Because of their unique structure as blank check companies, and their use as financing vehicles to take private companies public (referred to as a “de-SPAC” transaction), many unsuccessful SPAC mergers have since been challenged by stockholders in various types of securities litigation.
SPAC related securities cases generally have taken two forms—each designed to compensate different groups of investors. On one hand, many cases are brought as securities fraud class actions on behalf of open-market purchasers in the post-merger company after disclosure of negative financial news. These cases follow the typical pattern for securities fraud cases. On the other hand, the Delaware courts have found that in many of these ultimately unsuccessful transactions, SPAC insiders and controllers acted disloyally by recommending an unfair transaction to the pre-merger SPAC stockholders while obtaining out[1]sized financial benefits for themselves. These claims have been referred to as MultiPlan claims after the first case decided under Delaware law.
Recently, Cohen Milstein reached a settlement of MultiPlan-type claims in a SPAC related matter involving the merger of Pivotal Investment Corporation II (“Pivotal II”) and XL Fleet Corp. (“XL Fleet”) now known as Spruce Power. This case and the related settlement highlight the unique and complex nature of these actions and some of the difficulties presented when litigating and settling SPAC cases. See In re XL Fleet (Pivotal) Stockholder Litigation, Consol. C.A. No. 2021-0808-KSJM.
Prior to its merger with Pivotal II, XL Fleet was a privately held company manufacturing electrical vehicles. Like other typical SPAC transactions, XL Fleet became a publicly traded company through a de-SPAC merger with Pivotal II (“Merger”). At the time of the Merger, December 21, 2020, Pivotal II’s stock was priced at $10.00 per share based on a purported valuation of $1 billion. Pivotal II stockholders voted to approve the Merger pursuant to an allegedly materially misleading merger proxy (“Proxy”). Like all other de-SPAC merger transactions, Pivotal II stockholders had the option before the Merger occurred to redeem their Pivotal II shares for $10.00 per share plus interest.
Immediately following the Merger, XL Fleet’s stock began trading well-above $10.00 per share and continued to trade above that price for the next several months. On March 3, 2021, Muddy Waters released a short-sellers report which revealed a number of alleged serious problems in the company’s business and its inflated valuation. Following release of the Muddy Waters’ report, XL Fleet’s stock price dropped below $10.00 and continued to steadily decline over the next year.
Not unexpectedly, shareholders filed each of the two types of securities litigation: federal securities class actions on behalf of open-market purchasers of XL Fleet stock and state breach of fiduciary duty cases challenging the Merger disclosures. Since XL Fleet was incorporated in Delaware, Cohen Milstein undertook a books and records investigation under Delaware law on behalf of a stockholder to investigate the circumstances surrounding the Merger. Following that investigation, the firm filed a complaint in Delaware Chancery Court alleging that the Merger Proxy issued by Pivotal II was materially false and misleading which was a breach of Defendants’ fiduciary duties. The allegations of misrepresentations focused on three areas: (i) the failure to disclose the actual net cash per share available to contribute to the Merger; (ii) Defendants’ failure to conduct due diligence of XL Fleet in connection with the Merger; and (iii) the failure to disclose XL Fleet’s true valuation and the numerous problems affecting its business and operations.
The primary claim under Delaware law related to the Proxy’s alleged misrepresentation that the amount of cash available for the Merger was $10.00 per share when, in fact, the net cash per share available after calculating the dilution and certain expenses left only $7.66 per share available for the Merger. In short, stockholders did not get full value for their shares contributed to the Merger. Claims relating to the failure to properly disclose net cash per share have been upheld in other de-SPAC transaction cases. The Delaware Chancery Court eventually upheld this and the other misrepresentation claims alleged in the complaint.
Unique to the Pivotal II transaction was a separate breach of contract claim based on the Pivotal II’s charter. The charter required Pivotal II to enter into a business combination with a target company (XL Fleet) having a value of no less than 80% of the assets or value of Pivotal II. The required minimum in this case was approximately $180 million. Plaintiffs alleged that the pre-Merger value of XL Fleet, did not meet or exceed Pivotal II’s mandated minimum valuation. Evidence suggested that certain valuations of XL Fleet were well below the minimum value required which would be a breach of Pivotal II’s charter and give rise to a breach of contract claim. That claim was also sustained by the Court.
Following the completion of discovery, the parties reached an agreement to settle the Delaware action for $4.75 million. By that time, the federal securities class action on behalf of open-market purchasers of XL common stock had settled for $19.5 million. Although there may be some overlap between the two cases, the settlements are designed to compensate two separate groups of stockholders for different types of unlawful conduct.
The Delaware action settlement will compensate pre-merger investors in Pivotal II who were misled into voting to approve the Merger due to the issuance of a misleading Proxy. Unlike the class of investors who were harmed by the misleading statements made in connection with open market purchases of XL Fleet stock, stockholders in this case were injured because their decision on whether or not to redeem their shares was impaired by the false and misleading Proxy. Because Pivotal II stockholders did not receive adequate value for the assets contributed to the Merger they were injured. This was a harm unique to this group of stockholders.
In litigation involving de-SPAC transactions the parallel nature of Delaware fiduciary litigation and federal securities class actions work in tandem to ensure that different groups of interested stockholders receive compensation for different types of claims. In fact, Delaware courts have come to recognize the separate type of damages investors may suffer when their right to redeem is impaired by a misleading proxy. As Delaware law continues to evolve in the context of de-SPAC mergers, it remains to be seen how the courts will address damages to the pre-merger SPAC stockholders.
Earlier this fall, the Commodity Futures Trading Commission (CFTC) issued its annual Whistleblower Program report to Congress. The CFTC reported record breaking awards, reflecting an increase in whistleblower reports, and actions stemming directly from CFTC whistleblowers. Some highlights from the report:
- In FY 2024, the CFTC received a record 1,744 whistleblower tips and 317 award applications; the number of tips represented an increase of 14% above 2023, which had previously been the highest in CFTC history.
- A significant 42% of the CFTC’s enforcement matters involve whistleblowers, underscoring their vital role in the Division of Enforcement’s effectiveness.
- The CFTC awarded over $42 million in whistleblower awards, having awarded a record-breaking 12 whistleblower awards, including the CFTC’s first-ever award to a compliance officer. Another award recipient was a market participant who reported observations specific enough to lead to an enforcement action, resulting in a $4.5 million award.
- The CFTC ordered an entity to pay $55 million for fraud, manipulation, and impeding whistleblower communications with the CFTC. This matter represents the first time the CFTC has charged an entity for using agreements that impede whistleblowing.
- Since its inception in 2014, the CFTC has issued 53 orders granting awards totaling $390 million in whistleblower payments. Related enforcement actions to date have resulted in more than $3.2 billion in sanctions.
- Cryptocurrency schemes, romance scams, and banking fraud are three of the top trends driving CFTC enforcement actions. In its budget proposal, the CFTC requested approximately $210 million for anticipated whistleblower award payouts.
Notable Whistleblower Award
CFTC awards whistleblower over $18 million: The CFTC awarded over $18 million to a whistleblower who provided original information that led the CFTC and another authority to bring enforcement actions. The whistleblower’s submission included both information the whistleblower obtained from nonpublic sources and independent analysis of publicly available information. Not only was the whistleblower’s information highly significant to the CFTC’s investigation, but it also led the other authority to open an investigation and bring a related action.
How do I report fraud or misconduct to the CFTC?
If you suspect misconduct or fraud, contact a lawyer, such as a member of Cohen Milstein’s Whistleblower practice, who can counsel you on the Whistleblower process and help you complete and submit the tip, complaint, and referral form for the CFTC (CFTC Form TCR) or any other relevant federal agency.
Such consultations are confidential and free-of-charge.
What type of information is needed?
In addition to your personal observations and a completed Form TCR, the CFTC requires supporting information that is original and not in the public sphere.
Does the CFTC offer a whistleblower award for reporting fraud or misconduct?
Yes. As discussed above, if your information leads to a successful enforcement action resulting in more than $1 million in monetary sanctions, you will receive an award ranging from 10-30% of any amount collected.
Where do I find more about reporting fraud to federal agencies and becoming a whistleblower?
The CFTC’s Whistleblower Program provides comprehensive guidelines on reporting fraud and the whistleblower process.
You can also contact a member of Cohen Milstein’s Whistleblower practice for a confidential and free-of-charge consultation.
When Reporting, Is Legal Counsel Needed?
While it is not necessary to engage legal counsel at the time of reporting suspicious activities, it is recommended. Legal counsel specializing in Dodd-Frank related whistleblower matters can assist in not only assessing the gravity of the suspicious activity but completing the necessary agency documents, forms, and submitting corresponding evidence. Furthermore, having counsel is recommended if a federal agency such as the CFTC chooses to proceed with an investigation.
Confidentiality is a premium to the success of both programs.
About the Author
Christina McGlosson, special counsel in Cohen Milstein’s Whistleblower practice, focuses exclusively on Dodd-Frank Whistleblower representation. She is the former acting director of the Whistleblower Office in the Division of Enforcement at the U.S. Commodity Futures Trading Commission. She was also a senior attorney in the SEC’s Division of Enforcement, where she assisted in drafting the SEC rules to implement the whistleblower provisions of Dodd-Frank and served as senior counsel to the SEC Enforcement Division’s Director.
Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCen, as part of the U.S. Treasury, the Department of Justice, and other government agencies.
Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice
Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, NW
Washington, DC 20005
E: cmcglosson@cohenmilstein.com
T. 202-988-3970
Advertising Material. This content is informational in nature and should not be read or interpreted as legal advice. Should you need legal advice, please contact a lawyer.
On August 7, 2024, the Honorable Sunil R. Harjani of the United States District Court for the Northern District of Illinois denied Abbott’s motion to dismiss, permitting Lead Plaintiffs’ key derivative claims to go forward: a claim for breach of fiduciary duty for failure to oversee the manufacturing and sale of infant formula and a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 related to false and misleading statements on those same topics and involving the company’s repurchase of stock at prices inflated by the misleading statements.
Lead Plaintiffs in the case are the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority.
Background
Abbott, an Illinois corporation, is one of the primary manufacturers of infant formula products in the U.S., previously producing 40% of all infant formula products consumed in the U.S. It is also the nation’s leading provider of infant formula to low-income families through the U.S. government’s Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”) program. On February 15, 2022, Abbott closed its Sturgis, Michigan infant formula manufacturing facility due to the FDA’s concerns about contaminated baby formula. Two days later, on February 17, 2022, Abbott announced a “voluntary” recall of infant formula products manufactured at the Sturgis plant. The consequences were devastating. A nationwide shortage of baby formula ensued as the facility remained shut down for several months.
Abbott’s business suffered hundreds of millions in lost sales and profits and costs to remediate the facility and upgrade food safety compliance, risk management systems, and internal controls. The company’s business and reputation were badly tarnished as it came under regulatory, criminal, and Congressional scrutiny. The company is now exposed to numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.
In addition to their oversight failures, Plaintiffs allege that certain members of Abbott’s leadership violated Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”). Specifically, the complaint alleged that they authorized the company to engage in billions of dollars in stock repurchases while Abbott’s stock was artificially inflated due to false and misleading statements regarding Abbott’s production and manufacture of infant formula products in the US., with certain Defendants benefiting personally from insider stock sales before the truth started to leak out.
Motion to Dismiss Ruling
Recognizing the strength of the complaint, the Court upheld the core claims against Defendants’ motion to dismiss, including the federal violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5, which will allow the case to move forward in federal court. These are the claims that Defendants issued false and misleading statements to shareholders about the company that Defendants knew or recklessly disregarded were false, and which harmed the company by engaging in stock repurchases at inflated prices. The Court also found that the breach of fiduciary duty claim (sometimes referred to as a Caremark claim) for Abbott’s directors was sufficiently plead on the first prong, that the Director Defendants repeatedly failed to implement, monitor, or oversee compliance and safety of manufacturing at the Sturgis plant. Finally, the Court rejected Defendants’ contention that dismissing the suit was in the best interest of the company.
The Court did dismiss certain ancillary claims that do not affect the case’s overall scope or significance.
Defendants have asked the Court to reconsider certain aspects of its ruling; Plaintiffs have opposed that request.
Key Takeaways for Shareholders
Overcoming a motion to dismiss is a key milestone in any lawsuit and particularly so for a shareholder derivative lawsuit given the high burden that plaintiffs must meet. The past few years have seen an increasing focus in state and federal courts on corporate board and executives’ oversight responsibilities, particularly when health and safety is at risk. Long-term shareholders have important rights to protect their investment through investigating and, if warranted, pursuing litigation to ensure that corporate leaders fulfill their fiduciary duties. We look forward to continuing to litigate the Abbott derivative matter to protect Plaintiffs’ long-term investment and hold wrongdoers to account.
On September 4, 2024, reading her decision into the record from the bench, Judge Katherine Failla of the Southern District of New York granted final approval to a partial settlement with a number of the world’s largest banks to resolve allegations that they violated the antitrust laws by colluding to prevent the modernization of the stock lending market by jointly boycotting efficient, all-to-all trading platforms and price transparency.
In her decision, Judge Failla noted a few unusual things about the settlement. First, its size—she recognized that the amount of the settlement, approximately $580 million in cash, is a “historical settlement amount.” Second, she noted that the litigation was “particularly complex” and that “Plaintiffs’ counsel really had to begin at the ground level, because there was no investigation or academic treatise or anything sort of giving them a leg up on the facts of this case; they had to find it out themselves.” Third, she awarded the Iowa Public Employees’ Retirement System, Los Angeles County Employees Retirement Association, Orange County Employees Retirement System, Sonoma County Employees’ Retirement System, and Torus Capital LLC, incentive fees in recognition of their “extraordinary” contributions to the litigation. Finally, during the hearing Judge Failla expressed particular interest in hearing about what she described as the “compliance or equitable component of the settlement.”
This component of the settlement—injunctive relief which the parties agreed upon and Judge Failla ordered—is both unusual and noteworthy. In private antitrust litigation, it is unusual for there to be changes in how businesses operate because the Department of Justice or other governmental entities seek that sort of remedy. Rather, monetary compensation is the norm for private parties. Here, however, plaintiffs truly acted as private attorneys general.
Specifically, the injunctive relief, developed with an expert in competition economics, incorporated recommendations from both the guidelines for evaluating corporate antitrust compliance programs and the guidelines for evaluating competitor collaborations, in creating a state of the art program within EquiLend, the joint venture organization that was at the center of the allegations of collusion, to deter EquiLend members from acting jointly to prevent new platforms from entering the stock lending market.
Clear standards: The injunctive relief mandates the creation of an Antitrust Code of Conduct designed to prevent collusion and inappropriate information sharing.
Monitoring and auditing: EquiLend will require all Board Members and Alternate Board Members to certify on an annual basis that he or she will comply with the Antitrust Code of Conduct. In addition, EquiLend’s Chief Compliance Officer will provide annual reports of compliance to the EquiLend Board and the Designated Antitrust Liaison Counsel at each of the owner firms.
High-level involvement: EquiLend Board members will annually certify the Antitrust Code of Conduct to be transmitted to the Chief Compliance Officer of EquiLend. If the Chief Compliance Officer believes a Board Member or Alternate Board Member has violated the Antitrust Code of Conduct, he or she is required to inform the Designated Antitrust Liaison Counsel of the owner firm that employs the Board Member or Alternate Board Member. In addition, the Antitrust Code of Conduct must explicitly state that owner firms may take further steps to investigate any suspect communications or situations.
Reporting: EquiLend Board Members and Alternate Board Members are required to report potential breaches of the Antitrust Code of Conduct to the Chief Compliance Officer of EquiLend if they become aware of such breaches.
Training: EquiLend will provide every EquiLend Board Member and Alternate Board Member with antitrust training every two years.
Information sharing: The Settlement places limits on who can have access to confidential information and a requirement to report breaches of these confidentiality restrictions to EquiLend’s Chief Compliance Officer. These restrictions on information sharing must be incorporated into the Antitrust Code of Conduct.
Governance reforms: The Settlement also includes limitations on the terms of EquiLend Board Members (five years), hiring of new antitrust counsel and limitations on the terms of outside antitrust counsel (three years), and requiring the names of all individuals who attend Board Meetings or Working Group Meetings to be included in the minutes for those meetings. Limitations on the terms of outside antitrust counsel is particularly important because it removes the financial incentive to get re-hired, which may result in a lack of independence in identifying collusive or anti-competitive behavior.
The $580 million cash payment and injunctive relief reforms put into place with the stock lending settlement agreement and ordered by the Court in connection with final approval of the stock lending settlement illustrate the public good that private litigation can bring. As the litigation continues against Bank of America, plaintiffs will continue to push for relief from these abusive anticompetitive practices.
The U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo surprised the legal world by overturning Chevron USA v. Natural Resources Defense Council, 467 US 837 (1984).1 For the past forty years, Chevron has required judicial deference to federal agencies’ reasonable interpretation of statutes that courts deem ambiguous. This departure from precedent left lawyers in every regulated industry pondering, with apologies to Tina Turner, “What’s Chevron got to do, got to do with it?”
At first glance, Loper Bright’s only connection to retirement benefits is that it involves fishing, a favored pastime for retirees. However, Loper Bright goes deeper, increasing the likelihood that federal agency regulations will be challenged and rejected. Loper Bright’s impact may extend to administrative agency interpretations across consumer protection, transportation, healthcare, energy, and banking. It will take years to get certainty about which regulations are at risk, under what circumstances the courts will side with agencies over regulated entities, how far the challenges will go through the courts, and what the impact all of this may have on how public pension funds operate and function.
For now, the judicial challenge to the Department of Labor’s (DOL) Employee Retirement Income Security Act (ERISA) guidance concerning private pension funds through its rule on “Prudence and Loyalty in Selecting Plan Investments” is farther along than most other post-Loper Bright challenges. While the viability of that rule is uncertain and its applicability to public pension systems is only instructive, basic fiduciary duties emanating from state law remain in place. Even though Chevron is just a sweet old-fashioned notion now, public pension fiduciaries, as they have done in the past, need to engage in a rigorous review of their decision-making processes and thoroughly document the steps taken to arrive at those decisions to allow them to continue rolling on the river of prudent decision-making amidst what could be years of uncertainty while legal challenges wend their way through the courts.
We Don’t Need to Follow Chevron: Loper Bright Reverses Administrative Deference
In Chevron, the U.S. Supreme Court held that federal administrative agency determinations were entitled to judicial deference if the interpretation of an ambiguous statute was challenged in court. The rationale underlying the so called “Chevron deference” was that federal agencies, with their specialized expertise and accountability to the elected president, were better equipped than judges to make policy choices left open by Congress. For forty years, courts have applied Chevron deference across regulated industries in such areas as food safety, pollution, and labor regulations. On June 28, 2024, as NAPPA was concluding its Legal Education Conference, the Supreme Court decided Loper Bright Enterprises v. Raimondo (No. 22-451, June 28, 2024) (and a companion case, Relentless, Inc. v. Department of Commerce). Loper Bright involved family fishing businesses that challenged a regulation requiring industry-funded ocean monitoring promulgated by the National Marine Fisheries Service as unauthorized by the Magnuson-Stevens Fishery Conservation and Management Act of 1976 and as contrary to the federal Administrative Procedure Act (APA).2 The U.S. District Court for the District of the District of Columbia, applying Chevron deference, granted summary judgment upholding the regulation and the U.S. Court of Appeals for the D.C. Circuit affirmed. The Supreme Court granted certiorari and reversed. Relentless, the companion case, followed a similar path through the First Circuit.
Chief Justice Roberts wrote the Loper Bright opinion that overruled Chevron and held that courts must determine whether an agency has acted within its statutory authority using “traditional tools of statutory construction” to ensure that the agency’s determination is the best interpretation of the law pursuant to the APA. Even though agency determinations might still be “especially informative” when arising from “factual premises” that the agency is uniquely qualified to assess, courts still must independently determine the meaning of the ambiguous statute as a matter of law. The Supreme Court also emphasized that although Chevron deference has been overruled, prior decisions that relied on Chevron deference remain valid.
Justice Thomas concurred, concluding that Chevron deference violated the separation of powers through executive overreach into the judicial function. Justice Gorsuch also wrote separately, agreeing with Justice Thomas in a lengthy concurrence that Chevron deference violated the separation of powers and explaining why stare decisis did not require following Chevron. Justices Kagan, Sotomayor, and Jackson (Jackson participating only in Relentless) dissented. Their dissent emphasized the expertise of administrative agencies and political accountability of the executive branch, as well as Congress’s failure for 40 years to cure any disagreement with the Chevron doctrine. They also warned that the Loper Bright majority opinion enables judges to insert themselves into policy decisions. Finally, their dissent expressed concerns about the chilling effect on agencies to offer their own interpretations of statutory ambiguities, knowing that well-resourced regulated entities will challenge their interpretation.
In the near term, regulatory guidance from agencies will remain in effect unless a court rejects it. However, when regulations are challenged, challengers and government agencies will be placed on equal footing in advancing their arguments about the best interpretation of ambiguous laws. There is no longer deference accorded agency determinations.
It May Seem to You That ERISA Guidance Is Acting Confused: Loper Bright’s Shake-Up of DOL Standards
In 2022, the Biden Administration promulgated a rule that required an ERISA fiduciary to make investment decisions, “based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis” and stated that, depending on the facts and circumstances, risk and return factors “may include” ESG factors. A coalition of 26 states challenged the DOL’s 2022 rule asserting that the rule “contravenes ERISA’s clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries” and complaining that it introduced “ill-defined, subjective ESG concerns” into the fiduciary framework. These challenges culminated in the 26 states filing the lawsuit Utah v. Walsh (No. 23-11097, N.D. Tex.).
Surprisingly, considering his prior decisions favored more conservative policy outcomes, in September 2023, U.S. District Judge Matthew Kacsmaryk upheld the DOL’s interpretation based on then-applicable Chevron deference.3 Unsurprisingly, the plaintiffs appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. The plaintiffs argued that the 2022 Biden rule could not be supported without agency deference. The DOL countered, saying that the rule was consistent with ERISA itself and deference was unnecessary. Both parties agreed that the Fifth Circuit should assess whether the 2022 rule aligned with ERISA requirements. Then, less than two weeks before oral argument, the Supreme Court overturned Chevron deference. The Fifth Circuit, hearing the case with a new name, Utah v. Su, and new mandate (no Chevron deference), directed the District Court to independently interpret whether the 2022 rule was consistent with ERISA, with the instruction to Judge Kacsmaryk: “[W]e vacate and remand so that the district court can reassess the merits.”4 This case can be seen as a bellwether for how agency determinations will be reviewed under the Loper Bright holding.5
How Public Pension Funds Should Navigate the Waters Post-Loper Bright
Loper Bright is a “sea-change” decision, and public pension counsel needs to be alert to developments in federal administrative law because of the uncertainty it introduced. Despite this watershed alteration in administrative law, public pension fiduciaries’ duties of loyalty, prudence, and care as the primary drivers of their decisions remain the same. Public pension fiduciaries must still always exercise their duties consistent with the exclusive benefit rule as their guiding principle, acting solely in the interest, and with the exclusive purpose of providing benefits to members and beneficiaries of the plan.
Similarly, public pension fiduciaries must continue to exercise both procedural and substantive due diligence in their decision-making. Fiduciaries should continue to carefully document the information considered in making investment decisions, their reliance on experts, the reasoning behind their conclusions, and how they monitor these decisions to ensure they remain sound. Trustees who stay true to these responsibilities will find that these practices are “simply the best.”
Public pension attorneys will also need to be cognizant of impacts on investment and operating environments as the post-Chevron world evolves. Federal agencies with regulatory authority as diverse as the SEC, CFTC, IRS, FTC, CFPB, DOT, HHS and DOJ, among others, will be directly affected so that future regulatory schemes that affect public pension investments, partners, benefits, operations and even governance will need to be considered in this new context. Like-wise, states may be emboldened to adjust their regulatory review models to follow Loper Bright, which can have a more direct effect on public pension systems that are subject to state law requirements regarding their fiduciary duties.
The era of Chevron deference provided stability to the regulatory environment in which public pension systems operate. This new post-Chevron era promises uncertainty through trial and error that will, over time, define the way the judiciary and the legislature operate. While this plays out, public pension systems must be vigilant in observing and learning from related developments and, most importantly, must maintain focus on their basic fiduciary duties that prioritize the exclusive benefit rule for their members and beneficiaries. That is what Chevron has to do with it.
1 Loper Bright Enterprises v. Raimondo, 603 US ___(June 28, 2024).
2 5 U.S.C. §§ 551–559.
3 Utah v. Walsh, ___ F Supp3d ___, (N. D. Tex. 2:2023-cv-00016, Sept. 21, 2023), vacated and remanded sub. nom. Utah v. Su, ___ F4th ___ (23-11097, 5th Cir., July 18, 2024).
4 Utah v. Su, supra note 3.
5 It also should be noted that “more than 40 federal lawsuits citing the high court’s ruling in Loper Bright Enterprises v. Raimondo have been filed in the two-plus months since the decision. The suits—including those targeting firearm regulations, COVID-era loan programs, and Health and Human Services Department rules—show the wide range of court battles already prompted by the ruling.” Justin Henry, “Leading DC Firms Play Long Game in Life After Chevron Ruling,” Bloomberglaw.com (Sept. 13, 2024).
The article was selected for publication in the October 2024 Edition of The NAPPA Report and submitted by a member of NAPPA. NAPPA is a 501(c)(6) non-profit association providing continuing legal education to private and public attorneys whose primary practice is retirement law.
New rule set to safeguard investment adviser sector from illicit finance activity. New rule also requires reporting of suspicious or illegal activities by investment advisers.
On September 4, 2024, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, published its final rule (Rule) in accordance with the Bank Secrecy Act (BSA) that imposes minimum standards for establishing anti-money laundering/ countering the financing of terrorism (AML/CFT) programs. The Rule requires Registered Investment Advisers (RIAs) and Exempt Reporting Advisers (ERAs) to report suspicious activity to FinCEN in compliance with the suspicious activity reporting (SAR) requirements.
The purpose of the Rule is to safeguard investments in the United States and help prevent criminals and other illicit actors from laundering money through the U.S. financial system. The Rule helps to mitigate the risk of money laundering, terrorist financing, and other illicit finance activities through the investment adviser industry, particularly in relation to sanctioned entities, the Russian Federation, and exploitation by foreign state sponsored enterprises, most notably from the People’s Republic of China and Russia.
The new Rule, Department of the Treasury, Financial Crimes Enforcement Network, 31 CFR 1010 and 1032 goes into effect on January 1, 2026.
Why This Matters to Whistleblowers
The BSA authorizes the Dept. of Treasury and its bureaus to impose reporting and other requirements on financial institutions and other businesses to help detect and prevent money laundering.
According to FinCEN, investment advisers serve “as an entry point into the U.S. financial system and economy,” and may be susceptible to participating in fraud and other illegal activity by sanctioned and other unscrupulous foreign entities.
FinCEN has adopted the SAR filing provisions in the Rule to include investment advisers, thereby requiring certain investment advisers to report illicit activity to FinCEN.
Individuals working for such investment advisers may feel encouraged to “blow the whistle” on suspicious activity involving money laundering, terrorist financing, and other illicit finance activity.
Overview of the New ALM/CFT Rule & New Definitions:
Financial Institution – FinCEN is broadening the definition of “financial institution” to include certain investment advisers, and pursuant to the BSA, requiring certain investment advisers to report suspicious activity to FinCEN.
Investment Adviser – FinCEN is narrowing and clarifying the definition of “investment adviser.”
The Rule defines investment advisers as:
- investment advisers registered with or required to register with the SEC, also known as RIAs; and
- investment advisers that report information to the SEC as ERAs.
The narrower definition of investment adviser excludes from the definition:
- RIAs that register with the SEC solely because they are (i) mid-sized advisers, (ii) multi-state advisers, or (iii) pension consultants; as well as
- RIAs that are not required to report assets under management (AUM) to the SEC on Form ADV.
FinCEN is not applying this Rule to State-registered advisers. Foreign private advisers or family offices
(as defined in SEC regulations) are also exempt.
No later than January 1, 2026, investment advisers must have implemented AML/CFT programs, commenced filing SARs when required, and begun complying with the other reporting and recordkeeping requirements as described in the Rule.
SARs and other BSA forms, filing requirements, and FAQ can be found on FinCEN or the BSA E-Filing System.
Is Legal Counsel Needed if I Become a Whistleblower and “Blow the Whistle” on New Rule Violators?
While it is not necessary for a Whistleblower to engage legal counsel at the time of reporting fraud, misconduct, or other violations, it is recommended. Legal counsel specializing in Dodd-Frank-related whistleblower matters can assist in not only assessing the gravity of the possible violations the Whistleblower has knowledge of but will complete and file the required form – Form TCR with FinCEN.
About the Author
Christina McGlosson, Special Counsel in Cohen Milstein’s Whistleblower practice, focuses exclusively on Dodd-Frank Whistleblower representation. She is the former Acting Director of the Whistleblower Office in the Division of Enforcement at the U.S. Commodity Futures Trading Commission. She was also Senior Counsel in the SEC’s Division of Enforcement, where she assisted in drafting the SEC rules to implement the whistleblower provisions of Dodd-Frank.
Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCEN, the Department of Justice, and other government agencies.
Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice
Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, NW
Washington, DC 20005
E: cmcglosson@cohenmilstein.com
T. 202-988-3970
“FinCEN’s rule is long overdue. Investment Advisers are critical to the U.S. financial system and economy. At the same time, certain Investment Advisers are more vulnerable than others to sanctioned and other unscrupulous foreign entities. FinCEN’s final rule shores up the uneven application of the AML/CFT program across the industry and makes whistleblowing of suspicious activity an imperative,” said Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice at Cohen Milstein. It should be noted that Christina is the former acting director of the CFTC’s Whistleblower Office. She was also Senior Counsel to the Director of the SEC’s Division of Enforcement, during her fifteen-year tenure in the SEC’s Enforcement Division.”
The Employee Retirement Income Security Act was enacted in 1974 to address the public’s concerns that private pension plans and healthcare plans were being mismanaged and abused. We have much to celebrate as ERISA turns 50 this month.
Over the decades, ERISA has served as the most important safeguard for employee retirement savings plans and health benefits in the U.S. However, this moment also provides an opportunity to reflect on how ERISA is being tested in the courts.
Congress took a great deal of care in drafting and passing ERISA. It is the culmination of intricately planned legislation designed to address both the labor and tax components of employee benefit plans.
Over the years, Congress has amended ERISA to help meet the needs of the evolving workforce and U.S. families — adding protections like COBRA, the Health Insurance Portability and Accountability Act, and safeguards against “marriage penalties” for the pensions of married employees and their spouses.
Despite ERISA being such a robust federal law, some companies and plan providers don’t abide by it. Whether through intentional profit-seeking tactics or negligence, breaches in fiduciary duties and plan mismanagement occur regularly.
Self-dealing and fee skimming are ongoing issues in 401(k) management, particularly for proprietary plans, which are leveraged by sophisticated financial institutions, insurers, private equity companies and hedge funds.[1] A mere 10 basis points or 0.1% in additional fees can mean a windfall for the company and hundreds of millions of dollars in employee losses.
Similarly, with employee stock ownership plans — once a symbol of buying into the American dream — we continue to see less-than-honorable business owners hoodwinking employees into buying stock in their privately held companies at outrageously over-valued prices.
We have seen, firsthand, class actions lead to industrywide changes that will protect workers’ retirement savings, including a reduction of 401(k) fees and a shift toward more low-cost index fund investment options.
But ERISA’s regulatory framework is now in jeopardy after the U.S. Supreme Court’s June 28 decision in Loper Bright Enterprises v. Raimondo, which overturned the decades-old Chevron doctrine of judicial deference to federal agencies’ interpretation of ambiguous statutes. Now, the courts may play an even more important role in ensuring employees not only have access to their hard-earned retirement savings and healthcare benefits, but also to the courts to address misconduct by plan fiduciaries and administrators.
To date, ERISA has been implemented and interpreted through regulations issued by both the IRS and the U.S. Department of Labor. Given the Supreme Court’s decision to overturn Chevron, possibly jeopardizing some of these regulations, companies may have more incentive to ignore ERISA — particularly companies headquartered in judicial circuits with less-than-favorable track records of upholding pro-employee statutes. This could glut the courts with unnecessary lawsuits and potentially undo decades of bipartisan work.
Even before Chevron deference was overturned, worker protections under ERISA faced significant legal hurdles before the courts, due to corporate intervention. One particularly significant issue is arbitration clauses with class action waivers and restrictions on collective remedies, which can prevent employees from bringing meaningful claims, pursuing fulsome awards, and holding companies and plan fiduciaries accountable for misconduct or plan mismanagement to the fullest extent of the law.
Such arbitration clauses should be unenforceable because they prevent workers from exercising their statutory rights under ERISA to address plan-wide fiduciary and mismanagement issues. Yet, plan providers and fiduciaries continue to insert arbitration clauses, which deter employees from exercising their rights, and allow providers and fiduciaries to avoid accountability.
Employee and ERISA-rights advocates are cautiously optimistic, as workers have successfully addressed the enforceability of these arbitration clauses in several courts of appeal. Thus far, the U.S. Courts of Appeal for the Second, Third, Sixth, Seventh and Tenth Circuits have agreed with plaintiffs that ERISA renders arbitration agreements unenforceable.
Last October, the Supreme Court declined to review both the Tenth Circuit’s 2023 decision in Harrison v. Envision Management Holding Inc. Board of Directors,[6] and the Third Circuit’s 2023 decision in Henry v. Wilmington Trust NA, both of which held that arbitration provisions in plan agreements were unenforceable. However, arbitration enforcement cases are pending before the Ninth and Eleventh Circuits.
It is also encouraging to see ERISA evolving to anticipate the needs of today’s workers. For example, the Mental Health Parity and Addiction Equity Act, or MHPAEA, requires that procedures insurers cover for a medical diagnosis must also be covered if indicated for a mental health diagnosis, providing a critical tool to obtain gender-affirming care.
In Duncan v. Jack Henry & Associates Inc. in 2022, the U.S. District Court for the Western District of Missouri allowed a plaintiff’s claim to proceed under the MHPAEA, asserting that a plan that covers mental health treatment for gender dysphoria must also cover a gender-affirming procedure. The case has since settled.
Similarly, ERISA, with the aid of litigation, is playing an important role in mitigating emerging corporate abuse involving third-party pharmacy benefit managers, and outsized costs for employee health plans and prescription medications.
As we celebrate the 50th anniversary of ERISA, Congress should be applauded for the decades of care and research that have gone into this protective statute for worker and retiree rights. ERISA has proven to be one of the most effective laws to safeguard America’s retirees and employees.
However, much more needs to be done by lawmakers.
Unless further amendments are made to shore up ERISA — such as banning class action waivers, and identifying and codifying important regulations that are now imperiled by the Supreme Court’s Chevron ruling — profit-driven companies and plan providers will find new ways to shirk ERISA compliance and use the courts to strip away ERISA’s power to protect workers and retirees. The undoing of Chevron deference may provide them with new tools to do so.
While litigation, particularly class actions, can protect Americans’ hard-earned retirement savings, the courts should not be the endgame. ERISA is a shining achievement of bipartisan congressional efforts to protect workers and their access to health and retirement plans, but lawmakers need to regroup and continue their efforts to effectively protect America’s increasingly diverse workforce.
There is no shortage of uncertainty in our world. That said, two certainties that bear directly on the fortunes of pension funds—death and taxes—have always impacted the work of public pension administrators. Now we can add a third certainty to this list: the necessity of cybersecurity preparation.
According to a recent Forbes report, there were 2,365 cyberattacks last year, with about 350 million victims. That represented a 72% increase in incidents since 2021, the previous high water mark for cyberattacks. On average, each cyberattack costs about $4.5 million. The most typical occur by email, text or phone, with familiar vendors the most common targets—Microsoft, Amazon, Google, and Apple, to name a few. The risk is apparent. And literally as I write this, a massive cyberattack at AT&T is being reported.
In June, during the National Association of Pension Plan Attorneys’ 2024 Legal Education Conference, a panel of experienced pension fund lawyers and consultants offered some guidance regarding cyberattacks and how to prepare. The following draws from their advice.
First and foremost, educate yourself about the risks surrounding cyberattacks. From there, it is necessary to develop policies, some of which will be mandated by law and others specific
to your organization. Importantly, administrators must clearly and unambiguously specify the chain of command and roles for dealing with cyberattack issues, including an actual attack. Response protocols also must be detailed and unambiguous, so that intrusions are dealt with as quickly as possible. These processes must accommodate the many different aspects of responding to an incident; internal protocols, governing laws and regulations, notifications, and timing are among the important considerations. The development of these rules is not for the faint of heart, since they may implicate legal requirements, enterprise-wide function, beneficiaries, external constituencies, and vendors, as well as incur a variety of other risks.
Once the rules and protocols are in place, it is necessary to undertake regular training, especially for the personnel responsible for dealing with a cyberattack. Since attacks can emanate from anywhere within the enterprise, all personnel must be trained to recognize risks of a cyberattack that may target their own computers so that they can prevent the organization’s systems from being invaded or raise an alert with those responsible for responding to a cyberattack. The training should also include drills to ensure that any actual response is quick and direct. There also must be regular review of the policies, protocols and practices with appropriate revisions and updates, especially since the breadth of risks posed by a cyberattack are constantly evolving. Vigilance is a key component to ensuring up-to-date security.
Among the many aspects of policy, protocol, and practice to be addressed is the essential challenge of notifying those potentially affected by an incident. Applicable federal, state, local, and in some circumstances even international laws govern notification requirements for law enforcement and affected members and beneficiaries. Privacy laws, including HIPAA for health information, and SEC requirements, must be considered. You may have contractual provisions governing third parties and vendors—not only regarding their roles in direct cyberattacks on the pension system but also to incidents affecting those parties that could implicate system information.
Cybersecurity insurance may also be warranted. First and foremost, the insurance available for these attacks must be scrutinized for coverage, exclusions, and cost, but other factors also come into play when selecting a policy. This is another area of significant variation and evolution so, again, regular review will be necessary.
As any incident is likely to involve issues with legal counsel and advice, consideration of the role of the attorneys involved should be resolved early so that issues surrounding privilege and work product can be understood. Maintaining careful records is, as always, essential to establish fiduciary compliance, and consideration to record development and retention to avoid the risks attendant these kinds of crisis situations should be given early and fully. Data are valuable in today’s operating environment, meaning information not directly affected by any specific attack must also be protected, so informed assessment in these matters should be given.
This litany of approaches to deal with the risk of cyberattacks is meant merely as an introductory primer. Even from this approach, though, the risks inherent in the enterprise and the opportunities for missteps during responses, which can be hurried and erratic if not well conceived and planned, are evident, with concomitant negative effect on fiduciary duty. The use of experts, both internal and external, may well be warranted in order to minimize what is now inevitable: the risk of harm from cyberattack.
By Kate Fitzgerald, Snr. Marketing Communications Manager
On June 10, a South Florida jury found Chiquita Brands International responsible for the wrongful deaths of eight men murdered by Autodefensas Unidas de Colombia (AUC), and awarded their surviving family members $38.3 million in the first in a series of bellwether trials against the multinational.
The plaintiffs in In re Chiquita Brands International Inc. Litigation are the surviving family members of the eight victims who were targeted and killed by the AUC, a brutal paramilitary known for mass killing. The U.S. has designated the AUC as a Foreign Terrorist Organization which makes supporting it a federal crime. Providing financial support to the AUC was also a crime under Colombian law. The plaintiffs alleged that Chiquita paid the AUC nearly $2 million, while facilitating shipments of arms, ammunition, and drugs, despite knowing that the AUC was an illegal organization engaged in a reign of terror.
Agnieszka Fryszman and Leslie Kroeger led Cohen Milstein’s trial team in representing the family members of the trade unionists, banana workers, political organizers, activists, and others who were killed by the AUC. During the six-week trial, plaintiffs allege that the deaths of their relatives were a foreseeable result of Chiquita’s financial support of the AUC.
“Our clients risked their lives to come forward to hold Chiquita to account, putting their faith in the United States justice system. I am very grateful to the jury for the time and care they took to evaluate the evidence,” said Fryszman, chair of Cohen Milstein’s Human Rights practice. “The verdict does not bring back the husbands and sons who were killed, but it sets the record straight and places accountability for funding terrorism where it belongs: at Chiquita’s doorstep.”
Far Reaching Impact
The $38.3 million jury verdict came in the first in a series of bellwether trials against Chiquita. Roughly 4,500 plaintiffs are awaiting their trial dates. After 17 years or pre-trial litigation, this is the first time that an American jury has held a major U.S. corporation liable for complicity in serious human rights abuses in another country.
In Chiquita, plaintiffs relied on the “transitory tort doctrine,” an ancient legal doctrine that provides that someone who commits a civil injury in one part of the world can be sued where he or she is found. In such cases, courts often apply the law of the place of injury, in this case Colombia. After evaluating dozens of expert reports, the court in Florida applied Colombian law on negligence and hazardous activity.
“U.S. corporations that operate in places with less rule of law and access to courts and history of corruption and political violence will look to this verdict and see you’ll be held accountable in American court,” Fryszman said. “You can’t simply roll the dice and hope you’ll not get caught. There is no law-free zone you can take advantage of.”
Case Background
Chiquita has operated banana plantations in Colombia since the 1960s. During much of that time, Colombia was mired in armed conflict between left-wing guerrilla groups and right-wing paramilitaries.
Plaintiffs allege that from 1997 to 2004, Chiquita issued more than 100 regular, monthly payments to AUC, totaling more than $1.7 million, as well as supplying the AUC with shipments of arms and ammunition.
With Chiquita’s support, plaintiffs claim that the AUC expanded to more than 30,000 fighters. Based on official sources in Colombia, court records say that “paramilitaries were responsible for killing or disappearing more than 100,000 civilians during this time period and committed more than 10,000 acts of torture.”
In March 2007, Chiquita pled guilty to criminal charges brought by the U.S. for knowingly providing material support to the AUC. The Department of Justice described Chiquita’s support to the AUC as “prolonged, steady, and substantial.” Following its admission, Chiquita agreed with federal prosecutors to pay $25 million in damages. The company’s executives were spared criminal prosecution in both the U.S. and Colombia.
The civil claims in this suit were brought on the heels of that guilty plea and were subsequently consolidated by the multidistrict litigation (MDL) panel and heard by a federal court in Florida. A test group of plaintiffs, referred to as “bellwether” plaintiffs, was selected to proceed to trial by jury, which began on April 22, 2024.
After six weeks of trial, the jury was satisfied that plaintiffs had shown a preponderance of evidence that the AUC “in fact killed” eight of nine victims included in the first bellwether trial and that Chiquita was liable for not only providing substantial assistance to the AUC to create a foreseeable risk of harm, but failed to act as a reasonable business under the circumstances. The jury was also unconvinced that Chiquita lacked a viable alternative to supporting the AUC. Accordingly, it ordered the company to pay the eight plaintiffs more than $38 million in damages.
Next Steps
While the date of the second bellwether trial has been temporarily postponed so that Chiquita can appeal the verdict, Leslie Kroeger, a Cohen Milstein partner, stated “After a long seventeen years against a well-funded defense, justice was finally served. We look forward to the next round of bellwether trials and will continue to fight for our clients.”
Cohen Milstein, EarthRights International, and other co-counsel represent the family members of the decedents.
One can hardly open the business section of a newspaper today without immediately seeing an article about Artificial Intelligence (“AI”). Companies use the term to refer to different things, but one of the most prominent and frequently discussed types of AI used in businesses today is “generative AI.” Generative AI trains AI to absorb large amounts of data patterns and structures— so-called large-language models—so that it can learn and eventually generate new data with characteristics that are similar to the original data. Generative AI tools include popular chat-bots like ChatGPT and Claude, and search engines like Perplexity. Companies such as Google, Microsoft, Apple, and Meta have also built AI functionality into their core products.
As a firm committed to advocating for good corporate governance and the rights of shareholders, Cohen Milstein has dedicated substantial resources to understanding how AI tools can be used to supercharge our work to achieve the best results for our clients. In this article, we will share insights about how AI tools can be used by legal advocates and pension funds.
Use of AI as Advocates for Shareholders
We are at the dawn of the AI age, and many law firms have begun exploring how best to use AI to advance their clients’ interests. One simple but powerful function of AI tools is to generate accurate summaries of lengthy documents. Enforcing the securities laws often involves the review of lengthy documents, such as public companies’ filings with the Securities and Exchange Commission. Generative AI tools can quickly summarize those documents and the tools can also understand natural-language questioning about those documents, which allows our attorneys and experts to put their deep substantive knowledge to use in tandem with the AI technology to efficiently identify the most salient points.
Another important role we serve is to thoroughly investigate reported corporate wrongdoing to understand whether our institutional investor clients have been impacted. AI can accelerate our ability to conduct factual research about large numbers of companies and their officers and directors, by quickly answering numerous questions. To be sure, AI’s factual output cannot be independently relied upon due to the persistent problem of “hallucinations”—i.e., the system confidently misstating the facts. Nonetheless, AI’s factual output is often largely correct, and using it as a starting point (always coupled with independent factual verification) can accelerate our research and catalyze our ability to quickly understand an industry, company, or set of individuals who may have harmed shareholders.
Use of AI Within Pension Funds
Potential applications of AI extend far beyond the legal realm, offering transformative opportunities for our clients in various sectors, including pension funds. AI can enhance investment strategies through sophisticated algorithms that predict market trends, identify investment opportunities, and manage risks with greater precision thereby enhancing accuracy, efficiency, and financial stability. AI-driven solutions can also streamline administrative processes.
One of the primary advantages of AI in pension fund management is its ability to analyze vast amounts of financial data rapidly and accurately. While not necessarily something that is possible through chatbots such as ChatGPT, AI algorithms can identify patterns and trends that human analysts might miss, enabling more informed investment decisions that can help maximize returns on pension fund investments.
Risk management is another critical area where AI can make a substantial impact. Machine learning models can simulate various economic scenarios and stress-test portfolios, helping fund managers to anticipate potential risks and adjust their strategies accordingly. This proactive approach to risk management can safeguard the pension funds’ assets, providing more stability for the beneficiaries.
In addition to investment and risk management, AI can streamline the administrative processes associated with pension fund management. Tasks such as tracking contributions, managing payouts, and ensuring regulatory compliance can be automated using AI-powered tools. This automation reduces the likelihood of human errors. Importantly, using AI does not equate to a loss of jobs for humans; instead, it enhances the roles of those previously managing these tasks and directs resources to other important work.
In conclusion, incorporating AI into pension fund management offers a range of benefits, from improved investment strategies and risk management to more efficient administrative processes. Harnessing the power of AI may help pension funds better secure the financial futures of their pensioners. As technology continues to advance and with close oversight and testing, the potential for AI to transform pension fund management will only grow, promising even greater efficiencies and financial stability for public servants, while allowing human workers to focus on other valuable contributions.