblowers

9.12 The False Claims Act Checklist

The complete treatise, Federal Deception Law, can be accessed here via NCLC’s Digital Library.

About the Authors

Gary L. Azorsky, contributing author, is Co-Chair of Cohen Milstein’s Whistleblower/False Claim Act practice, has recovered nearly $2.5 billion in defrauded funds for federal and state governments, including a $784.6 million settlement in USA, ex re. Kieff v. Wyeth (D. Mass.), the seventh-largest FCA recovery on record and the second-largest recovery in history involving a single class of drugs. Mr. Azorsky has also provided expert FCA guidance in congressional hearings and at the state level and has testified in federal and state courts as an expert witness concerning the False Claims Act.

Jeanne A. Markey, contributing author, is Co-Chair of Cohen Milstein’s Whistleblower/False Claim Act practice, is recognized among the Lawdragon “500 Leading Plaintiff Financial Lawyers” in the United States. Ms. Markey has successfully represented whistleblowers in federal and state cases across the country in some of the highest-profile qui tam litigation in the healthcare, defense, and financial services industries, including USA, ex re. Kieff v. Wyeth (D. Mass.), which resulted in a $784.6 million settlement, the seventh-largest FCA recovery on record and the second-largest recovery in history involving a single class of drugs.

Other Contributors

Raymond M. Sarola is Of Counsel Cohen Milstein’s Whistleblower/False Claims Act and the Ethics and Fiduciary Counseling practice groups. Mr. Sarola represents whistleblowers in qui tam cases brought under the federal and state False Claims Act statutes in industries that conduct business with the government, including health care, defense, and financial services.  As a member of the firm’s Ethics and Fiduciary Counseling practice, Mr. Sarola calls on his experience as a trustee on the New York City pension fund boards in counseling public pension funds fiduciary issues.