The SEC’s Recent Risk Alert Highlights the Potential for Fraud

On April 18, 2024, the U.S. Securities and Exchange Commission (SEC) issued a Risk Alert summarizing the staff’s preliminary observations involving compliance by registered investment advisers with Rule 206(4)-1 of the Investment Advisers Act of 1940, as amended (the Marketing Rule).

The Risk Alert addresses the “general prohibition” provisions of the Marketing Rule in addition to the requirements relating to (1) adopting and implementing policies and procedures; (2) maintaining books and records; and (3) completing Form ADV questions regarding advertisements, specifically those including actual performance and hypothetical performance.

SEC staff observed and provided specific details regarding compliance deficiencies they have discovered in the following areas:

• Untrue and unsubstantiated statements of material fact regarding the investment adviser’s business;
• Misleading inferences or omission of material facts relating to conflicts, endorsements, performance claims, third party ratings, testimonials, and performance information;
• Fair and balanced treatment of material risks or limitations;
• References to specific investment advice that were not presented in a fair and balanced manner;
• Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced; and
• Advertisements that were otherwise materially misleading because of font size, visibility of disclosures, etc. particularly on websites and in videos.

The Risk Alert emphasizes the SEC’s focus on advertisements and Marketing Rule compliance and highlights the need for registered investment advisers to “reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”

What if I witness misconduct or suspect fraud?

If you observe investment adviser misconduct in violation of the Marketing Rule or any other federal securities law, it is critical that you inform the SEC.

The SEC will often pay monetary awards to whistleblowers who voluntarily provide the agency with original information about violations of the federal securities laws.

How do I report this misconduct or fraud to the SEC?

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 SEC’s tip, complaint, and referral form (Form TCR).

Such consultations are confidential and free-of-charge.

What type of information is needed to report fraud or misconduct to the SEC?

In addition to your personal observations and a completed Form TCR, the SEC requires supporting information that is original and not in the public sphere.

What if I’m not a company insider?

You do not need to be a company “insider” (like an employee or trader) to witness or report possible fraud or misconduct. Other market participants or victims of fraud or misconduct who observe these actions committed by others may also qualify as whistleblowers.

Does the SEC offer a whistleblower award for reporting fraud or misconduct?

Yes. If your information leads to a successful SEC 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 and becoming a whistleblower?

The SEC’s Office of the Whistleblower provides comprehensive guidelines on the 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.

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About the Author

Christina McGlosson is special counsel in Cohen Milstein’s Whistleblower practice, where she 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 (CFTC). She was also a senior attorney in the SEC Division of Enforcement.

Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCen, as part of the U.S. Treasury, 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. 202-408-3635

The Securities and Exchange Commission’s Whistleblower Program was established to incentivize financial industry professionals to play an important role in policing our nation’s capital markets, protecting investors, remedying past fraudulent conduct, and deterring it in the future. Over its decade-plus history, the program has been a resounding success. By offering awards of up to 30% of the money the SEC recovers in an enforcement action, the SEC Whistleblower Program has sent the loud and clear message that it pays to do the right thing. Multiple awards of over $100 million dollars in the last year amplify this message and SEC statistics indicate that would-be whistleblowers in the financial industry are paying attention. 

So, who are these would-be whistleblowers? In the financial industry, there are countless professionals who research and analyze every type of stock, bond, and increasingly more exotic investment products. These individuals sometimes learn through their work that a company is making false statements to the market to inflate the value of its securities, or manipulating security prices, or committing other violations of the federal securities laws. 

Not All Whistleblowers Are Company Insiders

According to the SEC, about 60% of the tips it receives come from company insiders who witness fraud and have access to incriminating non-public information that can be valuable to SEC enforcement teams. Yet nearly half of all SEC whistleblower tips originate from individuals who work outside of the company against which they reported fraud and who use their expertise and analysis to discover evidence of fraudulent schemes. 

So, in addition to using well-researched information to make smart and ethical decisions for their firms and clients, investment professionals can also monetize their analysis by providing it to the SEC and helping it investigate and prosecute securities fraud. 

Skyrocketing Whistleblower Awards

In fiscal year 2023, the SEC paid almost $600 million to whistleblowers, the largest annual amount in the history of the program. That total includes the SEC’s largest-ever whistleblower payment of $279 million, stemming from a tip it received about a bribery-for-business scheme allegedly spearheaded by Swedish telecommunications giant Ericsson, as well as another whistleblower award of over $100 million that went to seven tipsters. Since the SEC Whistleblower Program was established, it has paid more than $1.9 billion in awards to hundreds of whistleblowers who have provided invaluable assistance to the SEC’s enforcement efforts. 

SEC recoveries are frequently in the tens of millions of dollars – meaning whistleblower awards are often substantial since they are set by law at amounts between 10% and 30% of the SEC’s recovery. Factors that will increase the amount of an award within that range include:

• The information significantly furthers an SEC investigation.
• The whistleblower and his or her lawyer provide ongoing assistance during an investigation.
• An enforcement action involves a law enforcement priority such as recovering investor funds.

Whistleblower Anonymity

The SEC recognizes that financial awards are not always sufficient to encourage people to come forward, particularly if they are concerned about being branded as a “whistleblower” in their industry. Accordingly, the SEC Whistleblower Program protects the anonymity of whistleblowers in multiple ways:

• The SEC will take care to keep a whistleblower’s information strictly confidential and will often ask the whistleblower for consent before sharing it even with other government agencies.
• The SEC does not reveal the identity of a whistleblower when granting an award and goes so far as to not disclose even the enforcement action to which an award applies.
• Whistleblowers who retain an attorney to help prepare a submission and interact with the SEC can proceed anonymously through the whistleblower process – meaning that even the SEC does not know the individual’s identity. 

The SEC has ramped up its protection of whistleblowers and actively enforced its rule against interfering with anyone reporting fraud to the Commission. It has brought enforcement actions against companies for imposing restrictive confidentiality agreements and other actions meant to impede SEC whistleblowing.

Conclusion

The SEC Whistleblower Program has been one of the most impactful developments in financial fraud enforcement in recent decades. Last year alone, the SEC received over 18,000 new tips covering a wide range of securities violations, with increasing numbers of market manipulation and crypto asset submissions, and with a significant number coming from whistleblowers who reside in foreign countries. The program’s ongoing success is critical to the proper functioning of our capital markets and relies on individuals who learn of securities fraud and report their information to the SEC.

Antitrust litigation continues to be an important vehicle for employers, multi-employer health funds, and public entities to recover damages for inflated prices they have paid for prescription drugs through their employee benefits package. Cohen Milstein has been at the forefront of these cases, serving as lead counsel and recovering hundreds of millions of dollars for employers who overpaid for prescription drugs. This article takes a forward-looking view of likely future developments in this area—specifically regarding the industry’s shift towards “biologic” drugs. Remaining well-advised about this area of the law will benefit employers and Taft-Hartley healthcare funds covering union workers, by enabling them to decide when they may want to participate in this type of litigation to recover the overcharges they have incurred on employees’ prescription drug purchases.

Generic Delay Cases and Biosimilars: Overview

Generic-delay antitrust litigation involves claims that pharmaceutical companies have improperly delayed the market entry of lower-priced generic versions of a drug, thereby causing payers (e.g., self-insured employers) to overpay for a period of time. Perhaps the most well-known type of generic-delay case is the “reverse-payment” or “pay-for-delay” case, which was recognized by the Supreme Court in FTC v. Actavis. In these cases, a company with a patent-protected drug whose patent is expiring pays generic manufacturers not to produce the drug.

Generic-delay cases have traditionally focused on small-molecule drugs—which are governed by the 1984 Hatch-Waxman Act. But an increasingly large share of prescription drug payments now goes towards biologics. Biologics are derived from living cells, and their therapeutic equivalents are called biosimilars. The statute authorizing biosimilars was enacted in 2010. Despite their relative nascency, biologics and biosimilars now account for approximately 46% of U.S. prescription drug spend—$261 billion per year.

With such substantial revenues at stake, pharmaceutical companies have strong motivations to use anticompetitive tactics to delay the onset of biosimilar competition, just as they have to delay the entry of small-molecule competition. Differences between small-molecule generic markets and biosimilar markets, however, may warrant special attention as the same litigation strategies that have successfully policed small-molecule delay cases may require adjustment in biosimilar cases.

Those differences were well illustrated by 2023’s launch of biosimilar versions of Humira. Humira was the single-largest line item in the 2022 U.S. pharmaceutical budget. Americans spent over $18 billion on the biologic, over which the manufacturer had long maintained a monopoly. In mid-2023, however, a wave of biosimilar Humira competitors finally came to market and are helping to lower prices.

Same-Tier Formulary Coverage

Payers (and pharmacy benefit managers acting on their behalf) use several tools to incentivize the use of lower-priced generic drugs. One tool is the “formulary,” a list that organizes drugs into “tiers” which render drugs more or less expensive for a plan member. For example, a formulary may impose a $10/$30/$50 copay for drugs on the first/second/third tiers, with generic drugs usually on the least-expensive first tier.

Despite biosimilar versions of Humira carrying a lower list price than the brand product, many biosimilars are nonetheless being placed on formulary tiers equal to those of the brand. This means that biosimilars may not capture the same high level of market shares as do small-molecule generics, as patients will not be incentivized to use the biosimilar by the promise of lower copays.

If biologics maintain greater share following biosimilar entry, one consequence in biosimilar[1]delay cases will be an increased importance of “brand-brand damages.” As with small-molecule drugs, biosimilar competition can drive down the price of the brand drug compared to what the brand’s price would be without competition. Thus, even where payers would have purchased the brand drug rather than the biosimilar, they should have paid less for the brand and were damaged. These are called “brand-brand damages.” For payers who may pursue biosimilar-delay litigation, they should be sure to seek brand[1]brand damages when available.

One Biosimilar, Two Prices

Another dynamic that has appeared in biosimilar markets is companies launching the same product at two different price points: one with a high list price and substantial rebates, and a second with a lower list-price but few or no rebates. Biosimilar versions of Humira have generally coalesced around 5% off and 85% off Humira’s list price, with multiple companies offering both a high-list price and low list-price version.

This dynamic will affect damages calculations in biosimilar-delay cases. In small-molecule cases, experts generally identify what the “brand” price is and what the “generic” price would have been at a given time. Identifying a “generic” price is possible because small-molecule markets tend to coalesce closely around a prevailing price. Unlike in small-molecule cases, however, the launch of biosimilar Humira products shows that there will be biosimilars marketed with markedly different list prices.

Payer-Plaintiffs might address this dynamic in different ways. One could be to group together the brand with the high-priced biosimilars as being the “brand” price and consider the lower-priced drugs as representing the “biosimilar” price. Another approach could be to model the market as having three price-points: a brand price, a high-priced biosimilar, and a low-priced biosimilar. Whatever strategy is ultimately taken, experts can help to understand the different biosimilar prices and address this dynamic in plaintiffs’ damages models.

Product-Specific Differences

Unlike with small-molecule generic drugs, there may be product-specific differences among the biosimilars. For example, some (but not all) Humira biosimilars contain citrate—an ingredient that can cause pain at the injection site. Some (but not all) Humira biosimilars are marketed in a high-concentration formula. In litigation, drug manufacturer defendants may attempt to seize on such product-specific differences to resist efforts to hold them accountable for anticompetitive conduct. For example, defendants could seek to argue that these differences affect class certification or the relevant product market definition. In turn, payer-plaintiffs should be prepared to retain experts to prepare for and respond to these arguments.

Conclusion

The emergence of biosimilars is a beneficial development for the payers, as these affordable medicines stand to save Americans approximately $180 billion over the next five years. Thus, cases policing anticompetitive delay of biosimilar competition will remain an important tool for antitrust enforcers to promote competition in healthcare markets—and for employers and multi-employer health funds to ensure that their employees and members are able to recover the inflated prices they have paid for prescription drugs.

Editor’s Note – A more in-depth version of this article, along with footnoted sources, is available on Law360.

In winter 2022, families were devastated by a nationwide infant formula shortage. The shortage stemmed from a recall and the sudden shutdown of one of Abbott Laboratories’ infant formula factories after concerns developed about contaminated infant formula. Cohen Milstein is co-lead counsel in a shareholder derivative lawsuit seeking to hold Abbott’s board of directors and certain members of executive leadership responsible for breaches of fiduciary duty (and other claims) arising from that debacle.

What is a Shareholder Derivative Lawsuit?

Directors and officers of public companies owe fiduciary duties, including the duties of care, loyalty, oversight, and candor. When a director or officer breaches those duties in a way that harms the company, shareholders are empowered to bring a claim to hold that director or officer accountable and to remedy the harm. The ways a director or officer can breach their fiduciary duties include allowing the company to engage in illegal activity, failing to set up systems for the board to properly oversee the company’s business and make informed decisions on its behalf, and self-dealing.

Under the laws of most states, including Delaware, where many companies are incorporated, shareholders looking to investigate a possible claim may ask to inspect a company’s books and records as a first step. If after review of those books and records or other publicly available information the shareholder concludes that misconduct may have occurred, the shareholder has certain options. One option is for the shareholder to make a demand on the board to bring those claims on the company’s behalf against those who engaged in the misconduct. However, the “demand” requirement may be excused in certain cases if a majority of the board lacks independence or faces a substantial likelihood of liability. Under those circumstances, the shareholder can argue that making a demand would be futile and therefore that requirement should be excused by the court. The shareholder plaintiff would then “step into the shoes” of the company and pursue a claim on its behalf—essentially, protecting the company from the directors and officers who failed to protect it. Unlike a class action where the plaintiff is suing the company and hoping to recover money for injured class members, a shareholder derivative lawsuit seeks relief on behalf of the company. A successful resolution may include a financial recovery for the company and/or corporate governance reforms to reduce the likelihood that the misconduct reoccurs.

The Abbott Lawsuit

On October 16, 2023, the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority were appointed as lead plaintiffs in In re Abbott Derivative Litigation, pending in the Northern District of Illinois. Cohen Milstein represents the lead plaintiffs, along with co-counsel.

Abbott is one of the primary manufacturers of infant formula in the U.S. and is the leading provider of infant formula to low-income families through federal government programs. Abbott’s plant in Sturgis, Michigan is a key producer of formula.

Plaintiffs allege that Abbott’s leadership wholly failed to implement reasonable systems to oversee infant formula manufacturing and production—a striking oversight given the potentially severe consequences of unsafe infant formula—and ignored red flags of safety and compliance problems that arose. As a result, safety and compliance issues persisted at the Sturgis plant for years, as reported by whistleblowers and FDA inspections that found violations of regulations and resulted in Abbott receiving multiple notices of “significant objectionable conditions.” Moreover, Abbott’s own records reflected that it had detected Cronobacter, a potentially harmful bacteria, in products or the facility as early as 2019; the company had also received complaints about babies who became sick after consuming Abbott formula.

These worrisome conditions culminated in winter 2021. After a second complaint of a bacterial infection in an infant who was fed Abbott formula and later died, the FDA demanded that Abbott allow it to conduct a “for-cause” inspection. The FDA found multiple compliance failures associated with bacterial breeding and contamination risks, and detected Cronobacter at the Sturgis plant. After multiple requests from the FDA, on February 15, 2022, Abbott finally closed the Sturgis plant and two days later announced a “voluntary” infant formula recall.

The multi-month closure of the factory and the recall triggered a nationwide shortage of baby formula. Abbott ultimately entered into a Consent Order with the Department of Justice to resolve an inquiry into these concerns. Additionally, Abbott’s business suffered hundreds of millions in lost sales and profits, as well as costs to remediate the facility and upgrade compliance, risk management, and internal control systems. The business also suffered reputational harm as a result of the regulatory, criminal, and Congressional scrutiny. Abbott currently faces numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.

Plaintiffs allege that Abbott’s leadership breached their fiduciary duties by failing to implement adequate reporting mechanisms and information oversight systems to oversee the mission-critical issue of infant formula safety and compliance and failed to respond to red flags of safety issues and non-compliance. The lawsuit also alleges that certain directors caused Abbott to make false and misleading statements to the investing public about these highly material issues. As a result, plaintiffs say Abbott’s leadership failed to take action to ensure the safe production of infant formula and thereby prevent infant sicknesses and deaths linked to Abbott’s formula, as well as the harm to the business discussed above. Defendants have moved to dismiss the lawsuit, and that motion has been fully briefed. A decision will be forthcoming from the court.

Conclusion

The Abbott lawsuit reflects the important role of investors in holding corporate leaders accountable when they breach their fiduciary duties, particularly when critical health and safety issues are involved. It is also an example of the important role of courts outside Delaware in investor protection and public company oversight. While Delaware is the national center of corporate law since most publicly traded companies are currently incorporated there, Cohen Milstein considers all potential venues when evaluating a new case. As a result, we have achieved significant success in derivative litigation in state and federal courts across the country, including California, Ohio, and Illinois. We look forward to continuing to partner with our clients in these important lawsuits.

After four years of hard-fought litigation, lead plaintiffs in a certified class action against Pluralsight, Inc. and two of its executives have filed for preliminary approval of a $20 million settlement. Cohen Milstein serves as court-appointed lead counsel in the case, representing lead plaintiffs Indiana Public Retirement System and Public School Teachers’ Pension and Retirement Fund of Chicago. The substantial settlement is a significant victory for lead plaintiffs and the class of investors, who overcame an initial order dismissing the case by successfully appealing to the Tenth Circuit, resulting in a landmark opinion on the application of scienter to Rule 10b5-1 trading plans.

In March 2020, the Court appointed lead plaintiffs to lead the case, which was originally filed in August 2019. Filing an amended complaint three months later, lead plaintiffs alleged that defendants misrepresented the size of the company’s sales force—the main driver of Pluralsight’s quarter-over-quarter billings growth and the key business metric by which Pluralsight attracted investors. The complaint also alleged that the company and its CEO and CFO knew that Pluralsight misrepresented the size of the sales force,intentionally withheld this pertinent information from investors, and reaped millions of dollars in profits by selling stock to unsuspecting investors.

Just over a year later, in August 2021, the U.S. District Court for the District of Utah dismissed the amended complaint, finding, among other things, that Pluralsight’s use of predetermined stock trading plans (established in 2000 by the Securities and Exchange Commission in Rule 10b5-1) automatically removed defendants’ motive to manipulate the company’s stock price. Lead plaintiffs appealed the case to the Tenth Circuit, presenting an emerging issue of first impression.

In the closely watched appeal, an amici curiae brief was filed by former SEC Commissioners Robert J. Jackson and Luis A. Aguilar, former SEC Chief Accountant Lynn Turner and Columbia Law Professor Joshua Mitts, along with other prominent academics, who urged reversal, explaining that the “text and history of Rule 10b5-1 shows that such plans can be manipulated easily for personal financial gain and thus cannot rebut the inference that personal financial gain was a motive for defendants’ material misrepresentations.”

In its August 23, 2022 opinion reversing the district court’s dismissal, the Tenth Circuit held, among other things, that the existence of a 10b5-1 trading plan does “not per se rebut an inference of scienter where … a defendant was allegedly motivated to misrepresent or withhold material information to affect a stock price.” In its ruling, the Tenth Circuit explained that these plans do not prevent officers from “making false statements to artificially inflate the stock price to trigger those automatic trades—and that is what Plaintiffs allege occurred here.”

Apart from its important scienter ruling, the Tenth Circuit also held that lead plaintiffs plausibly alleged that defendants made a false and misleading statement at the start of the class period, when Pluralsight’s Chief Financial Officer, James Budge, told investors that the company had “about 250” quota-bearing sales representatives. As the Tenth Circuit recognized, the complaint alleged that defendants later revealed that Pluralsight only had “about 200” quota-bearing sales representatives at the time, which strongly suggested that Budge’s statement was “objectively verifiable” and false. The complaint alleged that the truth was revealed six months later, when the Company reported that its billings growth had plummeted, stunning analysts and investors alike, and causing the stock price to plunge by nearly 40 percent.

While the Tenth Circuit’s decision was a significant and positive ruling for all investors, the ruling also limited the scope of the case to Budge’s single statement. Lead plaintiffs faced significant obstacles in their attempt to hold defendants liable for this statement, which was both false and misleading by omission. But after the Tenth Circuit’s reversal, lead plaintiffs continued to vigorously litigate the action, successfully moving for class certification, a motion the district court granted in late December 2023.

In early February 2024, the District Court granted lead plaintiffs’ motion to compel regarding the discovery period for the case, a critical ruling that significantly expanded the scope of discovery. About a month later, lead plaintiffs and defendants reached a settlement.

This case demonstrates the importance of institutional investors leading litigation, pressing forward on appeal, and having the ability to marshal support from leading experts on the stock market and federal securities laws, who submitted an amici brief to the Tenth Circuit. Lead plaintiffs’ advocacy resulted in helpful law and a significant recovery for the class.

Lyzette Wallace will speak on the panel “A Review and Update on Civil Rule 30(b)(6)” at the American Bar Association Litigation Section’s Annual Conference on April 19. The panel will explore elements of the Rule including:

• Proper notice
• Objections and their resolution
• Depositions and their use in court

The ABA Litigation Section Annual Conference will take place April 19-21 in Atlanta, GA.

Suzanne M. Dugan

As pension funds across the country put 2023 behind them, the new year may bring additional headwinds. (Keep in mind: 2024 is a leap year, so there is one more whole day this year for complication and challenge!) Concerns about interest rates and inflation are front of mind for institutional investors, who are wondering whether the Federal Reserve will cut interest rates and how much the economy will slow. A presidential election year brings further uncertainty. Beyond those concerns, here are some key areas that public pension plan leaders have said they will be thinking about in the 366 days of 2024.

Cybersecurity

Managing cybersecurity risk will be a top priority in 2024. The U.S. recorded a 75% increase in ransomware events between July 2022 and June 2023, according to Malwarebytes, Inc. The National Conference on Public Employee Retirement Systems notes that public employee pension funds are prime targets for cyber criminals drawn by the fact that they collect large amounts of personally identifiable information, hold significant assets, and have relatively small staffs. Any doubt about this was resolved in June 2023, when the nation’s two largest US pension plans, CalPERS and CalSTRS, were involved in a worldwide data security incident that impacted one of their contracted third-party vendors. The so-called MOVEit hack, named after the popular file transfer software that was breached, demonstrates that pension plans must be cognizant of their fiduciary risk. As the U.S. Department of Labor has emphasized, plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks. One mitigation risk tool that pension systems have begun instituting are cybersecurity tabletop exercises, which simulate real-world attacks and are designed to test the organization’s ability to respond to a cybersecurity incident.

Artificial Intelligence

The use of artificial intelligence (AI) is another hot topic in the pension plan world in 2024. The CFA Institute noted in a report issued in October 2023 that “the potential impact of AI on the pensions industry is likely to be widespread.” In a webinar hosted by the National Institute on Retirement Security, Andrew Roth, the Deputy Director of the Teacher Retirement System of Texas, observed that “tools that have AI components built into them [have] great promise for transformational technology to quickly get things done and do things faster with fewer resources” but “underlying that promise is a lot of risk.” Pension systems are exploring the use of AI in a wide variety of ways, such as plan operations, member communications, retirement planning, investment analysis, and modeling. The CFA Institute notes that as pension systems learn how to integrate AI into their processes, each decision must be considered through an ethical lens. The report finds that AI can be used in many aspects of pension systems to potentially improve returns and reduce costs, “thereby delivering a higher standard of living in retirement—a worthwhile objective for all pension systems.” But as the CFA Institute notes, “[a]ctive governance and clear accountability are essential in the development of all AI models and algorithms” and “[t]his will require experienced pension professionals to be involved, for, without that experience, judgment and oversight, there is the real risk that some outcomes will be helpful or misleading, or possibly even wrong, in the complex world of pensions.”

Governance

There are a myriad of other key challenges that pension plans face in 2024—from regulatory issues (IRS guidance on Secure 2.0) to litigation (seeking to overturn the new SEC rule requiring increased disclosure from private fund advising and prohibiting certain fee arrangements) to politicization (efforts to prohibit pension plans from making certain investments, or from doing business with certain investment managers). As the Council of Institutional Investors wrote in a recent letter, it believes “the heightened political atmosphere of U.S. elections will increase public scrutiny of members’ investment policies and practices—especially those related to sustainability.” An overarching principle that stands out when pension plans are addressing issues like these with fiduciary implications is the need for good plan governance. As noted by the Stanford Institutional Investors’ Forum Committee on Fund Governance, just as good organization governance is critical to publicly owned corporations (corporate governance), it is also critical to pension plans that own the stocks of those companies (plan governance). It cannot be said strongly enough: governance matters. It reduces the risk of conflicts of interest, abuse of authority, and misuse of plan resources. It helps ensure organizational performance, such as proper payment of benefits, and multiple studies have concluded that governance is, in fact, a key driver of strong investment performance—which is necessary to pay benefits. Good governance can also help attract and retain employees to public pension plans, which may not be able to compete with private sector salaries but can win employees’ hearts and minds through their mission to protect the retirement security of the nation’s teachers, safety officers, and other public servants. In 2024, more than ever, sound governance results in greater transparency, promotes buy-in from plan sponsors, legislators and other stakeholders, and enables trustees and administrators to fulfill their fiduciary duty to the members and beneficiaries of their pension plans.

Richard E. Lorant

A federal judge in Utah has certified a class of Pluralsight, Inc. investors seeking damages after Pluralsight stock dropped 40% when executives allegedly admitted they had exaggerated the size of the sales force key to the company’s continued growth.

In a December 27 memorandum decision and order granting class certification, U.S. District Judge David Barlow designated lead counsel Cohen Milstein as class counsel and its clients— lead plaintiffs Indiana Public Retirement System and Public School Teachers’ Pension and Retirement Fund of Chicago—as class representatives.

“We are very pleased with this detailed and well-reasoned opinion,” said Carol V. Gilden, the Chicago-based partner leading Cohen Milstein’s litigation team. “With the class certified, we can focus on marshaling the evidence we are collecting through the discovery process to secure the best possible resolution for our clients and the class.”

Headquartered in Utah, Pluralsight provides cloud-based and video training courses, skill and role assessments, learning paths, and analytics tools to businesses. Plaintiffs allege that the company and two top executives violated securities laws by making materially false misrepresentations and omissions about Pluralsight’s sales force and its ability to sustain strong growth in billings.

The complaint further accuses the executives, Aaron Skonnard, the CEO and Chairman, and James Budge, the chief financial officer, of violating securities laws by trading stock based on their inside knowledge. In all, plaintiffs allege that Pluralsight’s top three executives sold $47 million in stock during the class period, which runs from January 16, 2019, through July 31, 2019, including through their 10b5-1 trading plans.

In his opinion, Judge Barlow found that plaintiffs satisfied the requirements to pursue a class action under Federal Rule of Civil Procedure 23(a). Under the rule, the class must be large enough to make it impractical to pursue claims as individuals; the class members must share common “questions of law or fact;” and the class representatives must have “claims or defenses” typical of those of the class at large and “fairly and adequately” protect the interests of the class.

In appointing class counsel, the judge found that “Cohen Milstein will fairly and adequately represent the class’s interests.” He based his decision on the firm’s prosecution of the lawsuit since its March 2020 lead counsel appointment, its experience as class counsel in other cases, and its significant resources.

Indeed, it took plenty of perseverance and skill to even reach the class certification stage. Filed in New York, the proceedings were transferred to the District of Utah where, in March 2021, the judge who was first assigned to the case dismissed plaintiffs’ amended complaint. More than a year later, in August 2022, the Tenth Circuit Court of Appeals reversed the lower court’s dismissal on plaintiffs’ main claims. Following their successful argument to the appeals court, lead plaintiffs filed their second amended complaint in November 2022 and followed with their motion to certify the class in March 2023.

The case is Indiana Public Retirement System, et al. v. Pluralsight, Inc. et al., 19-cv-00128- DBB-DAO (D. Utah).

Carol V. Gilden and Laura H. Posner

Fraud by omission versus commission. Should a corporation be able to do one but not the other in its mandatory discussion of known trends without risking liability under Section 10(b) of the Securities Exchange Act? This is a question the Supreme Court has been itching to answer.

The case is Macquarie Infrastructure Corp. et al. v. Moab Partners LP et al., case number 22- 1165. Back in 2017, the Supreme Court was prepared to review the issue in another case, Leidos Inc. v. Indiana Public Retirement System et al., case number 16-581, but the case settled a month before arguments were scheduled. This time, there don’t appear to be any settlements on the horizon, and numerous parties, including the U.S. Solicitor General, have filed amicus briefs, signifying the high stakes involved.

Important to investors is an SEC disclosure requirement under Regulation S-K Item 303, 17 CFR section 229.303 (“Item303” disclosures, also known as Management’s Discussion and Analysis of Financial Condition and Results of Operations), which requires companies to disclose “where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.” The purpose, according to the SEC, is to enable investors “to assess the financial condition and results of operations” of a company and its “prospects for the future.”

In the case under review, Macquarie did not disclose that one of its most profitable subsidiaries was about to be subject to a United Nations regulation limiting pollution that would significantly eat into its profits. The plaintiff’s 2018 lawsuit claims the defendants concealed the pending restrictions for two years. When the company finally did disclose the limitations it faced, its stock fell by over 40%.

The defendants argue that even if they had a duty to disclose the expected impact of the United Nations regulations under Item 303, they should not be held liable for failing to do so under Section 10(b) of the Securities Exchange Act. The district court sided with the defendants, but a unanimous Second Circuit disagreed and reinstated the claims in December 2022 before the Supreme Court ultimately agreed to review the case in September 2023.

Considering the high stakes involved for investors, who could see their ability to recover losses through private actions severely limited, Cohen Milstein has been actively engaged in the amicus effort to support the plaintiffs in the case and to respond to the arguments raised in amicus briefs filed in support of defendants by heavyweights like the U.S. Chamber of Commerce and Securities Industry and Financial Markets Association (“SIFMA”).

This amicus effort includes briefs filed on behalf of dozens of securities law and business professors, institutional investors with over 340 billion in assets under management, and a group of consumer advocates who include the Consumer Federation of America, Better Markets, Inc., Public Justice, and the American Association for Justice.

As part of that amicus effort, Cohen Milstein authored an amicus brief on behalf of former SEC Commissioners and senior officials appointed by both Republican and Democratic presidents. That brief addressesthe defendants claim that allowing for Section 10(b) liability for violations of Item 303 will force companies to provide overbroad and unnecessary disclosures that will confuse investors. Cohen Milstein’s clients noted in their amicus brief that the SEC has “repeatedly highlighted that Only material items” be included in such disclosures, and that the SEC “expressly condemned unnecessary or duplicative disclosures precisely because they frustrate investor understanding.” Indeed, in its 2003 Guidance, the SEC encouraged companies to “de-emphasize (or, if appropriate, delete) immaterial information that does not promote understanding.”

The former SEC officials brief also noted the crucial role private actors play in the enforcement of securities laws, which ultimately provide investor confidence that promotes the liquidity of the U.S. securities market to the benefit of corporations and investors alike. The U.S. securities markets would not be “the envy of the world” without strong enforcement mechanisms, of which private actors are a vital part.

The Supreme Court has recognized this role as well, finding that private securities fraud actions provide “a most effective weapon in the enforcement” of securities laws and are “a necessary supplement to [SEC] action.” J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964). The former SEC officials’ brief noted that the “commission and its senior leadership have repeatedlyinformed this Court of its view that private actions serve an essential role.” As then-Chairman Richard Breeden explained in testimony before the US Senate, the SEC “does not have adequate resources to detect and prosecute all violations of the federal securities laws,” private actions thus “perform a critical role in preserving the integrity of our securities markets.”

The brief also discussed how the SEC has long recognized that a violation of Item 303 can serve as a basis for a Rule 10b-5 action and rejects the defendants’ argument that fraud by omission should be permitted while fraud by commission should not. It is no surprise, therefore, that the plaintiffs were joined by the Solicitor General, who not only filed a brief in support of the plaintiffs but also asked to be allowed to make oral arguments. The Supreme Court granted this request on January 5, 2024, and oral arguments in the case took place January 16, 2024. Cohen Milstein will continue to closely monitor the case to ensure investor interests are protected.

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¹ Commission Statement About Management’s Discussion and Analysis of Financial Condition and Results of Operations, 67 Fed.Reg. 3746 at 3747 (Jan 25, 2002).

When Congress passed the Securities and Exchange Act of 1934, one of its main goals was to protect the marketplace from the kind of manipulative conduct that precipitated the Great Wall Street Crash of 1929. In the nine decades since, technology has evolved tremendously, and with it the methods devious traders use to manipulate stock prices. But the fundamental threat market manipulation poses to the integrity of securities markets remains unchanged. That’s why Cohen Milstein has developed a series of innovative cases to hold trading firms and individuals accountable when they engage in manipulative securities transactions.

In a class action on behalf of investors in XIV notes, for example, the firm alleged that Credit Suisse manufactured a crash in these securities to obtain illegal profit and we obtained a groundbreaking decision from the Second Circuit holding that these allegations sufficiently pled market manipulation claims. We also represent a class of shareholders in Overstock who allege that the company’s “short squeeze” manipulated the market for its own securities; those claims are currently under review by the Tenth Circuit. And when the Supreme Court considered the scope of key market manipulation provisions of the Exchange Act, we filed an amicus brief advocating for the position that the Court ultimately adopted in holding a broker liable for engaging in manipulative conduct.

Most recently, we filed two market manipulation lawsuits on behalf of dynamic companies in the biotech and information technology industries against some of the nation’s largest broker-dealers for allegedly manipulating the price of these companies’ shares for their own profit. The cases allege that the defendants engaged in “spoofing” to artificially drive down the price of the companies’ shares in order to purchase them at below-market prices.

Spoofing is a form of market manipulation that typically involves placing large “baiting” orders on one side of the market to induce other traders to follow suit, then buying or selling that security on the other side of the market at the artificial prices created by the spoofing, and finally cancelling the baiting orders before they are executed.

The particular mechanisms of spoofing can involve complex features of high-frequency trading algorithms in electronic trading venues. But the basic concept can be analogized to a headfake in sports. A trader fools the marketplace into thinking it is trading in one direction with the goal of moving other traders in that direction, allowing the trader to execute its true trading intention in the other direction, at a greater profit. In our two cases, we allege that the defendants wished to purchase the companies’ shares at artificially low prices and used baiting orders to sell in order to execute buy orders at better prices.

Spoofing in the age of high-speed trading has been prosecuted criminally and civilly by the Department of Justice, Securities and Exchange Commission, and Commodities Future Trading Commission. But private spoofing cases have been very rare. This is in part because government agencies, unlike private plaintiffs, have access to pre-suit investigative discovery tools to obtain and analyze nonpublic trading data.

In our cases, we responded to this challenge by conducting comprehensive and sophisticated analysis of multiple sources of publicly available trading data, matching orders and executions, and applying parameters to identify patterns that courts have held to be indicative of spoofing. These patterns include placing large baiting orders on the opposite side of the market from smaller legitimate orders, cancelling the baiting orders after the smaller orders have executed, leaving the baiting orders on the market for only a short period of time, placing baiting orders behind other legitimate orders to make them less likely to execute, and other conduct contrary to acting as an ordinary market maker.

In both of our spoofing cases, defendants have moved to dismiss the complaint. In the Northwest Biotherapeutics case, briefing has concluded, and oral argument was held on November 14, 2023 before Magistrate Judge Gary Stein in the Southern District of New York. Arguing for the plaintiffs, we explained how our allegations are exactly the type that courts have consistently held sufficient to plead spoofing claims. The defendants argued, as those accused of spoofing always do, that their conduct was normal trading activity, either making markets or trading on behalf of clients. Magistrate Judge Stein recently issued a report and recommendation that agreed with our position on the sufficiency of our allegations as to defendants’ manipulative conduct, scienter, and reliance, and concluded that only our loss causation allegations require more detail in an amended complaint. We await final orders from the district court judges in both cases.

Favorable decisions affirming the sufficiency of these complaints would be a major development towards fairer markets and remedies for companies and investors that have been victimized by manipulative trading schemes.