Even as avenues for consumers to pursue group litigation abroad expand, activity in shareholder lawsuits outside the United States has grown more narrowly focused on jurisdictions with lower adverse risks and better histories of recovery, according to recent publications by service providers.

While the number of non-US shareholder actions filed in the first half of this year held steady, “litigation funders have changed their geographic focus, investing more resources in countries perceived as lower risk with more expedited legal proceedings and away from countries where previously filed suits have been slower and more challenging than expected,” Financial Recovery Technology (FRT), a global class action recovery service, wrote in its Mid-Year 2023 in Review.

According to FRT, 25 recovery actions were initiated outside the US from January through June, nearly on track to match the 52 cases filed in 2022. The 2023 cases were filed across six jurisdictions, however, compared with 11 countries in 2022. Both totals include opt-in actions, where affected investors are required to register as parties relatively early in the proceedings, as well as opt-out actions, where (like in US federal class actions) affected shareholders can wait until a case is decided to file a settlement claim.

The review found that countries with opt-out actions, such as Australia and the Netherlands, were seeing an uptick in new matters, while Germany, Brazil, and other jurisdictions where prior cases have become bogged down have seen fewer new filings. Risk calculations were also driving institutional investors’ decisions on whether to register for cases, FRT said, adding that, so far in 2023 it has seen “the greatest client participation in passive [opt-out] countries including Australia and the Netherlands.”

ISS Securities Class Action Services (SCAS), another settlement-claims-filing service, also underscored the importance of assessing adverse cost risks in overseas litigation, even when third-party litigation funders take out “after the event” (ATE) insurance—policies designed to kick in if a court orders plaintiffs to pay defendants’ costs.

“[E]ven with litigation funding and ATE insurance, there is still a risk that participating investors could be left footing some of the bill,” SCAS wrote in a September 2023 white paper, Participating in Securities Collective Actions Outside the US: Are Adverse Costs Worth the Risk? In one English High Court case where the judge found for defendants in 2019 (Lloyds/ HBOS), defendants claimed more than £30 million in legal costs, £9 million more than that funder’s ATE insurance cap.

The white paper highlighted the risk of paying adverse costs in five countries, saying risks were lowest in Australia, the Netherlands, and Japan and highest in the United Kingdom and Brazil. Despite such generalizations, the paper’s authors said investors need to rely on a “thorough, objective case and jurisdictional analysis” to make decisions on whether to participate in non-US litigation.

“Unfortunately, there is no universal approach to handling adverse costs across multiple jurisdictions,” they wrote. “The adverse cost risk is highly contextspecific based on the jurisdiction, the particular case, and the terms offered by the funder.”

If new cases and participant registrations are concentrated in a handful of lower-risk countries, the EU and the UK, at least, continue to expand their own legal mechanisms for collective redress. Depending on the commentator, this process is either leading to an explosion of “US-style” class actions or a more measured, European model.

“The growth of group litigation in the UK and Europe over recent years has been exponential, and its significance to businesses as a key corporate risk will only continue to increase,” the law firm Jones Day wrote in an October 2023 client booklet, The Rise of  US-Style Class Actions in the UK  and Europe.

In the UK, for example, Jones Day said 13 new claims were brought in 2022 under the collective proceedings order introduced in 2015, double the number in 2021. The authors attributed the rise to a “confluence” of factors: “an upswing in the thirdparty litigation funding market, increasingly sophisticated and experienced claimant law firms, and liberalised group claim procedures.”

Still, the UK has been a bit of a bumpy road for case organizers and funders. Most recently, the UK’s Supreme Court ruled that litigation funding agreements that provide funders a share of damages should be defined as “damages-based agreements,” meaning that they are unenforceable unless comply with a strict set of regulations that, among other things, limit the percentage to 10 percent— and completely unenforceable for opt-out proceedings before the Competition Appeal Tribunal. In the wake of this agreement, funders are working to revamp their agreements with registrants.

Unlike the UK, the EU appears to be moving slowly and steadily toward more claimant-friendly “collective redress” procedures. The European Commission’s 2018 “New Deal for Consumers” and 2020 “Representative Actions Directive” required the EU’s 27 member states to put in place a collective action mechanism for consumers in a range of sectors, including data protection, financial services, travel and tourism, energy, and communications. These cases can be filed by “qualified entities”— typically consumer groups registered in at least one of the EU countries—that represent a minimum number of claimants.

While adoption has been slow enough to prompt the European Commission to send “formal notice” in January to member countries who had failed to change their laws to conform, at least 10 countries have now complied with the directive, with all but a few in the process of doing so.

On September 29, 2023, Germany became the latest EU member country to approve a law transposing the Representative Actions Directive. Expected to take effect by the end of October, the new law expands protections for consumers in German courts, where previous collective actions provided only declaratory and injunctive relief. Also under the new law, consumers will have until three weeks after the end of oral proceedings to register their claim, when they will have a better idea of the case’s chances for success.

That said, the German parliament estimates that only 15 cases a year will be brought under the new law. Bird & Bird attorney Susanne Lutz says that is because of features in the final law that favor defendants. For one thing, at least 50 impacted consumers need to group together to commence an action. For another, litigation funding fees are capped at 10% of the “economic benefit resulting from the redress action” and contractual arrangements must be disclosed. In addition, the law dropped a proposal to include disclosure obligations for relevant documents. And finally, claimants can still be found liable for adverse costs, though the €300,000 cap is less than originally proposed.

“Many companies feared the introduction of a ‘class action’ based on the US model; however, this fear is not justified,” she wrote, adding that representative actions brought under the law “should not be able to be utilized as a business model for purely profit-making purposes.”

The future of pharmaceutical antitrust litigation will likely focus in large part on biologics and biosimilars. Cases involving the delayed market entry of generic pharmaceuticals have traditionally focused on small-molecule generic drugs.

In recent years, though, the U.S. drug market has come to be dominated by biologics. Biologics — and their generic counterparts, called biosimilars — are prescription drugs derived from living cells; examples include insulin, vaccines and antibody drugs.[1]

Following five years of double-digit annual growth, in 2022 biologics captured 46% of U.S. prescription drug spending — approximately $261 billion.[2]

Generic-delay cases involving small-molecule drugs are familiar territory for many pharmaceutical antitrust litigators, though the same is not yet true for biosimilar-delay cases.

Whereas small-molecule generics have been regulated by the Hatch-Waxman Act for nearly 40 years, biosimilars have been authorized under U.S. law for just over a decade. And new evidence indicates that while biosimilar markets are largely akin to small-molecule generic markets, there are also important differences.

Those differences have been well illustrated by 2023’s launch of biosimilar versions of Humira. Humira was the single-largest line item in the 2022 U.S. pharmaceutical budget.[3] Americans spent over $18 billion on the biologic, which treats conditions such as rheumatoid arthritis.[4]

Why the high prices? Humira’s manufacturer, AbbVie Inc., long maintained a monopoly on the drug. In mid-2023, however, a wave of biosimilar Humira competitors finally came to market, with the most recent launching in October.[5]

This article identifies the emerging ways in which biosimilar markets differ from traditional small-molecule drug markets, and recommends how pharmaceutical antitrust litigators can account for these market dynamics in biosimilar-delay cases.

Generic-Delay Cases and Biosimilars: Overview

Generic-delay litigation involves claims that pharmaceutical companies have improperly delayed the market entry of lower-priced generic versions of a drug, thereby causing payers — e.g., wholesalers, self-insured employers or patients — to overpay for a period of time.

Perhaps the most well-known type of generic-delay case is the “reverse-payment,” or “pay-for-delay,” case, which was recognized by the U.S. Supreme Court in FTC v. Actavis.[6]

Pharmaceutical companies can also face liability for other misconduct that delays generic competition, such as abusing the Orange Book system,[7] refusing to sell essential inputs to prospective generic competitors,[8] or filing sham patent litigation.[9]

Generic-delay cases have traditionally focused on small-molecule, chemically derived drugs — which are governed by the 1984 Hatch-Waxman Act. But an increasingly large share of prescription drug payments now goes toward biologics. Biologics are derived from living cells, and their therapeutic equivalents are called biosimilars.

The statute authorizing biosimilars — the Biologics Price Competition and Innovation Act — was enacted in 2010.[10]

The biosimilar market is thus relatively nascent: Whereas the U.S. Food and Drug Administration approved 722 small-molecule generic drugs in 2022,[11] it has approved a total of just 43 biosimilars since the BPCIA was enacted in 2010.[12]

Despite their relative nascency, biologics and biosimilars now account for approximately 46% of U.S. prescription drug spending — $261 billion per year.[13]

With such substantial revenues at stake, pharmaceutical companies have strong motivations to use anti-competitive tactics to delay the onset of biosimilar competition, just as they have to delay the entry of small-molecule competition.

Differences between small-molecule generic markets and biosimilar markets, however, may warrant special attention from practitioners, as the same litigation strategies that have successfully policed small-molecule delay cases may require adjustment in biosimilar cases.

Same-Tier Formulary Coverage

Payers, and pharmacy benefit managers acting on their behalf, use several tools to incentivize the use of lower-priced generic drugs rather than more expensive branded drugs. One tool is the formulary, a list that organizes drugs into tiers, which render drugs more or less expensive for plan members.

For example, a formulary may impose a $10/$30/$50 copay for drugs on the first/second/third tiers, with generic drugs usually on the least-expensive first tier.[14] The formulary and other mechanisms[15] have contributed to small-molecule generics rapidly capturing the vast majority of brands’ market share in competitive generic markets.[16]

Despite biosimilar versions of Humira carrying a markedly lower list price than the branded product, many biosimilars are nonetheless being placed on formulary tiers equal to those of the name brand.[17] Placing biosimilars on the same formulary tier as their branded counterparts means that biosimilars may not capture the same high level of market shares as do small-molecule generics, as patients will not be incentivized to use the biosimilar by the promise of lower copays.

If biologics do maintain a greater share following biosimilar entry — as appears to be occurring with Humira[18] — one consequence in biosimilar-delay cases will be an increased importance of brand-brand damages.

As with small-molecule drugs, biosimilar competition can drive down the price of the branded drug compared to what the name brand’s price would be without competition.[19] Thus, even where payers would have purchased the branded drug had competition not been improperly delayed, they would have paid less for it and were thus damaged. These are called brand-brand damages.[20]

Practitioners should expect that brand-brand damages may be a meaningful part of the damages claims in biosimilar-delay cases, and be sure to prepare the fact and expert discovery necessary to establish, or respond to, claims for brand-brand damages.

One Biosimilar, Two Prices

Another unique dynamic that has appeared in biosimilar markets, including for Humira, is companies launching the same product at two different price points: one with a high list price and substantial rebates, and a second with a lower list price but few or no rebates.

Biosimilar versions of Humira have generally coalesced around 5% off and 85% off Humira’s list price — just under $7,000 for a month’s supply as of 2023 — with multiple companies offering both a high-list price and low list-price version.[21]

For example, Boehringer Ingelheim Vetmedica Inc.’s Oct. 3 launch of an unbranded biosimilar at an 81% discount follows its July 2023 launch of a branded biosimilar priced at a 5% discount.[22]

A post-generic entry pricing regime with multiple list prices will affect how plaintiffs calculate their damages in biosimilar-delay cases. In small-molecule delay cases, experts generally identify what the name-brand price is and what the generic price would have been at a given time in the but-for world absent the defendants’ anti-competitive conduct.

Identifying a generic price is possible because small-molecule generics in competitive markets tend to coalesce closely around a prevailing price.[23] Unlike in small-molecule cases, however, the launch of biosimilar Humira products shows that there will be biosimilars marketed with markedly different list prices.

Plaintiffs might address this dynamic in different ways. One could be to group together the name brand with the high-priced biosimilars as being the branded price and consider the lower-priced drugs as representing the biosimilar price.

It is no concern that one company may offer two differently priced products; branded manufacturers already do this with small-molecule drugs in marketing authorized generics.

From this perspective, biosimilar markets resemble small-molecule markets with the only difference being that multiple products are marketed around the name brand’s price point instead of only one.

Another approach could be to model the market as having three price points: a branded price, a high-priced biosimilar and a low-priced biosimilar.

While requiring an additional layer of analysis as compared to the first approach, this carries the benefit of acknowledging that even the high-priced biosimilars are marketed at a slight list-price discount to the brand — in Humira’s case approximately 5%.

Whatever strategy is ultimately taken, practitioners should be mindful that biosimilar market pricing structures differ from small-molecule markets. Counsel should coordinate early in the case with experts to understand the different biosimilar players and their prices, and develop a strategy for modeling the prices that payers would have paid in the but-for world absent the anti-competitive conduct.

Product-Specific Differences

While small-molecule generics can be automatically substituted at pharmacies for their branded counterparts, the same is true of biosimilars only when they have received an interchangeable designation.[24] As of October 2023, only two Humira biosimilars have received such a designation.[25]

There are thus product-specific differences among the biosimilars which one might not typically see in small-molecule generics. For example, some, but not all, Humira biosimilars contain citrate — an ingredient that can cause pain at the injection site. Some, but not all, Humira biosimilars are marketed in a high-concentration formula, which accounts for about 85% of prescriptions.[26]

Importantly, none of these differences should take the products outside of the relevant antitrust market — i.e., they all compete on price and will drive down overall spending on these drugs. Indeed, in a recent earnings call, AbbVie CEO Richard Gonzalez said the company is “competing very effectively with the various biosimilar offerings.”[27]

Nonetheless, defendants may attempt to seize on such product-specific differences to resist efforts to hold them accountable for anti-competitive conduct.

For example, defendants in private class action litigation could seek to argue that the product differences limit plaintiffs’ abilities to demonstrate elements of their case on a classwide basis.

Defendants could also attempt to argue that variation among biosimilars means the products do not fall within the same relevant antitrust market.

Practitioners should be prepared to account for these product-specific differences in addressing issues of market power, classwide proof and otherwise throughout the litigation. In order to address these issues, practitioners should consider retaining a medical expert.

Medical experts, who are often, though not always, used in generic-delay cases, may be especially crucial in providing the fact finder with expert analysis on why these product-specific differences do or do not matter for a party’s positions.

Conclusion

The emergence of biosimilars is a beneficial development for the U.S. health care system, as these affordable medicines stand to save Americans approximately $180 billion over the next five years.[28]

Thus, cases policing anti-competitive delay of biosimilar competition will remain an important tool for antitrust enforcers to promote competition in health care markets.

However, practitioners should remain mindful that biosimilar markets are relatively nascent, and successful enforcement of the antitrust laws against companies that improperly delay biosimilar competition will require thoughtful consideration of the specific dynamics that prevail in the emerging biosimilar market.

Read Lessons For Biosimilar and Biologic Antitrust Litigation. 

For far too long, data brokers who work out of the public eye to collect and sell all types of consumer data have been allowed to profit with little oversight.

Most consumers don’t even know that vast quantities of their personal information are regularly sold into a fast-growing, $240 billion market — let alone consent to it.[1]

The tide may be turning.

With California Gov. Gavin Newsom signing the Delete Act into law Oct. 10, there is renewed focus on holding an extremely lucrative but underregulated industry accountable.[2][3]

The act will allow Californians to delete their personal information held by some 500 data brokers registered in California through a single, verified request — albeit not until 2026.

But will the Delete Act be enough?

Keeping data brokers in check after a long period of free rein, may require a two-pronged approach: legislation and litigation.

Indeed, consumer protection litigation may prove to be a well-placed and time calculated strategy to help expedite continued legislation beyond California and establish important case law in the meantime.

What Data Brokers Are

Data brokers are businesses that aggregate and sell all types of personal information.

This includes names, addresses, phone numbers, email addresses, gender, age, marital status, education, profession, income and credit score, health information, political affiliations, and even real-time location data.

Why Data Brokers Are Bad for Consumers

In short, consumers have no control over what data brokers do with their personal information, because data brokers do not have a direct relationship with consumers — even though consumer data is the product they sell.

As Slate journalist Justin Sherman explains, there are three main avenues for data brokers to obtain personal information:[4]

1. Acquiring companies, apps and websites that collect information on people;

2. Scraping public records, like voting registries and property records; and

3. Using algorithms and other techniques to predict data points, such as using a consumer’s purchase and ZIP code data to infer household income.

Some data brokers use a combination of all three. But no matter how the data broker gets consumer data, one thing remains constant: Consumers often don’t know about it, and have no say in it.

Data brokers have every incentive to amass consumer data but no incentive to protect consumers from any of the downstream effects of monetizing it, such as keeping it from falling into the hands of a scammer or criminal, or ensuring its accuracy to prevent wrongful denial of credit, housing or employment.

What the Government Has Done About Data Brokers

There is currently no federal data broker legislation, though data brokers have argued that existing laws like the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the Federal Trade Commission Act are adequate to address any harms that occur because of their business practices.

The FTC made headlines[5] last year by filing suit against Kochava Inc., a data broker that sold geolocation data that could be used to trace the movements of individuals to and from sensitive locations, including abortion clinics and places of worship. But that effort has not been successful to date.

The FTC’s initial suit was dismissed, though the agency refiled it in June. Likewise, in August of this year, the Consumer Financial Protection Bureau announced its intention to launch rulemaking targeting data brokers under the FCRA.[6] But the rules will not be released for public comment until 2024.

Only four states have laws requiring data broker registries: Vermont, California, Texas and Oregon.[7] These laws do not restrict the collection or sale of personal information, however. They only require that data brokers register with a state agency and provide certain information about their business practices.

But, as mentioned, California is upping the ante with the Delete Act. Once implemented, Californians will likely have more control over their personal information.

Until then, consumers are left to navigate the old system, in which they have little power to exercise control over their private information. The state has until 2026 to implement the Delete Act. This is where private lawsuits can play a role.

Another Avenue for Change

Government enforcement actions against data brokers have been limited, such as violations under the FCRA.

But the plaintiffs bar is starting to hold data brokers accountable for the unfettered collection and sale of consumer data using more novel theories of liability under federal and state law. Below are three types of data broker consumer class actions that have recently been in the news.

These are still in the early stages of litigation, but worth monitoring given the lengths registered data brokers go to obtain and sell consumer information.

Challenging the Premise of Accumulating Personal Information

In 2022, immigrant activists and organizational plaintiffs sued LexisNexis Risk Solutions Inc. for its online database Accurint, which allegedly aggregates public and nonpublic information to create detailed dossier on individuals, including names, government records, utility bills, phone records and medical records.

The plaintiffs in Ramirez v. LexisNexis Risk Solutions allege, among other things, that this platform enabled the U.S. Immigration and Customs Enforcement to obtain sensitive information about them while circumventing state and local laws.

The plaintiffs brought claims under the Illinois Consumer Fraud and Deceptive Business Practice Act and for unjust enrichment. The case is still awaiting a decision on a motion to dismiss in the Circuit Court of Cook County, Illinois.

The technology and data collection practices at the heart of this case are the subject of Electronic Privacy Information Center’s recent call for ICE to cancel its $22.1 million contract with LexisNexis for invasive surveillance databases.[8]

Engaging in Electronic Tracking to Aggregate Personal Information

Another group of plaintiffs, one of whom is affiliated with the Center for Human Rights and Privacy, sued the database management company and registered data broker Oracle America Inc., claiming that it violated state privacy and federal wiretap laws, along with unjust enrichment, by tracking users across the internet and selling their personal information without their knowledge or consent.

Earlier this month, the U.S. District Court for the Northern District of California allowed many of these claims to move forward, denying the bulk of Oracle’s motion to dismiss in Katz-Lacabe v. Oracle America Inc.[9]

What Constitutes Data Broker Activity

In September, OpenAI LP and Microsoft Corp. were sued for ChatGPT’s practice of scraping personal information from hundreds of millions of individuals without their knowledge or consent to train fast-growing artificial intelligence technology applications.[10]

Among other things, the plaintiffs in A.T. v. OpenAI LP in the Northern District of California argue that this practice amounts to an illegal data brokerage and violates state consumer protection and privacy laws.

Conclusion

Though the cases are still in early stages, they serve as a reminder that the data broker business model uses consumer data for a purpose that may do more harm than good.

Notably, most of these cases to redress consumer harm and hold data broker activity accountable are being litigated in the Northern District of California.

Indeed, California is often a leader in consumer protection law and business innovation. With the signing of the Delete Act into law, the Golden State could lead the nation in an important paradigm shift and start the ball rolling on change.

[1] The Record, Sept. 21, 2023, “FTC Official Attacks Data Brokers at Industry Conference” https://therecord.media/ftc-samuel-levine-data-brokers-speech.

[2] Consumer Reports: Advocacy, October 10, 2023, “Governor Newsom Signs First-of-Its-Kind Data Rights Bill into Law” (Press Release) https://advocacy.consumerreports.org/press_release/governor-newsom-signs-first-of-its-kind-data-rights-bill-into-law/.

[3] California Legislative Information, Sept. 28, 2021, Senate Bill No. 362, Chpt. 334 https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB362.

[4] SLATE, April 26, 2023, “How Shady Companies Guess Your Religion, Sexual Orientation, and Mental Health: And Sell That Data to the Highest Bidder” https://slate.com/technology/2023/04/data-broker-inference-privacy-legislation.html.

[5] Federal Trade Commission, Aug. 29, 2022, “FTC Sues Kochava for Selling Data that Tracks People at Reproductive Health Clinics, Places of Worship, and Other Sensitive Locations: Agency Alleges that Kochava’s Geolocation Data from Hundreds of Millions of Mobile Devices Can Be Used to Identify People and Trace Their Movements” (Press Release) https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-sues-kochava-selling-data-tracks-people-reproductive-health-clinics-places-worship-other.

[6] Consumer Financial Protection Bureau, Aug. 15, 2023, “Remarks of CFPB Director Rohit Chopra at White House Roundtable on Protecting Americans from Harmful Data Broker Practices” https://www.consumerfinance.gov/about-us/newsroom/remarks-of-cfpb-director-rohit-chopra-at-white-house-roundtable-on-protecting-americans-from-harmful-data-broker-practices/.

[7] Vermont Secretary of State, Business Division, Data Brokers Register Online https://sos.vermont.gov/corporations/other-services/data-brokers/; Office of the Attorney General for California, Data Broker Registry https://oag.ca.gov/data-brokers; Texas Health and Human Services, C-828, Data Broker https://www.hhs.texas.gov/handbooks/texas-works-handbook/c-820-data-broker; Oregon Department of Justice, AG Rosenblum’s Legislative Report: A Successful Session for Laws Protecting Oregonians https://www.doj.state.or.us/media-home/news-media-releases/ag-rosenblums-legislative-report-a-successful-session-for-laws-protecting-oregonians/?hilite=data+broker.

[8] EPIC.org, February 23, 2023, EPIC, Coalition Call for ICE to Cancel Contract with LexisNexis for Invasive Surveillance Databases https://epic.org/epic-coalition-call-for-ice-to-cancel-contract-with-lexisnexis-for-invasive-surveillance-databases/.

[9] Law360, Oct. 4, 2023, “Oracle Can’t Gut Consumer Class Action Over Data Collection” https://www.law360.com/articles/1729508.

[10] A.T. et al v. OpenAI LP et al, Case No. 3:23-cv-04557, United States District Court for the District of Northern California.

On August 10, 2023, the Second Circuit decertified Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., a long-pending class action against Goldman Sachs related to a $550 million fine for failing to disclose conflicts of interest tied to investments in various collateralized debt obligation transactions. The decision (Goldman IV) raises important implications about what plaintiffs need to show to obtain class certification in cases where defendants can argue the alleged misrepresentations are “generic” and do not closely match later disclosures that revealed the defendants’ fraud.
 
To obtain class certification, securities fraud plaintiffs must show that the issue of reliance (i.e., whether a plaintiff relied upon the alleged misrepresentations when buying or selling securities) can be proven on a class-wide basis. To do this, plaintiffs typically rely on the “Basic presumption” established by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224 (1988). The idea behind Basic is that stock trading in an efficient market incorporates all public, material information (including material misrepresentations), and that investors rely on the integrity of the market price when they choose to buy or sell that stock. Thus, if plaintiffs can show the market for the security at issue was efficient, there is no need to individually prove reliance—all members of the class effectively relied on the defendants’ material misrepresentations by buying or selling the company’s stock at the prevailing market price, which was impacted by the defendants’ material misrepresentations. Defendants can, however, rebut the Basic presumption by demonstrating by a preponderance of the evidence that the alleged misrepresentations did not actually impact the stock’s price.
 
There are two ways a misrepresentation can impact a stock’s price: by inflating it, or by maintaining already-existing inflation. In the latter scenario, the back-end price drop when the truth is disclosed can generally be used as a proxy to show there was front-end inflation. But what happens in an inflation-maintenance case when the subject matter of the price-propping misrepresentation and the truth-revealing corrective disclosure don’t quite match up? That’s the question addressed by Goldman IV.
 
Goldman IV concerns two categories of alleged misrepresentations. The first relate to Goldman’s business principles—statements like “[w]e are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us,” “[o]ur clients’ interests always come first,” and “[i]ntegrity and honesty are at the heart of our business.” The second are lengthier “risk factor” statements from Goldman Sachs’ annual report that address the company’s purportedly “extensive procedures and controls that are designed to identify and address conflicts of interest.” The plaintiffs allege that these statements maintained Goldman Sachs’ already-inflated stock price, and that the SEC’s investigation of Goldman Sachs and the company’s payment of a $550 million fine revealed the truth and caused Goldman’s stock price to fall such that investors lost $13 billion.
 
The case has a long and tortuous appeal history, involving three prior Second Circuit opinions and a Supreme Court decision in 2021. See Goldman Sachs Grp., Inc. v. Ark. Teacher Ret. Sys., 141 S. Ct. 1951 (2021). Most importantly, the Supreme Court’s 2021 decision was on the very issue addressed by Goldman IV, and explained that the “inference [ ] that the back-end price drop equals front-end inflation [ ] starts to break down” when the earlier misrepresentation is generic and the later corrective disclosure is specific. Thus, the “generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory.” Ultimately, the district court was instructed to “consider all record evidence relevant to price impact and apply the legal standard as supplemented by the Supreme Court.” The district court then re-certified the class, setting up a fourth appeal to the Second Circuit.
 
This time, the Second Circuit de-certified the class. At its core, the Second Circuit’s decision addresses a simple question: “How generic are the alleged misrepresentations?”
 
As to the first category of statements, concerning Goldman Sachs’ ethical business principles, the Second Circuit found the district court’s analysis “untenable” because the district court understated the statements’ “genericness.” The Second Circuit found such statements were “separately disseminated to shareholders in separate reports at separate times,” and could not be read in conjunction with the conflicts statements to bolster or strengthen the argument they impacted Goldman Sachs’ stock price, which the Second Circuit found otherwise unconvincing.
 
Everything thus turned on the conflicts statements. And as to those statements, the Second Circuit found there was an insufficient link between them and the corrective disclosures, because not one of the corrective disclosures expressly identified the conflicts statements, and there was a “considerable gap in specificity” between the two. The proper way for the district court to determine the amount of front-end inflation would have been to “ask what would have happened if the company had spoken truthfully at an equally generic level,” but “instead, the district court allowed the details and severity of the corrective disclosures to do the work of proving front-end price impact.” This was a mistake, because “[u]tilizing a back-end price drop as a proxy for the front-end misrepresentation’s price impact works only if, at the front end, the misrepresentation is propping up the price.”
 
Going forward, the Court explained, “a searching price impact analysis” must be conducted where (1) there is a considerable gap in genericness between the misrepresentations and corrective disclosures, (2) the corrective disclosures do not directly refer back to the alleged misrepresentations, and (3) the plaintiff claims a company’s generic risk disclosure was misleading by omission.
 
The Second Circuit directed lower courts to consider indirect evidence of price impact, such as discussions in the market, and to determine whether the specific statements at issue were important to investors in deciding whether to buy or sell stock.
 
Goldman IV shows that in cases in the Second Circuit where securities fraud plaintiffs are advancing a price-maintenance theory, and where the defendants might argue the alleged misrepresentations are “generic” and not sufficiently tethered to the subsequent corrective disclosures, plaintiffs should marshal as much evidence as they can—econometric and statistical evidence, market commentary, media reports, and more—to solidify their arguments that they are entitled to the Basic presumption and class certification. Because most securities cases do not concern supposedly “generic” alleged misrepresentations, we do not anticipate the decision will have a significant impact on securities cases more broadly.

As the new school year begins, take control of your identity and your person. Don’t be the target of cyberbullying, cyberstalking or sexual exploitation.

As technology has become more advanced, cyberbullying and cyberstalking have become easier. Be alert and have a plan for stopping and reporting bad behavior.

1. Signs of cyberbullying — Is someone sending, posting photos, or sharing negative, harmful, false, or mean content about you or a friend by text or by online social media apps or gaming apps? Cyberbullying isn’t always easy to spot, especially when it’s done by people who are supposed to be your friends. Some cyberbullying can cross the line into unlawful or criminal behavior.

• Indicator: Repeated bullying can cause embarrassment, humiliation, or other harm.
• How to stop it: Take screen shots of the abusive behavior. Block the person, tell a trusted adult, and report the behavior to the social media site.
• Read more about cyberbullying.

2. Signs of cyberstalking — Is someone trying to scare or threaten you by repeatedly sending you texts or posts saying that they know where you live, they are watching you, or they are going to hurt you? Has someone tracked your personal and private information and used it to make you afraid?

• Indicator: Cyberstalking can cause fear or distress for personal safety.
• How to stop it: Take screen shots of the abusive behavior. Block the person. Tell a trusted adult. Report the behavior to the social media sites. If necessary, contact the police.
• Read more about cyberstalking.

3. Signs of AirTag stalking — Is someone showing up uninvited at your home or other places you may be? GPS and Bluetooth tracking devices like Apple AirTags, Samsung SmartTags, Tile Trackers, and Chipolo ONE are, unfortunately, making cyberstalking easier for people who may want to scare you or cause harm. Devices like these are the size of a quarter. They are easy to slip into a backpack, coat, car, or other personal belongings.

• Indicator: Tracking device stalking, which is another form of cyberstalking, can cause fear, distress or concern for personal safety or personal property.
• How to stop it: Apple, Samsung, Tile and Chipolo all have instructions on how to stop their tracking devices. For instance, if you have an iPhone, Apple has provided step-by-step instructions on how to set up your iPhone to notify you if there’s an unwanted AirTag on your person or in your personal property, as well as how to disable it. An unwanted AirTag may beep. You should also receive a notification on your iPhone. The beeping is known as an “anti-stalker” notification, given the rise in crime. Find the AirTag, tell a trusted adult, and contact the police.
• Read more about finding, blocking, disabling tracking devices.

If you experience any of these behaviors or if you feel pressured by a peer or adult to do something you are uncomfortable with, seek out a trusted adult and talk to them about the issue and your concerns.

General rules of safety:

• Don’t share images you don’t want seen on the Internet
• Keep your personal belongings to yourself
• Never give your personal information to strangers or people you don’t know well

About the Author

Takisha D. Richardson leads the Sexual Abuse & Sex Trafficking team at Cohen Milstein. She represents child sexual abuse victims and adult survivors of sexual abuse. She is the former Assistant State Attorney and Chief of the Special Victims Unit of the State Attorney’s Office for Palm Beach County, Florida.

Legal Disclaimer

The information contained herein is not legal advice and should not be interpreted as such. If you need legal advice, please consult a lawyer. Endorsements and past results do not guarantee, warranty, or predict any future outcomes.

Private equity continues to expand its holdings in healthcare, having invested almost $1 trillion in hospitals and specialized practices over the last decade. And patient care and government healthcare plans such as Medicare and Medicaid are feeling the impact as evidence mounts that private equity may be crossing the line between managing the business operations of a healthcare provider and exercising control over patient care decisions.

A 2021 study published by the Becker Friedman Institute for Economics concluded that private equity ownership increases the short-term mortality of nursing home residents by 10%. That represents more than 20,000 lives lost during a 12-year period, likely due to lowered nursing-staff-to-resident ratios and the diversion of patient care funding to private equity owners. An investigation by USA Today and Newsday found that when private equity firms acquire an interest in dental practices treating Medicaid patients, those practices tend to incentivize dentists to increase the volume of procedures, regardless of medical necessity. Surprise billing, where patients receive outsized bills for out of network services provided on an emergency basis, or for supplemental services rendered by an out of network provider working within an in-network facility, are correlated to private equity ownership and outsourcing tactics.

If a private equity firm seeks to, or has acquired, your healthcare organization, there are few things you should know.

1. Purpose: The sole purpose of a private equity firm is to provide its investors with profits. In the healthcare context they do this through the strategic acquisition of various types of health care providers, some of which may be large companies like hospital systems, and others which may be smaller, such as physicians group practices. The acquisition targets are providers from which the firm believes it can generate value for itself and its investors. Typically, a private equity firm acquires a portfolio company for five to seven years, during which it cuts costs, sells off assets, and/or enhances efficiencies (sometimes by “rolling up” individual physician practices providing the same services) to improve financial results. Then it sells off the portfolio company.

2. Organizational Structure: Many private equity firms with portfolio companies in the healthcare sector have adopted the “Friendly PC” organizational model, which when used properly, can help to separate patient care (and the medical judgments which lie at the heart of patient care), from the private equity firm thereby avoiding accusations that it is unlawfully practicing medicine. Under this model, the professional corporation is owned by physicians and employs the physician providers as well. The professional corporation then enters into an agreement with a management services organization (“MSO”) which is controlled by the private equity firm. The MSO manages the day-to-day business operations of the medical practice and employs the non-clinical employees.

3. Operational Anomalies: Private equity firms and/or their MSOs may contract out critical care services, such as emergency, radiology, and anesthesiology, as well as administrative departments, such as accounting. This gives them greater leverage in pushing costs down but can result in the elimination of healthcare provider services and jobs, and the implementation of new billing and/or service tactics. Issues that can arise from private equity ownership are many — from surprise billing, to acquiring excess debt (just weeks ago, private equity-owned Envision Healthcare, discussed below, declared bankruptcy), to making decisions about patient care.

Unfortunately, private equity acquisitions in the healthcare sector may create an inherent conflict of interest between patients and their government healthcare plans on one hand, and private equity firms and their investors on the other.

Medical professionals and administrators are sometimes caught in the middle as patient care suffers.

In these situations, medical staff have legal resources to seek recourse and accountability. Many states have longstanding laws that prohibit non-licensed medical professionals, including private equity limited partnerships, from engaging in the practice of medicine. Additionally, the federal False Claims Act (FCA) and its state law counterparts have long been used to remedy and deter all manner of health care fraud directed at government payers.

The corporate practice of medicine (“CPOM”) doctrine prohibits corporations from practicing medicine or employing a physician to provide professional medical services. The doctrine exists, in part, to ensure that physicians are free to exercise their medical judgment independent of a corporation’s obligations to its shareholders.

More than thirty states have CPOM statutes, and while every state allows for the creation of professional corporations, most restrict shareholders, owners, or board directors to persons licensed to render the same professional service as the professional corporation. Other states allow non-physician owners or shareholders but limit such ownership to a minority percent. The aim of these statutes is to preserve a physician’s independence in exercising his or her medical judgment for the benefit of the patient.

Two recent court decisions in which state CPOM statutes were applied are particularly noteworthy:

• In a unanimous 2017 decision in Allstate Ins. Co. v. Northfield Med., the New Jersey Supreme Court reinstated a nearly $4 million dollar verdict that Allstate Insurance received against a chiropractor and his lawyer, based on violations of New Jersey’s CPOM statute. In this case, the chiropractor, rather than the affiliated medical doctor, was extracting the profits from and maintaining control over a multidisciplinary healthcare provider.
• In 2019, in Andrew Carothers, M.D., P.C. v. Progressive Insurance, the New York Court of Appeals affirmed the jury’s determination that a medical professional corporation had given nonphysicians too much operational and financial control over its activities and thus violated New York’s CPOM statute requiring that medical professional corporations be owned and controlled solely by licensed professionals. 

There are at least two recent examples of healthcare providers holding private equity firms accountable for crossing the line between managing the non-clinical aspects of a health care provider and unlawfully making decisions about patient care. Both involve Kohlberg Kravis Roberts Envision Healthcare:

• In 2019, the American Academy of Emergency Medicine Physician Group sued Envision, alleging that the private equity firm violated California CPOM statutes when it assumed responsibility for managing the emergency department at Placentia-Linda Hospital in 2018. Specifically, through its own employees, officers and agents, Envision assumed control of the medical professional corporation which was ostensibly created to prevent Envision from making medical treatment decisions. AAEMPG alleges that Envision engaged in this unlawful strategy nationwide.
• In 2022, an emergency room doctor who had complained about deliberate staffing shortages at a Kansas hospital and was terminated in response, was awarded $26 million by a jury in compensatory and punitive damages. The physician claimed that Emcare, a division of Envision, had staffing policies that caused persistent staffing shortfalls and endangered patient safety.

Could a court find that a violation of CPOM gives rise to parallel violations of the FCA when the private equity firm causes Medicare or Medicaid claims to be submitted for reimbursement?

No court has yet been presented with this question. However, the U.S. Supreme Court has held that the submission of claims for services provided by unlicensed professionals can violate the FCA. This legal backdrop is immensely instructive when considering strategies for policing the activities of private equity firms that exercise control over the operations of healthcare providers and prevent independent medical decision-making — especially when their activities are shortchanging patients and government payers, all in the name of profits.

The potential for private equity to insidiously undermine the doctor-patient relationship and usurp the ability to make treatment decisions from physicians is growing at an alarming rate. Such activity may also lead to the submission of illegal false claims to Medicare and Medicaid.

It is vital that healthcare professionals at health facilities owned and operated by private equity firms have in place effective enforcement strategies to ensure physician autonomy and quality patient care are not sacrificed. Barring that, medical professionals and administrators should be wary of the potential for private equity, in its quest to extract value out of a healthcare provider, to unlawfully exercise control over patient treatment decisions. If private equity is intervening in medical care or patient outcomes are worsening, pursuing legal action can be vital to winning accountability. CPOM statutes, the FCA, and state false claims statutes offer a powerful means of preserving patient care and physician independence to exercise effective patient care.

On May 16, the United States District Court for the Southern District of New York preliminarily approved a $1 billion settlement in In re Wells Fargo Securities Litigation (S.D.N.Y.). If granted approval, following a hearing scheduled for September 8, 2023, it would be among the top securities class action settlements of all time.

A Story of Betrayal and Fraud

Wells Fargo Bank is one the largest banks in the United States.

Between May 30, 2018 and March 12, 2020 (the “Class Period”), Wells Fargo and its top executives allegedly made a series of false and misleading statements to not only investors, but the public and Congress. Specifically, Plaintiffs allege that the Bank, which had been fined $3 billion by the U.S. Department of Justice, SEC, and other federal and state authorities for opening an estimated 3.5 million phony bank accounts, misrepresented its compliance with government mandated consent orders.

These orders, mandated by the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, were created to rectify Wells Fargo’s governance and oversight failures, which allowed such consumer fraud to happen in the first place.

To make matters worse for the Bank, the FRB issued an unprecedented asset cap, restricting any future growth until the bank was in compliance with the consent orders.

As senior bank executives continued to allegedly mislead investors that regulators were satisfied with the Bank’s progress on fulfilling the consent orders and that the asset cap would be timely removed, Wells Fargo’s common stock traded at artificially inflated prices.

The Truth Revealed

The truth regarding Wells Fargo’s fraud was revealed over a number of corrective disclosures. Ultimately, in March 2020, a House Committee on Financial Services report revealed that, after a yearlong investigation, Wells Fargo’s remediation plans were “materially incomplete” and fell “woefully short” of regulators’ expectations.

Congressional hearings revealed even more. Wells Fargo CEO Charles Scharf testified that “the company’s leadership failed its stakeholders” and “we did not have the appropriate controls in place across the company.”  As a result of these revelations, Wells Fargo’s stock plummeted.

The Role of Investors

Given the significant losses to their public pension funds, the Public Employees’ Retirement System of Mississippi (Mississippi) and the State of Rhode Island, Office of the General Treasurer (ERSI), stepped in and addressed Wells Fargo’s fraud head on. In November 2020, shortly after the initial investor suit was filed, both ERSI and Mississippi were appointed co-Lead Plaintiffs, Cohen Milstein was appointed Lead Counsel with co-counsel.

If the court grants final approval, this $1 billion settlement will help compensate the public pension funds and other investors impacted by Wells Fargo’s fraud.

Significance of Investor Involvement

Research confirms that when large, sophisticated institutional investors, such as ERSI and Mississippi, serve as lead plaintiffs in securities class actions, the case is more likely to survive defendants’ motions to dismiss, settlements are higher in value and are from a higher percentage of recoverable damages. Their involvement in securities class action helps to deter companies from engaging in fraud in the future.

Indeed, a $1 billion settlement is also an effective warning to other banks and companies: investors are not only watching, but they are also ready to act.

Investor Impact on Industry

In re Wells Fargo Securities Litigation also highlights the enforcement role private litigation can play when banks fall short of their obligations to ensure proper compliance with regulators and other government entities.

This is important to note as banks get bigger through market consolidation. The effect will likely mean less executive and board oversight and less market choice for customers, creating ripe opportunities for customer harm and fraud.

Investor confidence and our economy are dependent upon the integrity of the banking industry, and institutional investors are critical to helping keep banks accountable.

Shareholder Advocate Summer 2023

On June 9, 2023, Chancellor Kathaleen St. J. McCormick of the Court of Chancery of the State of Delaware issued a telephonic ruling which largely denied Defendants’ motions to dismiss the complaint in the In re XL Fleet (Pivotal) Stockholder Litigation, C.A. No. 2021-0808-KSJM, allowing a class of investors to pursue claims related to the fairness of a de-SPAC transaction.

This class action arises from the merger between Legacy XL, a provider of electrification solutions for commercial vehicles in North America, and Pivotal II (“Pivotal”), a Delaware corporation formed as a special purpose acquisition company (SPAC).

Plaintiffs alleged that Defendants, including Pivotal’s board of directors, Pivotal Investment Holdings II LLC, and Pivotal’s sponsor, used Pivotal to enrich themselves by using funds held in trust for the benefit of the public stockholders to consummate a value-destroying merger with Legacy XL without disclosing information that was material to the stockholders’ decision to allow their funds to be invested in the merger. As a result of Defendants’ actions in pursuing the merger without disclosing material facts to stockholders, the stockholders sustained substantial financial losses.

The merger closed on December 21, 2020. Just ten weeks later, Muddy Waters Research issued a report revealing that the proxy statement, which Pivotal investors relied on when determining how to vote on the merger, contained false and misleading information, while also omitting material information about Legacy XL’s value. That news caused the company’s stock’s price to begin a steep downward decline from trading at nearly $17 per share to less than $2 per share a year later, when the company disclosed that it was under investigation by the Securities and Exchange Commission.

Significantly, the Court found that the de-SPAC transaction was subject to “Delaware’s most onerous standard of review”—entire fairness—because “the complaint sufficiently pleads it’s a conflicted controller transaction.” The Court rejected Defendants’ argument that the sponsor of the SPAC, which only held 20% of the company’s equity, was not a controlling stockholder. The Court highlighted that the sponsor was conflicted because of its interest in consummating “a bad deal over no deal at all,” which would cause the sponsor to lose its entire investment in Pivotal. In contrast, Pivotal investors would receive their $10 per share investment back if they had decided to vote against the merger.

Next, the Court found that Plaintiffs sufficiently pled breach of fiduciary duty claims against the Pivotal board by alleging that the proxy statement omitted material information, which fell into two categories: (1) the cash-per-share investment that Pivotal would make into the newly merged companies; and (2) the valuation of Legacy XL that stockholders would receive in exchange.

Finally, the Court upheld Plaintiffs’ claim that Pivotal breached the 80% requirement in its charter because Legacy XL was not worth at least $178.4 million at the time of the merger. As a result, the Court allowed claims to proceed against the Pivotal board for breaching the charter’s terms.

By Chris Lometti and Richard E. Lorant
Securities Litigation 101
Shareholder Advocate Summer 2023

In prior articles, we have mentioned the importance of enacting a policy to govern a pension fund’s approach to tracking and managing its securities litigation assets. Today we will focus on a key section of that policy: the criteria for active involvement in a securities lawsuit.

How Private Enforcement by Institutional Investors Promotes Fair and Free Markets

First, some background on what makes the federal securities class action mechanism such a vital tool to enforce transparency and accountability for publicly traded companies in U.S. markets and why active involvement by institutional investors is important to making class actions effective.

Private enforcement of U.S. securities laws through civil litigation provides an important complement to government prosecution by  the Securities and Exchange Commission through its civil enforcement and administrative actions, and the Department of Justice, which is responsible for criminal enforcement. Chronically underfunded and understaffed, federal enforcement agencies necessarily focus on the largest, most egregious cases. Moreover, the SEC typically retains money it collects through civil penalties rather than returning money to shareholders. When the SEC does reimburse defrauded investors directly through its Fair Fund, its disgorgements are dwarfed by the amounts recovered through private securities class action settlements; the top 50 Fair Fund disgorgements totaled $11.5 billion, about a fifth of the $56.8 billion recovered by the 50 largest securities class action settlements.

Likewise, a class action mechanism that allows parties with similar claims to pursue damages collectively is essential because the vast bulk of individual securities losses are “negative claims” too small to pursue alone: the cost of hiring an attorney exceeds the value of the potential award or settlement. This is true even for most institutional investors, which explains why only a small number of frauds generate the kind of massive losses required for big pension funds to opt out of class actions to seek their own settlements. Without class actions—and the contingency fees that make them economically feasible for plaintiffs’ lawyers—most frauds would simply go unpunished; all but the very largest shareholders damaged by the very largest frauds would absorb their losses as part of the cost of investing in public markets. It’s noteworthy that, while most countries outside the U.S. have prioritizedsending corporate fraudsters to prison above compensating investors, that is changing. The European Union, for example, is instituting rules to facilitate collective actions in all member nations.

As further context when considering involvement, it is also important to remember that the emergence of institutional investors as lead plaintiffs following passage of the Private Securities Litigation Reform Act of 1995 (PSLRA) has benefited all shareholders. Numerous academic studies show that cases led by sophisticated institutional investors have better outcomes, bigger recoveries, and lower attorneys’ fees than those led by individual investors on average, even when controlling for case size. In fact, at least one study found that the involvement of institutional lead plaintiffs has lowered attorney fees for all shareholder lawsuits, since judges often look at similar-sized cases when deciding on fee awards. These improved results argue for pension funds to continue to selectively pursue meritorious litigation for their own benefit—and for the greater good.

Case-by-Case Factors to Consider for Active Participation as  Lead Plaintiff

So, what factors do funds consider when deciding whether to file a lead plaintiff motion? As in all fiduciary and policy-related practices, one size doesn’t fit all. But what follows are some general concepts.

An analysis of whether to actively pursue a case begins with the size of a fund’s initial loss and potential damages, both as an absolute number and relative to other potential lead plaintiff movants.

Funds who have a securities litigation policy often identify a minimum dollar loss (i.e., “loss threshold”) to consider active involvement in meritorious litigation. This loss threshold, whether firm or flexible, will help fund staff determine if its loss is large enough to warrant spending time on the litigation, since class actions allow absent class members to wait until there is a recovery to file a settlement claim. Consulting with monitoring counsel will also give the fund an idea whether its loss is outsized compared to other funds that are likely movants.

The PSLRA directs judges to select the movant with the largest loss as lead plaintiff, so long as it is a typical and adequate class representative, so calculating the initial loss amount is relatively straightforward. The initial complaint will identify a purported class period based on corrective disclosures—moments the stock price was materially affected because defendants allegedly misled investors or failed to publicly disclose information they should have under the law. Movants then sum up their losses during the class period, typically using the last-in-last-out (LIFO) or first-in-first-out (FIFO) method relied on by most courts.

It’s impossible to determine, at the outset, how much the involvement of any one fund as lead plaintiff will increase the recovery. Finally, while many judges reimburse lead plaintiffs for time spent on their litigation duties, such awards are not guaranteed. Unfortunately, it’s also impossible to predict the final recovery amount, or even the recoverable damages, at this stage of the litigation; those issues are subject to judicial rulings, expert testimony, and the evidence produced in discovery. But the initial case analysis may provide an inkling of potential settlement size based on the overall damages, the legal strength of each corrective disclosure, and the timing of the investor’s class period purchases and sales. It also may identify a legal claim that wasn’t included in the initial complaint, such as a purchase in a particular stock offering, or an additional alleged corrective disclosure. If appointed Lead Plaintiff, the fund could assert these additional claims in an amended complaint, thus increasing the value of the case.

Securities litigation policies also identify non-financial factors to consider when deciding whether to act as lead plaintiff. Those factors include: 

• The value of ensuring that the litigation is well managed and efficiently handled, especially if the fund has large potential damages.
• The ability to negotiate the settlement amount.

• The opportunity to incorporate governance improvements at the settlement stage.
• The desire to police egregiously unlawful behavior, deter future fraud, and protect market transparency.
• The ability to negotiate attorneys’ fees.
• The chance to serve as a positive example of shareholder involvement for institutional investors, which the PSLRA has charged with leading such actions.
• The interest in sharing the responsibility of serving as lead plaintiff among like-minded institutional investors to ensure that the U.S. class action system continues to function efficiently as an enforcement mechanism.

In addition, it is important to remember that certain lawsuits, such as shareholder derivative class actions, do not directly return money to investors. These lawsuits primarily address breaches of fiduciary duty by corporate leaders who have exposed systemic, harmful governance and cultural practices that harm long-term shareholder value. As fiduciaries, pension fund trustees should consider some or all these policy issues when deciding whether active participation in litigation is warranted.

There is no doubt that boards of trustees perform an essential and critically important function in the oversight of pension plans in the  United States. There is also no doubt that the quality of governance matters, as research has shown that a high-functioning board leads to better outcomes. So, how should a board react when a single trustee seems to be operating at cross-purposes to the rest of the board and behaving inappropriately?

A bedrock of an effectively functioning board is for all trustees to demonstrate respect for the board’s collective decision-making process. To be effective, the board must speak with one voice. This does not mean that there isn’t a full and frank airing of views and that there aren’t disagreements—indeed, there can, should, and inevitably will be disagreements at some point in the operation of a board. Trustees need to encourage and engage in open discussions and respect differences of opinion while weighing decisions. But once the board has voted in favor of a decision, the board should speak with a single voice and give direction as a whole—no matter whether that direction is to staff, members and beneficiaries, legislators, the public, or other stakeholders.

This leads to the question of how to rein in a rogue board member. One potential action is for the board to censure the offending trustee. The U.S. Supreme Court considered this topic in 2022 in a case, Houston Community College System v. Wilson, that did not involve a pension board but is nonetheless illustrative. After years of acrimony, the Board of Trustees of the Houston Community College System (“HCC”) censured one of its members, Mr. Wilson, who responded by filing a lawsuit challenging the Board’s action. The issue before the Supreme Court was: Did the Board’s censure offend Mr. Wilson’s First Amendment right to free speech?

Mr. Wilson’s tenure was marked by controversy from the start. He often disagreed with the Board about the best interests of HCC, brought multiple lawsuits challenging the Board’s actions, and assisted others in filing lawsuits. Four years into his tenure, he had filed four lawsuits costing HCC more than $300,000 in legal fees. He also was accused of leaking confidential information, publicly denigrating parts of the College’s anti-discrimination policy, and drawing media attention in a variety of ways. For example, after the Board voted to fund an overseas campus over Mr. Wilson’s opposition, Mr. Wilson orchestrated a wave of negative robocalls targeting other board members’ constituents. He gave local radio interviews accusing Board members of illegal and unethical conduct and stated that they were not representing the public. He also hired private agents to investigate a fellow Board member and HCC itself, and maintained a private website that used HCC’s name in violation of Board policy.

These escalating disagreements led the Board to reprimand Mr. Wilson publicly. After Mr. Wilson continued to charge the Board—in media outlets as well as in state court actions—with violating its ethical rules and bylaws, the Board adopted another public resolution, this one censuring Mr. Wilson and stating that Mr. Wilson’s conduct was “not consistent with the best interests of the College” and “not only inappropriate, but reprehensible.”

The Supreme Court, in a unanimous decision, held that Mr. Wilson did not possess an actionable First Amendment claim arising from the Board’s purely verbal censure. The Court noted that bodies in this country have long exercised the power to censure their members, as far back as colonial times. The Court stated, “[t]he censure at issue before us was a form of speech by elected representatives concerning the public conduct of another elected representative. Everyone involved was an equal member of the same deliberative body.”

Importantly, the issue before the Court was a narrow one that did not, for example, involve expulsion or exclusion. The censure neither prevented Mr. Wilson from doing his job nor denied him any privilege of office, and Mr. Wilson did not allege it was defamatory. As such, the Court found that the censure was not a “materially adverse action” capable of deterring Mr. Wilson from exercising his own right to speak. Left for another day was the question of how the Court would treat the board’s imposition of other punishment—such as limiting his eligibility for officer positions— that might be a “materially adverse action” deterring the trustee from exercising his own right to speak.

This case involves many of the very same issues that are regularly discussed in this column. Short of formal censure, what other tools in the pension board tool kit can be used to address the rogue trustee situation?

• Education: A regular and ongoing program of fiduciary education can help trustees understand the fiduciary principles that govern the exercise of their duties and how to apply those principles in real world situations.
• Board governance manual: A roadmap to guide board operations, the governance manual may include charters for the board and the committees of the board. It should be a living document. Rather than “set it and forget it,” you should regularly review and revisit the board governance manual to determine if it reflects the system’s values, is a tool for board accountability, and is meeting your needs—especially as times change and the operating environment evolves.
• Policies and procedures: These may be free-standing or contained in the board governance manual. As an example, the Supreme Court case cited above highlights the importance of having a solid Communications Policy that addresses when trustees may speak to the media on behalf of the board. Another important policy that could address the situation of a rogue trustee is a code of ethics for the board. Other policies may address such topics as board delegation; board training, reimbursement for travel and other expenses; service provider selection; succession planning; and periodic reviews of the executive director and any other direct reports to the board. Just as pension systems are not all alike, policies and procedures should be customized and tailored to fit the particular needs of a pension system.
• Consulting services: An independent outside source can prove invaluable in reviewing governance structure and suggesting ways to enable boards and executives to become more effective. Other ways in which boards may benefit from the use of a consultant includes strategic planning, messaging, and stakeholder relations.
• Self-evaluation: Does your board conduct annual board selfevaluations? These can confirm strengths and reveal areas for improvement to help the board fulfill its responsibilities and fiduciary duties.

Implementing some of all of these strategies may help a pension system board avoid and address a fellow trustee’s inappropriate behavior.