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

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

Use of AI as Advocates for Shareholders

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

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

Use of AI Within Pension Funds

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

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

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

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

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

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

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

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

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

Background

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

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

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

Moelis

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

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

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

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

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

Opposition to S.B. 313

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

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

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

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

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

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

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

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

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

NVIDIA: Pleading Standards for Scienter and Falsity

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

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

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

Facebook: Disclosure of Previously Materialized Risks

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

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

Implications

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

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

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

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

In our inaugural installment of Securities Litigation 101, we discussed the ins and outs of shareholder derivative actions—lawsuits in which shareholders act on behalf the company to sue its directors for fiduciary breaches that caused harm to the company. Today, we will explore a powerful tool that shareholders can use to determine whether to file a derivative lawsuit: a books and records demand.

These procedures, often referred to as Section 220 demands for the section of the Delaware General Corporation Law (DGCL) that gives shareholders the right to inspect records of Delaware corporations, are also available outside the First State. By seeking internal board materials, shareholders can determine whether a company’s board of directors acted properly from a fiduciary standpoint or, conversely, can lay the groundwork for potential derivative litigation.

Submitting a books and records demand is straightforward and follows relatively the same process under each state’s corporate laws. If the shareholder has a “proper purpose”—defined as one “reasonably related to such person’s interest as a stockholder”—counsel prepares a letter explaining the concerns and basis for the document requests. A proper purpose for making a demand may include valuing the shareholder’s interest in the corporation or investigating possible wrongdoing, such as breaches of fiduciary duty by directors or officers that could include corporate waste, self-dealing, failure to oversee the business, allowing the business to engage in illegal activity, or insider trading. Along with the letter, the shareholder provides proof of their ownership of the stock during the relevant period and a power of attorney authorizing counsel to make the demand on their behalf.

Once a shareholder clears these hurdles, they are typically able to obtain access to board documents (such as board meeting agendas, minutes, and presentations), policies and procedures, and annual directors’ and officers’ questionnaires. The scope of the board materials to be produced is defined by the evolving caselaw in the particular state where the company is incorporated.

Annual directors’ and officers’ questionnaires are particularly helpful in identifying any intertwined relationships between the executives running the company and the directors charged with its oversight. Certain interdependencies may mean board members lack independence, thus making it “futile” to demand that the board bring claims against the company in a derivative action and allowing the shareholder to sue the board on the company’s behalf to protect the company from further harm—and in turn, protect the shareholder’s interest in the company. Derivative litigation does not return money directly to shareholders but rather may seek a monetary remedy for the company itself and/or seek to force companies to address inadequacies in corporate governance oversight, workplace policies, or other shortcomings that can harm shareholder value over the long term.

If the corporation does not comply with the books and records demand, the shareholder may enforce their right to make the demand by filing an action asking the court to compel the company to comply with the demand. These cases, typically summary proceedings, are litigated at an unusually fast pace, with litigators asking for a bench trial as soon as two to three months after filing a complaint. More like an evidentiary hearing than a full-blown trial, books-and-records trials normally last one day or less, with no opening or closing statements.

Cohen Milstein has significant experience issuing books and records demands on behalf of its institutional investor clients to uncover evidence of wrongdoing or mismanagement that would otherwise go unseen. By taking this preliminary step, shareholders can better assess how best to act as responsible stewards of the companies they own before bringing litigation.

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.

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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).

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.

The Winter 2024 issue of the Shareholder Advocate, our quarterly securities litigation and investor protection newsletter, features:

Read the Winter 2024 issue of the Shareholder Advocate.

By Jan E. Messerschmidt

Can you commit securities fraud by tweeting an emoji? One court confirmed that you can in an important recent decision from the District Court for the District of Columbia.

In Bed Bath & Beyond Corporation Securities Litigation,¹ Judge Trevor McFadden held that the plaintiffs had adequately alleged multiple securities fraud, insider trading, and market manipulation claims against Ryan Cohen.

Defendant Cohen is an entrepreneur-turned-investor who founded the online pet store Chewy and sold it for more than $3 billion. Most recently, Cohen became an investor in so-called “meme stocks.” These stocks are popular among retail investors who gather online on Twitter (now known as “X”) and Reddit, often using memes and emojis to discuss their trades (thus the moniker “meme stock”). Meme stock traders are known for buying and selling stocks of companies that most traditional investors either ignore or short (that is, bet that the price will fall rather than rise).

Cohen entered the meme stock fray in 2020 by buying a large stake in GameStop, the struggling brick-and-mortar video game retailer. After buying his stake in GameStop, Cohen made multiple business recommendations and soon selected several directors of its board. GameStop had been popular with meme stock investors, but when they found out about Cohen’s involvement, GameStop’s stock soared by more than 40%. Cohen’s popularity rose and he was soon viewed as the leader of meme stock investors, with media outlets naming him the “meme stock king.”

Cohen followed the same playbook with the struggling retailer Bed Bath & Beyond. In early 2022, Cohen bought a 9% stake in the company and, as with GameStop, made public business recommendations and picked several members of Bed Bath & Beyond’s board. Cohen’s main proposal for Bed Bath & Beyond was that the company should sell its one bright spot, its subsidiary buybuy BABY, which sells items for babies and children. As with GameStop, Bed Bath & Beyond’s stock price rose and became a popular meme stock, despite the company’s well-known struggles.

But by August 2022, Bed Bath & Beyond’s leadership had decided against selling buybuy BABY. Instead, the company planned to use the subsidiary as collateral to borrow more money, an agreement finalized in late August 2022. At the same time, Bed Bath had announced more bad news, firing 20% of its workforce and closing 150 stores.

But before all that became public, Plaintiffs allege, Cohen hatched a plan to profit from his huge investment in Bed Bath & Beyond. As alleged in their complaint, starting in early August 2022, Cohen made three moves designed to drive Bed Bath & Beyond’s stock price higher so that Cohen could sell his stake at a profit.

First, Cohen tweeted an emoji. On August 12, 2022, CNBC.com tweeted a negative story about Bed Bath & Beyond accompanied by a picture of a woman pushing a shopping cart in one of the Company’s stores. Cohen fired back with a tweet saying, “At least her cart is full,” which he capped with an emoji of a “smiley moon.”

Many meme stock investors interpreted Cohen’s smiley moon emoji to mean “to the moon” or “take it to the moon,” a phrase that meme stock investors commonly use when they are predicting a stock price to increase. The complaint alleges that Cohen used the tweet to tell his thousands of meme stock investor followers that Bed Bath’s stock was about to rise and that they should either buy or hold their positions. And they appeared to act on his tip. Bed Bath’s stock price soared.

Four days later, Cohen filed a Schedule 13D document with the SEC stating that he had not recently sold any Bed Bath Stock. If Cohen had any concrete plans to sell his stock, he was legally required to disclose those plans on his Schedule 13D, but Cohen mentioned no such plans. Meme stock investors saw this as even more evidence that Cohen remained enthusiastic about Bed Bath’s growth prospects and its stock price continued to rise.

Finally, later that same day, Cohen filed a Form 144 with the SEC, which outlined his potential plan to sell his stock. But at that time, Cohen could file his Form 144 on paper via email, so his Form 144 was not immediately made public.

Meanwhile, over two days, on August 16 and 17, Cohen quietly sold his entire stake in Bed Bath & Beyond for a whopping profit of $68 million. When news finally broke that Cohen had sold off his entire stake, Bed Bath’s stock plunged by more than 50% within a few days.

Moving to dismiss the complaint, Cohen claimed that emojis can never be actionable because they have no defined meaning, asserting that there is no way to establish the truth of “a tiny lunar cartoon.”² Judge McFadden rejected that argument, explaining that emojis are “symbols” that are an “effective way of communicating ideas” and “[e]mojis may be actionable if they communicate an idea that would otherwise be actionable.”³ Judge McFadden put it simply: “A fraudster may not escape liability simply because he used an emoji.”⁴

In this case, Judge McFadden explained, the complaint plausibly alleged that the smiley moon tweet relayed Cohen’s communication to his followers that Bed Bath & Beyond’s stock price was going up and that they should buy or hold.

Judge McFadden rejected most of Cohen’s other arguments as well. Cohen argued that the Complaint did not adequately allege “scheme liability” under Section 10(b) of the Exchange Act, claiming that scheme liability claims cannot be based “solely upon misrepresentations or omissions.” But Judge McFadden explained the Complaint alleged “a pump and dump scheme that relies on more than just misrepresentations or omissions,”⁵ including Cohen’s delayed filings of two SEC forms. Judge McFadden also refused to dismiss the Plaintiff’s insider trading claims under Section 20A and its market manipulation claims under Sections 9(a)(3) and 9(a)(4), providing important precedent for claims that are rarely litigated.

Six weeks after Judge McFadden’s decision, The Wall Street Journal reported that the SEC was investigating Cohen about his ownership and trades of Bed Bath & Beyond stock, making clear the significance of Cohen’s alleged misconduct.

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1. Cohen Milstein filed the first amended complaint in the case and currently serves as Liaison Counsel to the proposed class.
2. In re Bed Bath & Beyond Securities Litigation, 1:22-cv-02541, ECF No. 91, at 10 (D.D.C. July 27, 2023).
3. Id.
4. Id. at 10-11.
5. Id. at 22.
6. Id.