Category: Articles - Page 6

On September 4, 2024, reading her decision into the record from the bench, Judge Katherine Failla of the Southern District of New York granted final approval to a partial settlement with a number of the world’s largest banks to resolve allegations that they violated the antitrust laws by colluding to prevent the modernization of the stock lending market by jointly boycotting efficient, all-to-all trading platforms and price transparency.

In her decision, Judge Failla noted a few unusual things about the settlement. First, its size—she recognized that the amount of the settlement, approximately $580 million in cash, is a “historical settlement amount.” Second, she noted that the litigation was “particularly complex” and that “Plaintiffs’ counsel really had to begin at the ground level, because there was no investigation or academic treatise or anything sort of giving them a leg up on the facts of this case; they had to find it out themselves.” Third, she awarded the Iowa Public Employees’ Retirement System, Los Angeles County Employees Retirement Association, Orange County Employees Retirement System, Sonoma County Employees’ Retirement System, and Torus Capital LLC, incentive fees in recognition of their “extraordinary” contributions to the litigation. Finally, during the hearing Judge Failla expressed particular interest in hearing about what she described as the “compliance or equitable component of the settlement.”

This component of the settlement—injunctive relief which the parties agreed upon and Judge Failla ordered—is both unusual and noteworthy. In private antitrust litigation, it is unusual for there to be changes in how businesses operate because the Department of Justice or other governmental entities seek that sort of remedy. Rather, monetary compensation is the norm for private parties. Here, however, plaintiffs truly acted as private attorneys general.

Specifically, the injunctive relief, developed with an expert in competition economics, incorporated recommendations from both the guidelines for evaluating corporate antitrust compliance programs and the guidelines for evaluating competitor collaborations, in creating a state of the art program within EquiLend, the joint venture organization that was at the center of the allegations of collusion, to deter EquiLend members from acting jointly to prevent new platforms from entering the stock lending market.

Clear standards: The injunctive relief mandates the creation of an Antitrust Code of Conduct designed to prevent collusion and inappropriate information sharing.

Monitoring and auditing: EquiLend will require all Board Members and Alternate Board Members to certify on an annual basis that he or she will comply with the Antitrust Code of Conduct. In addition, EquiLend’s Chief Compliance Officer will provide annual reports of compliance to the EquiLend Board and the Designated Antitrust Liaison Counsel at each of the owner firms.

High-level involvement: EquiLend Board members will annually certify the Antitrust Code of Conduct to be transmitted to the Chief Compliance Officer of EquiLend. If the Chief Compliance Officer believes a Board Member or Alternate Board Member has violated the Antitrust Code of Conduct, he or she is required to inform the Designated Antitrust Liaison Counsel of the owner firm that employs the Board Member or Alternate Board Member. In addition, the Antitrust Code of Conduct must explicitly state that owner firms may take further steps to investigate any suspect communications or situations.

Reporting: EquiLend Board Members and Alternate Board Members are required to report potential breaches of the Antitrust Code of Conduct to the Chief Compliance Officer of EquiLend if they become aware of such breaches.

Training: EquiLend will provide every EquiLend Board Member and Alternate Board Member with antitrust training every two years.

Information sharing: The Settlement places limits on who can have access to confidential information and a requirement to report breaches of these confidentiality restrictions to EquiLend’s Chief Compliance Officer. These restrictions on information sharing must be incorporated into the Antitrust Code of Conduct.

Governance reforms: The Settlement also includes limitations on the terms of EquiLend Board Members (five years), hiring of new antitrust counsel and limitations on the terms of outside antitrust counsel (three years), and requiring the names of all individuals who attend Board Meetings or Working Group Meetings to be included in the minutes for those meetings. Limitations on the terms of outside antitrust counsel is particularly important because it removes the financial incentive to get re-hired, which may result in a lack of independence in identifying collusive or anti-competitive behavior.

The $580 million cash payment and injunctive relief reforms put into place with the stock lending settlement agreement and ordered by the Court in connection with final approval of the stock lending settlement illustrate the public good that private litigation can bring. As the litigation continues against Bank of America, plaintiffs will continue to push for relief from these abusive anticompetitive practices.

The U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo surprised the legal world by overturning Chevron USA v. Natural Resources Defense Council, 467 US 837 (1984).¹ For the past forty years, Chevron has required judicial deference to federal agencies’ reasonable interpretation of statutes that courts deem ambiguous. This departure from precedent left lawyers in every regulated industry pondering, with apologies to Tina Turner, “What’s Chevron got to do, got to do with it?”

At first glance, Loper Bright’s only connection to retirement benefits is that it involves fishing, a favored pastime for retirees. However, Loper Bright goes deeper, increasing the likelihood that federal agency regulations will be challenged and rejected. Loper Bright’s impact may extend to administrative agency interpretations across consumer protection, transportation, healthcare, energy, and banking. It will take years to get certainty about which regulations are at risk, under what circumstances the courts will side with agencies over regulated entities, how far the challenges will go through the courts, and what the impact all of this may have on how public pension funds operate and function.

For now, the judicial challenge to the Department of Labor’s (DOL) Employee Retirement Income Security Act (ERISA) guidance concerning private pension funds through its rule on “Prudence and Loyalty in Selecting Plan Investments” is farther along than most other post-Loper Bright challenges. While the viability of that rule is uncertain and its applicability to public pension systems is only instructive, basic fiduciary duties emanating from state law remain in place. Even though Chevron is just a sweet old-fashioned notion now, public pension fiduciaries, as they have done in the past, need to engage in a rigorous review of their decision-making processes and thoroughly document the steps taken to arrive at those decisions to allow them to continue rolling on the river of prudent decision-making amidst what could be years of uncertainty while legal challenges wend their way through the courts.

We Don’t Need to Follow Chevron: Loper Bright Reverses Administrative Deference

In Chevron, the U.S. Supreme Court held that federal administrative agency determinations were entitled to judicial deference if the interpretation of an ambiguous statute was challenged in court. The rationale underlying the so called “Chevron deference” was that federal agencies, with their specialized expertise and accountability to the elected president, were better equipped than judges to make policy choices left open by Congress. For forty years, courts have applied Chevron deference across regulated industries in such areas as food safety, pollution, and labor regulations. On June 28, 2024, as NAPPA was concluding its Legal Education Conference, the Supreme Court decided Loper Bright Enterprises v. Raimondo (No. 22-451, June 28, 2024) (and a companion case, Relentless, Inc. v. Department of Commerce). Loper Bright involved family fishing businesses that challenged a regulation requiring industry-funded ocean monitoring promulgated by the National Marine Fisheries Service as unauthorized by the Magnuson-Stevens Fishery Conservation and Management Act of 1976 and as contrary to the federal Administrative Procedure Act (APA)^.2 The U.S. District Court for the District of the District of Columbia, applying Chevron deference, granted summary judgment upholding the regulation and the U.S. Court of Appeals for the D.C. Circuit affirmed. The Supreme Court granted certiorari and reversed. Relentless, the companion case, followed a similar path through the First Circuit.

Chief Justice Roberts wrote the Loper Bright opinion that overruled Chevron and held that courts must determine whether an agency has acted within its statutory authority using “traditional tools of statutory construction” to ensure that the agency’s determination is the best interpretation of the law pursuant to the APA. Even though agency determinations might still be “especially informative” when arising from “factual premises” that the agency is uniquely qualified to assess, courts still must independently determine the meaning of the ambiguous statute as a matter of law. The Supreme Court also emphasized that although Chevron deference has been overruled, prior decisions that relied on Chevron deference remain valid.

Justice Thomas concurred, concluding that Chevron deference violated the separation of powers through executive overreach into the judicial function. Justice Gorsuch also wrote separately, agreeing with Justice Thomas in a lengthy concurrence that Chevron deference violated the separation of powers and explaining why stare decisis did not require following Chevron. Justices Kagan, Sotomayor, and Jackson (Jackson participating only in Relentless) dissented. Their dissent emphasized the expertise of administrative agencies and political accountability of the executive branch, as well as Congress’s failure for 40 years to cure any disagreement with the Chevron doctrine. They also warned that the Loper Bright majority opinion enables judges to insert themselves into policy decisions. Finally, their dissent expressed concerns about the chilling effect on agencies to offer their own interpretations of statutory ambiguities, knowing that well-resourced regulated entities will challenge their interpretation.

In the near term, regulatory guidance from agencies will remain in effect unless a court rejects it. However, when regulations are challenged, challengers and government agencies will be placed on equal footing in advancing their arguments about the best interpretation of ambiguous laws. There is no longer deference accorded agency determinations.

It May Seem to You That ERISA Guidance Is Acting Confused: Loper Bright’s Shake-Up of DOL Standards

In 2022, the Biden Administration promulgated a rule that required an ERISA fiduciary to make investment decisions, “based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis” and stated that, depending on the facts and circumstances, risk and return factors “may include” ESG factors. A coalition of 26 states challenged the DOL’s 2022 rule asserting that the rule “contravenes ERISA’s clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries” and complaining that it introduced “ill-defined, subjective ESG concerns” into the fiduciary framework. These challenges culminated in the 26 states filing the lawsuit Utah v. Walsh (No. 23-11097, N.D. Tex.).

Surprisingly, considering his prior decisions favored more conservative policy outcomes, in September 2023, U.S. District Judge Matthew Kacsmaryk upheld the DOL’s interpretation based on then-applicable Chevron deference.³ Unsurprisingly, the plaintiffs appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. The plaintiffs argued that the 2022 Biden rule could not be supported without agency deference. The DOL countered, saying that the rule was consistent with ERISA itself and deference was unnecessary. Both parties agreed that the Fifth Circuit should assess whether the 2022 rule aligned with ERISA requirements. Then, less than two weeks before oral argument, the Supreme Court overturned Chevron deference. The Fifth Circuit, hearing the case with a new name, Utah v. Su, and new mandate (no Chevron deference), directed the District Court to independently interpret whether the 2022 rule was consistent with ERISA, with the instruction to Judge Kacsmaryk: “[W]e vacate and remand so that the district court can reassess the merits.”⁴ This case can be seen as a bellwether for how agency determinations will be reviewed under the Loper Bright holding.⁵

How Public Pension Funds Should Navigate the Waters Post-Loper Bright

Loper Bright is a “sea-change” decision, and public pension counsel needs to be alert to developments in federal administrative law because of the uncertainty it introduced. Despite this watershed alteration in administrative law, public pension fiduciaries’ duties of loyalty, prudence, and care as the primary drivers of their decisions remain the same. Public pension fiduciaries must still always exercise their duties consistent with the exclusive benefit rule as their guiding principle, acting solely in the interest, and with the exclusive purpose of providing benefits to members and beneficiaries of the plan.

Similarly, public pension fiduciaries must continue to exercise both procedural and substantive due diligence in their decision-making. Fiduciaries should continue to carefully document the information considered in making investment decisions, their reliance on experts, the reasoning behind their conclusions, and how they monitor these decisions to ensure they remain sound. Trustees who stay true to these responsibilities will find that these practices are “simply the best.”

Public pension attorneys will also need to be cognizant of impacts on investment and operating environments as the post-Chevron world evolves. Federal agencies with regulatory authority as diverse as the SEC, CFTC, IRS, FTC, CFPB, DOT, HHS and DOJ, among others, will be directly affected so that future regulatory schemes that affect public pension investments, partners, benefits, operations and even governance will need to be considered in this new context. Like-wise, states may be emboldened to adjust their regulatory review models to follow Loper Bright, which can have a more direct effect on public pension systems that are subject to state law requirements regarding their fiduciary duties.

The era of Chevron deference provided stability to the regulatory environment in which public pension systems operate. This new post-Chevron era promises uncertainty through trial and error that will, over time, define the way the judiciary and the legislature operate. While this plays out, public pension systems must be vigilant in observing and learning from related developments and, most importantly, must maintain focus on their basic fiduciary duties that prioritize the exclusive benefit rule for their members and beneficiaries. That is what Chevron has to do with it.

1 Loper Bright Enterprises v. Raimondo, 603 US ___(June 28, 2024).

2 5 U.S.C. §§ 551–559.

3 Utah v. Walsh, ___ F Supp3d ___, (N. D. Tex. 2:2023-cv-00016, Sept. 21, 2023), vacated and remanded sub. nom. Utah v. Su, ___ F4th ___ (23-11097, 5th Cir., July 18, 2024).

4 Utah v. Su, supra note 3.

5 It also should be noted that “more than 40 federal lawsuits citing the high court’s ruling in Loper Bright Enterprises v. Raimondo have been filed in the two-plus months since the decision. The suits—including those targeting firearm regulations, COVID-era loan programs, and Health and Human Services Department rules—show the wide range of court battles already prompted by the ruling.” Justin Henry, “Leading DC Firms Play Long Game in Life After Chevron Ruling,” Bloomberglaw.com (Sept. 13, 2024).

The article was selected for publication in the October 2024 Edition of The NAPPA Report and submitted by a member of NAPPA. NAPPA is a 501(c)(6) non-profit association providing continuing legal education to private and public attorneys whose primary practice is retirement law.

New rule set to safeguard investment adviser sector from illicit finance activity. New rule also requires reporting of suspicious or illegal activities by investment advisers.

On September 4, 2024, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, published its final rule (Rule) in accordance with the Bank Secrecy Act (BSA) that imposes minimum standards for establishing anti-money laundering/ countering the financing of terrorism (AML/CFT) programs. The Rule requires Registered Investment Advisers (RIAs) and Exempt Reporting Advisers (ERAs) to report suspicious activity to FinCEN in compliance with the suspicious activity reporting (SAR) requirements.

The purpose of the Rule is to safeguard investments in the United States and help prevent criminals and other illicit actors from laundering money through the U.S. financial system. The Rule helps to mitigate the risk of money laundering, terrorist financing, and other illicit finance activities through the investment adviser industry, particularly in relation to sanctioned entities, the Russian Federation, and exploitation by foreign state sponsored enterprises, most notably from the People’s Republic of China and Russia.

The new Rule, Department of the Treasury, Financial Crimes Enforcement Network, 31 CFR 1010 and 1032 goes into effect on January 1, 2026.

Why This Matters to Whistleblowers

The BSA authorizes the Dept. of Treasury and its bureaus to impose reporting and other requirements on financial institutions and other businesses to help detect and prevent money laundering.

According to FinCEN, investment advisers serve “as an entry point into the U.S. financial system and economy,” and may be susceptible to participating in fraud and other illegal activity by sanctioned and other unscrupulous foreign entities.

FinCEN has adopted the SAR filing provisions in the Rule to include investment advisers, thereby requiring certain investment advisers to report illicit activity to FinCEN.

Individuals working for such investment advisers may feel encouraged to “blow the whistle” on suspicious activity involving money laundering, terrorist financing, and other illicit finance activity.

Overview of the New ALM/CFT Rule & New Definitions:

Financial Institution – FinCEN is broadening the definition of “financial institution” to include certain investment advisers, and pursuant to the BSA, requiring certain investment advisers to report suspicious activity to FinCEN.

Investment Adviser – FinCEN is narrowing and clarifying the definition of “investment adviser.”

The Rule defines investment advisers as:

investment advisers registered with or required to register with the SEC, also known as RIAs; and
investment advisers that report information to the SEC as ERAs.

The narrower definition of investment adviser excludes from the definition:

RIAs that register with the SEC solely because they are (i) mid-sized advisers, (ii) multi-state advisers, or (iii) pension consultants; as well as
RIAs that are not required to report assets under management (AUM) to the SEC on Form ADV.

FinCEN is not applying this Rule to State-registered advisers. Foreign private advisers or family offices
(as defined in SEC regulations) are also exempt.

No later than January 1, 2026, investment advisers must have implemented AML/CFT programs, commenced filing SARs when required, and begun complying with the other reporting and recordkeeping requirements as described in the Rule.

SARs and other BSA forms, filing requirements, and FAQ can be found on FinCEN or the BSA E-Filing System.

Is Legal Counsel Needed if I Become a Whistleblower and “Blow the Whistle” on New Rule Violators?

While it is not necessary for a Whistleblower to engage legal counsel at the time of reporting fraud, misconduct, or other violations, it is recommended. Legal counsel specializing in Dodd-Frank-related whistleblower matters can assist in not only assessing the gravity of the possible violations the Whistleblower has knowledge of but will complete and file the required form – Form TCR with FinCEN.

About the Author

Christina McGlosson, Special Counsel in Cohen Milstein’s Whistleblower practice, focuses exclusively on Dodd-Frank Whistleblower representation. She is the former Acting Director of the Whistleblower Office in the Division of Enforcement at the U.S. Commodity Futures Trading Commission. She was also Senior Counsel in the SEC’s Division of Enforcement, where she assisted in drafting the SEC rules to implement the whistleblower provisions of Dodd-Frank.

Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCEN, the Department of Justice, and other government agencies.

Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice

Cohen Milstein Sellers & Toll PLLC

1100 New York Avenue, NW

Washington, DC 20005

E: cmcglosson@cohenmilstein.com

T. 202-988-3970

“FinCEN’s rule is long overdue. Investment Advisers are critical to the U.S. financial system and economy. At the same time, certain Investment Advisers are more vulnerable than others to sanctioned and other unscrupulous foreign entities. FinCEN’s final rule shores up the uneven application of the AML/CFT program across the industry and makes whistleblowing of suspicious activity an imperative,” said Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice at Cohen Milstein. It should be noted that Christina is the former acting director of the CFTC’s Whistleblower Office. She was also Senior Counsel to the Director of the SEC’s Division of Enforcement, during her fifteen-year tenure in the SEC’s Enforcement Division.”

The Employee Retirement Income Security Act was enacted in 1974 to address the public’s concerns that private pension plans and healthcare plans were being mismanaged and abused. We have much to celebrate as ERISA turns 50 this month.

Over the decades, ERISA has served as the most important safeguard for employee retirement savings plans and health benefits in the U.S. However, this moment also provides an opportunity to reflect on how ERISA is being tested in the courts.

Congress took a great deal of care in drafting and passing ERISA. It is the culmination of intricately planned legislation designed to address both the labor and tax components of employee benefit plans.

Over the years, Congress has amended ERISA to help meet the needs of the evolving workforce and U.S. families — adding protections like COBRA, the Health Insurance Portability and Accountability Act, and safeguards against “marriage penalties” for the pensions of married employees and their spouses.

Despite ERISA being such a robust federal law, some companies and plan providers don’t abide by it. Whether through intentional profit-seeking tactics or negligence, breaches in fiduciary duties and plan mismanagement occur regularly.

Self-dealing and fee skimming are ongoing issues in 401(k) management, particularly for proprietary plans, which are leveraged by sophisticated financial institutions, insurers, private equity companies and hedge funds.[1] A mere 10 basis points or 0.1% in additional fees can mean a windfall for the company and hundreds of millions of dollars in employee losses.

Similarly, with employee stock ownership plans — once a symbol of buying into the American dream — we continue to see less-than-honorable business owners hoodwinking employees into buying stock in their privately held companies at outrageously over-valued prices.

We have seen, firsthand, class actions lead to industrywide changes that will protect workers’ retirement savings, including a reduction of 401(k) fees and a shift toward more low-cost index fund investment options.

But ERISA’s regulatory framework is now in jeopardy after the U.S. Supreme Court’s June 28 decision in Loper Bright Enterprises v. Raimondo, which overturned the decades-old Chevron doctrine of judicial deference to federal agencies’ interpretation of ambiguous statutes. Now, the courts may play an even more important role in ensuring employees not only have access to their hard-earned retirement savings and healthcare benefits, but also to the courts to address misconduct by plan fiduciaries and administrators.

To date, ERISA has been implemented and interpreted through regulations issued by both the IRS and the U.S. Department of Labor. Given the Supreme Court’s decision to overturn Chevron, possibly jeopardizing some of these regulations, companies may have more incentive to ignore ERISA — particularly companies headquartered in judicial circuits with less-than-favorable track records of upholding pro-employee statutes. This could glut the courts with unnecessary lawsuits and potentially undo decades of bipartisan work.

Even before Chevron deference was overturned, worker protections under ERISA faced significant legal hurdles before the courts, due to corporate intervention. One particularly significant issue is arbitration clauses with class action waivers and restrictions on collective remedies, which can prevent employees from bringing meaningful claims, pursuing fulsome awards, and holding companies and plan fiduciaries accountable for misconduct or plan mismanagement to the fullest extent of the law.

Such arbitration clauses should be unenforceable because they prevent workers from exercising their statutory rights under ERISA to address plan-wide fiduciary and mismanagement issues. Yet, plan providers and fiduciaries continue to insert arbitration clauses, which deter employees from exercising their rights, and allow providers and fiduciaries to avoid accountability.

Employee and ERISA-rights advocates are cautiously optimistic, as workers have successfully addressed the enforceability of these arbitration clauses in several courts of appeal. Thus far, the U.S. Courts of Appeal for the Second, Third, Sixth, Seventh and Tenth Circuits have agreed with plaintiffs that ERISA renders arbitration agreements unenforceable.

Last October, the Supreme Court declined to review both the Tenth Circuit’s 2023 decision in Harrison v. Envision Management Holding Inc. Board of Directors,[6] and the Third Circuit’s 2023 decision in Henry v. Wilmington Trust NA, both of which held that arbitration provisions in plan agreements were unenforceable. However, arbitration enforcement cases are pending before the Ninth and Eleventh Circuits.

It is also encouraging to see ERISA evolving to anticipate the needs of today’s workers. For example, the Mental Health Parity and Addiction Equity Act, or MHPAEA, requires that procedures insurers cover for a medical diagnosis must also be covered if indicated for a mental health diagnosis, providing a critical tool to obtain gender-affirming care.

In Duncan v. Jack Henry & Associates Inc. in 2022, the U.S. District Court for the Western District of Missouri allowed a plaintiff’s claim to proceed under the MHPAEA, asserting that a plan that covers mental health treatment for gender dysphoria must also cover a gender-affirming procedure. The case has since settled.

Similarly, ERISA, with the aid of litigation, is playing an important role in mitigating emerging corporate abuse involving third-party pharmacy benefit managers, and outsized costs for employee health plans and prescription medications.

As we celebrate the 50th anniversary of ERISA, Congress should be applauded for the decades of care and research that have gone into this protective statute for worker and retiree rights. ERISA has proven to be one of the most effective laws to safeguard America’s retirees and employees.

However, much more needs to be done by lawmakers.

Unless further amendments are made to shore up ERISA — such as banning class action waivers, and identifying and codifying important regulations that are now imperiled by the Supreme Court’s Chevron ruling — profit-driven companies and plan providers will find new ways to shirk ERISA compliance and use the courts to strip away ERISA’s power to protect workers and retirees. The undoing of Chevron deference may provide them with new tools to do so.

While litigation, particularly class actions, can protect Americans’ hard-earned retirement savings, the courts should not be the endgame. ERISA is a shining achievement of bipartisan congressional efforts to protect workers and their access to health and retirement plans, but lawmakers need to regroup and continue their efforts to effectively protect America’s increasingly diverse workforce.

There is no shortage of uncertainty in our world. That said, two certainties that bear directly on the fortunes of pension funds—death and taxes—have always impacted the work of public pension administrators. Now we can add a third certainty to this list: the necessity of cybersecurity preparation.

According to a recent Forbes report, there were 2,365 cyberattacks last year, with about 350 million victims. That represented a 72% increase in incidents since 2021, the previous high water mark for cyberattacks. On average, each cyberattack costs about $4.5 million. The most typical occur by email, text or phone, with familiar vendors the most common targets—Microsoft, Amazon, Google, and Apple, to name a few. The risk is apparent. And literally as I write this, a massive cyberattack at AT&T is being reported.

In June, during the National Association of Pension Plan Attorneys’ 2024 Legal Education Conference, a panel of experienced pension fund lawyers and consultants offered some guidance regarding cyberattacks and how to prepare. The following draws from their advice.

First and foremost, educate yourself about the risks surrounding cyberattacks. From there, it is necessary to develop policies, some of which will be mandated by law and others specific

to your organization. Importantly, administrators must clearly and unambiguously specify the chain of command and roles for dealing with cyberattack issues, including an actual attack. Response protocols also must be detailed and unambiguous, so that intrusions are dealt with as quickly as possible. These processes must accommodate the many different aspects of responding to an incident; internal protocols, governing laws and regulations, notifications, and timing are among the important considerations. The development of these rules is not for the faint of heart, since they may implicate legal requirements, enterprise-wide function, beneficiaries, external constituencies, and vendors, as well as incur a variety of other risks.

Once the rules and protocols are in place, it is necessary to undertake regular training, especially for the personnel responsible for dealing with a cyberattack. Since attacks can emanate from anywhere within the enterprise, all personnel must be trained to recognize risks of a cyberattack that may target their own computers so that they can prevent the organization’s systems from being invaded or raise an alert with those responsible for responding to a cyberattack. The training should also include drills to ensure that any actual response is quick and direct. There also must be regular review of the policies, protocols and practices with appropriate revisions and updates, especially since the breadth of risks posed by a cyberattack are constantly evolving. Vigilance is a key component to ensuring up-to-date security.

Among the many aspects of policy, protocol, and practice to be addressed is the essential challenge of notifying those potentially affected by an incident. Applicable federal, state, local, and in some circumstances even international laws govern notification requirements for law enforcement and affected members and beneficiaries. Privacy laws, including HIPAA for health information, and SEC requirements, must be considered. You may have contractual provisions governing third parties and vendors—not only regarding their roles in direct cyberattacks on the pension system but also to incidents affecting those parties that could implicate system information.

Cybersecurity insurance may also be warranted. First and foremost, the insurance available for these attacks must be scrutinized for coverage, exclusions, and cost, but other factors also come into play when selecting a policy. This is another area of significant variation and evolution so, again, regular review will be necessary.

As any incident is likely to involve issues with legal counsel and advice, consideration of the role of the attorneys involved should be resolved early so that issues surrounding privilege and work product can be understood. Maintaining careful records is, as always, essential to establish fiduciary compliance, and consideration to record development and retention to avoid the risks attendant these kinds of crisis situations should be given early and fully. Data are valuable in today’s operating environment, meaning information not directly affected by any specific attack must also be protected, so informed assessment in these matters should be given.

This litany of approaches to deal with the risk of cyberattacks is meant merely as an introductory primer. Even from this approach, though, the risks inherent in the enterprise and the opportunities for missteps during responses, which can be hurried and erratic if not well conceived and planned, are evident, with concomitant negative effect on fiduciary duty. The use of experts, both internal and external, may well be warranted in order to minimize what is now inevitable: the risk of harm from cyberattack.

By Kate Fitzgerald, Snr. Marketing Communications Manager

On June 10, a South Florida jury found Chiquita Brands International responsible for the wrongful deaths of eight men murdered by Autodefensas Unidas de Colombia (AUC), and awarded their surviving family members $38.3 million in the first in a series of bellwether trials against the multinational.

The plaintiffs in In re Chiquita Brands International Inc. Litigation are the surviving family members of the eight victims who were targeted and killed by the AUC, a brutal paramilitary known for mass killing. The U.S. has designated the AUC as a Foreign Terrorist Organization which makes supporting it a federal crime. Providing financial support to the AUC was also a crime under Colombian law. The plaintiffs alleged that Chiquita paid the AUC nearly $2 million, while facilitating shipments of arms, ammunition, and drugs, despite knowing that the AUC was an illegal organization engaged in a reign of terror.

Agnieszka Fryszman and Leslie Kroeger led Cohen Milstein’s trial team in representing the family members of the trade unionists, banana workers, political organizers, activists, and others who were killed by the AUC. During the six-week trial, plaintiffs allege that the deaths of their relatives were a foreseeable result of Chiquita’s financial support of the AUC.

“Our clients risked their lives to come forward to hold Chiquita to account, putting their faith in the United States justice system. I am very grateful to the jury for the time and care they took to evaluate the evidence,” said Fryszman, chair of Cohen Milstein’s Human Rights practice. “The verdict does not bring back the husbands and sons who were killed, but it sets the record straight and places accountability for funding terrorism where it belongs: at Chiquita’s doorstep.”

Far Reaching Impact

The $38.3 million jury verdict came in the first in a series of bellwether trials against Chiquita. Roughly 4,500 plaintiffs are awaiting their trial dates. After 17 years or pre-trial litigation, this is the first time that an American jury has held a major U.S. corporation liable for complicity in serious human rights abuses in another country.

In Chiquita, plaintiffs relied on the “transitory tort doctrine,” an ancient legal doctrine that provides that someone who commits a civil injury in one part of the world can be sued where he or she is found. In such cases, courts often apply the law of the place of injury, in this case Colombia. After evaluating dozens of expert reports, the court in Florida applied Colombian law on negligence and hazardous activity.

“U.S. corporations that operate in places with less rule of law and access to courts and history of corruption and political violence will look to this verdict and see you’ll be held accountable in American court,” Fryszman said. “You can’t simply roll the dice and hope you’ll not get caught. There is no law-free zone you can take advantage of.”

Case Background

Chiquita has operated banana plantations in Colombia since the 1960s. During much of that time, Colombia was mired in armed conflict between left-wing guerrilla groups and right-wing paramilitaries.

Plaintiffs allege that from 1997 to 2004, Chiquita issued more than 100 regular, monthly payments to AUC, totaling more than $1.7 million, as well as supplying the AUC with shipments of arms and ammunition.

With Chiquita’s support, plaintiffs claim that the AUC expanded to more than 30,000 fighters. Based on official sources in Colombia, court records say that “paramilitaries were responsible for killing or disappearing more than 100,000 civilians during this time period and committed more than 10,000 acts of torture.”

In March 2007, Chiquita pled guilty to criminal charges brought by the U.S. for knowingly providing material support to the AUC. The Department of Justice described Chiquita’s support to the AUC as “prolonged, steady, and substantial.” Following its admission, Chiquita agreed with federal prosecutors to pay $25 million in damages. The company’s executives were spared criminal prosecution in both the U.S. and Colombia.

The civil claims in this suit were brought on the heels of that guilty plea and were subsequently consolidated by the multidistrict litigation (MDL) panel and heard by a federal court in Florida. A test group of plaintiffs, referred to as “bellwether” plaintiffs, was selected to proceed to trial by jury, which began on April 22, 2024.

After six weeks of trial, the jury was satisfied that plaintiffs had shown a preponderance of evidence that the AUC “in fact killed” eight of nine victims included in the first bellwether trial and that Chiquita was liable for not only providing substantial assistance to the AUC to create a foreseeable risk of harm, but failed to act as a reasonable business under the circumstances. The jury was also unconvinced that Chiquita lacked a viable alternative to supporting the AUC. Accordingly, it ordered the company to pay the eight plaintiffs more than $38 million in damages.

Next Steps

While the date of the second bellwether trial has been temporarily postponed so that Chiquita can appeal the verdict, Leslie Kroeger, a Cohen Milstein partner, stated “After a long seventeen years against a well-funded defense, justice was finally served. We look forward to the next round of bellwether trials and will continue to fight for our clients.”

Cohen Milstein, EarthRights International, and other co-counsel represent the family members of the decedents.

One can hardly open the business section of a newspaper today without immediately seeing an article about Artificial Intelligence (“AI”). Companies use the term to refer to different things, but one of the most prominent and frequently discussed types of AI used in businesses today is “generative AI.” Generative AI trains AI to absorb large amounts of data patterns and structures— so-called large-language models—so that it can learn and eventually generate new data with characteristics that are similar to the original data. Generative AI tools include popular chat-bots like ChatGPT and Claude, and search engines like Perplexity. Companies such as Google, Microsoft, Apple, and Meta have also built AI functionality into their core products.

As a firm committed to advocating for good corporate governance and the rights of shareholders, Cohen Milstein has dedicated substantial resources to understanding how AI tools can be used to supercharge our work to achieve the best results for our clients. In this article, we will share insights about how AI tools can be used by legal advocates and pension funds.

Use of AI as Advocates for Shareholders

We are at the dawn of the AI age, and many law firms have begun exploring how best to use AI to advance their clients’ interests. One simple but powerful function of AI tools is to generate accurate summaries of lengthy documents. Enforcing the securities laws often involves the review of lengthy documents, such as public companies’ filings with the Securities and Exchange Commission. Generative AI tools can quickly summarize those documents and the tools can also understand natural-language questioning about those documents, which allows our attorneys and experts to put their deep substantive knowledge to use in tandem with the AI technology to efficiently identify the most salient points.

Another important role we serve is to thoroughly investigate reported corporate wrongdoing to understand whether our institutional investor clients have been impacted. AI can accelerate our ability to conduct factual research about large numbers of companies and their officers and directors, by quickly answering numerous questions. To be sure, AI’s factual output cannot be independently relied upon due to the persistent problem of “hallucinations”—i.e., the system confidently misstating the facts. Nonetheless, AI’s factual output is often largely correct, and using it as a starting point (always coupled with independent factual verification) can accelerate our research and catalyze our ability to quickly understand an industry, company, or set of individuals who may have harmed shareholders.

Use of AI Within Pension Funds

Potential applications of AI extend far beyond the legal realm, offering transformative opportunities for our clients in various sectors, including pension funds. AI can enhance investment strategies through sophisticated algorithms that predict market trends, identify investment opportunities, and manage risks with greater precision thereby enhancing accuracy, efficiency, and financial stability. AI-driven solutions can also streamline administrative processes.

One of the primary advantages of AI in pension fund management is its ability to analyze vast amounts of financial data rapidly and accurately. While not necessarily something that is possible through chatbots such as ChatGPT, AI algorithms can identify patterns and trends that human analysts might miss, enabling more informed investment decisions that can help maximize returns on pension fund investments.

Risk management is another critical area where AI can make a substantial impact. Machine learning models can simulate various economic scenarios and stress-test portfolios, helping fund managers to anticipate potential risks and adjust their strategies accordingly. This proactive approach to risk management can safeguard the pension funds’ assets, providing more stability for the beneficiaries.

In addition to investment and risk management, AI can streamline the administrative processes associated with pension fund management. Tasks such as tracking contributions, managing payouts, and ensuring regulatory compliance can be automated using AI-powered tools. This automation reduces the likelihood of human errors. Importantly, using AI does not equate to a loss of jobs for humans; instead, it enhances the roles of those previously managing these tasks and directs resources to other important work.

In conclusion, incorporating AI into pension fund management offers a range of benefits, from improved investment strategies and risk management to more efficient administrative processes. Harnessing the power of AI may help pension funds better secure the financial futures of their pensioners. As technology continues to advance and with close oversight and testing, the potential for AI to transform pension fund management will only grow, promising even greater efficiencies and financial stability for public servants, while allowing human workers to focus on other valuable contributions.

Delaware Gov. John Carney has enacted a controversial law that will allow publicly traded companies incorporated in the state to grant some stockholders broad powers without a shareholder vote, ratifying the state legislature’s fast-tracked approval of the measure last month.

On July 17, Gov. Carney, a Democrat, signed Senate Bill 313 (S.B. 313), which sailed through the Delaware State Assembly in June despite concerns raised by dozens of academics, shareholder rights’ advocates, and two judges.

Critics said the state’s bar association and lawmakers too hastily drafted the law, contending that it allows side agreements whereby a company’s board of directors can cede its rights to a few powerful stockholders. The law was conceived as a response to several high[1]profile court rulings by the Delaware Court of Chancery that were perceived as anti-business, one of which is still under appeal.

The Senate passed S.B. 313, unopposed and without debate on June 13, just three weeks after it was introduced; a week later, on June 20, the House voted 34 to 7 to approve the measure. Now law, the measure amends the Delaware General Corporation Law (DGCL), which directly affects the governance of millions of companies incorporated in the First State and serves as a model nationwide.

Background

The DGCL includes important investor protection privileges, which are typically refined over time through a steady stream of decisions by the highly specialized and well-respected Delaware Court of Chancery. But recently a debate has unfolded over whether the Court has given shareholders too much say over how companies are run, rather than deferring to the business judgment of corporate directors. Delaware is home to more than half of all U.S. publicly traded corporations and more than two-thirds of the Fortune 500, and some leaders fear that any perceived bias could lead to an exodus.

DGCL Section 141(a) says the “business and affairs” of Delaware corporations “shall be managed by or under the direction of a board of directors,” as long as the directors act loyally and carefully as required by their fiduciary duty to the corporation and its stockholders. The “business judgment rule,” as it’s known, is an important element of the DGCL and has been a key to the state’s popularity among businesses— along with low startup costs, ease of incorporation, and the promise that legal disputes will be adjudicated by the Chancellors, as the seasoned and sophisticated Chancery Court judges are known.

Since 2023, several companies citing increased litigation risk have left Delaware, including TripAdvisor and Fidelity National Financial. Most famously, in June, Tesla CEO Elon Musk sought and received shareholder approval to reincorporate in Texas after Chancellor Kathaleen St. Jude McCormack rejected his 2018 pay package, originally worth $56 billion. In her January opinion, Chancellor McCormick sided with investors who said Tesla’s Board of Directors was beholden to Musk and breached its fiduciary duty by approving the mammoth pay package after sham negotiations.

Moelis

In the interest of brevity, today’s article will deal with only one of the three rulings addressed by the new law: the February 23, 2024 decision by Vice Chancellor J. Travis Laster in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Moelis).

Moelis & Co is a global investment bank founded by Ken Moelis, who ran the bank for years as a private entity before deciding to raise capital by taking the company public in 2014. In order to do so, he reorganized Moelis under a new holding company incorporated in Delaware with himself as CEO and Chairman of the Board.

In Moelis, Vice Chancellor Laster granted summary judgment in favor of a pension fund that objected to a stockholder agreement between Mr. Moelis and the company, reached a day before the IPO, that required the Board of Directors to get written pre-approval from Mr. Moelis over important business decisions and the composition of the board itself. As summarized by Vice Chancellor Laster: “The Pre-Approval Requirements encompass virtually everything the Board can do. Because of the Pre[1]Approval Requirements, the Board can only act if [Mr.] Moelis signs off in advance.”

Citing the standard established in Court’s landmark 1957 decision, Abercrombie v. Davies, Vice Chancellor said some of the challenged provisions facially violated Section 141(a) because they “have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters” or “tend[] to limit in a substantial way the freedom of director decisions on matters of management policy. . .”

Moreover, Vice Chancellor Laster wrote, Mr. Moelis “could have accomplished the vast majority of what he wanted” by changing the company charter or having the company issue him new preferred stock with outsized voting and director appointment rights. Instead, he created a situation where “the business and affairs of the Company are managed under the direction of [Mr.] Moelis, not the Board,” as required by Section 141(a).

Opposition to S.B. 313

Into this climate of uncertainty strode the Council of the Corporate Law Section of the Delaware State Bar Association, which quickly drew up S.B. 313 and obtained Bar Association backing. Introduced on May 23 by Delaware Senate Majority Leader Bryan Townsend, a corporate attorney with Morris James LLP, the measure allows the type of stockholder agreements invalidated in Moelis, even if their provisions are not specified in a certificate of incorporation.

The bill drew fire even before its introduction—including from Chancellor McCormick, the author of the two other opinions that prompted the creation of S.B. 313. In an April 12 letter that became public at the end of May, Chancellor McCormick wrote the Delaware State Bar Association that “there is no justification for the rushed nature of the proposal. . .” which, she said had “moved forward at a pace that forecloses meaningful deliberation and input from diverse viewpoints.” The Chancellor also took issue with the fact that the Delaware Supreme Court had not yet ruled on an appeal to the decision. “So why the rush?” she asked.

On June 7, after S.B. 313 had been introduced, a group of more than 50 law professors opposed the bill in a letter to the members of the Delaware Legislature. In the letter, posted on the Harvard Law School Forum on Corporate Governance, the professors wrote that, beyond overturning Moelis, the proposal “would allow corporate boards to unilaterally contract away their powers without any shareholder input.”

“We are professors of corporate law, and we routinely disagree over corporate law issues. Yet we are unanimous in our belief that the appropriate response to the Moelis decision is to allow the appellate process to proceed to the Delaware Supreme Court,” the letter said. “The issues at stake warrant careful judicial review, not hasty legislative action.”

Also in June, Vice Chancellor Laster, in a LinkedIn post he said was made outside his official capacity, called out S.B. 313 as “not the annual tweaking of the DGCL. That’s a cosmetic procedure by comparison. This is major surgery.”

Finally, on July 10, the Council of Institutional Investors asked Gov. Carney to veto the bill, saying that lawmakers’ “unprecedented action” to “overturn[] a trial court ruling that is not yet final” constituted a “legislative rush to judgment. . .”

“A hallmark of Delaware General Corporation Law is the careful and deliberate nature in which it is adopted and enforced, as well as the ways in which Delaware law balances boards’ decision-making with accountability to shareholders,” CII Jeffrey Mahoney wrote. “That reputation could be seriously impaired by a perception that influential actors can easily change the law whenever the Delaware Court of Chancery has the temerity to rule against them.”

The speed with which the measure was created, approved, and enacted appears to swing the pendulum in Delaware away from the Court of Chancery and advocates of a more deliberative approach to changes in Delaware’s board-centric corporate governance model.

Last month, the U.S. Supreme Court agreed to consider two cases from the Ninth Circuit Court of Appeals that will implicate the ability of investors to bring securities fraud claims. The most worrisome—NVIDIA Corp. v. E. Ohman J:or Fonder AB, No. 23-970—will address a fundamental question about the pleading standards for securities fraud cases under the already heightened Private Securities Litigation Reform Act of 1995 (PSLRA) standard. The other—Facebook v. Amalgamated Bank, No. 23-980—will expound upon whether publicly listed companies must disclose past known risks that do not pose ongoing or future risks. Both cases are scheduled to be heard during the upcoming 2024-2025 term.

NVIDIA: Pleading Standards for Scienter and Falsity

In NVIDIA, shareholders brought a putative class action lawsuit under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5, alleging that NVIDIA and several of its officers intentionally misrepresented the extent to which the accelerated computing company’s gaming segment revenues were driven by selling its graphic processing units (GPU) to cryptocurrency miners rather than to gamers. Plaintiffs allege that defendants tracked mining related sales in multiple ways and had access to documents that demonstrated the high demand and use of NVIDIA GPUs among cryptocurrency miners, a conclusion plaintiffs based partly on interviews with former employees. Unlike in most securities fraud class actions, the plaintiffs were even able to allege a number of specifics relating to the documents to which defendants had access, including detailed descriptions of the contents of the documents, the names of regular internal reports, and how often the reports were distributed. The plaintiffs also relied upon an RBC Capital Markets report and independent expert analysis of public data to demonstrate that NVIDIA had generated over a billion dollars more in mining-related revenues than had previously been disclosed.

The U.S. District Court for the Northern District of California dismissed the complaint, concluding that the plaintiffs were not able to point to any specific information in NVIDIA’s internal documents to support an inference of scienter (defendants acting either recklessly or with knowledge that their own actions were wrong), which is required under the PSLRA. A divided panel of the Ninth Circuit reversed in part and remanded, disagreeing with the District Court and finding that plaintiffs adequately showed scienter based on the employee interviews, at least as to the CEO. In addition, considering an issue the District Court had not broached, the majority concluded that the expert report sufficiently supported plaintiffs’ falsity claims.

On June 17, 2024, the Supreme Court granted certiorari to hear two questions, the first relating to scienter and the second relating to falsity: (1) “Whether plaintiffs seeking to allege scienter under the PSLRA based on allegations about internal company documents must plead with particularity the contents of those documents. . .” and (2) “Whether plaintiffs can satisfy the PSLRA’s falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.”

Facebook: Disclosure of Previously Materialized Risks

In Facebook, shareholders brought a putative class action lawsuit, also under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, alleging that Facebook failed to disclose materialized business risks related to Cambridge Analytica’s access to and misuse of Facebook user data, instead describing such risks as merely hypothetical. While the District Court for the Northern District of California granted defendants’ motion to dismiss, the Ninth Circuit reversed. The divided panel held that Facebook could be held liable for securities fraud for disclosing in its filings that security breaches and improper third-party access to user data “could harm” its business, given that Facebook was aware of the Cambridge Analytica breach.

On June 10, 2024, the Supreme Court granted certiorari to consider one of the two questions from the Facebook petition: “Are risk disclosures false or misleading when they do not disclose that a risk has materialized in the past, even if that past event presents no known risk of ongoing or future business harm?”

Implications

Both the NVIDIA and Facebook cases are bound to impact the ability of investors to successfully pursue securities class action lawsuits.

The first question presented in the NVIDIA case, in particular, could serve as a serious impediment to bringing securities fraud claims. The PSLRA, as interpreted by the Supreme Court nearly two decades ago, already provides a heightened standard for pleading scienter—much higher than in any other area of law. If the Supreme Court decides NVIDIA in favor of defendant-appellants, it will make bringing securities fraud cases even more difficult by requiring plaintiffs to plead in great detail the specific contents of internal documents for the case to proceed. It is nearly inconceivable to imagine how plaintiffs can clear this hurdle, since the PSLRA imposes an automatic stay on discovery, meaning defendants are not required to produce any internal documents until after the complaint survives a motion to dismiss. This also would encourage the problematic practice of company insiders stealing company documents and turning them over to lawyers. The second NVIDIA question is important, but likely less impactful, since pleading based on expert testimony is relatively rare. And when there is expert testimony, it is not typically a “substitute for particularized allegations of fact,” but rather a tool to opine on protocol in a given industry or to analyze public data.

Resolution of the Facebook question is less likely than NVIDIA to be devastating to securities cases, but a decision in favor of the appellants could still have significant repercussions. If a past event presents no risk of “ongoing or future business harm,” then it is not material—i.e. something that a reasonable investor would consider important in deciding whether to buy or sell a security—and a court likely will not sustain a securities fraud case on that basis. Moreover, the Facebook question will not impact the majority of securities fraud claims, since investors typically bring such claims only when known risks were indeed material. However, contrary to the way defendants in Facebook framed the question to the Court, the known risk at issue was in fact material to investors and to Facebook—indeed, Facebook agreed to pay $5.1 billion in civil penalties to settle charges by the Federal Trade Commission and the SEC over the scandal.

Regardless of the cases’ outcomes, the fact that the Justices will hear two securities fraud cases next term is a testament to the Supreme Court’s increasingly active role in this space. In recognition of the cases’ potential impact, Cohen Milstein is helping to spearhead amicus efforts supporting plaintiffs in both NVIDIA and Facebook. We encourage investors to follow these cases closely and support those efforts.

Judge’s ruling opens door for crypto, blockchain, digital asset insiders and others with inside information about fraud and misconduct to blow the whistle.

On August 7, 2024, the U.S. Securities and Exchange Commission (SEC) secured a ruling in a groundbreaking case, SEC v. Ripple Labs Inc., et al., that certain cryptocurrency and digital asset token transactions must be registered with the SEC. Failure to register such transactions under Sections 5(a) and 5(c) of the Securities Act of 1933 will result in enforcement actions and penalties.

Specifically, the court ordered that Ripple Labs Inc., (Ripple) a privately held company and one of the world’s largest enterprise blockchain solutions for global financial institutions, businesses, and governments, pay a $125 million civil penalty for its failure to register institutional sales of its XRP token in 1,278 transactions in violation of the federal securities laws. The court also permanently enjoined Ripple from ongoing sales of XRP without registering them as securities, lest it continue to violate the federal securities laws. Simultaneously, the court denied the SEC’s request for an additional $876 million disgorgement.

While both sides are claiming victory, the court’s decision, nevertheless, sets a precedent for how cryptocurrency and blockchain developers can legally raise funds from institutional investors moving forward. This decision is also a call to action for potential whistleblowers.

A Call to Action for Whistleblowers

Originally filed in 2020, the SEC alleged that Ripple made more than $1 billion in unregistered sales of its XRP token. In July 2023, the court issued a 34-page summary judgment ruling, finding the XRP token was a security when it was sold directly to institutional investors but not when it was sold on public exchanges in blind transactions.

Going forward, cryptocurrency and blockchain developers looking to raise funds from institutional investors must register their transaction under Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act).

The judge’s ruling opens the door for would-be whistleblowers in the crypto, blockchain, and digital asset markets to come forward and blow the whistle based on their knowledge of possible federal securities law violations, in addition to coming forward to report illegal sales of securities, like the unregistered transactions here – Ripple’s XRP offerings to institutional investors.

With this long-awaited ruling, whistleblowers, now more than ever, can play a pivotal role in holding crypto, blockchain, and digital asset companies to account to ensure greater market confidence.

What are Sections 5(a) and 5(c) of the Securities Act of 1933?

The Securities Act serves to ensure that companies register securities with the SEC, disclose material information about those securities to the public, and do not engage in fraud. Section 5 requires companies (issuers) to file a registration statement with the SEC when publicly offering securities.

Section 5 (a) and (c) center on the SEC’s review and approval of the registration statement, while regulating the issuers’ activities, including communications, during this review.

Case Background

In 2020, the SEC alleged that Ripple raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors.

Ripple, which touts American Express, BBVA, and BMO among its clients, argued that XRP should not be treated as a security. Ripple maintained that XRP does not meet the criteria set out by the Howey Test, a standard used to determine whether a financial instrument is classified as a security.

One of the first of its kind, the lawsuit sent shockwaves through the cryptocurrency sector when blockchain projects had been operating with little regulatory oversight.

As a result, the August 7 ruling sets a precedent going forward for the industry. While the SEC will have authority over sales to institutions, crypto exchanges can allow cryptocurrency trades to “programmatic buyers,” i.e., algorithmic trades to the public, with the understanding that cryptocurrency transactions on exchanges are not securities transactions.

What if I witness misconduct or suspect fraud?

If you observe possible misconduct or fraud violation of the Sections 5(a) and 5(c) of the Securities Act of 1933, 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) 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.