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

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

Background

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

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

Class Certification Decision

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

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

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

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

Implications & Next Steps

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

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

Discovery in the matter is under way.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Winter 2025 issue of the Shareholder Advocate, our quarterly securities litigation and investor protection newsletter, features:

Download the issue (PDF).

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

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

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

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

Because of their unique structure as blank check companies, and their use as financing vehicles to take private companies public (referred to as a “de-SPAC” transaction), many unsuccessful SPAC mergers have since been challenged by stockholders in various types of securities litigation.

SPAC related securities cases generally have taken two forms—each designed to compensate different groups of investors. On one hand, many cases are brought as securities fraud class actions on behalf of open-market purchasers in the post-merger company after disclosure of negative financial news. These cases follow the typical pattern for securities fraud cases. On the other hand, the Delaware courts have found that in many of these ultimately unsuccessful transactions, SPAC insiders and controllers acted disloyally by recommending an unfair transaction to the pre-merger SPAC stockholders while obtaining out[1]sized financial benefits for themselves. These claims have been referred to as MultiPlan claims after the first case decided under Delaware law.

Recently, Cohen Milstein reached a settlement of MultiPlan-type claims in a SPAC related matter involving the merger of Pivotal Investment Corporation II (“Pivotal II”) and XL Fleet Corp. (“XL Fleet”) now known as Spruce Power. This case and the related settlement highlight the unique and complex nature of these actions and some of the difficulties presented when litigating and settling SPAC cases. See In re XL Fleet (Pivotal) Stockholder Litigation, Consol. C.A. No. 2021-0808-KSJM.

Prior to its merger with Pivotal II, XL Fleet was a privately held company manufacturing electrical vehicles. Like other typical SPAC transactions, XL Fleet became a publicly traded company through a de-SPAC merger with Pivotal II (“Merger”). At the time of the Merger, December 21, 2020, Pivotal II’s stock was priced at $10.00 per share based on a purported valuation of $1 billion. Pivotal II stockholders voted to approve the Merger pursuant to an allegedly materially misleading merger proxy (“Proxy”). Like all other de-SPAC merger transactions, Pivotal II stockholders had the option before the Merger occurred to redeem their Pivotal II shares for $10.00 per share plus interest.

Immediately following the Merger, XL Fleet’s stock began trading well-above $10.00 per share and continued to trade above that price for the next several months. On March 3, 2021, Muddy Waters released a short-sellers report which revealed a number of alleged serious problems in the company’s business and its inflated valuation. Following release of the Muddy Waters’ report, XL Fleet’s stock price dropped below $10.00 and continued to steadily decline over the next year.

Not unexpectedly, shareholders filed each of the two types of securities litigation: federal securities class actions on behalf of open-market purchasers of XL Fleet stock and state breach of fiduciary duty cases challenging the Merger disclosures. Since XL Fleet was incorporated in Delaware, Cohen Milstein undertook a books and records investigation under Delaware law on behalf of a stockholder to investigate the circumstances surrounding the Merger. Following that investigation, the firm filed a complaint in Delaware Chancery Court alleging that the Merger Proxy issued by Pivotal II was materially false and misleading which was a breach of Defendants’ fiduciary duties. The allegations of misrepresentations focused on three areas: (i) the failure to disclose the actual net cash per share available to contribute to the Merger; (ii) Defendants’ failure to conduct due diligence of XL Fleet in connection with the Merger; and (iii) the failure to disclose XL Fleet’s true valuation and the numerous problems affecting its business and operations.

The primary claim under Delaware law related to the Proxy’s alleged misrepresentation that the amount of cash available for the Merger was $10.00 per share when, in fact, the net cash per share available after calculating the dilution and certain expenses left only $7.66 per share available for the Merger. In short, stockholders did not get full value for their shares contributed to the Merger. Claims relating to the failure to properly disclose net cash per share have been upheld in other de-SPAC transaction cases. The Delaware Chancery Court eventually upheld this and the other misrepresentation claims alleged in the complaint.

Unique to the Pivotal II transaction was a separate breach of contract claim based on the Pivotal II’s charter. The charter required Pivotal II to enter into a business combination with a target company (XL Fleet) having a value of no less than 80% of the assets or value of Pivotal II. The required minimum in this case was approximately $180 million. Plaintiffs alleged that the pre-Merger value of XL Fleet, did not meet or exceed Pivotal II’s mandated minimum valuation. Evidence suggested that certain valuations of XL Fleet were well below the minimum value required which would be a breach of Pivotal II’s charter and give rise to a breach of contract claim. That claim was also sustained by the Court.

Following the completion of discovery, the parties reached an agreement to settle the Delaware action for $4.75 million. By that time, the federal securities class action on behalf of open-market purchasers of XL common stock had settled for $19.5 million. Although there may be some overlap between the two cases, the settlements are designed to compensate two separate groups of stockholders for different types of unlawful conduct.

The Delaware action settlement will compensate pre-merger investors in Pivotal II who were misled into voting to approve the Merger due to the issuance of a misleading Proxy. Unlike the class of investors who were harmed by the misleading statements made in connection with open market purchases of XL Fleet stock, stockholders in this case were injured because their decision on whether or not to redeem their shares was impaired by the false and misleading Proxy. Because Pivotal II stockholders did not receive adequate value for the assets contributed to the Merger they were injured. This was a harm unique to this group of stockholders.

In litigation involving de-SPAC transactions the parallel nature of Delaware fiduciary litigation and federal securities class actions work in tandem to ensure that different groups of interested stockholders receive compensation for different types of claims. In fact, Delaware courts have come to recognize the separate type of damages investors may suffer when their right to redeem is impaired by a misleading proxy. As Delaware law continues to evolve in the context of de-SPAC mergers, it remains to be seen how the courts will address damages to the pre-merger SPAC stockholders.

On August 7, 2024, the Honorable Sunil R. Harjani of the United States District Court for the Northern District of Illinois denied Abbott’s motion to dismiss, permitting Lead Plaintiffs’ key derivative claims to go forward: a claim for breach of fiduciary duty for failure to oversee the manufacturing and sale of infant formula and a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 related to false and misleading statements on those same topics and involving the company’s repurchase of stock at prices inflated by the misleading statements.

Lead Plaintiffs in the case are the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority.

Background

Abbott, an Illinois corporation, is one of the primary manufacturers of infant formula products in the U.S., previously producing 40% of all infant formula products consumed in the U.S. It is also the nation’s leading provider of infant formula to low-income families through the U.S. government’s Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”) program. On February 15, 2022, Abbott closed its Sturgis, Michigan infant formula manufacturing facility due to the FDA’s concerns about contaminated baby formula. Two days later, on February 17, 2022, Abbott announced a “voluntary” recall of infant formula products manufactured at the Sturgis plant. The consequences were devastating. A nationwide shortage of baby formula ensued as the facility remained shut down for several months.

Abbott’s business suffered hundreds of millions in lost sales and profits and costs to remediate the facility and upgrade food safety compliance, risk management systems, and internal controls. The company’s business and reputation were badly tarnished as it came under regulatory, criminal, and Congressional scrutiny. The company is now exposed to numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.

In addition to their oversight failures, Plaintiffs allege that certain members of Abbott’s leadership violated Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”). Specifically, the complaint alleged that they authorized the company to engage in billions of dollars in stock repurchases while Abbott’s stock was artificially inflated due to false and misleading statements regarding Abbott’s production and manufacture of infant formula products in the US., with certain Defendants benefiting personally from insider stock sales before the truth started to leak out.

Motion to Dismiss Ruling

Recognizing the strength of the complaint, the Court upheld the core claims against Defendants’ motion to dismiss, including the federal violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5, which will allow the case to move forward in federal court. These are the claims that Defendants issued false and misleading statements to shareholders about the company that Defendants knew or recklessly disregarded were false, and which harmed the company by engaging in stock repurchases at inflated prices. The Court also found that the breach of fiduciary duty claim (sometimes referred to as a Caremark claim) for Abbott’s directors was sufficiently plead on the first prong, that the Director Defendants repeatedly failed to implement, monitor, or oversee compliance and safety of manufacturing at the Sturgis plant. Finally, the Court rejected Defendants’ contention that dismissing the suit was in the best interest of the company.

The Court did dismiss certain ancillary claims that do not affect the case’s overall scope or significance.

Defendants have asked the Court to reconsider certain aspects of its ruling; Plaintiffs have opposed that request.

Key Takeaways for Shareholders

Overcoming a motion to dismiss is a key milestone in any lawsuit and particularly so for a shareholder derivative lawsuit given the high burden that plaintiffs must meet. The past few years have seen an increasing focus in state and federal courts on corporate board and executives’ oversight responsibilities, particularly when health and safety is at risk. Long-term shareholders have important rights to protect their investment through investigating and, if warranted, pursuing litigation to ensure that corporate leaders fulfill their fiduciary duties. We look forward to continuing to litigate the Abbott derivative matter to protect Plaintiffs’ long-term investment and hold wrongdoers to account.

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

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

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

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

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

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

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

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

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

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

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

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

Richard E. Lorant

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

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

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

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

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

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

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

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

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

Carol V. Gilden and Laura H. Posner

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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