With the head-snapping implosion of Silicon Valley Bank and cryptocurrency lenders Signature and Silvergate Bank, amidst speculation of independent auditor complicity, this past week, it feels like 2008 all over again.

Only this time, we’re in a post-Dodd-Frank world and Barney Frank is on the board of Signature.

Recession seems all but certain, as the Fed is still expected to push interest rates higher by a 0.25 percentage point later this March, despite the recent run on the banks.

In many parts of the country and industry sectors, it’s already here—from layoffs in the tech sector, which experienced over 95,000 job losses in 2022, up by a whopping 649% from 2021 according to the Challenger Report, a tumbling housing sector, and stalling retail and manufacturing sectors.

In a shrinking economy a few things are certain, as history seems to repeat itself— recessions generally reveal frauds that were previously concealed by rapid growth and fat profit margins, as suggested by Warren Buffet’s famous quote: “When the tide goes out, you see who’s swimming naked.”

Since the 1980s, a recession has occurred on average every six to eight years. In addition to uncovering fraud, recessions have been a catalyst for lawmakers and regulators to re-assess corporate governance reform, the integrity of free markets and investor protections in hopes of protecting investors and the economy from malfeasance.

Notable recessionary reforms to mitigate malfeasance and fraud include the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Act. SOX is the direct result of the ending of the “irrational exuberance” in the stock market—as U.S. Securities and Exchange Commission Chair Alan Greenspan coined it in 1996—which foretold the 2001 implosion of the dot.com bubble, as well the revelation that Enron was cooking its books with the help of its auditor, Arthur Andersen.

Dodd-Frank was borne from the subprime mortgage crisis, which flowed into the Great Recession of 2008, and the cascade of revelations of malfeasance from insider trading and fraud at Countrywide, one of the largest subprime mortgage issuers at the time, to the downfall of Bear Stearns and Lehman Brothers. Published in July 2010, Dodd-Frank also addressed the May 2010 flash crash, which erased almost $1 trillion in market value in U.S. stock markets.

One can only speculate that the irrational exuberance in highly unregulated cryptocurrencies and the spectacular collapse of FTX and Alameda Research and technology related frauds like Theranos and Nikola—and the looming government investigations into potential bank-related fraud and improprieties carried out by SVB, Signature, and Silvergate and their auditors—are a preview of schemes that will be hallmarks of the 2023 recession.

This may also, again, result in various regulatory reforms—including increasing safeguards on banks the size of SVB and Signature.

Despite reforms and regulatory patches, Congress and regulators can never seem to keep up with the constant flow of fraud and malfeasance.

This is where investors play a critical role.

Investor Impact

In their efforts to recoup losses, investors can play a key role to hold banks, market makers and other bad actors accountable through civil litigation.

Recessionary fraud has had a staggering impact on investors. The Great Recession, the worst U.S. economic disaster since the Great Depression, wiped out nearly $8 trillion in value in the U.S. stock market between late 2007 and 2009. While the Department of Justice was able to extract $200 billion in civil fines and penalties from culpable financial institutions, little went to investors.

Through private litigation, specifically securities class actions governed by the Private Securities Litigation Reform Act (PSLRA), investors were able to recoup not insignificant losses from banks, mortgage lenders and other complicit financial entities.

For instance, of the 113 mortgage backed securities (MBS) settlements achieved by government agencies, insurers, and investors between 2011 and 2017, 24 were securities class actions filed by investors, who in turn, were able to recover more than $3.9 billion.

Congress has endorsed such investor actions. When the PSLRA was enacted, Congress recognized that ‘‘[P]rivate lawsuits promote public and global confidence in our capital markets and help . . . to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs’’ and are ‘‘an indispensable tool’’ used to ‘‘protect investors and to maintain confidence in the securities markets.’’

The Supreme Court has, in its words, ‘‘repeatedly []emphasized that implied private actions provide ‘a most effective weapon in the enforcement’ ’’ of the securities laws and are ‘‘a necessary supplement to Commission action.’’

The SEC has also been supportive of the efforts of private litigants. For example, in 1995, SEC Chairman Arthur Levitt in his testimony before the Senate on the PSLRA recognized that ‘‘[P]rivate rights of action are not only fundamental to the success of our securities markets, they are an essential complement to the SEC’s own enforcement program.’’

Indeed, empirical analysis confirms the value of private securities litigation in that they ‘‘provide greater deterrence against more serious securities law violations compared with the SEC.’’

Hindsight is the Best Insight

This reliance on private actions holds true for some of the other biggest frauds in recent history. In actions related to the giant Enron fraud, the SEC recovered $440 million, while private attorneys recovered around $7.3 billion for investors. Similarly, in suits related to the accounting fraud at Worldcom, the SEC recovered $750 million, while private attorneys representing investors recovered $6.1 billion for their clients.

In an even more dramatic example, private attorneys recovered approximately $3.2 billion for investors harmed by the massive fraud at Cendant and the SEC recovered nothing—though the Department of Justice did prosecute, convict, and send to prison Cendant’s Chief Executive Officer.

While all of this may sound like ancient history, in the court of law it’s not and provides an important roadmap for investors on how to effectively prosecute such cases going forward.

Read the compelete OpEd by Michael B. Eisenkraft in the New York Law Journal.

If you are concerned about pay equity, this tip sheet can provide an overview of your legal rights, help you collect the information you need, and tell you where to turn for additional assistance.

Things to Look For

Pay Comparisons: Learn what others with comparable experience and jobs in your company are being paid. Glass Door, PayScale.com, Blind and other salary review websites may provide information reported by current or former employees. New job postings at your company may also list salary ranges. Information from peers at other companies can also be useful.

How Is Pay Set at Your Company: Learn how pay is set at your company. What factors are used in setting starting pay? Do they reflect what’s important in performing the job?  When can pay be adjusted? What factors are considered in making adjustments?  Who controls decision-making?

Be Aware:

• Pay differences may arise at time of hire.  Sometimes a new employer may base their salary offer on your last salary – that’s a red flag.
• Pay differences at time of hire may also be caused by slotting women into lower-level positions than men with comparable qualifications.
• Pay disparities also arise in awards of bonuses and stock options, where differences may be even larger than with salary.
• Annual reviews and pay raises may exacerbate or create pay differences.  Sometimes this is caused by evaluation systems that disadvantage women.

Informal Steps to Take

• Collect as much information as you can about pay ranges in your company and industry.
• Ask your manager about benchmarks for your compensation in your annual review.
• Seek assistance from your work sponsors to correct any pay disparities impacting you.
• Learn how best to negotiate for what you want.  While equal pay should not depend on negotiation, it’s one of the tools you may find helpful.  For example, AnitaB.org, a non-profit organization that helps women in the tech sector, offers salary negotiation workshops.
• Encourage employers to conduct rigorous pay equity audits and make changes based on the results. Salesforce, for example, has been recognized as a leader in that respect, as cited by Wired, “How Salesforce Closed the Pay Gap Between Men and Women,” (Oct. 15, 2019) and Inc., “How to Fix Gender Inequality at Your Company, From the HR Exec Who Helped Close Salesforce’s Pay Gap,” (Sept. 12, 2019).

Know Your Rights

Title VII Protections

• Prohibits discrimination in every aspect of employment, including compensation, on many grounds including sex, race, religion.  Other statutes cover age discrimination or disability discrimination.
• Requires that you file a charge with the EEOC or parallel state agency as a first step before you can go to court.
• Some claims require proof of intent to discriminate, while others require only identification of a specific practice that appears neutral, but which disproportionately disadvantages women, and cannot be justified.
• The deadline to file a charge can be as short as 180 days from the discriminatory event, but you have 300 days when your state or local municipality has an enforcement agency that enforces a parallel state law against discrimination. Thus, in most states you have 300 days to file your charge.

Equal Pay Act Protections

• The federal Equal Pay Act (EPA) prohibits paying employees of different sexes differently if they do equal work on jobs which require equal skill, effort, and responsibility, in the same establishment.  (Pay differentials based on productivity, seniority, merit, or other job-related factor other than sex are permitted.)  No proof of intent to discriminate is required.
• You must file an EPA case in court within two years of the paycheck challenged or in three years if a willful violation is proved.
• Many states have their own equal pay statutes, and some have provisions with stronger worker protections than the federal EPA.

Individual & Class Actions

• Each type of claim can be pursued by an individual on behalf of herself, or on behalf of herself and a class of other “similarly situated” women.
• Class action lawsuits focus on an employer’s pattern of compensating women less.  Relief can include not just money damages for members of the class, but also changes to the system going forward, such as an overhaul of the policies for deciding compensation.
• Individual cases focus on the individual bringing the suit. Courts may exclude evidence related to how others were treated, even when claims are similar; relief can include money damages, but not any system-wide change.

Sharing Salary Information – Important Protections

• Many employers prohibit or discourage employees from sharing salary information with each other. It’s important to know your right to discuss pay information with your colleagues.
• Some states explicitly forbid employers from prohibiting employees from discussing their wages with other employees, including in Massachusetts, New York, Illinois, California and Washington.
• These state laws prohibit employers from retaliating against an employee for disclosing the employee’s own wages or inquiring about or discussing the wages of another employee, as long as they do not reveal information about others that they obtained because of particular job responsibilities, such as in HR.
• Even better, some states now require employers to provide information about the salary range for jobs.
  • Colorado was the first, requiring that both internal and external job postings list the salary range.
  • As of May 15, 2022, New York City requires job postings to list salary ranges.
  • Beginning January 1, 2023, California and Washington state also require job postings to list salary ranges.
  • On March 3, 2023, the Governor of New York signed into law a similar requirement that will take effect across the state on September 17, 2023.
  • Several other states have laws that require disclosure of wages, salary range or rate of pay upon request, including Connecticut, Maryland, Nevada and Rhode Island.
• Federal law offers some protections for discussing pay with co-workers but excludes managers. Enforcement is not as robust and proceeds through the National Labor Relations Board.  See:
  • National Labor Relations Board – Your Right to Discuss Wages
  • National Labor Relations Board – Investigated Charges

Prohibitions on Using Prior Salary to Set Pay

• Just as important as making sure you have information you need about salary, is making sure your prospective employer does not use information about your prior salary to offer you a lower pay rate than it would otherwise at your new job.
• The legal trend has been for courts to find that employers cannot rely upon prior pay in defending a claim of pay discrimination.  See Rizo v. Yovino, 950 F.3d 1217 (9th Cir. 2020) (en banc).
• Some states prohibit employers from taking adverse action against an applicant who refuses to disclose their pay history. Many states, including Illinois and New York, specifically prohibit employers from asking applicants to disclose their salary history. Some also prohibit relying on prior salary even if disclosed voluntarily.  For example:
  • California: Employers cannot rely on or ask for prior salary in deciding whether to make an offer or what salary to offer.  If the applicant does disclose their salary history voluntarily and without prompting, the employer may not rely on that information in determining the applicant’s salary.
  • Massachusetts: The law prohibits employers from asking either an applicant or their prior employer about prior pay or requiring that an applicant’s prior pay meet any particular criteria.  Even if prior pay is volunteered, the employer cannot rely upon such prior pay as a defense to an equal pay claim.
  • Complete List of State Bans or Restrictions on Asking About Prior Pay: See States with Salary History Bans.
    • States with bans include: Alabama; Colorado; Connecticut; Delaware; Hawaii; Illinois; Maryland; Massachusetts; Missouri; Nevada; New Jersey; New York; Oregon; Puerto Rico; Rhode Island; Vermont; Washington. Additional states and localities prohibit government employers from asking about salary history.

Other Legal Resources

• How to file an EEOC charge:
• If possible, consult with an attorney first, before filing a charge with the EEOC.
  • Local Bar Association: Many local bar associations have referral services that may connect you with attorneys
  • National Employment Lawyers Association (NELA): NELA is the largest professional organization for lawyers who represent employees in employment disputes
  • Cohen Milstein Sellers & Toll PLLC: We work specifically in class action, including gender pay discrimination class actions. We would be happy to consult with you:

Download our Pay Equity Tip Sheet.

In previous articles, we wrote about factors a fund may consider when deciding whether to file a motion for lead plaintiff in a securities class action and the criteria a judge uses to select among competing movants. In this installment, we discuss what is required and expected of the court-appointed lead plaintiff during the litigation, with institutional investors in mind.

In general, the lead plaintiff selects and retains lead counsel, negotiates attorneys’ fees, oversees the litigation, participates in settlement negotiations, and makes major decisions on advice of counsel—such as whether to participate in mediation, accept a settlement offer, proceed with trial, or appeal. The lead plaintiff must act in the best interests of the class members throughout the litigation.

Federal securities litigation is largely brought under two laws enacted after the Wall Street Crash of 1929: the Securities Act of 1933, which covers newly issued securities, and the Securities Exchange Act of 1934, which covers existing securities traded on exchanges. Six decades later, the Private Securities Litigation Reform Act of 1995 (PSLRA) added lead plaintiff provisions to both laws.

The PSLRA directs judges to “appoint as lead plaintiff the member or members of the purported plaintiff class who the court determines to be most capable of adequately representing the interests of class members” and who “in the determination of the court, has the largest financial interest in the relief sought by the class,” unless someone can show they are not “typical” and “adequate” under Rule 23 of the Federal Rules of Civil Procedure. A “typical” plaintiff is one whose legal claim arises from the same events and is based on the same legal theory as those of the class; an “adequate” one does not have interests that are opposed to the class and has sufficient resources and experience to represent the class and oversee counsel.

Selecting Counsel and Negotiating Fees

Under the law, the lead plaintiff selects and retains counsel to represent the class, subject to court approval. Because the courts typically evaluate a proposed lead counsel’s experience in shareholder class actions and its ability to litigate the case at hand, the lead plaintiff is advised to choose a firm that has a history of successful representations and is free of conflicts of interest.

Negotiating a reasonable fee with a proposed counsel is an important duty for lead plaintiff, since attorneys’ fees and expenses are normally subtracted from any monetary recovery before it is distributed to the class members. An unreasonably high fee, therefore, reduces the portion of the settlement that goes to shareholders. At the same time, lead counsel typically litigates securities class action on contingency, only recouping the cost of attorney time and expenses if the case succeeds, so its fee agreements price in that risk. Because shareholder lawsuits are complex and often take years to resolve, lead counsel may spend hundreds of thousands and even millions of dollars on out-of-pocket expenses such as outside damage experts, massive document reviews, and mediators; that doesn’t count the salaries lead counsel must pay, win or lose, to the lawyers, paralegals and staff who work on the case.

Happily, there are plenty of blueprints available for would-be lead plaintiffs looking to structure a retention agreement. Organizations such as the National Association of Public Pension Attorneys and the Council of Institutional Investors have published primers on securities litigation that offer sample agreements, including fee percentages.

In addition, like the selection of lead counsel itself, attorneys’ fees and expenses are subject to court approval in federal securities litigation. The PSLRA requires attorney fees and expenses to be a “reasonable percentage” of the damages paid to the class, leaving it up to the judge to determine what that means. Federal courts conduct a review of attorney time sheets and expense reports to measure the proposed fee against the work performed. Federal courts also consider the fee percentages to other settlements of a comparable size or in the corresponding circuit to maintain consistency in fee awards.

Overseeing the Litigation

The PSLRA’s requirement that the court appoint as the lead plaintiff the party or parties most capable of adequately representing the class, combined with subsequent decades of jurisprudence, establish clear expectations that the lead plaintiff oversee the litigation and monitor counsel.

While the law and the courts do not require intimate knowledge with the day-to-day details of the litigation, the lead plaintiff should understand the basics, including the important allegations in the complaint and the case’s procedural status. It should be familiar with its responsibilities and understand its duties, especially the need to respond to defendants’ discovery requests by providing relevant documents and deposition testimony related to its investment in the company. The lead plaintiff must be willing and able to perform these duties since defendants may challenge its adequacy of oversight during depositions or at the class certification stage. Within these broad parameters, however, institutional investors have considerable leeway to seek a level of involvement that is appropriate for their staffing resources while maintaining a hand in major strategic decisions that affect the outcome of the case.

The lead plaintiff should require the lead counsel to provide regular updates about the litigation, give them an opportunity to review key pleadings, and advise them of upcoming deadlines and decision points. The lead counsel should provide clear analysis, guidance, and recommendations on any decisions required of the lead plaintiff. During the discovery phase, the lead plaintiff should expect the lead counsel to help produce required documents and, after proper preparation, represent the lead plaintiff in depositions.

Participating in Settlement Talks

One of the most important responsibilities of the lead plaintiff is to participate in any settlement discussions or mediations. An active lead plaintiff can greatly impact the size of the settlement, the makeup of the settlement considerations (e.g., cash only or cash and stock) and the decision to include corporate governance elements in the settlement agreement. In addition, the lead plaintiff is required to approve any settlement prior to court review. If no settlement is reached, the lead plaintiff will need to attend the trial. If the case is lost at trial, lead plaintiff must evaluate with lead counsel and decide whether to appeal.

Conclusion

Understanding the expectations and responsibilities of the lead plaintiff before facing a decision to file a lead plaintiff motion creates clear expectations about the time and staff resources an institutional investor needs to commit to the process. It also highlights the importance of establishing relationships with experienced plaintiffs’ counsel. Perhaps most importantly, it illustrates why sophisticated institutional investors are better able to adequately represent class members than small individual investors, especially in large-scale litigation.

Download PDF.

By Christine Webber

The U.S. Equal Employment Opportunity Commission held a public hearing Jan. 31 examining the implications of artificial intelligence technology on equal employment opportunity.

According to EEOC Chair Charlotte A. Burrows:

The goals of this hearing were to both educate a broader audience about the civil rights implications of the use of these technologies and to identify next steps that the Commission can take to prevent and eliminate unlawful bias in employers’ use of these automated technologies.

During the hearing, panelists Pauline Kim, professor at Washington University School of Law in St. Louis, and Manish Raghavan, assistant professor at Massachusetts Institute of Technology, testified about the prevalent misuse of the four-fifths rule in evaluating whether AI selection tools cause adverse impact.

We agree, and we believe this shows that the EEOC should revise its guidelines to abandon the rule.

Whether or not the EEOC eliminates the rule, courts have long made clear that the four-fifths rule is not the test for adverse impact that they will apply.

As the U.S. Court of Appeals for the Ninth Circuit described in Stout v. Potter in 2002, under the four-fifths rule:

[A] selection practice is considered to have a disparate impact if it has a “selection rate for any race, sex, or ethnic group which is less than four-fifths (4/5) (or eighty percent) of the rate of the group with the highest rate.”

The rule originates from the Uniform Guidelines on Employee Selection Procedures, which were originally published in 1978. The four-fifths rule specifically states that it speaks only to what federal agencies would generally do.

It’s been nearly 45 years since the four-fifths rule was published by the EEOC, but even at that time, courts largely looked to more formal and sophisticated statistical tests for evidence of adverse impact. Since then, the consensus, from the U.S. Supreme Court on down, and including leading authorities, has been that the four-fifths rule of thumb was not the governing test and was not as probative as formal statistical analysis.

As the consensus rejected reliance on the four-fifths rule in favor of statistical significance tests, some proponents of the four-fifths rule argued that Title VII of the Civil Rights Act required showing practical significance in addition to statistical significance, and repackaged the four-fifths rule as a test of practical significance.

While some courts have considered practical significance, the four-fifths rule has not been generally adopted as a test for practical significance, and many courts did not consider practical significance a requirement at all.

Recently, the Supreme Court’s 2009 decision in Ricci v. DeStefano appeared to foreclose reading a practical significance into Title VII, stating that a prima facie case of disparate impact requires that plaintiffs show a statistically significant disparity and nothing more.

The recent push to incorporate a requirement of practical significance into disparate impact analysis, and to make the four-fifths rule the test to show satisfaction of such a requirement, has come in large part from those wanting to enable AI selection devices to be accepted without violating disparate impact rules.

Since AI selection tools provide fertile opportunities for disparate impact claims, and AI vendors want to assure the employers they hope to recruit as customers that their products will not result in Title VII violations, AI vendors have cited the four-fifths rule as the basis for their claims that their products will keep employers compliant with Title VII.

Simultaneously, there has been a push to define disparate impact liability under federal and state laws in relation to the four-fifths rule. For example, a proposed 2020 California Senate bill would have defined disparate impact as being indicated where the selection rate for any protected class existing in 2% or more of the total applicant population is less than four-fifths of the selection rate for the class with the highest selection rate and where such difference in selection rates between such classes is statistically significant and to provide a safe harbor for any selection tool that cleared the four-fifths rule.

The push to anoint the four-fifths rule as the test for disparate impact is not only unsupported by the case law, but it is also bad policy. The four-fifths rule is a proclamation that practices that keep up to 20% more of a disadvantaged group from being hired should be accepted without further scrutiny.

Read the complete article on Law360.

A U.S. magistrate judge has ruled that Church of Scientology leader David Miscavige was “actively concealing his whereabouts or evading service” in a federal trafficking lawsuit and declared him officially served in the case.

Judge Julie S. Sneed noted that opposing attorneys had gone to significant lengths to serve Miscavige with the lawsuit filed in Tampa federal court last April. Valeska Paris and husband and wife Gawain and Laura Baxter allege they were trafficked into Scientology as children and forced to work for little or no pay as adults.

See full coverage at Scientology Leader David Miscavige Concealed Whereabouts, Federal Judge Says.

Fiduciary Focus
Shareholder Advocate Winter 2023

With 2022 in the rearview mirror, public pension plans might be inclined to breathe a big sigh of relief. In a year when Pensions & Investments’ top story was the impact of inflation and interest rate hikes on market returns, public pension plans suffered along with other investors, ending a string of positive investment results that had propelled valuations and funding ratios. Time then to turn the page and think about some of the pressing issues pension fund leaders will face in 2023. To guide us, we asked executive directors and general counsel to identify the top challenges from a fiduciary perspective for their public pension systems in the new year.

People and Culture

The pandemic changed the work environment in the U.S. and pension plans were not excepted. Many systems faced hiring difficulties, struggling to fill vacancies ranging from call center positions to associate attorneys. The New York Times reports that while the labor market remains tight, many economists expect more layoffs and fewer job openings in the private sector in the coming months as corporations restructure their operations. This could prove beneficial to public pension plans as they seek to meet their hiring needs.

Post-pandemic, the phenomenon of remote work has become the “new normal.” Job applicants surveyed by the employment search site ZipRecruiter reported that, on average, they would take a 14% pay cut to work remotely. Some pension plans have responded by allowing entire call center operations to be conducted remotely as a way of boosting staff recruitment and retention. Others have allowed many departments to operate in a hybrid fashion, with staff in the office two to three days a week. Finally, there are certain departments for which leaders believe an ethical culture with a proper focus on fiduciary duty can best be maintained by the return of staff full-time in the office.

Issues articulated regarding people and culture were not limited to staffing. Some funds in 2023 will be transitioning to newly appointed or elected trustees, and the integration of these new trustees to the existing board is a chief concern. While new trustees may bring experience, skills and energy to a board, they may not be well versed in trust principles governing the operations of public pension plan and, as such, may not understand the critical importance of fiduciary duty. Appropriate onboarding and a thorough orientation program with a rigorous commitment to fiduciary education can go a long way in acclimating new trustees so that they may understand and be properly integrated into the public pension plan culture.

Cybersecurity

Cybersecurity continues to be a major concern for retirement plans and managing cybersecurity risk is at the forefront for executives and counsel. Cybersecurity risks are rising on both the benefits and investment sides of pension operations. Under benefits operations, plan participants’ financial and personally identifiable information maintained by pension systems are at risk from cyber attack. Investment operations also face risks from attack in their various processes, from capital calls to other aspects of investment transactions.

In 2021, the U.S. Department of Labor’s Employee Benefits Security Administration issued much-anticipated cybersecurity guidance for private sector employee retirement plans, indicating that responsible plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks. And public pension systems may be at even more risk than their private plan peers. Bad actors may take advantage of data that is publicly available by virtue of participants’ government employment to further their attempts at identity theft. Public records and FOIA requests have already been used fraudulently. Some public pension plans offer more tempting targets due to antiquated IT systems and limited resources.

Fiduciaries should develop and document their due diligence in implementing cyber-risk-management strategies, including risk assessment and incident response plans and tools to manage cyber situations and crises.

Member Communication and Managing Expectations

Effective communication with plan members is critical to the successful operation of pension plans. One of the biggest challenges cited by one Executive Director is managing the expectations of active and retired system members. For example, retirees may expect or seek cost of living adjustments each year, without understanding that the plan may not be designed or authorized to accommodate such adjustments. Active members, who may have an unreasonable expectation that their pension alone will be sufficient to support them in retirement, need sufficient retirement education to plan adequately for their retirements well in advance. Front and center in 2023 will be the continuing focus of pension systems on how to efficiently interact with their members. We anticipate continuing to see redesigned websites created with members in mind and user-friendly portals that allow members to find information more easily. The best examples include navigation tools designed to offer members, retirees, and employers easy access to information, forms, and publications. Members report that videos and information on benefits planning are helpful tools, as are searchable forms and publications and websites that automatically adjust for use of a smartphone, tablet, or computer. While websites and portals are now the norm, a number of retirees remain committed to receiving print information, thus requiring plans to continue to send mail to members who request it.

Legislative and Regulatory Landscape

Finally, pension plan executives and counsel report being extremely concerned about the growing politicization of their operating environment. For example, the issue of so-called environmental, social, and governance investing seems to be the latest to divide “red” and “blue” states. But prudent fiduciaries know that there are no “red” or “blue” considerations in fiduciary duty. In 2023, trustees, executives, and counsel will need to remain laser-focused on their fiduciary duty to act for the exclusive benefit of members and beneficiaries without regard to the interests of other parties.

Conclusion

As we close the books on a year in which the investing environment was incredibly challenging, investors expect 2023 to be a turbulent year as well. This should not surprise anyone, as we are all aware of the ongoing difficulties in working in the public pension sector.

After a long gestation period, the SEC issued its final rules to address insider trading on December 14, 2022.¹ Investors have been clamoring for reforms of Rule 10b5- 1, which provides an affirmative defense against insider trading claims to corporate executives who use prearranged plans to buy and sell their company’s stock. The SEC agreed with critics who said existing plans were too easily manipulated and adopted the changes unanimously—an accomplishment of note in these politically charged times. While less ambitious than proposed rules announced last year (see discussion in the Winter 2022 Shareholder Advocate), the changes are significant, nonetheless.

The major changes include:

• A “cooling off” period before a Rule 10b5-1 plan can be executed
• Restrictions on multiple Rule 10b5 plans
• Restrictions on single-trade plans
• New disclosure requirements
• Enhanced “good faith” certification requirements

Rule 10b5-1, which was adopted over 20 years ago, provides corporate insiders protection from insider trading claims if their trades were exercised according to a written pre-arranged plan that was devised before the executive was aware of any material non-public information (“MNPI”). In its December 14, 2022 final rule, the SEC explained, “We are concerned that some corporate insiders use Rule 10b5-1 plans in ways that are not consistent with the objectives of the rule, and that harm investors and undermine the integrity of the securities markets.”

In fact, courts have also raised concerns over these plans. For instance, before issuing an important ruling for investors limiting the use of Rule 10b5-1 plans, the Tenth U.S. Circuit Court of Appeals recently recognized such abuses in Indiana Public Retirement System, et. al. v. Pluralsight, Inc., where Cohen Milstein serves as lead counsel. Finding that the “text and history of Rule 10b5-1 shows that such plans can be manipulated easily for personal financial gain,” the court reversed the district court and stripped defendants of their purported “get out of jail free card,” finding that the Rule 10b5-1 trading plan did not rebut an inference of scienter per se (see discussion in the Fall 2022 Shareholder Advocate).

One of the most important changes the SEC has issued in its final rule is the creation of a “cooling off” period. Under the old rules, insiders could make and use a trading plan the very same day, which practically eviscerated its purpose to prevent insider trading. Under the SEC’s new rules, anyone other than an issuer, i.e., the company itself, must wait a certain period of time before executing a trade under a Rule 10b5-1 plan. Directors or officers must wait between 90 and 120 days, depending on the circumstances.² All other persons other than issuers must wait 30 days.

Another change places restrictions on overlapping plans. Previously, traders could create multiple plans and decide later to cancel one that became disadvantageous. Now, the SEC prohibits the use of a Rule 10b5-1 affirmative defense if persons (other than issuers) have multiple overlapping plans.

The SEC amendments also impose new restrictions on “single-trade plans,” which are designed to execute a single trade on one occasion rather than multiple trades over time. Before the change, traders could create multiple single-trade plans; under the new rules, the SEC limits their use to just one plan per 12-month period.

As for the new disclosure requirements, the SEC now requires that the creation, modification, or termination of any directors’ or officers’ Rule 10b5-1 plans be disclosed in quarterly reports (Form 10-Q or Form 10-K as applicable) starting with the financial reports covering the first quarter of 2023. Under the old rules, Rule 10b5-1 plans did not need to be disclosed, which kept investors from knowing whether suspicious trades by officers or directors were made pursuant to a plan or not.

In addition, the SEC now requires companies to disclose whether they have an insider trading policy and to provide it annually as an exhibit. The SEC explained that seeing the details of such policies and whether they are merely perfunctory declarations or ones with effective controls will give investors important information.³

Finally, the SEC heightened the “good faith” certification requirements. While the SEC currently requires that plans be entered in good faith, the new rule requires a certification that the plans have been exercised and operated in good faith. The SEC now requires traders to certify that they both entered in and “acted in good faith with respect to” the plan.

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¹ The rules were announced on December 14, 2022 but will not become effective until February 27, 2023.

² The SEC now requires directors or officers to wait “until the later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted or, for foreign private issuers, in a Form 20-F or Form 6-K that discloses the issuer’s financial results (but in any event, the required cooling-off period is subject to a maximum of 120 days after adoption of the plan).”

³ “The thoroughness and precision of such policies and procedures may help investors to understand whether they will be successfully implemented…An investor might reasonably conclude that an issuer adopting a policy generally prohibiting insider trading, but without disclosing how it prevents the unlawful communication of and trading on material nonpublic information, provides fewer such assurances to investors than an issuer that has developed and disclosed more particular and thorough policies and procedures.”

By Kate Fitzgerald

Holding large, formidable corporations accountable to achieve economic and social justice for our client—even if it takes decades—is a hallmark of our work at Cohen Milstein.

No better example is our representation of 11 Indonesian citizens in Doe, Aceh, Indonesia v. ExxonMobil Corporation (D.D.C.). For more than 21 years, the plaintiffs in this high-profile cross-border lawsuit have sought justice from ExxonMobil Corporation for human rights abuses they allegedly suffered at the hands of ExxonMobil’s security personnel in Aceh, Indonesia.

On March 24, 2023, they will finally get their day in court, when a U.S. federal jury trial is set to start.

Originally filed in 2001, the lawsuit alleges that ExxonMobil used Indonesian soldiers to provide security at the company’s sprawling natural gas operation in the largely rural Aceh province. The lawsuit also alleges that these same soldiers physically abused, sexually assaulted, tortured, or murdered plaintiffs or family members who lived in the surrounding villages.

The federal lawsuit addresses many novel issues of law and jurisdiction. The D.C. Circuit Court of Appeals reviewed the case twice, in 2007 and 2011, ultimately concluding that plaintiffs could move forward to prove that ExxonMobil bore liability for these atrocities under Indonesian law. In 2007, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the views of the executive branch on ExxonMobil’s petition for certiorari, which subsequently led the Court to deny the petition.

Despite years of aggressive defense, during which ExxonMobil moved to stay the case at least seven times at the district court, court of appeals, and Supreme Court levels, plaintiffs persevered. All the while, the litigants grew older.

Then, as the world quarantined against COVID-19, the district court, seemingly inspired by technological innovations widely adopted during the pandemic, agreed that plaintiffs and their eyewitnesses could provide testimony from the other side of the world via videoconference. At summary judgment, plaintiffs submitted these long-distance depositions, along with close to 400 exhibits, to support their claims.

On August 2, 2022, the district court issued a detailed and pointed 86-page opinion denying ExxonMobil Corporation’s motion for summary judgment, stating that “with only limited exceptions, defendants remaining arguments—about causation, quantifiable loss, ExxonMobil’s liability, and due process—are entirely meritless.” The court repeatedly found that ExxonMobil’s characterizations of the evidence was “wrong” or “simply wrong.” Furthermore, the court published for the first time the testimony of the victims and witnesses about the horror. After almost every account, the court stated, a reasonable jury could conclude the “connection between the soldier’s wrongdoing and his employment relationship with defendants.”

Agnieszka Fryszman, co-chair of Cohen Milstein’s Human Rights practice, and her small but dedicated legal team have tenaciously pursued this hard-fought litigation against a deep-pocketed defense, handling discovery, trial court briefing, appellate briefing, appeals court argument, and Supreme Court practice.

The Winter 2023 issue of the Shareholder Advocate includes:

• In Slack Case, Supreme Court to Weigh Narrowing Liability for Companies that Go Public via Direct Listing – Will Wilder
• Heeding Investor Advocates, SEC Tightens Rules for Insider Stock Trading Plans – Kate Nahapetian
• Human Rights Practice Readies for Trial Against ExxonMobil for Alleges Abuses in Indonesia – Kate Fitzgerald
• Securities Litigation 101: The Role of the Lead Plaintiff – Christopher Lometti and Richard E. Lorant
• Fiduciary Focus: Top of Mind Issues for 2023 – Suzanne M. Dugan

Download the Winter 2023 edition of the Shareholder Advocate (PDF).

This term, the Supreme Court will hear oral arguments in Slack v. Pirani, a case that could have major implications for investors in companies that go public via direct listings.

The Supreme Court recently agreed to hear Slack Technologies v. Fiyyaz Pirani, a federal securities class action case arising from Slack Technologies’ (“Slack”) 2019 direct listing on the New York Stock Exchange. The case presents novel questions about standing under the Securities Act of 1933 (“Securities Act”) and could have significant ramifications for investors who purchase securities through direct listings and other alternative forms of public offerings by creating a dangerous loophole in the Securities Act.

Unlike companies that go public via initial public offerings, a privately held company that undertakes a direct listing does not issue new shares. Instead, it files a registration statement to allow existing shareholders to sell their shares directly to the public on an exchange. By filing the registration statement, a direct listing also creates a market for existing holders to resell unregistered shares in the company that meet the SEC holding requirements for exempt securities. Slack, a technology company that offers a popular instant messaging platform for businesses and organizations, opted to go public through a direct listing on the New York Stock Exchange in June 2019.

By going public through a direct listing, Slack simultaneously offered a mix of registered and unregistered securities to the public on the New York Stock Exchange. Plaintiff Fiyyaz Pirani bought shares in Slack through the direct listing on the day it went public and throughout the next few months. Pirani alleges that Slack’s registration statement was misleading because it failed to disclose important information about its service disruption policy. In a motion to dismiss, Slack argued that Pirani lacked standing to sue under Section 11 of the Securities Act because he could not “trace” the shares he purchased back to the shares offered through the misleading registration statement—and further, because the registered and unregistered shares were identical, Pirani could not definitively prove that the shares he purchased were registered shares subject to liability under Section 11.

The district court found that Pirani had standing, and the Ninth Circuit affirmed. The Ninth Circuit concluded that because the unregistered shares could not have been publicly sold without the registration statement for the registered shares to create the market, the “traceability” rule was inapplicable, and both the unregistered and registered shares were “such securities” subject to Section 11 of the Securities Act. In support of this finding, the Ninth Circuit looked to the Securities Act’s legislative history and the federal securities laws’ underlying purpose of protecting investors and preventing fraud.

In their petition to the Supreme Court for a writ of certiorari, Slack argued that the Ninth Circuit opinion is not supported by the text of the Securities Act or precedent and significantly expands Securities Act liability for unregistered shares. They argue that allowing investors to sue on this type of direct listing for shares that may not have been registered could extend liability to almost any sale of an unregistered security, such as a sale made by a corporate insider after an IPO “lockup” period, which would disincentivize companies from going public.

Slack v. Pirani could have significant ramifications for investors. While fewer than 20 companies have gone public through a direct listing since they were authorized in 2018, a December 2022 SEC rule change relaxing opening auction price restrictions is expected to increase their popularity. In addition, a Supreme Court ruling for Slack in this case could essentially shield companies going public through a direct listing from any Section 11 liability, as many shareholders would not be able to prove that the shares they purchased were registered. This would create a dangerous loophole in the Securities Act that could further incentivize companies to go public through direct listings and skirt Section 11 liability.

The case could also have potential ramifications beyond the direct listing context. The Supreme Court hears relatively few securities cases and has not heard any cases arising from the Securities Act since the confirmation of Justice Amy Coney Barrett cemented a 6-3 conservative majority on the Court. The Court could use this case to change standing requirements under the Securities Act in other ways that could affect shareholders in more traditional public offerings like IPOs and Special Purpose Acquisition Companies, or SPACs.

The Supreme Court will hear oral arguments in Slack v. Pirani sometime later this year. Since the case could disrupt federal securities law in a variety of ways, investors are urged to follow the briefing and arguments in the coming months.