For decades, artificial intelligence (AI) was the stuff of science fiction. Today, it is fueling one of the biggest investment booms in history. In 2024 alone, venture capitalists poured over $209 billion into AI startups—a 30% jump from the previous year. Major tech acquisitions, led by Cisco’s $28 billion acquisition of Splunk, focused on expanding AI capabilities, while biotech companies invested $5.6 billion in AI-powered innovation, including a $1 billion deal between Novartis and Generate:Biomedicines. Even the U.S. government is betting big on AI, with the recently announced $500 billion Stargate initiative involving Oracle, OpenAI, SoftBank, and MGX.

But not all the news has been good. In late January, Chinese AI platform DeepSeek sent shockwaves through the market, first by disrupting U.S. chipmakers with its vastly faster and cheaper AI modeling, then by promptly falling victim to a massive cyberattack. The episode raised concerns that some companies may be concealing vulnerabilities or inflating their AI potential, echoing the dot-com bubble of the 1990s.

In this article, we explore the key risks in the AI gold rush, investor expectations for transparency into AI capabilities, and steps corporate boards can take to minimize AI litigation risk.

A Brave New World

AI is not just a passing trend—it’s an intrinsic technology that can be woven into every facet of business operations, from optimizing supply chains and financial modeling to revolutionizing drug discovery. For instance, biotech startup Absci uses generative AI to design entirely new antibodies, accelerating drug development in ways previously thought impossible. With AI’s broad applicability and transformative potential, corporate directors should be mindful of how it will evolve and whether they are appropriately navigating the risks inherent in exploiting this technology. For example, observers say the rush to monetize AI has outpaced regulatory frameworks and risk mitigation efforts. Some industry leaders and experts fear that AI’s rapid evolution could outstrip companies’ ability to control it, creating unforeseen risks both for boards and humankind more broadly.

Potential AI Risks:  Just Fool’s Gold for Nerds?

Without meaningful oversight, the AI gold rush might simply lead corporations and their investors to a pot of fool’s gold. Indeed, despite its promise, AI raises several risks corporate boards must navigate.

One major concern is “AI washing” where companies exaggerate or misrepresent their AI capabilities to suggest they have a competitive edge. Similar to “greenwashing,” where companies falsely tout environmental achievements, AI washing can mislead investors and inflate a company’s valuation. In the race to demonstrate supremacy over AI applications, companies may overstate their AI capabilities to the market.

Communication risks also pose a challenge. Generative AI systems, like ChatGPT, are prone to “hallucinations,” producing incorrect, biased, or entirely fabricated information due to input errors. These AI-generated inaccuracies could expose companies to litigation, including fraud, defamation, and consumer protection claims. Legal scholars caution that as businesses increasingly rely on AI for customer service, marketing, and decision-making, the risk of hallucinations could escalate.

Third-party risks are another significant issue. Many businesses rely on external AI-powered tools and APIs, such as PayPal’s API for online payments or GitHub Copilot for software development. These services require companies to upload sensitive and proprietary data onto supposedly secure platforms. However, recent data breaches at OpenAI and DeepSeek highlight vulnerabilities that prompt hackers to target AI-driven systems. The MOVEit data breach involving Progress Software, which relies heavily on AI, is another example of this growing threat. Beyond security concerns, companies that fail to properly vet AI vendors may also introduce unintentional bias into human resources platforms and other enterprise-wide systems, leading to reputational damage and potential legal consequences.

Internal risks are also a pressing concern. As AI becomes more deeply integrated into business operations, a systemwide failure of a critical AI technology could have far-reaching consequences. Last year’s CrowdStrike outage—though not AI-related—disrupted global travel, healthcare systems, stock markets, and banking services, underscoring the dangers of over-reliance on complex and not fully understood technologies. New AI systems could pose significant system-wide risks that require heightened board attention and oversight.

Legal risks are another growing concern, particularly in healthcare and insurance, where AI-driven claim denials face increasing scrutiny. Over time, AI models can develop self-reinforcing behaviors that, while initially legal, may evolve into unlawful discrimination. This underscores a key principle of AI governance: companies cannot simply deploy AI and assume it will operate fairly and legally without continuous monitoring.

Stepping Into the Void: Investors’ Role in Holding Companies Accountable for Accurate AI Discussions

Investors are already actively pursuing AI-related securities class action and shareholder derivative litigation. Early signs suggest that AI-washing is currently taking center stage in these lawsuits. According to NERA, 2024 saw 13 AI-washing-related cases, more than double the number in 2023.

One of the most notable AI-washing securities class actions filed to date is a recently certified case against Zillow (Nasdaq: Z) and its derivative lawsuit counterpart. Both cases allege that Zillow overstated the forecasting capabilities of its proprietary AI-driven pricing model used in its now‑defunct Zillow Offers program.

Other recent AI-related securities class actions include:

• Oddity Tech (Nasdaq: ODD): The Israeli beauty and wellness platform allegedly misrepresented its proprietary AI technology’s ability to target customer needs and drive sales before its IPO. The “AI” turned out to be little more than a basic questionnaire.
• Innodata (Nasdaq: INOD): The company claimed to have a proprietary AI system, but in reality much of the work was done by thousands of low-wage offshore workers.
• Elastic NV (NYSE: ESTC): Investors allege that this company repeatedly overstated the stability of its sales operations. The lawsuit claims Elastic will likely fail to meet its previously issued FY 2025 revenue guidance.

The rise of AI-washing litigation suggests investors are already pushing back on misinformation and misrepresentations about companies’ AI capabilities. The AI gold rush bears striking similarities to past market bubbles, from the dot-com era to the SPAC frenzy—where exaggerated claims led to market corrections and waves of investor lawsuits. If companies continue to overpromise and underdeliver on their claims of having a competitive advantage with AI, they could face a similar reckoning.

What’s a Director to Do? Adopting AI Safeguards to Protect Shareholder Value

Corporate boards should take notice of the legal landscape and potential for liability requires a recognition not only of the power of AI, but also the urgency of establishing oversight over AI risk management. Institutional investors will insist on corporate accountability for transparency around AI capabilities, responsible AI deployment, and mechanisms to manage emerging risks.

Despite the increasing integration of AI in business operations, in many cases companies’ AI governance remains alarmingly weak. A 2024 Deloitte Global survey of nearly 500 board members and C-suite executives across 57 countries found that only 14% of boards discuss AI at every meeting, while 45% have yet to include AI on their agendas. Additionally, while 94% of businesses are increasing AI spending, within the last two years only 6% of companies had policies in place for the responsible use of AI, and merely 5% of executives report having implemented any AI governance framework.

To strengthen AI oversight, investors will expect directors to take several key steps. Corporate boards should establish dedicated AI governance committees to assess risks, oversee AI development and implementation, and ensure regulatory compliance. Given the growing use of AI across industries— 72% of organizations worldwide have integrated AI into at least one business function, and 21% have fully embedded AI into their operations—it would be prudent for all or some combination of the company’s Chief Technology Officer, Chief Legal Officer, Chief Risk Officer, and Audit Committee to discuss AI governance at least annually, and perhaps quarterly. Directors should engage third parties to identify risks, vulnerabilities and ethical concerns. Finally, Boards should also enhance AI literacy to ensure directors fully understand the technologies they are tasked with overseeing.

This article was published in The CLS Blue Sky Blog.

Every April, National Fair Housing Month marks the anniversary of the signing into law of the Fair Housing Act of 1968 (FHA). The legislation was passed in response to the civil rights movement and the assassination of Martin Luther King, Jr., and it aimed to eliminate discrimination in housing, ensuring that all people have access to safe and affordable homes, regardless of race, color, religion, sex, national origin, familial status, or disability.

In 2025, Fair Housing Month remains as important as ever. While progress has been made in fighting housing discrimination, the work to ensure equal housing opportunities for all continues.

1.  What Does Housing Discrimination Look Like?

Despite decades of effort to address housing inequality, discrimination is still rampant in many areas. Studies from organizations like the National Fair Housing Alliance show that people of color, individuals with disabilities, and those from marginalized communities face significantly higher barriers when it comes to accessing housing.

Housing discrimination can take many forms, including:

• Redlining: When banks and insurance companies deny services or investments to certain neighborhoods, often based on race, color, religion, sex, national origin, familial status, or disability (“protected characteristics”).

• Steering: When real estate agents guide homebuyers or renters towards or away from certain neighborhoods based on their protected characteristics.

• Unfair eviction practices: When landlords or property managers use discriminatory tactics to evict tenants, particularly those from marginalized communities.

• Discriminatory lending: When banks or mortgage lenders deny loans or offer unfavorable terms to borrowers based on an applicant’s protected characteristics.

2. Fair Housing Includes Access to Affordable Housing & Vouchers

The lack of affordable housing across the nation has reached crisis level. With the cost of living and job insecurity on the rise, particularly in urban areas, many individuals and families are struggling to find housing they can afford.

This housing crisis disproportionately affects communities of color, thereby limiting access to good schools and more diverse cultural experiences and perpetuating racial segregation.

According to the National Low Income Housing Coalition (NLIHC), 70% of all extremely low income families spend more than half their income on rent while only 1 in 4 extremely low income families who need assistance receive it.

NLIHC, in partnership with the National Women’s Law Center, also found that 74% of households that use federal rental assistance programs, including Housing Choice Vouchers, are headed by women. In 2023, federal housing assistance lifted the incomes of 364,000 Black, non-Hispanic women, 333,000 Latinas, 930,000 Asian women out of poverty.

Fair Housing Month serves as a reminder of the importance of the Housing Choice Voucher Program, administered by the U.S. Department of Housing and Urban Development (HUD), which provides rental assistance to eligible families and individuals.

What Do Housing Vouchers Cover?

Housing vouchers, such as those provided through HUD, typically cover a portion of a tenant’s rent, based on income and family size, as well as market rates. The tenant is responsible for paying the difference between the voucher amount and the total rent.

• Landlord’s Obligations: Landlords who accept housing vouchers must comply with local housing quality standards. They are responsible for maintaining the property and ensuring it meets safety and health standards. They also must work with the local authority to submit payment requests and report any issues.

• Local Housing Authority’s Obligations: Local housing authorities administer voucher programs locally, providing families in need with housing assistance, and helping facilitate the lease and payments to the landlord or property manager. They also work to ensure landlords and property managers comply with federal and state fair housing and voucher guidelines.

In some jurisdictions, it is also unlawful for housing providers to discriminate based on “source-of-income,” such as the use of a housing voucher.  See a list of the states and localities where such discrimination is unlawful.

Unfortunately, even in those jurisdictions with statutes protecting against “source-of-income” discrimination, voucher discrimination by some landlords, property management companies, and real estate agents persist, necessitating investigations by local housing authorities and often litigation.  

3. Fair Housing Means the Right to Safe, Habitable Living Conditions

Another objective of Fair Housing Month is to remind the public about the scope of their rights. In addition to access to housing, everyone has the right to a safe, healthy, and secure living environment. A place to call home. For adults and children, this is a crucial right and essential for maintaining dignity and quality of life.

What Does Safe, Habitable Living Conditions Mean?

“Safe, habitable living conditions” refers to an environment or space where individuals can live without the risk of harm to their health, safety, or well-being. It encompasses several key factors that ensure a place is suitable for long-term living.

The National Low Income Housing Coalition’s State and Local Innovation recently published the Code Enforcement and Habitability Standards Toolkit, which provides a comprehensive overview on habitability standards, laws, and policies.

4. Fair Housing Resources States and local communities play an important role in enforcing fair housing laws. For instance, these laws are enforced by state human rights commissions, local housing authorities, and fair housing organizations. These entities ensure compliance with the FHA and state-specific laws that prohibit discrimination based on race, color, religion, sex, disability, familial status, or national origin, along with other protected characteristics like “source of income” (use of a housing voucher) in certain jurisdictions.

Anyone who works in law will tell you that we are beholden to our calendars, face deadlines largely outside our control, and are inundated with constant emails, messages, and phone calls all demanding our attention. The work doesn’t end at the office door, either. Many of us live in a constant state of priority reconfiguration as we strive to stay abreast of technology, serve on boards and committees, and make time for our families. This often results in long hours, working weekends, and inadequate or interrupted sleep. It is time for us to acknowledge the untenable nature of this model and make mental health and wellness a top priority.

Addressing mental health in law firms requires more than lip service. It demands a comprehensive and sustained commitment to creating a healthier work environment. These practice steps can help law firms promote mental health and wellness:

• Reduce the stigma.
• Establish mental health programs and provide resources.
• Promote a healthy work-life balance.
• Offer stress management and resilience training.
• Fine-tune workload expectations.
• Provide opportunities for wellness.

Rachael Flanagan is a tireless advocate for mental health awareness. She frequently speaks and writes on the topic. Read her latest article Cultivate a Healthy Law Firm.

The start of a new year often brings change and fresh opportunities, and the world of public pensions is no exception.

For some pension plans, the new year may signal the appointment of new trustees to their boards. It’s essential for new trustees to educate themselves, particularly when it comes to the fiduciary responsibilities that form the foundation of everything they do. Even the most well-intentioned trustees must take care to fully understand their obligations as fiduciaries to prevent inadvertent errors that could potentially leave them in violation of their fiduciary duty. As we welcome these individuals to their important roles, we would like to take the opportunity to address some frequently asked questions, drawn from many years of experience in trustee training.

I am a new trustee on the board of a police and firefighters’ pension system elected by the police members. I owe a fiduciary duty to my constituents—the police members—to always act in their best interests. Correct?

Not exactly. Trustees owe a fiduciary duty to all the members of a public pension plan—not just the membership group from which they were elected. This duty of loyalty is central to every statement of fiduciary duty.

The duty of loyalty means that a trustee wears only one “hat.” The courts have determined that a trustee may not, at the same time he or she is serving as a fiduciary for all members, wear a second hat as a representative of the entity that appointed him or her. This can be hard, as constituents may expect their elected “representative” on the board to take care of their needs. But as the courts have consistently held and the U.S. Supreme Court has reiterated, the duty to the trust beneficiaries must overcome any loyalty to the interests of the party or parties that appointed the trustee.

But as a governor’s appointee to a state pension board, shouldn’t I be primarily concerned with the taxpayers? After all, taxpayer money flows into the fund from the state, which is the employer.

Trustees of public retirement systems are not fiduciaries for appointing authorities, employers who pay into the systems, unions, constituencies from which they are elected, taxpayers, or the public. Rather, as noted, the duty of loyalty provides that trustees always act in the best interests solely of the members and beneficiaries.

The duty of loyalty is closely related to and informed by the exclusive benefit rule, which provides that trustees shall administer their pension systems for the sole and exclusive benefit of the members and participants. The pension plan’s assets are held in a trust, and once contributions are made to that trust—whether by employees who are members of the plan or by states or municipalities who continue as employers—those contributions become part of the trust.

Moreover, public pension plans are generally considered “qualified” retirement plans under the Internal Revenue Code, which allows for tax advantages such as tax-deferred contributions and earnings growth for employees participating in the plan. The Internal Revenue Code specifies that no part of the corpus or income from the trust may be used for purposes other than for the exclusive benefit of the employees or their beneficiaries. Any violation of this “exclusive benefit rule” could put the tax qualification of the plan at risk.

As a fiduciary, I feel that “the buck stops with me.” Isn’t it my job to make decisions—not the job of the staff or outside experts?

The role of the board is certainly as the final decision-maker, but the answer to the question posed is a little more complex. The importance of governance is critical, since research indicates a strong positive correlation between good governance and a performance premium. The role of the board is one of oversight. As noted by the National Association of State Retirement Administrators, boards are established to oversee the operations of the system, to ensure that the system is fulfilling its statutory responsibilities related to retirement system functions. The board is also charged with establishing the policies of the system and with strategic planning. Staff, on the other hand, has responsibility for the day-to-day operation of the system, as well as the implementation of the policies and strategic plan set by the board. Consultants provide the outside expertise that enables both the board and staff to better fulfill their respective responsibilities.

Fiduciary law provides that a trustee has a duty to personally perform the responsibilities of a trustee except as a prudent person might delegate those responsibilities to others. In deciding whether, to whom, and in what manner to delegate fiduciary authority, and in monitoring those to whom they have delegated responsibility, trustees owe a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person of comparable skill would act in similar circumstances (duties of prudence and care).

The law recognizes that a trustee cannot personally perform every function and does not possess all required expertise. Thus, trustees are authorized to delegate; delegation is, in fact, a critical part of a proper exercise of fiduciary duty. The decisions to appoint and monitor delegates are fiduciary functions: the trustee has a duty to properly select delegates and to monitor them. 

Remember that fiduciaries are judged by the decision-making process they follow. Do you as a trustee have sufficient information from experts, both staff and independent outside experts? Does your board engage in a rigorous decision-making process in a manner consistent with procedural prudence? The process undertaken should be documented to demonstrate prudence in decision-making. And finally, fiduciaries have an ongoing duty to monitor decisions to make sure those decisions remain prudent. 

The U.S. District Court for the District of Colorado has granted class certification in a lawsuit brought by the El Paso Firemen & Policemen’s Pension Fund, the San Antonio Fire & Police Pension Fund, and the Indiana Public Retirement System (Plaintiffs).

The securities fraud suit names InnovAge Holding Corp., several of its executives and board members, two private equity firms that allegedly controlled the company, and 11 underwriters who facilitated the company’s initial public offering in March 2021 (IPO) as Defendants. This decision by Judge William J. Martínez marks an important milestone in the case.

Background

InnovAge, a healthcare provider specializing in senior care through the federal Program of All-Inclusive Care for the Elderly (PACE), went public in the spring of 2021. Plaintiffs allege that the push to go public was driven by two private equity firms—Apax Partners and Welsh, Carson, Anderson & Stowe—who owned controlling stakes in InnovAge and had been instrumental in the InnovAge’s controversial decision to convert from a nonprofit to a for-profit company in the years prior to the IPO.

Plaintiffs allege that InnovAge made false and misleading statements regarding the company’s regulatory compliance, the quality of its care model, and the viability of its growth strategy. The claims focus heavily on InnovAge’s compliance with regulatory standards, a critical requirement in the highly regulated PACE industry. Plaintiffs assert that the company misrepresented its adherence to these standards, concealing issues later revealed by government audits. According to the lawsuit, these audits uncovered significant compliance violations, including woefully understaffed care centers, that ultimately resulted in sanctions that hindered InnovAge’s ability to accept new participants, negatively impacting its stock value.

Class Certification Decision

In its decision certifying Plaintiffs’ proposed shareholder class, the Court rejected Defendants’ two arguments opposing class certification.

First, the Court found that Plaintiffs satisfied the predominance requirement for class certification, rejecting Defendants’ argument that Plaintiffs did not comply with the Supreme Court’s decision in Comcast Corp. v. Behrend, which held that antitrust plaintiffs had failed to provide a damages methodology that aligned with their theory of liability. Defendants argued that Plaintiffs’ damages model failed to disentangle the effects of actionable misrepresentations from other factors affecting InnovAge’s stock price. Plaintiffs responded that Defendants were attempting to stretch the logic of Comcast beyond the specific, limited context in which it was originally applied. Judge Martínez sided with Plaintiffs, citing well-established precedent that Plaintiffs’ proposed “out-of-pocket” event study methodology is widely accepted in securities fraud cases. Judge Martínez also reasoned that, even if there were any shortcomings in the damages model, they would affect all class members uniformly and thus would not preclude class certification. The Court ultimately found that common issues, including the alleged misrepresentations and their impact on InnovAge’s stock price, predominated over any individual questions.

The “Comcast argument” Defendants raised is one that plaintiffs in securities class actions regularly encounter at the class certification stage, despite its being routinely rejected by courts. Just two months ago, attorneys at Cohen Milstein overcame a nearly identical argument when a district court in South Carolina granted a motion for class certification against Deloitte. This argument has become so common that, in briefing motions for class certification, Cohen Milstein attorneys have begun filing a list of district court opinions rejecting Comcast arguments, which they did here, listing 90 such instances.

Judge Martínez also found that Plaintiffs satisfied the requirement under Rule 23 of the Federal Rules of Civil Procedure that named plaintiffs in class actions are “adequate” representatives. In doing so, Judge Martinez noted that Plaintiffs were “sophisticated institutional investors who manage billions in assets,” who had “thus far capably demonstrated their understanding of this action by testifying as to the occurrence of key events; the cause of their alleged losses; and the causes and effects of Defendants’ alleged conduct.” (internal citations omitted).

Implications & Next Steps

Class certification is a key step in securities litigation and enables the Plaintiffs to serve as representatives of the class of InnovAge investors. Being certified to proceed as a class, rather than on an individual basis, increases bargaining power in the litigation and streamlines discovery and motions practice.

The story of InnovAge—that is, the story of a non-profit healthcare company converted into a publicly traded, for-profit corporation controlled by private equity firms—is emblematic of a broader trend of private equity firms’ involvement in the healthcare industry. As this lawsuit illustrates, that involvement often comes with a pursuit of cost-cutting and profit maximizing that can have serious repercussions not only for patients, but ultimately for other investors backing the healthcare companies.

Discovery in the matter is under way.

For further details, refer to the Court’s official order dated January 9, 2025.

With some federal appointees publicly tasked with overhauling or even eliminating the departments they’re tapped to lead, President Trump’s choice of Securities and Exchange Commission veteran and Washington insider Paul S. Atkins to head the agency seems to harken to a more conventional time.

Mr. Atkins is an unarguably experienced pick with a history of service to the agency, acting as an SEC Commissioner under Presidents George W. Bush and Obama and a high-level staffer for SEC Chairs Arthur Levitt and Richard Breeden before that. That makes him likely to be a more evolutionary Chair than a revolutionary one, according to Cohen Milstein partner Daniel S. Sommers.

“In contrast to some of the President-elect’s nominees for other agencies, I think it unlikely that Mr. Atkins will have the dismantling of the SEC as his mission,” Mr. Sommers said. “So, to the extent that U.S. politics is cyclical, there may still be a sufficient infrastructure at the SEC to resume pro-investor activity when Democratic control returns to the White House.”

As an SEC Commissioner from 2002 to 2008, Mr. Atkins largely followed the standard recent playbook for Republican appointees—backing measures to expand access to capital markets over increased regulation and expressing doubts about the value of holding public companies responsible when their executives break the law.

Mr. Sommers said Mr. Atkins’ tenure as an SEC Commissioner provides strong evidence as to how he will approach the SEC’s enforcement function if confirmed by the Senate. “We should expect that Mr. Atkins will strongly favor enforcement actions against individuals rather than corporations, and will look at all potential enforcement actions with heightened skepticism,” he said.

“While those approaches may not be ideal for institutional investors, I take at least some limited comfort from his history of working at the SEC and what appears to be his appreciation of the SEC’s importance as an institution,” Mr. Sommers said.

After leaving the SEC, Mr. Atkins founded DC-based political consulting firm Patomak Global Partners, advising financial industry and cryptocurrency clients about markets and regulatory issues. In 2016, he was a member of President Trump’s first-term transition team, advising the incoming administration on financial policies and appointments.

Since returning to the private sector, Mr. Atkins has expressed views in line with policies currently popular among Republican lawmakers and diametrically opposed to positions favored by his predecessor, Gary Gensler, who resigned on January 20. Under former Chair Gensler, the SEC filed lawsuits against large crypto-related companies, including digital exchanges Coinbase and Kraken, and enacted rules requiring climate-risk disclosures in public company filings.

Mr. Atkins, meanwhile, is an outspoken advocate for facilitating the growth of cryptocurrencies, sitting on the board of advisors of the Digital Chamber of Commerce, a blockchain trade association. Last year, he criticized “activist” investing, denouncing in a Newsweek article Department of Labor rules changes that he said “would encourage” asset managers to include environmental, social, and governance considerations in their investment decisions.

President Trump, who as recently as 2021 said cryptocurrencies looked like a “disaster waiting to happen” and that bitcoin “just seems like a scam,” did an about-face on digital currencies during this year’s election campaign. In a Truth Social post announcing his pick, President Trump said Mr. Atkins “recognizes that digital assets & other innovations are crucial to Making America Greater than Ever Before.”

In his post, President Trump also called Mr. Atkins “a proven leader for common sense regulations” who “believes in the promise of robust, innovative capital markets that are responsive to the needs of Investors, & that provide capital to make our Economy the best in the World.”

Whatever agenda he sets as Chair, Mr. Atkins will almost certainly face some daunting challenges to retain experienced staff if the new administration makes good on its public promises to “drain the swamp” by greatly reducing the size of the federal workforce.

In his first days in office, President Trump signed an executive order reclassifying federal employees involved in policy to make those employees easier to fire. The president of the American Federation of Government Employees, Everett Kelly, said the new order could eliminate civil service protections for “hundreds of thousands of federal jobs,” making those employees “answerable to the will of one man.”

In addition, President Trump issued an executive order creating a new Department of Government Efficiency (DOGE) within the Executive Office. In an opinion article published by The Wall Street Journal following the election, DOGE Chair Elon Musk wrote that the projected “drastic reduction in federal regulations” would justify “mass head-count reductions” across the federal government. These reductions, he wrote, could be achieved through “large-scale firings” and “voluntary terminations” induced by measures such as relocating federal employees outside Washington and ending remote work.

As if to underscore the changing of the guard, the SEC issued a flurry of enforcement actions in the waning days of the Biden administration, including one against Mr. Musk. The SEC suit accused Mr. Musk of violating federal securities laws by failing to timely disclose his acquisition of more than 5% of Twitter’s outstanding shares prior to his 2022 acquisition of the social media platform, now named X. The maneuver allowed Mr. Musk to underpay for his purchase by at least $150 million, the SEC alleged. It’s unclear if the SEC will continue to pursue the lawsuit under Chair Atkins.

In the past two weeks, the U.S. Supreme Court dismissed as “improvidently granted” — an order colloquially called a DIG — two securities class actions, Nvidia Corp. v. Investors, and Facebook Inc. v. Amalgamated Bank. DIGs are rare and are issued only when the Supreme Court realizes it shouldn’t have taken a case at the outset.

Dismissing two securities cases in such close succession, both of which presented significant risks to investor protections, is not only a procedural anomaly — it’s a necessary course correction.

The petitioners’ questions presented in both the Facebook and Nvidia cases were flawed — mischaracterizing existing law, purported circuit splits, the facts of the cases and the lower courts’ decisions.

The Supreme Court’s decisions to dismiss these cases maintain securities law pleading standards, preventing them from being unfairly tilted in favor of corporate defendants. The stakes in both cases were immense: The petitioners — Nvidia and Meta — in both cases sought rulings that would have significantly weakened securities laws and undermined investors’ ability to hold corporations accountable for fraud.

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.