The law should be modified to require that it be public whether a 10b5-1 plan exists and include the date it was entered into; all 10b5-1 plans be approved by a company’s compensation committee; and most critically, the owner of the plan must be blind to the dates and/or strike prices for purchases and sales set forth in their plan, so that they are not incentivized to improperly keep material news from investors.

By now, the story is familiar: A company announces either good or bad news and its stock price goes up or down, only for investors to later learn that around the same time, corporate insiders sold millions of dollars of their company stock holdings, often for the first time in years. It happened at Eastman Kodak, Moderna Therapeutics, and, more recently, at government contractor Emergent BioSolutions, whose share price fell over 50% from February 2021 to April 2021, coinciding with its announcement of negative financial results and COVID-19 vaccine production problems. Just before that period of bad news, for the first time in over four years, its CEO Robert G. Kramer sold a substantial amount of his company stock for proceeds of over $10 million.

These transactions have something in common besides their fortuitous timing: They were all the result of an SEC rule that was meant to prevent insider trading on the basis of material nonpublic information. The SEC rule, formally known as 10b5-1, covers what are known as “trading plans,” and requires that executives pre-arrange for specific amounts of stock to be sold at specific times according to pre-established criteria. Notably, the rule does not require disclosure of the substance of the plans to investors, and executives can cancel the plans at any time and enter into as many plans as they want.

The theory was that if these plans are adopted when insiders are not in possession of material nonpublic information, they would prevent illegal insider trading. To encourage their use, the Rule provides those who adopt a 10b5-1 plan a “safe harbor” that serves as an affirmative defense to claims of insider selling.

Over the past year, such plans have garnered mounting scrutiny from federal regulators, including SEC Chairman Gensler, and lawmakers. Several recent peer-reviewed studies and hearings in Congress have demonstrated that rather than prevent insider trading, executives use these plans to obtain financial windfalls—the exact opposite of the Rule’s purported intent. The focus thus far has been on whether these plans are being used to promote (not prevent) insider trading on material nonpublic information by encouraging executives to sell before bad news is disclosed, and whether the plans ought to continue to operate as get out of jail free cards when they mask such improper insider selling.

But there is another serious risk that has not garnered enough attention: the risk that 10b5-1 plans create an incentive for company insiders to continue to hide bad news from investors and prop up stock prices by making false and misleading positive statements in advance of planned trades. In addition to corporate insiders’ decisions to sell, there should be heightened scrutiny of corporate insiders’ decisions to speak to investors around the time of planned sales. After all, an executive who knows that they have pre-planned trades on the horizon, or trades that their plan will execute at a certain price, may have an improper motive to reap as much money as possible by keeping the company’s stock price as high as possible.

One way in which investors demonstrate motive in securities fraud cases is by alleging that executives made unusual or suspicious trades based on factors such as their profits, timing, and percentage of holdings sold. But despite the fact that 10b5-1 plans were created as an affirmative defense against allegations of insider trading, courts in these separate securities fraud cases have also routinely allowed company insiders to rely on their 10b5-1 plans to defeat an inference of a motive. As long as an insider has a 10b5-1 plan adopted before the start of a fraudulent scheme, courts almost always find that stock trades pursuant to the plan weigh against an inference that defendants knowingly or recklessly misled investors based on a motivation to inflate the stock price to maximize profits.

Potential changes are on the horizon. The flood of recent massive insider sales has prompted the SEC to call for restrictions on trading plans—for instance, a cooling-off period between when the plan is adopted and when trades can begin—as proposed recently by SEC Chairman Gensler. The House of Representatives also recently passed a bill directing the SEC to carry out a study of potential amendments to Rule 10b5-1, including requiring issuers to adopt a window during which insiders are allowed to trade.

While these proposed changes are a step in the right direction, they fall short of fixing the problems inherent in the 10b5-1 safe harbor. To protect investors, ensure that these plans are not being manipulated for the benefit of insiders, and garner the protection of the safe harbor in litigation, the law should be modified to require that it be public whether a 10b5-1 plan exists and include the date it was entered into; all 10b5-1 plans be approved by a company’s compensation committee; and most critically, the owner of the plan must be blind to the dates and/or strike prices for purchases and sales set forth in their plan, so that they are not incentivized to improperly keep material news from investors.

The Rule’s safe harbor must also be modified to make clear that it is applicable only to claims of insider selling, and does not automatically negate well-pled allegations of motive in securities fraud actions. Although not a panacea, such changes would go a long way to ensuring that 10b5-1 plans are not used by executives to financially benefit themselves at the expense of investors or to hide material information from the market.

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Laura Posner is a partner at Cohen Milstein and a member of the firm’s securities litigation & investor protection and ethics & fiduciary counseling practice groups. She was previously the top securities regulator in New Jersey. Megan Kinsella Kistler, associate at the firm and member of the firm’s securities litigation & investor protection practice, represents institutional and individual shareholders in derivative lawsuits and securities class actions. She is a former federal prosecutor. 

For most, summer is synonymous with having fun in the sun. But sometimes products designed to help keep you safe in the sun or better enjoy the summer may actually be dangerous. We all know sunscreen can help reduce the risk of skin cancer, but a recent U.S. Food & Drug Administration (FDA) recall suggests some sunscreens may increase the risk of cancer. Information about that recall and other recent summer product recalls are discussed below.

Johnson & Johnson Sunscreen Recall
On July 14, 2021, the FDA announced that Johnson & Johnson voluntarily recalled specific Neutrogena and Aveeno aerosol sunscreen products due to the presence of Benzene, a known carcinogen. The aerosol sunscreen products being recalled are:

  • NEUTROGENA® Beach Defense® aerosol sunscreen,
  • NEUTROGENA® Cool Dry Sport aerosol sunscreen,
  • NEUTROGENA® Invisible Daily™ defense aerosol sunscreen,
  • NEUTROGENA® Ultra Sheer® aerosol sunscreen, and
  • AVEENO® Protect + Refresh aerosol sunscreen.

According to the FDA announcement, Johnson & Johnson advises that consumers should stop using these specific products and appropriately discard them.

Umbrosa Pool and Patio Umbrellas Recalled Due to Injury Hazard
On May 27, 2021, the United States Consumer Product Safety Commission (CPSC) announced that Umbrosa has recalled umbrellas equipped with the Umbrosa Evolution Arm/Holder due to an injury hazard from the umbrella arm breaking at the elbow while in use. According to the CPSC announcement, consumers should immediately stop using the recalled umbrellas and contact Umbrosa to receive a free replacement arm/holder. Umbrosa is contacting all known purchasers directly.

Pool Heaters Recalled by Pentair Water Pool and Spa Due to Fire Hazard
On April 18, 2021, the CPSC announced a recall of StaRite and Mastertemp pool heaters due to a fire hazard. According to the CPSC announcement, consumers should stop using the heater immediately if they have one of the specific models cited in the recall. Owners can contact Pentair Water Pool and Spa for a free repair.

Cohen Milstein closely monitors product recalls across industry:
Launched in July 2019, Cohen Milstein’s U.S. Product Recall News Blog tracks product recalls across industry, including consumer products; motor vehicle, tire, and roadway safety products; food, drugs, cosmetics, and medicines; as well as chemicals and environmental products. We monitor the following regulatory agencies and product recall websites:

When safety issues regarding a product are brought to the CPSC, NHTSA or the FDA, these agencies will evaluate and track the issues and will determine whether or not a specific product is not fit or safe for public use. Depending on the product and scope of the problem, either a voluntary recall may be issued by the offending company or a mandatory recall will be issued by the governing agency. The agencies will also work with the offending company on the most appropriate mitigation strategies, including corrective actions.

Cohen Milstein’s Complex Tort Litigation attorneys litigate Unsafe & Defective Products, Wrongful Death & Catastrophic Injury, Environmental Toxic Torts and other matters related to dangerous products, recovering hundreds-of-millions of dollars for consumers who have been harmed by such defective or dangerous products. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us or call us at 877.515.7955.

We co-counsel nationwide.

The Summer 2021 issue of the Shareholder Advocate includes:

  • Directors and Officers Face Potential Liability under Section 14(a) for their Roles in Ohio’s Largest Bribery Scheme – Amy Miller and Richard A. Speirs
  • The Escalating Litigation Involving Actuarial Equivalence on Taft-Hartley Plans: No End in Sight – Michelle C. Yau
  • In Set Capital, Second Circuit Reinstates Investors’ Claims Against Issuers of Popular ‘Fear Index’ Security – Michael B. Eisenkraft
  • Federal Judge Dismisses Latest Lawsuit Seeking to Legitimize Forced Arbitration – Richard E. Lorant
  • Fiduciary Focus: One Thing the Pandemic Won’t Change is the Need for Trustees to Focus on Fundamentals – Luke Bierman

Fiduciary Focus
Shareholder Advocate Summer 2021

As the United States slowly but steadily returns from the depths of the pandemic, many practices that became usual over the last year remain uncertain in the continuation. Will we continue to work from home? Will we continue to meet online? Will we continue to dress casually or, in some notorious cases, at all? Will we live, work and play in cities, in high rises, in proximity? Will the incidence of retirement skyrocket? Will birth rates remain low? Will we invest in online technologies and divest from REITS with shopping malls? What will the future hold for the many aspects of administering and investing a pension fund?

Certainly these and many other questions will take time to sort out, with their answers offering significant fodder for discussion around trustee and senior staff tables, if not Zoom screens. The fiduciary responsibility that guides these kinds of considerations, however, remains the same. Focusing on the exclusive obligation to serve beneficiaries’ interests is the standard that guides trustees and senior staff, whether within or outside a pandemic. While the calculus may adjust due to changing circumstances tied to the impact of a global pandemic, the process for considering any social, political, cultural, and economic evolutions is unchanged. Fiduciary destiny requires being well informed on those circumstances and fully focused on the fund’s beneficiaries. When in doubt, go back to basics.

Despite these many adjustments and their possible accommodations due to the shared global experiences over the past year and a half, there are many considerations that seem very familiar: everything old may just be new again. For example, recent reporting indicates that the U.S. Department of Labor is again reconsidering whether changes to the standards for environmental, social, and governance (“ESG”) investing are warranted. We all are well aware of the long history of yo-yoing regulatory adjustments the attention to ESG has inspired. Here we go again.

Likewise, disparities in opportunity in investing, corner offices and board rooms are receiving renewed and enhanced attention after a year of clear and often tragic evidence of racism, sexism and other bias in many aspects of American life. The 9th Circuit recently permitted a lawsuit challenging California’s statutory requirement for greater gender representation on boards of local corporations to go forward, which will likely impact the viability of a lawsuit challenging a similar California statute mandating racial and ethnic representation. Here we go again.

And issues related to climate change remain prominent. For example, Exxon must accommodate new board directors who would not be characterized as fossil fuel apologists and were elected with help from pension funds that increasingly are finding their voices on these important issues. Here we go again.

As the world returns to some semblance of the familiar, pension fund trustees and senior staff must likewise find their ways through both knowns and unknowns. There will be plenty of each to navigate but the guiding principles of fiduciary responsibility remain the same regardless of the issue, old or new, familiar or novel. Back to basics with pinpoint focus on the exclusive benefit rule is a safe approach with the virtue of providing helpful guidance. Everything old is indeed new again—including the fiduciary responsibilities shared by the trustees and senior staff of America’s public pension funds.

On May 11, 2021, in Employees Retirement System of the City of St. Louis v. Jones, No. 2:20-cv-04813, 2021 WL 1890490 (S.D. Ohio May 11, 2021), Chief Judge Algenon L. Marbley of the U.S. District Court for the Southern District of Ohio upheld all claims in a shareholder derivative action seeking to hold certain current and former FirstEnergy Corp. (“FirstEnergy” or the “Company”) directors and officers accountable for their roles in orchestrating one of Ohio’s largest public bribery schemes. Specifically, the Court found Plaintiffs had sufficiently alleged Section 14(a) derivative claims under the Securities Exchange Act of 1934 concerning FirstEnergy’s issuance of false and misleading proxy statements from 2018 through 2020 related to its shareholders’ annual meeting and the re-election of the Company’s directors. This determination allows the Court to exercise supplemental jurisdiction over Plaintiffs’ state law claims, including breach of fiduciary duty and unjust enrichment related to the same criminal scheme. The Court then held that demand was futile on the majority of the FirstEnergy board of directors (the “Board”) under Rule 23.1 of the Federal Rules of Civil Procedure, and that Plaintiffs had standing to assert their state law claims too.

Cohen Milstein Sellers & Toll PLLC represents one of the Plaintiffs in the litigation. This decision represents an important victory for investors because the Court further expanded upon the view that a company’s directors cannot solicit shareholders’ votes using a misleading proxy statement that conceals a company’s illegal activities and the company’s true financial status. The Court held that a misleading proxy statement can provide an “essential link” in causing harm to a company for purposes of establishing Section 14(a) claims in the context of the re-election of directors.

Here, Plaintiffs alleged that between 2017 and 2020, FirstEnergy and its most senior officers paid more than $60 million in illegal contributions to Ohio’s Speaker of the House, Larry Householder, and other Ohio public officials, in exchange for favorable legislation designed to bail out FirstEnergy’s failing nuclear plants. The U.S. Attorney for the Southern District of Ohio described this plot as “likely the largest bribery, money laundering scheme ever perpetrated against the people of the State of Ohio.”

Notably, the bribery scheme began a few days after Householder assumed his office on January 3, 2017, when FirstEnergy flew him to Washington, D.C. on the Company’s private jet to attend President Trump’s inauguration. Within two months of this trip, FirstEnergy and its subsidiaries began making payments to Householder’s secret 501(c) (4) entity. Householder then pushed through House Bill 6 (“HB6”), which according to the FBI, was “essentially created to prevent the shutdown of [FirstEnergy’s] nuclear plants.” Notably, HB6 included a “decoupling” provision that ensured a guaranteed level of income for FirstEnergy, and therefore established a floor for Defendants’ performance-based compensation. Even before charges of misconduct arose, the public strongly opposed HB6, and it was called the “worst energy bill of the 21st century.” In fact, FirstEnergy spent $38 million to defeat a referendum of HB6, while the media publicly questioned the propriety of FirstEnergy’s relationship with Householder. Plaintiffs further alleged that the directors were aware of shareholders’ concerns about the Company’s lobbying efforts and campaign contributions and took affirmative actions to conceal them. None of these material facts were disclosed in the Company’s proxy statements and other public filings.

The bribery scheme was exposed on July 21, 2020, when formal criminal charges were brought against Householder and others, and reports of FirstEnergy’s involvement surfaced soon thereafter. The Company’s stock value fell 45% in the aftermath, eliminating approximately $12 billion of stockholder value. In addition, securities analysts estimate that the Company faces between $500 million and $1 billion in future sanctions. By late April 2021, the Company had disclosed that it was in early discussions with federal prosecutors about a deferred prosecution agreement.

In the May 2021 ruling, Judge Marbley found that Plaintiffs had satisfied all four elements for their Section 14(a) claims related to the Company’s 2018, 2019, and 2020 proxy statements used to solicit FirstEnergy shareholders’ votes for director re-election and executive compensation approval. Judge Marbley explained how Plaintiffs’ allegations meet the heightened pleading requirements of the PSLRA because they alleged that “the Director Defendants caused the Company to issue Proxy Statements that concealed an illegal bribery scheme, its implications for FirstEnergy’s overall business and financial health, and the deficient governance practices at the Company that allowed it to proceed.” The Court then rejected Defendants’ argument that Plaintiffs must plead scienter (intent to deceive) for their level of culpability. Instead, Judge Marbley held that negligence was the appropriate standard to apply for Section 14(a) liability against corporate insiders, like Defendants. The Court further determined that Plaintiffs had alleged that the directors were at least negligent due to the numerous “red flags” that put them on notice of the bribery scandal, including public news reports and concerns raised by the Company’s shareholders.

Next, the Court held that the proxy statements issued by the directors were an “essential link” to causing harm to FirstEnergy. As the Court acknowledged, the Sixth Circuit has yet to define “transaction causation” in the context of the re-election of directors and executive compensation approval and Section 14(a). However, the Court rejected Defendants’ argument that Plaintiffs cannot establish causation because other courts find that injuries caused by “mismanagement or breach of fiduciary duty” are not redressable under proxy rules. Instead, the Court relied on those cases where courts had found causation in similar circumstances to those alleged by Plaintiffs. In fact, Judge Marbley highlighted how “[h]ere, Plaintiffs allege far more than more mismanagement or an isolated bad act. Rather, they have set forth in detail that the Director Defendants perpetrated an illicit bribery scheme and caused substantial risk to the Company that eventually resulted in the loss of nearly half of its stock value.”

After upholding Plaintiffs’ Section 14(a) claims, the Court then determined that those claims shared a common nucleus of operative facts with Plaintiffs’ state law claims because they all related to the same criminal scheme. The Court, therefore, exercised supplemental jurisdiction over the state law claims to determine whether Plaintiffs had adequately alleged demand futility under Rule 23.1 of the Civil Rules of Procedure. Notably, the Court held that Plaintiffs had met their burden to show demand futility in two ways. First, the Court found that Plaintiffs’ allegations were plausible that a majority of the Board was directly overseeing the Company’s most senior officers’ illicit political activities, including the five members of the Corporate Governance Committee. Second, the Court found that the complaint’s allegations were also excused demand because a majority of the Board faces a substantial likelihood of liability, since they acted with reckless disregard for the Company’s best interest. Specifically, Judge Marbley held that Plaintiffs’ “allegations together support the Court’s inference that a majority of the Director Defendants recklessly disregarded their duties to the Company and allowed the criminal scheme to continue unchecked.” The Court then concluded that because Plaintiffs have sufficiently pled demand futility they had standing to bring all their state law claims. The Court, thus, denied Defendants’ motion to dismiss on all counts.

This decision as an important ruling in the area of proxy statement disclosures and solicitation of stockholder votes as the Court found a direct causal link between the misleading proxy statement and issues of voting on director elections and executive compensation—issues of paramount importance in the area of corporate governance.

By Michelle C. Yau, Mary J. Bortscheller, and Julie S. Selesnick

The January 2020 edition of the Shareholder Advocate discussed important fiduciary liability concerns related to the actuarial equivalence requirements of ERISA. This article revisits the subject and provides an overview of court rulings that occurred in the past 18 months.

Actuarial Equivalence Explained

Actuarial equivalence is a computation that means that, all else being equal, all optional forms of benefits offered by a pension plan have the same economic value as each other. Practically speaking, two forms of pension benefits are actuarially equivalent if the present value of all the monthly payments that are likely to be paid to a retiree are equal in value; this calculation is done using two primary actuarial assumptions: an interest rate and a mortality table. The interest rate discounts the value of future payments, while the mortality table provides the anticipated length of time the future payments will be made based on the life expectancy of a person at a given age.

Significantly, ERISA requires the value of all optional forms to be actuarially equivalent to the value of a single life annuity beginning at normal retirement age.1 And whether a plan violates ERISA’s actuarial equivalence rules turn1 Those provisions include ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), ERISA § 203(a), 29 U.S.C. § 1053(a), ERISA § 205(a) & (d) (1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B) and § 206(a)(3), 29 U.S.C. § 1056(a)(3).s on whether the actuarial assumptions used to calculate all optional forms of benefits are reasonable. On the question of whether a pension plan’s actuarial assumptions are reasonable, courts have considered whether those assumptions have been updated to reflect current trends in mortality and interest rates.

ERISA Litigation Alleging Non-Actuarially Equivalent Benefits

To date, eleven (11) class action lawsuits have been filed asserting ERISA violations for the failure to pay actuarially equivalent pension benefits. To date, all lawsuits in this area have involved corporate pension plans. The vast majority survived motions to dismiss in jurisdictions around the country, including: Torres v. American Airlines, Inc. (N.D. Tex.); Smith v. U.S. Bancorp (D. Minn.); Cruz v. Raytheon Company (D. Mass.); Belknap v. Partners Healthcare System, Inc. (D. Mass.); Duffy v. Anheuser Bush (E.D. Mo.); Berube v. Rockwell Automation, Inc. (E.D. Wis.); Herndon v. Huntington Ingalls Industries, Inc., et al. (E.D. Va.); Masten v. Met Life (S.D.N.Y) and Scott v. AT&T Inc. (N.D. Cal).

Only two courts have granted motions to dismiss: DuBuske v. PepsiCo, Inc. (S.D.N.Y.) and Brown v. UPS (N.D. Ga.). But both dismissals were based upon procedural rather than substantive issues and in the PepsiCo case, the plaintiffs were given leave to replead.

Torres v. American Airlines and the Smith v. U.S. Bancorp were the first two cases where class certification was contested. In both, the proposed classes were not certified. In U.S. Bancorp, shortly thereafter, the parties announced they had reached an undisclosed settlement in principle.

The first major settlement for the failure to pay actuarially equivalent benefits came in February 2021, in Cruz v. Raytheon Company. In this case, the plaintiffs challenged Raytheon’s use of 1971 mortality tables to calculate JSAs. Raytheon has agreed to pay $59.2 million to more than 10,000 participants and beneficiaries. The settlement followed the district court’s denial of the motion to dismiss.

Recommendations

Because continued litigation in this area is likely, ERISA pension plan trustees should review their plan documents and work with their actuary to consider whether the actuarial assumptions used by the plan are reasonable. It is important to document all steps a plan takes to evaluate the reasonableness of the plan’s actuarial assumptions in the event that litigation ever ensues.

As you consider these issues, Cohen Milstein’s ERISA/employee benefits group is available to assist with a review of the actuarial assumptions in your retirement plan(s).

1 Those provisions include ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), ERISA § 203(a), 29 U.S.C. § 1053(a), ERISA § 205(a) & (d) (1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B) and § 206(a)(3), 29 U.S.C. § 1056(a)(3).

A recent ruling by the Second Circuit Court of Appeals in Set Capital LLC v. Credit Suisse Group AG, 996 F.3d 64, 77–78 (2d Cir. 2021) revived claims that financial giant Credit Suisse Group AG (“Credit Suisse”) had manipulated the market for a popular security that, oddly enough, allowed investors to bet against an index reflecting expectations of upcoming stock market volatility. Significantly for investors, the April 2021 decision created positive jurisprudence for investors seeking to bring so-called “scheme liability” claims under Sections 10b-5(a) and (c) of the Securities Exchange Act of 1934 (“Exchange Act”), an area where case law has been sparse. Cohen Milstein Sellers & Toll PLLC serves as co-lead counsel for the putative class in this case and briefed and argued the case before the Second Circuit.

A Product Whose Popularity Created Problems

Credit Suisse issued and sold a very popular Exchange Traded Note (“ETN”) formally named the VelocityShares Daily Inverse VIX Short-Term ETN, but more commonly known by the nickname XIV. XIV was a volatility-linked financial product associated with the VIX Index, sometimes referred to as Wall Street’s “fear index” or “fear gauge.” The value of XIV is derived from the inverse value of the daily returns of the S&P 500 VIX Short-Term Futures Index (“VIX Futures Index”), which tracks a portfolio of first- and second month VIX futures contracts. Generally speaking, when the relevant VIX futures contracts underlying the VIX Futures Index decrease in value by 1%, the XIV notes increase in value by 1%, and vice versa. So, when VIX goes one way, XIV goes the other—hence its clever nickname, VIX spelled backwards. To remove some of this volatility risk from its books, Credit Suisse decided to hedge the risk. And the more XIV Credit Suisse issued, the more it needed to hedge. One way to hedge the risk was to buy the underlying VIX futures contracts. The problem for Credit Suisse was XIV’s popularity. XIV became a huge product, which correspondingly increased Credit Suisse’s need to hedge. The danger was that one of the main ways to hedge that risk, purchasing VIX Futures, could drive up the value of the VIX Futures indexes if done in high enough volume, thus further driving down the value of XIV and creating a vicious cycle.

According to the complaint investors filed in this matter, that is exactly what happened, in dramatic fashion. On June 30, 2017, Credit Suisse offered an additional 5,000,000 XIV notes to investors. On January 29, 2018, Credit Suisse offered an additional 16,275,000 notes on top of the 10,793,880 XIV notes already outstanding. This dramatically increased Credit Suisse’s need to hedge. On February 5, 2018, XIV prices dropped due to an increase in volatility—a drop that accelerated due to a massive purchase of VIX futures. In a single day, the price of XIV crashed by 96%. Credit Suisse then declared an Acceleration Event that effectively delisted the security. The Complaint alleged that Credit Suisse knew, based on prior events and other data, that its massive sales of XIV would create a correspondingly massive need to hedge that, in a time of volatility, would force buying of large amounts of VIX futures that, in turn, would drive down the price of XIV even further. To quote Adam Levine, who pithily described the allegations in his Bloomberg column: “1. [Credit Suisse] sold notes that would go down when VIX futures went up. 2. Then [Credit Suisse] bought a ton of VIX futures, pushing their prices up. 3. Investors in the notes lost everything. 4. [Credit Suisse] made a bunch of money.”1 In the Offering Documents for these XIV notes, while Credit Suisse acknowledged that its hedging activity “could affect” the value of VIX Futures index, it also stated that it “had no reason to believe” that any impact would be “material.”

Investors filed suit, alleging violations of Rules 10b-5(b) of the Exchange Act of 1934 for false and misleading statements made by Credit Suisse, Section 11 of the Securities Act of 1933 for false and misleading statements in the prospectus, and 10b-5(a) and (c) of the Exchange Act for the entire manipulative scheme. The District Court dismissed the claims in their entirety, but the Second Circuit, in an opinion issued April 27, 2021, largely reversed the District Court, allowing most of the claims to move past the motion to dismiss. See Set Cap., at 68–69 (2d Cir. 2021).

The most important part of this opinion, from the perspective of an investor, is likely its ruling on the 10b-5(a) and (c) or “scheme liability claims.” 10b-5(a) and (c) claims are broader than 10b-5(b) claims in that they do not require misrepresentations or omissions. Despite being broader than 10b-5(b) claims, they are brought far less frequently, resulting in sparse case law regarding scheme liability claims. The key quotation from Set Capital is the following holding:

Credit Suisse argues that the complaint fails to allege any “artificial” impact on the price of XIV Notes because its hedging trades were “done openly” for the legitimate purpose of “manag[ing] risk,” not deceiving investors. To be sure, it is generally true that short selling or other hedging activity is not, by itself, manipulative—even when it occurs in high volumes and even when it impacts the market price for a security. But here, the complaint alleges more than routine hedging activity: It alleges that Credit Suisse flooded the market with millions of additional XIV Notes for the very purpose of enhancing the impact of its hedging trades and collapsing the market for the notes. In this context, it is no defense that Credit Suisse’s transactions were visible to the market and reflected otherwise legal activity. Open-market transactions that are not inherently manipulative may constitute manipulative activity when accompanied by manipulative intent. In some cases, as here, “scienter is the only factor that distinguishes legitimate trading from improper manipulation.” To the extent Credit Suisse claims it hedged for a legitimate purpose, its position contradicts the complaint. As we discuss in detail below,

Set Capital specifically alleges that Credit Suisse executed its hedging trades on February 5 for a manipulative purpose—to trigger a liquidity squeeze that would destroy the value of XIV Notes. Set Cap. at 77–78 (internal citations omitted).

This is important for three reasons. It re-affirmed the flexibility and adaptiveness of 10b-5(a) and (c) to cope with novel schemes, it illustrated that scheme liability can protect investors in non-traditional investments, and it expanded the concept of open market fraud to the Second Circuit.

Recently, in Lorenzo v. SEC, 587 U.S. ___ (2019), the Supreme Court also made clear that the scheme liability provisions “capture a wide range of conduct[,]” id. at 6; “even a bit participant in the securities market may be liable under [Rule] 10b-5 so long as all the requirements for primary liability . . . are met[,]” id. at 12 (internal quotation marks and citations omitted); and in drafting and passing the federal securities laws, “Congress intended to root out all manner of fraud in the securities industry[,]” id. at 13. In Set Capital, Credit Suisse was alleged to have executed a novel scheme that harmed investors because of the relationship between two securities—XIV and VIX futures— both of which were recent creations. Set Capital, one of the first circuit decisions to address scheme liability post-Lorenzo, reaffirms that securities fraud, no matter how novel, still falls under the remit of 10b-5.

In their papers, Credit Suisse also argued that XIV was an extraordinarily risky product designed for professional traders and that investors essentially assumed the risk that the product would fail abruptly and they would lose their entire investment. In reviving investors claims, the Second Circuit in Set Capital reaffirmed the principal that securities fraud is unacceptable and actionable for any securities— no matter how esoteric or risky.

Finally, in Set Capital the Second Circuit adopted the concept of open-market fraud. Whether or not otherwise legal conduct can constitute manipulation if the intent is to manipulate is a question that is currently actively being debated amongst the Courts. See, e.g., Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation by Gina Gail S. Fletcher Duke Law Journal. (noting divergence of views in the Courts on this issue). Set Capital moves the Second Circuit into line with the D.C. Circuit and out of sync with the Third Circuit. See, e.g, Koch v. S.E.C., 793 F.3d 147, 153–54 (D.C. Cir. 2015), cert. denied, 577 U.S. 1235, 136 S.Ct. 1492, 194 L.Ed.2d 586 (2016) (holding that a “burst of trading” on the open market, combined with manipulative intent, was enough to violate the Exchange Act); GFL Advantage Fund, Ltd., 272 F.3d at 205 (explaining that market manipulation depends on the activity rather than the intent). Given the circuit split, there is a chance that this will be an issue eventually settled by the Supreme Court.

For all these reasons, Set Capital is both an important decision and a positive step for investors.

1 https://www.bloomberg.com/opinion/articles/2021-05-04/under-armour-earni…

A federal judge has quashed a high-profile attempt to force Johnson & Johnson to present shareholders with a proposal requiring the use of arbitration, instead of the courts, to resolve their legal disputes with the company.

In his June 30, 2021 Memorandum Opinion and Order, Judge Michael A. Shipp of the U.S. District Court of New Jersey granted Defendants’ motion to dismiss a complaint filed by Harvard Law School Professor Hal S. Scott and the Doris Behr 2012 Irrevocable Trust (“Trust”). Plaintiffs in The Doris Behr 2012 Irrevocable Trust, et al. v. Johnson & Johnson sought declaratory and injunctive relief from Johnson & Johnson for allegedly violating Section 14(a) of the Securities Exchange Act by excluding the Trust’s proposal to change the company’s bylaws from the proxy materials issued for its April 2019 shareholder meeting.

Public pension funds and their advocates mobilized to oppose the lawsuit, which offered the strange spectacle of a shareholder recurring to the courts to prevent future investors from doing the same. The New Jersey Attorney General, the California Public Employees’ Retirement System and the Colorado Public Employees’ Retirement Association all intervened on Johnson & Johnson’s behalf in asking the judge to dismiss the claims. Cohen Milstein was among the law firms working on behalf of institutional investor clients concerned about the potential repercussions of the lawsuit, which was the latest in a long line of initiatives led by Scott to curb shareholder rights and “overregulation.”

Before the April 2019 shareholder meeting, Johnson & Johnson had sought and received a “no-action letter” from the Securities and Exchange Commission supporting its decision to shelve the forced arbitration proposal presented by Scott. The New Jersey Attorney General had also asked the SEC to allow Johnson & Johnson to exclude the proposal, opining that it would violate New Jersey state law. Judge Shipp stayed the case in late 2019 to allow the Delaware Supreme Court to issue its decision in Salzberg v. Sciabacucchi, reopening the case in June 2020 after it was decided. Scott’s second amended complaint cited Salzberg, saying the decision invalidated arguments by Defendants and the New Jersey Attorney General that the forced arbitration proposal, if adopted, would violate New Jersey law. The second amended complaint sought declaratory relief—asking the Court to issue a declaration that the forced arbitration proposal would be legal under federal and New Jersey law—and dropped Plaintiffs’ previous petition for injunctive relief.

In his 10-page decision dismissing Plaintiffs’ complaint in its entirety, Judge Shipp sided squarely with Defendant-intervenors who argued that the Trust’s claims should be rejected on multiple grounds. First, the Court agreed with Defendant-intervenors that Plaintiffs’ demand for declaratory relief was moot since Johnson & Johnson excluded the proposal from proxy materials for its 2019 annual meeting and declaratory relief “cannot be obtained for alleged past wrongs.” He also agreed that Plaintiffs’ request for declaratory relief was not ripe for consideration “because any controversy with respect to a proposal that the Trust might submit in connection with future shareholder meetings is hypothetical on future events, including this Court issuing a declaration that the proposal is legal under both federal and state law.” On the question of whether Plaintiffs deserve declaratory relief, Judge Shipp said the Trust would not “face hardship if the Court refuses to rule on the legality of the Trust’s proposal” and because “the requested declaratory relief would amount to an advisory opinion,” which federal courts are not entitled to grant.

The victory for investors comes amid signs that the SEC may consider formalizing its traditional opposition to public corporations that seek to include forced arbitration clauses in their governing or offering documents. Under the Trump administration, the Treasury Department had alarmed investor advocates when it urged the SEC to consider allowing companies to require shareholders to use arbitration, an idea that was later publicly supported by two Republican SEC Commissioners.

But in two appearances before Congress this year, new SEC Chair Gary Gensler has firmly supported the importance of preserving shareholders’ access to the courts. In his most recent testimony before the House Financial Services Committee in May, Gensler was asked if it would violate federal securities law to insert a forced arbitration provision into a public company’s governing documents. “The SEC has said consistently to issuers, as I understand it, that it would be best not to put this into these corporate charters,” Gensler responded. “And I think the American public needs to be able to have redress to their courts. That’s sort of a fundamental piece to be able to go straight to the courts. And that’s been true in terms of issuers for decades. And I think that’s worked well.”

To the individuals and families affected by the devastating Champlain Towers South condominium building collapse in Surfside, Florida, we send our deepest condolences.

While first responders and city, county, and federal authorities work to understand how a building failure of this magnitude occurred, we have prepared a list of frequently asked questions (FAQs) about personal injury, property damage, and wrongful death claims.

NOTE: This document should not be interpreted as legal advice. We do, however, encourage those affected by the tragic collapse of the Champlain Towers South condominium building to seek legal counsel.

What Should I Do If I Was Injured or My Property Was Damaged in the Collapse?

There are several important steps you may consider taking if you or a loved one has been personally injured or if your property has been damaged or destroyed due to the Champlain Towers South condominium collapse in Surfside, Florida.

  • If You Were Injured, Seek Immediate Medical Care

If you were injured in any way from this incident, or believe you may have been injured, it is important that you seek medical care as quickly as possible. Obtaining proof of your injury through medical care is a crucial step in establishing any potential claim you may have for your injury or loss. Insurance agencies will want to see documented proof of injury before any compensation can be considered. Some injuries are not readily obvious and by failing to seek medical attention quickly you risk your own health as well as your ability to pursue financial compensation.

  • Get Copies of Your Medical Records

When visiting medical facilities or doctors regarding your injury, be sure to keep a detailed log of your appointments and obtain a copy of your medical records, including reports of any loss of functionality in your work or personal life, doctor evaluations and reports, medications administered, medical treatments provided or recommended, pharmaceutical prescriptions, and results of lab work.

  • Document the Details of the Accident

While the incident is still fresh in your mind, write down a detailed accounting of everything that you remember.

  • Where were you when the building collapsed? Did you hear or see anything just prior to the collapse or in the days or weeks leading up to the collapse?
  • Be sure to include the time, the number and location of your unit, and the names of any other people who were with you.
  • Did you notice any important details just prior to or after the incident?
  • Take pictures of your injuries and, if possible, pictures of the location where you were injured and any dangerous conditions that caused your injuries.
  • If you speak with medical providers or safety professionals, takes notes about your conversations.
  • Property Damage? Make a List of Your Belongings

You should also make a detailed list of your belongings that were contained within the collapsed building or within a damaged surrounding area.

  • Provide a detailed explanation for any items that are irreplaceable or were unique, such as heirlooms or antiques with intangible value.
  • If you have photos or videos of the items that were inside your home, make sure to document these as you identify the scope of your losses.  You may find that family members or friends will have photographs or videos taken in your home on prior occasions, which will depict items you lost. Also check your social media postings for documentation of your possessions.
  • Use Caution When Communicating with An Insurance Company on Your Own

When asked about the incident, be sure to use facts only. Say only the truth of what you know and do not exaggerate any claims or details regarding them.

  • You are not obligated to answer questions that you do not honestly know the answer to. Don’t be afraid to tell an insurance representative that you do not know a response to a particular question. Having no answer is better than the wrong answer.
  • Do not give medical opinions about your injuries and whether or not existing injuries you have may influence your injuries from the collapse. Leave the medical diagnosis to the professionals.
  • If an insurance representative ever askes you to provide a written or audio recorded statement, you have the right to refuse. Providing such statements may be used against you to diminish your case or claim.
  • Do I Have a Case for Personal Injury or Property Damage?

If you or a loved one were injured, or your property was damaged in the Champlain Towers South condominium building collapse, you may have a legal claim. We encourage you to seek legal counsel as soon as possible to assess your legal claims.

  • Do I Have a Case for Wrongful Death?

In Florida, the personal representative of someone who died as a result of the negligence or intentional misconduct of one or more parties can file an action for wrongful death on behalf of the victim’s estate and certain surviving family members. Such a claim must be filed within two years of the victim’s death.

While pertinent facts regarding the cause of the Champlain Towers South condominium building collapse are still being investigated by local, state, and federal authorities, we encourage to seek legal counsel if you lost a loved one in this horrific tragedy.

  • Additional Resources

The unforeseen loss of a loved one or a home can be traumatic and challenging. We encourage you to seek legal counsel in order to assess whether you may have any legal claims as a result of the Champlain Towers South condominium building collapse. Additionally, the following local resources may be able to assist you with any other questions or concerns you may have.

  • Surfside Community Center – Champlain Tower South Information & Resources: The town of Surfside is working closely with Federal Emergency Management Agency (FEMA) and county and state agencies, as well as local religious organizations and relief organizations, such as the Red Cross and United Way, to help families affected by the Champlain Towers South condominium building collapse. The Surfside Family Reunification Hotline is: 305-614-1819
  • Miami-Dade County – Surfside Family Assistance: The county of Miami-Dade is also working closely with federal, state, and local agencies and first responders, as well as local religious organizations and the Red Cross and United Way in aiding families and other people affected by the Champlain Towers South condominium building collapse.
  • American Red Cross – Building Collapse in Surfside, Miami Dade County: The American Red Cross is providing emergency hotel lodging for residents and others displaced by the crisis. Red Cross volunteers, including specially trained disaster mental health and spiritual care volunteers are providing one-on-one support to those coping with this tragedy, are available at the Surfside Community Center — which is a safe space for people to receive emotional support, get something to eat and drink, connect with community organizations offering aid, and hear updates from authorities

If you have questions about your legal rights or if you are seeking legal counsel, please contact us.

Cohen Milstein’s Complex Tort Litigation practice is a nationally recognized, premier trial practice focused on Catastrophic Injury & Wrongful Death claims. Based in Palm Beach Gardens, FL, we represent individuals throughout Florida and nationally who have suffered catastrophic injuries, wrongful death, and property loss due to unsafe products, unsafe construction, as well as toxic substances, and medical negligence.

Our primary objectives are to ensure injured victims receive just restitution through the court system and to hold responsible parties accountable.

For more information, please contact Theodore J. Leopold or Leslie M. Kroeger, co-chairs of Cohen Milstein’s Complex Tort Litigation practice at 1-877-515-7955.

We are at a crossroads that will determine how the nation’s workers can protect their own rights as the defense bar is working feverishly to erect barricades to the few remaining legal avenues workers have left to address workplace disputes.

With the enthusiastic support of the U.S. Supreme Court, large employers have overwhelmingly required their workers to submit their workplace disputes to binding arbitration and forbids them from pursing their claims together. But after many workers have pursued similar claims in arbitration—rather than abandoning them as employers may expect—employers are now being counseled to make arbitration more challenging and expensive to the workers.

A legislative solution exists that would level the arbitral playing field: the Protecting the Right to Organize (PRO) Act of 2021 (H.R. 842), the union-backed bill that would protect workers’ ability to pursue arbitration claims in groups. The House passed the bill in March, and it is now before a Democrat-controlled Senate for the first time and gaining public support.

U.S. Supreme Court Set Hurdles

Both the Civil Rights Act of 1964 and the Fair Labor Standards Act provide a forum in federal court for employees to challenge discrimination and wage theft, but the Supreme Court has repeatedly acceded to the defense bar’s demands, enforcing arbitration agreements that foreclose litigation in court and that forbid workers from vindicating their rights collectively.

For example, in Epic Systems Corp. v. Lewis, the Supreme Court held that it did not violate the National Labor Relations Act—a statute protecting workers’ ability to organize—for employers to require employees to waive their right to pursue claims collectively or on a classwide basis in arbitration.

The Supreme Court went even further in Lamps Plus Inc. v. Varela, holding that an employer could not be compelled to arbitrate employee claims on a classwide basis where the arbitration agreement was ambiguous about whether class arbitration was permitted.

The PRO Act would statutorily reverse these decisions.

Notwithstanding these hurdles, workers have successfully pursued individual claims in arbitration, sometimes in large numbers and challenging the same unlawful conduct by the same corporations, even where it might have been more efficient to pursue class action lawsuits in court.

Employers Work to Curtail Worker’s Rights

Burdened by the costs associated with these cases, which the defense bar calls “mass arbitrations,” employers are now balking at the very arbitration procedures that they imposed on these workers in the first place.

After DoorDash recently failed to pay the required arbitration fees on time, Judge William Alsup in the Northern District of California compelled the company to pay its fees and arbitrate 5,010 delivery drivers’ cases. Alsup said “in irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed.”

Now, leading firms that represent employers have advanced proposals that would further curtail workers’ ability to assert their rights. After years of advocating on behalf of their corporate clients to impede workers’ ability to bring cases in court, and to bring class actions anywhere, these firms seek to make alternative adjudication procedures, such as arbitration, cost prohibitive to individual workers.

Some measures, such as the requirement that employees file a notice with the company or engage in informal alternative dispute resolution before filing, are disingenuous. Where the employer does not intend to negotiate such claims before they are filed, the provisions act merely as another hurdle to bringing a case.

Other proposals may undermine the very system employers have favored. Cost-splitting and fee-shifting provisions may not be enforceable at all because purportedly procedural arbitration provisions are not valid where they have the effect of waiving substantive rights.

Recognizing that forcing workers to pursue their claims in arbitration might not have the intended effect of minimizing the number of workers whose claims are pursued, the defense bar also proposes measures that can only be described, to use Judge Alsup’s term, as “hypocrisy.”

For example, it suggests that arbitration agreements include a provision, at the election of the employer, that employers be able to settle as a certified class the individual worker claims that its agreement required be pursued separately. Similarly, employers are counseled to develop procedures to arbitrate multiple claims in batches, assigned to a single arbitrator, and with a single fee for the employer.

Yet, an efficient means to adjudicate multiple cases already exists: class actions. Where claims are sufficiently similar to warrant their adjudication collectively, employers should permit those claims to proceed in a certified class action in the first place, not as a last resort when the employer has exhausted all other means of achieving an employer-friendly global resolution.

Since the passage of the Civil Rights Act of 1964 more than 50 years ago, workers’ access to the courts—and increasingly arbitral fora—has been eroded. Substantive rights are only as good as the procedures available to enforce them.

The PRO Act offers some hope that Congress will come to the rescue and enshrine protections for workers to organize and enforce their rights as a group. In the meantime, we must skeptically examine new defense proposals, and fight those unenforceable provisions that waive long-standing substantive rights to challenge discrimination and wage theft.

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Stacy N. Cammarano is an associate in the Civil Rights and Employment practice group at Cohen Milstein Sellers & Toll PLLC.

Joseph M. Sellers is a partner at Cohen Milstein Sellers & Toll PLLC and chair of the Civil Rights and Employment practice group.

The authors represent workers challenging discrimination, wage theft, and other illegal employment practices—individually and through class actions—in arbitration and court.