I Overview

i Sources of law

The foundation of securities law in the United States is a series of New Deal-era federal statutes enacted between 1933 and 1940. Securities regulation in the United States had traditionally been left to the individual states. But the stock market crash of 1929 and the ensuing depression persuaded Congress that federal legislation was necessary to restore investor confidence in securities markets. Congress thus enacted the Securities Act of 1933 (the Securities Act), which generally regulates the issuance of new securities, and the Securities Exchange Act of 1934 (the Exchange Act), which generally regulates secondary trading of securities after they are issued. Since their enactment, the Securities Act and the Exchange Act have been the bedrock of securities regulation in the United States.

These foundational statutes were soon supplemented by additional federal laws designed to fill out the regulatory framework: the Commodity Exchange Act of 1936, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. In addition to establishing general rules governing disclosure in securities trading, these statutes created a number of federal administrative agencies, including most prominently the Securities and Exchange Commission (SEC), empowered to announce rules that interpret and provide for the enforcement of the federal securities statutes. These regulatory agencies are supplemented in turn by self-regulatory organisations, including the Financial Industry Regulatory Authority (FINRA) and the various securities exchanges, which issue their own rules and police their membership under the oversight of the SEC. Finally, judicial decisions interpreting the securities laws and regulations are an important source of securities law in the United States.

Over the past three decades, Congress has augmented this federal regulatory scheme through new legislation, including, most importantly:

  1. the Private Securities Litigation Reform Act of 1995 (PSLRA), which amended the Securities Act and the Exchange Act with the objective of reducing the incidence of meritless private securities litigation;
  2. the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which further amended the Securities Act and the Exchange Act to ensure that securities litigation would be channelled to the federal courts;
  3. the Commodity Futures Modernization Act of 2000, which revamped the Commodity Exchange Act of 1936 with a particular focus on strengthening regulation of the futures market and relaxing oversight of swap agreements;
  4. the Sarbanes-Oxley Act of 2002, which sought to enhance public disclosure, improve the quality and transparency of financial reporting and auditing, and strengthen penalties for securities law violations;
  5. the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which increased exposure to liability under the federal securities laws of credit-ratings agencies and expanded the SEC's power to pursue enforcement actions premised on knowingly or recklessly aiding or abetting violations of the Securities Act, the Investment Company Act and the Investment Advisers Act; and
  6. the Jumpstart Our Business Startups Act of 2012, which instructed the SEC to write rules governing capital formation, disclosure and registration requirements.

The full effect of this second wave of federal securities legislation continues to reverberate through the American legal system, as the agencies charged with establishing regulations under Dodd-Frank put the final touches to their implementation of the statutes and the federal courts interpret their provisions. Moreover, federal elections in the United States have led to further uncertainty, raising the likelihood – as yet unrealised – that recent legislation and rule-making may be revisited or extended as power transfers between parties with strikingly different approaches to securities regulation. What is certain is that the legislation of the past several decades will continue to alter the scope and character of securities law in the United States.

In addition to these federal sources of law, state laws continue to regulate the securities markets (often called blue sky laws), and state corporate law has created a fiduciary duty of candour that often imposes disclosure obligations similar to federal law.

ii Regulatory authorities

American securities law is enforced by government agencies, self-regulatory organisations and private litigation. While the SEC is empowered to pursue civil enforcement actions, all criminal actions under the federal securities laws are prosecuted by the United States Department of Justice. Self-regulatory organisations such as FINRA and the securities exchanges have more limited enforcement powers; they can fine, suspend or bar their members from participating in certain aspects of the securities industry. Private litigants can sometimes avail themselves of state and federal statutes to seek monetary damages and occasionally injunctive relief.

Most civil enforcement actions – that is, lawsuits brought by the government to enforce the law or by investors to recover damages under the law – can be brought only in the federal courts. Government agencies such as the SEC can also bring administrative proceedings, which are presided over by administrative law judges. Criminal prosecutions proceed through the court system.

Self-regulatory organisations enforce their rules by pursuing formal complaints before internal adjudicators. For example, formal complaints filed by FINRA are presented before FINRA's Office of Hearing Officers. The determinations of this Office can be appealed before FINRA's National Adjudicatory Council, the determinations of which can in turn be reviewed by the SEC and then the federal courts.

iii Common securities claims

The most common securities claims under US law seek to enforce rights under Sections 11, 12 and 17 of the Securities Act and Sections 10, 13 and 14 of the Exchange Act. Monetary damages are available under each of these provisions for civil violations. Criminal penalties are generally available where an individual or corporation 'wilfully' violates the provisions of the Securities Act or the Exchange Act.2

Sections 11 and 12 of the Securities Act provide buyers a cause of action to recover for violations of the mandatory disclosure rules governing prospectuses and registration statements: Section 11 makes issuers responsible for a false or misleading registration statement liable in damages to any and all purchasers regardless of whom they bought from, while Section 12 allows a purchaser to rescind his or her purchase of securities, or to recover damages from the issuer if the purchaser no longer holds the stock, provided that the seller used a false or misleading prospectus or statement in making the sale. Section 17 is the general anti-fraud provision of the Securities Act, governing all sales by an issuer and prohibiting practices that would defraud a purchaser of securities.

Section 10 of the Exchange Act empowers the SEC to issue regulations restricting short sales, stop-loss orders and the use of manipulative or deceptive devices in the purchase or sale of securities. The SEC has promulgated a large number of rules under Section 10, the most important of which is Rule 10b-5, which is patterned closely on Section 17 of the Securities Act and generally prohibits fraud in the exchange of securities. Rule 10b-5 is by far the most important civil liability provision of the securities law. A significant percentage of US private securities actions seek damages under Rule 10b-5 and the US regulation of insider trading is largely rooted in the application of that rule.

Section 13 of the Exchange Act imposes reporting requirements on issuers, large institutional investment managers and shareholders who acquire a greater than 5 per cent stake in a security. Under Regulation 13D, a report must be made to the SEC within 10 days of the 5 per cent threshold being crossed.

Section 14(a) and (b) empower the SEC to regulate the solicitation of voting proxies from shareholders. Among the rules the SEC has issued under this authority is Rule 14a-9, which prohibits solicitation via false or misleading proxies. Section 14(d), as implemented in Regulation 14D, regulates and requires disclosure in connection with tender offers by bidders seeking to own more than 5 per cent of a publicly traded security. Section 14(e) and Rule 14e-3 broadly prohibit fraud in connection with the making of tender offers – a prohibition that extends to circumstances in which offerors tip friendly co-investors.

Secondary liability for securities law violations is also possible in some circumstances. A defendant can be held answerable for another person's primary violations of the securities laws under Section 15 of the Securities Act or Section 20 of the Exchange Act, as well as by application of the common law doctrines of respondent superior, aiding and abetting or conspiracy. Section 15 imposes secondary liability on controlling persons for primary liability of 'controlled persons' under Sections 11 and 12 (but not 17) of the Securities Act. Section 20 imposes secondary liability on controlling persons for primary liabilities of controlled persons under any provision of the Exchange Act. Administrative regulations define control, in related contexts, as 'the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise',3 but exactly who meets this standard has never been completely clear. Controlling shareholders, directors and even lenders can be controlling persons, where they have the power or potential power to influence the activities of the controlled person.

Up until the 1994 decision of the Supreme Court in Central Bank of Denver,4 a majority of US courts had held that civil liability could be imposed on those who aided and abetted primary violations of the securities laws. Central Bank swept away these precedents when it held that Section 10(b) of the Exchange Act would not support a cause of action for aiding and abetting. Moreover, the Court suggested that aiding and abetting liability is unavailable under any of the liability provisions of the Acts.

Following Central Bank, lower federal courts grappled with whether parties, such as accountants and lawyers, traditionally subject to liability under an aiding and abetting theory may be made subject to primary liability for their role in preparing misleading information. In some federal circuits, notably the Ninth, preparatory liability of this kind was held to attach even if a misstatement was made by another party. But throughout much of the country, courts have restricted this preparatory liability. The majority of courts have held that, under Central Bank, a third party may not be held liable by virtue of its participation in the preparation of a misrepresentation; rather, the party must actually make a false or misleading statement to be liable.

In the years since Central Bank, the Supreme Court has twice extended its holding, though this past term the Court issued a decision suggesting a marked expansion of liability for more peripheral participants in fraudulent schemes. In its 2011 Janus Capital opinion, the Court held that Rule 10b-5(b) liability may only be imposed on the 'maker' of the statement alleged to be materially false or misleading.5 Three years earlier, in Stoneridge Investment Partners,6 the Court rejected a theory of 'scheme' liability under which plaintiffs brought Rule 10b-5 actions against secondary actors, such as investments banks, that had no duty to disclose and did not prepare or participate in preparing a corporation's financial misstatements. Most recently, however, the Court has signalled a major departure from Janus Capital and Stoneridge Investment Partners, holding that defendants who merely 'use' misstatements may be held liable under other subsections of Rule 10b-5. That decision, Lorenzo v. SEC,7 could well herald an expansion of 'scheme' liability, although the first crop of decisions from the federal courts has taken a mixed stance on that broad interpretation.8

Importantly, these restrictions on aiding-and-abetting liability do not apply to SEC civil enforcement actions. To the contrary, the PSLRA created a new Section 20(e) of the Exchange Act, which expressly authorised the SEC to seek injunctions or civil monetary penalties from those who knowingly aid or abet primary violations. Liability under Section 20(e) was broadened by Dodd-Frank, which also created a parallel Section 15(b) of the Securities Act. As currently written, Sections 20(e) and 15(b) allow the SEC to pursue actions against parties who knowingly or recklessly aid and abet another party's violation of the securities laws.

II Private Enforcement

i Forms of action

Nearly all private US securities enforcement is through class-action litigation in the federal courts. Where a corporation is itself the entity that suffered injury under the securities laws, derivative actions can be pursued. This litigation is usually 'lawyer-driven', relying on plaintiffs' lawyers to enforce the rights of absent class members. Class-action lawyers typically derive their fees from settlements, or through recovery obtained at the end of the action.

Most private securities class actions are brought under Sections 11 and 12 of the Securities Act and Sections 10 and 14 of the Exchange Act – with Section 14 claims gaining increasing prominence over the past three years, as merger-related litigation has shifted from state to federal courts. Plaintiffs' burden of proof and the defences available to a defendant will vary depending on which statutory provision is invoked. These provisions can also be civilly enforced by the public authorities, or support criminal prosecution if a violation was wilful.

One notable impediment to private claimants seeking remedies under the US securities laws is the frequent absence of a private right to sue. While the right for individual buyers and sellers to bring suit to recover actual losses is well established for claims of fraud under Section 10 of the Exchange Act and some other statutory provisions, it should not be assumed that private plaintiffs can sue to redress conduct that violated the securities laws. In recent years, federal courts have been generally unwilling to imply new private rights of action where Congress has not explicitly provided one – a trend that is unlikely to subside following the appointment of conservative jurists by the current presidential administration. As such, certain areas of enforcement are exclusively in the hands of government authorities.

An additional barrier that plaintiffs must surmount is the need to show standing to sue. The contours of the standing requirement vary from one statutory provision to the next, but in general a plaintiff must show that he or she is the type of party who is authorised to sue under the statute. For example, the Supreme Court has held that to bring an action under Rule 10b-5, a plaintiff must show that he or she purchased or sold securities in the transaction complained of.9 These standing requirements are reviewed where relevant in the discussion below. Note, however, that these obstacles to suit – standing and a private right of action – do not apply to the Securities and Exchange Commission, which can bring an action on behalf of the government under all provisions of the securities laws.

Because the federal securities laws are generally disclosure-based (rather than contract-based), a complaining plaintiff will usually bear the burden of establishing that an issuer, seller, or buyer traded securities on the basis of a material misstatement or omission. Indeed, the requirement that any misstatement be material recurs throughout US securities law and applies to most private and government enforcement actions. The leading case on materiality is TSC Industries, Inc v. Northway, Inc,10 in which the Supreme Court defined a material fact as one to which there is a substantial likelihood that a reasonable investor would attach importance in making a decision because the fact would significantly alter the 'total mix' of available information.11 In a recent demonstration of how broadly this definition can sweep, the Second Circuit held that a misrepresentation as to price could be found material even in a negotiating context where such misleading statements were common.12 However, some courts have held that false statements or omissions are not materially misleading as long as the market possessed the correct information.13 Additionally, courts have held that actionable statements must be sufficiently 'concrete' and 'specific', as opposed to 'single, vague statement[s] that are essentially mere puffery'.14 For example, the Second Circuit recently held that where a defendant insurance company had been cited for non-compliance with certain healthcare regulations, prior public statements about its commitment to behave ethically and comply with applicable regulations were 'too general to cause a reasonable investor to rely upon them'.15

Under SLUSA, plaintiffs are barred from bringing class actions asserting certain securities fraud claims under state law. Specifically, SLUSA bars state-law claims alleging 'a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security'.16 This provision of SLUSA was enacted to block plaintiffs from using state law to evade the PSLRA's restrictions on federal securities class actions. To effect that purpose, the Supreme Court has interpreted the provision broadly to apply to any alleged misrepresentation that 'coincides with a securities transaction – whether by the plaintiff or by someone else'.17 Despite this guidance, the courts have long struggled with delineating precisely which state-law class actions involving securities are precluded by SLUSA. This has resulted in a framework that varies somewhat from one federal circuit to the next, although in recent years, the Second and Ninth Circuits – whose courts are prime venues for federal securities litigation – have held that SLUSA precludes state-law claims that can succeed only through proof of conduct that is specified in the SLUSA preclusion statute (i.e., misrepresentations or omissions of material fact in connection with the purchase or sale of a covered security).18

Notably, while SLUSA restricts plaintiffs' ability to circumvent federal law, the Supreme Court recently held in Cyan Inc v. Beaver County Employees' Retirement Fund19 that the statute does not restrict plaintiffs from pursuing Securities Act class actions in the state courts. In addition, the Cyan Court held that defendants may not remove Securities Act class actions to federal court. Cyan thus preserves plaintiffs' ability to pursue Securities Act class actions outside the federal forum. The decision has spawned a boom in litigation pressing federal securities claims in the state courts, particularly in New York and California. This in turn has given way to significant questions around whether and how to import federal procedural restrictions on security litigation into the state forums. For example, the New York state courts are presently divided over whether the PSLRA's discovery stay applies in state court.20

Securities Act: Section 11

To bring a securities claim under Section 11(a) of the Securities Act, a plaintiff must show that a registration statement 'contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading'.21 Once a plaintiff satisfies this burden, Section 11(a) makes liable the issuer, the directors of the issuer, anyone named in the registration statement as about to become a director of the issuer, every person who signed the registration statement, every expert (e.g., accountant or appraiser) who was named as having certified or prepared the misleading part of the registration statement and every underwriter of the security. The plaintiff need not show that he or she relied upon the misstatements or that any defendant acted in bad faith.

Several courts have held that to establish standing, a Section 11 plaintiff must 'plead that [his or her] stock was issued pursuant to the public offering[s] alleged to be defective'.22 However, most courts have held that stock purchased in a secondary market is 'issued pursuant to the public offering' if the plaintiffs can trace their securities to the challenged registration.23

An issuer has virtually no defence under Section 11; it is effectively strictly liable for material misstatements and omissions in registration statements. Assuming a material misstatement, an issuer's only hope of avoiding liability is to prove that the plaintiff knew of the misstatements or omissions when the trade occurred. However, other defendants have a variety of defences under Section 11(b). Thus, a party named in a registration statement can avoid liability if he or she resigns and informs the SEC of the false or misleading statement before the registration statement becomes effective. In addition, under Section 11(b)(3), a non-issuer defendant can avoid liability if he or she can show reasonable grounds for believing that the alleged misstatements were true. The degree of investigation sufficient to serve as 'reasonable grounds' varies by category of defendant – while accountants are largely governed by professional standards, underwriters are subject to much stricter due diligence obligations.24

In Omnicare, Inc v. Laborers District Council Construction Industry Pension Fund,25 the Supreme Court rejected a lower court holding that an issuer's sincerely held opinion could constitute an 'untrue statement of a material fact' under Section 11. The Court reasoned that accurately disclosing a belief cannot amount to an untrue statement. But the Court also held that some genuinely held opinions could still be actionable, because Section 11 also proscribes statements that have 'omitted to state a material fact . . . necessary to make statements not misleading'. Omitted facts could render a genuinely held opinion misleading where investors expect that the opinion 'fairly aligns with the information in the issuer's possession at the time'. Accordingly, 'if a registration statement omits material facts about the issuer's inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from [the issuer's statement of opinion], then Section 11's omissions clause creates liability'. The Court counselled that 'to avoid exposure for omissions under Section 11, an issuer need only divulge an opinion's basis, or else make clear the real tentativeness of its belief'. In applying Omnicare, the Second Circuit has held that a securities claim may fail even where defendants were aware of significant information that undermined their public statements.26 Significantly, the principles of Omnicare have gained purchase on other areas of federal securities law, including claims brought under Section 10(b) of the Exchange Act.27

Securities Act: Section 12

Under Section 12(a)(1), any person who offers or sells a security required to be registered under the Securities Act but not registered is liable to the person purchasing the security. Under Section 12(a)(2), any person who by the use of any means of interstate commerce offers or sells a security on the basis of a materially false or misleading prospectus or materially false or misleading oral statements is liable to the person purchasing from him or her, unless he or she can show that he or she did not know, and could not in the exercise of reasonable care have known, of the falsehood or omission.

To succeed in a Section 12 claim, a plaintiff need not show that he or she relied on the misstatements or that the defendant acted in bad faith. However, no liability will attach in a private action – under Section 12 or other provisions of the Securities Act or the Exchange Act – based on certain statutorily defined 'forward-looking statements' unless the plaintiff proves actual knowledge of the false or misleading nature of the statement on the part of a natural person making the statement or on the part of an executive officer approving the statement made on behalf of a business entity.28 In addition, a defendant can avoid Section 12(a)(2) liability by showing that any claimed depreciation in a security's value was not caused by the defendant's misstatements or omissions.29

Exchange Act: Section 10

Section 10 authorises the SEC to prescribe rules addressing prohibited securities trading practices. Under Section 10(a), the SEC is empowered to prohibit short sales and the use of stop-loss orders for securities registered under the Exchange Act or traded on national security exchanges. The statute also empowers the SEC to prohibit 'the use of a manipulative or deceptive device or contrivance' in connection with the purchase or sale of any securities or in connection with security-based swap agreements. While there are currently 11 SEC-promulgated rules in force under Section 10(b), the most important by far is the general anti-fraud rule, Rule 10b-5. Rule 10b-5 prohibits use of any means of interstate commerce to (a) employ any device, scheme or artifice to defraud; (b) make material misstatements or omissions; or (c) engage in any course of business that operates as a fraud against any person, in connection with the purchase or sale of any security or securities-based swap agreement. This rule is the great engine of private securities enforcement in the United States.

In general, to prevail on a Rule 10b-5 claim, a plaintiff must prove that the defendant: (1) made a false statement or an omission of material fact30 (2) with scienter (3) in connection with the purchase or sale of a security (4) upon which the plaintiff justifiably relied31 and (5) that proximately caused (6) the plaintiff's economic loss.32 The most important violations of Rule 10b-5 fall into three categories:

  1. common fraud in transactions by sellers, purchasers, brokers and others;
  2. false or misleading statements of material fact by corporate insiders or others that affect the prices in which securities trade; and
  3. trading on material non-public information by corporate insiders and their tippees (insider trading).

There has been substantial debate and disagreement in the courts over how to construe the reliance element of Rule 10b-5 in the context of class actions. The difficulty is that to proceed as a class under the Federal Rules of Civil Procedure, plaintiffs must show that common questions of law or fact 'predominate over any questions affecting only individual members'.33 But whether a particular buyer or seller relied on an alleged misstatement is typically an individualised question. Thus, if Rule 10b-5 were interpreted to require proof of individual reliance on defendants' misstatements, it would be more challenging for plaintiffs' lawyers to bring claims on a class basis.

The Supreme Court rode to the rescue of plaintiffs in Basic Inc v. Levinson,34 endorsing a 'fraud-on-the-market' theory under which courts may presume that '[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price'.35 This theory obviates the need for proof of individual reliance and facilitates class certification. However, the fraud-on-the-market presumption is only available if a plaintiff can allege and prove that the market was 'efficient' – which is to say that market prices were responsive to new, material news. To establish (or refute) the claim of market efficiency, parties present economists armed with event studies analysing how the relevant market reacted to new information.36

More recently, in Halliburton Co v. Erica P John Fund, Inc,37 the Supreme Court clarified that Rule 10b-5 defendants can defeat class certification by demonstrating that alleged misstatements had no effect on price. Based on this holding, defendants can now rebut the Basic presumption by citing news and analyst reports and other public information that shows how the supposedly undisclosed truth was already known to the market. Courts continue to grapple with the application of this standard. The Second and Sixth Circuits have held that defendants must 'demonstrate a lack of price impact by a preponderance of the evidence' under Halliburton,38 diverging from the Eighth Circuit, which has suggested that defendants can defeat Basic by simply 'com[ing] forward with evidence showing a lack of price impact'.39 And courts across the country have struggled with plaintiffs pursuing a 'price maintenance' theory of liability – under which an alleged misstatement's lack of price impact can be overlooked so long as the misstatement 'maintained' an inflated share price by reinforcing or failing to correct a preexisting market misapprehension. That theory has been accepted by a number of circuit courts.40

The Supreme Court has also clarified that courts should not presume that a misstatement caused an inflated purchase price in Rule 10b-5 cases. In Dura Pharm Inc v. Broudo,41 the Court unanimously held that 'an inflated purchase price will not itself constitute or proximately cause the relevant economic loss'.42 Following Dura, plaintiffs in fraud-on-the-market and other Rule 10b-5 cases must prove that their economic losses were actually attributable to a defendant's misrepresentations.43

In addition, the Supreme Court has repeatedly examined the impact that Section 10(b)'s 'in connection with' requirement has on plaintiff standing. As noted above, the Court has generally required that a Section 10 plaintiff demonstrate that he or she was misled into purchasing or selling securities. More recently, the Court has clarified this standard, holding in Wharf (Holdings) Ltd v. United Int'l Holdings, Inc,44 that the sale of an option to buy stock while secretly intending never to honour it also falls within the 'in connection with' language. The Court again revisited the scope of Section 10(b) in SEC v. Zandford,45 holding that the provision reached a defendant broker who, by selling a client's securities and transferring the proceeds to his own account, stole money from a discretionary account. Most recently, the Court held that not only is a Section 10 plaintiff not permitted to sue under a theory that false or misleading statements led them not to buy or sell shares, but that such 'holder' transactions are nevertheless pre-empted by SLUSA and barred in state court as well.46

Insider trading in violation of Section 10

Since the decision of the SEC in Cady, Roberts & Co,47 insider trading – trading on material non-public information – by both corporate insiders and their tippees has been viewed by the SEC and the courts as a violation of Rule 10b-5. As such, a range of defendants can be held liable: insiders who trade on insider information; insiders who disclose material non-public information to others who may then trade (tippers); and the third-party traders who are tipped off by insiders (tippees).

This does not mean that corporate insiders have a duty to disclose all material information to the public.48 Rather, their duty is to disclose or to abstain from trading until disclosure takes place. The duty to disclose material non-public information or abstain from trading has been held to apply not only to registered securities, but to unregistered and delisted securities as well. Since this liability is rooted in Rule 10b-5, it is subject to the purchaser–seller standing requirements discussed above.

To succeed on an insider-trading claim under Rule 10b-5, a plaintiff generally must establish five basic elements: (1) the buying or selling of a security or the tipping thereof (2) on the basis of information about the security that is (3) non-public, (4) material and (5) where trading without disclosure constitutes a breach of a fiduciary duty or other relationship of trust and confidence owed to the source of the information.

Other than materiality (discussed under 'Forms of action'), the most complex of these elements is the last – the rule that insider-trading liability can attach only if the trading constitutes a breach of a duty. This element is generally satisfied under one of two established theories. Under the 'classical' theory, a corporate insider or 'temporary insider' working for the benefit of a corporation breaches his duty to the corporation and its shareholders by using confidential corporate information to trade in the corporation's stock for his or her personal benefit.49 Under the 'misappropriation' theory, a tipper or trader who has no duty to the issuer or to shareholders may nevertheless be liable where he or she obtains confidential information in breach of a duty owed to the source of the information. The misappropriation theory was approved by the Supreme Court in United States v. O'Hagan,50 where the defendant was a lawyer who traded based on the information that one of his law firm's clients was planning a tender offer. In Rule 10b5-2, the SEC has enumerated broad categories that give rise to a duty of trust or confidence to a source of information under the misappropriation theory.

Insider-trading tippees can also be sued or prosecuted under Section 10 and Rule 10b-5. Under the standard established by the Supreme Court in Dirks v. SEC,51 a tippee is liable where: (1) an insider receives a 'direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings'; and (2) the tippee knew or had reason to know of the tipper's breach of duty to an issuer.52 As the Supreme Court recently reaffirmed in United States v. Salman,53 insider-trading liability extends to circumstances where an insider gifts non-public information to a 'trading relative or friend'.54

Rule 14a-9

Rule 14a-9 prohibits any proxy solicitation made pursuant to Section 14 of the Exchange Act that 'contain[s] any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication . . . which has become false or misleading'.55 To succeed on a Rule 14a-9 claim, a plaintiff must establish that a proxy statement contained a material misrepresentation or omission that caused the plaintiff injury and that the proxy solicitation itself was an essential link in accomplishing the transaction.56 In recent years, this provision has increasingly been invoked by plaintiffs seeking to challenge merger disclosures.57 In 2018, for example, some 76 per cent of large mergers were challenged in federal court.58 The large majority of such lawsuits are mooted through minor updates to merger disclosures, a practice that has been criticised as yielding little value beyond a mootness fee for plaintiffs' counsel.59

Unlike Section 10(b), Section 14(a) does not require a showing of manipulative or deceptive conduct. As a result, most courts require proof of negligence, not scienter.60 However, some courts have adopted a more nuanced approach to the scienter requirement. For example, the Eighth Circuit has held that while proof of negligence suffices for corporate officer defendants, scienter must be shown where the defendant is an accountant or an outside director.61

Section 14(e) and Rule 14e-3

Section 14(e) broadly prohibits the making of untrue statements and the commission of fraudulent acts in connection with tender offers. Unlike Section 14(a), Section 14(e) has been widely understood to require allegations of scienter.62 Recently, however, the Ninth Circuit diverged from this position, holding that Section 14(e) only requires proof of negligence.63 In late 2018, the Supreme Court granted an appeal of the Ninth Circuit's decision, to review the necessity of proving fraudulent intent, and also invited a broader examination of whether private litigants have any right at all to sue under Section 14(e). However, after hearing the argument, the Court reversed course and dismissed the appeal without resolving the issues presented. As such, the Emulex decision remains good law within the Ninth Circuit, easing the Section 14(e) state-of-mind requirement for cases brought within that jurisdiction. Given the disagreement among the federal circuits and the apparent interest in re-examining the existence of a private right of action, it is likely that the dispute will find itself back before the Supreme Court in the coming years.

The SEC has also issued several regulations under the authority granted by Section 14(e), the most significant being Rule 14e-3(a), which prohibits any person 'who is in possession of material information relating to such tender offer which information he knows or has reason to know is non-public and which he knows or has reason to know has been acquired directly or indirectly from' the tender offeror, the issuer or any officer, director, partner, employee or any other person acting on behalf of the offeror to trade in the affected securities unless the information and its source are 'publicly disclosed' 'within a reasonable time' before the trade.64 Subsection (d) of the rule prohibits tipping in the tender-offer context, barring certain persons from communicating material non-public information relating to the tender offer where it is reasonably foreseeable that such communication is likely to result in a violation of Rule 14e-3. Rule 14e-3 has the effect of broadening the scope of insider-trading liability in the tender-offer context by dispensing with the requirement that a breach of fiduciary duty be shown.

Exchange Act: Section 16

Section 16 of the Exchange Act provides another important source of liability for insider trading. Section 16(a) requires certain insiders to report their transactions and positions in their employers' securities. Section 16(c) bars insiders from shorting their employers' equity securities. Section 16(b) permits a corporation (or derivative plaintiff) to recover short-swing profits from insider trades within a six-month period.

By its terms, the liability created under Section 16(b) is sharply circumscribed, affecting only 'short-swing' profits enjoyed by a defined class of insiders, a category defined to include beneficial owners or groups of owners holding 10 per cent or more of an issuer's shares. However, where an insider runs afoul of the provision, he or she must disgorge all profits.

ii Procedure

In general, plaintiffs bringing a complaint in federal court must allege facts sufficient to render their claim plausible on its face, but must allege fraud with particularity. The PSLRA codifies a heightened pleading standard imposed for securities fraud claims brought under the Exchange Act. Under the PSLRA, a securities fraud claim must specify each statement alleged to have been misleading, identify the speaker, state when and where the statement was made, plead with particularity the elements of the false representation, plead with particularity what the person making the representation obtained, and explain the reason or reasons why the statement is misleading. In addition, where scienter is an element of the securities claim, plaintiffs must 'state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind'.65 Often, a defendant will test the adequacy of a private securities complaint by bringing a motion to dismiss soon after filing.

Federal discovery procedures are liberal, coupling broad mandatory disclosures with invasive depositions, subpoenas and interrogatories. Under the PSLRA, however, in any private action brought under the Acts, all discovery is stayed while a motion to dismiss is pending unless the court finds that particularised discovery is necessary to preserve evidence or prevent prejudice. As such, the federal courts often weigh defendants' motions to dismiss on a thin factual record, drawing solely from the facts alleged in the complaint, documents that the complaint incorporates by reference, and public information that is available for judicial notice. While the courts have typically been permissive in applying incorporation by reference and judicial notice to expand the record on motions to dismiss, a recent Ninth Circuit decision could signal a retrenchment of this approach. The Ninth Circuit emphasised that judicial notice of public documents is only available for facts 'not subject to reasonable dispute', and cautioned that a complaint's 'mere mention of the existence of a document' is insufficient to support incorporation by reference.66 If that panel's sceptical approach is adopted more broadly by the Ninth and other federal circuits, it could complicate the efforts of defendants to achieve early dismissal of complaints that rely upon cherry-picked quotations and selective narratives.

iii Settlements

Far more often than not, securities suits that survive a motion to dismiss are settled rather than litigated to trial. Since securities lawsuits are typically brought as class actions, their settlement can bind absent class members and judicial review of such settlements must comply with Federal Rule of Civil Procedure 23 (Rule 23). Rule 23 requires the court to conduct a hearing and to approve a settlement only after a finding that it is 'fair, reasonable, and adequate'. In applying this standard, the courts look to a range of factors, including:

  1. the complexity, expense and likely duration of the litigation;
  2. the reaction of the class to the settlement;
  3. the stage of the proceedings and the amount of discovery completed;
  4. the risks of establishing liability;
  5. the risks of establishing damages;
  6. the risks of maintaining the class action through trial;
  7. the ability of the defendants to withstand a greater judgment;
  8. the range of reasonableness of the settlement fund in light of the best possible recovery; and
  9. the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.67

Under Federal Rule of Civil Procedure 23(e)(5), '[a]ny class member may object to [a proposed settlement subject to judicial review]'.

Attorneys' fees are also subject to judicial review in the securities class action context. Under the PSLRA, '[t]otal attorneys' fees and expenses awarded by the court to counsel for the plaintiff class' in an Exchange Act lawsuit cannot 'exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class'.68 More generally, Federal Rule of Civil Procedure 23(h) permits a court to award class counsel 'reasonable attorney's fees and non-taxable costs that are authorized by law or by the parties' agreement'.69 This 'reasonableness' determination can be guided by retainer agreements, fee stipulations embodied in settlement agreements and other fee agreements entered into between lead plaintiffs and class counsel.70

iv Damages and remedies

Different remedies are available for the common securities claims described above. For claims brought under Section 11 of the Securities Act, the measure of a plaintiff's damages is the decline in the value of his or her securities, quantified as the difference between purchase price and sale price. For Section 12 of the Securities Act, the remedy is rescission – the plaintiff tenders his or her securities to the defendant and receives his or her purchase price with interest. Where appropriate, a court can also order injunctive relief for a Securities Act plaintiff.71

Remedies available under Section 10, Rule 10b-5, Rule 14a-9 and Rule 14e-3 include both injunctive relief and damages. However, the measure of damages in all Exchange Act claims is limited to 'actual damages'. In the context of a Rule 10b-5 claim, the Supreme Court has held that this imposes an 'out-of-pocket' measure, which is the difference between the price paid or received for the security and its true value at the time of purchase.72 In insider-trading cases brought under Rule 10b-5, a disgorgement remedy is often available, under which defendants are liable for the profits that they and their tippees obtained. Finally, at least where the plaintiff dealt face-to-face with the defendant and the securities purchased or sold have not been re-transferred, the plaintiff may elect to sue for rescission rather than damages. In a Rule 14a-9 claim, courts have allowed both out-of-pocket and disgorgement damages, as well as fashioning damages designed to give the plaintiff the benefit of the bargain they would have received had the misrepresentations been true.

III Public Enforcement

i Forms of action and procedure

The agencies charged with enforcing the securities statutes can proceed through a civil proceeding in court, an internal administrative proceeding, or a criminal prosecution. Notably, while the SEC is empowered to civilly prosecute securities law violators under any of the provisions discussed above, it can also call upon a range of other statutory provisions, including most importantly Section 17 of the Securities Act. Unlike private litigants, government enforcement agencies generally have standing to enforce all aspects of the federal securities laws.

Section 17 contains a range of proscriptions that collectively endow the SEC with substantial authority to punish fraudulent trading in securities. Sections 17(a)(1), (2) and (3), respectively, prohibit the use of any means of interstate commerce: (1) to employ any device, scheme or artifice to defraud; (2) to obtain money or property by means of material misstatements or omissions; or (3) to engage in any course of business that would operate as a fraud upon a purchaser. In keeping with the general scheme of the Securities Act, Section 17 protects only purchasers and operates only against sellers, unlike Section 10(b) of the Exchange Act, which operates against both purchasers and sellers. The Supreme Court has emphasised that each of Sections 17(a)(1), (2) and (3) contains different prohibitions, to be interpreted separately.73 Most importantly, a defendant's bad faith need only be shown in a prosecution under Section 17(a)(1), not (2) or (3). Section 17's other liability provision, 17(b), prohibits publishing any description of any security without disclosing consideration received from any issuer, underwriter or dealer of the security.

Regardless of the statutory provision that the SEC is enforcing, its investigations generally commence with an informal inquiry, requesting that the subject of an investigation voluntarily provide information or documents. The next step is the entry of a formal order of investigation, permitting SEC staff to issue investigative subpoenas. These orders are typically non-public. At the close of such an investigation, the SEC staff will issue a 'Wells notice' to the subject of the investigation, informing that person of the SEC's preliminary determination of whether securities laws were violated. Where the SEC has determined that no enforcement action will be brought, a termination notice can be sent.

If the SEC determines that there has been a violation of the securities laws, it can commence either a civil proceeding before a court or an internal administrative proceeding. In a civil proceeding, the SEC often seeks an injunction barring further violations of the securities laws and remedies to cure past violations. Remedies can include disgorgement of ill-gotten gains or civil monetary penalties. Damages can be placed in a 'fair fund' for disbursements to victims of a defendant's illegal practices. In an administrative proceeding, the SEC pursues an accelerated 'trial' before an administrative law judge (ALJ). The remedies available in this tribunal are much the same as in an ordinary court, though in an administrative proceeding the SEC can request a permanent cease-and-desist order rather than an injunction. In addition, the ALJ in an administrative proceeding can order that a defendant be barred from appearing or practising before the SEC, effectively debarring them from employment in the securities industries. The process for the appointment of SEC ALJs has recently been a subject of controversy, with the Supreme Court holding in June 2018 that ALJs are subject to constitutional restrictions on the appointment of federal 'officers', in a decision that raises questions over whether ALJs can be shielded from removal absent cause.74

Parallel SEC civil and criminal proceedings are not uncommon. Moreover, the SEC and other agencies sometimes refer matters to other agencies for enforcement action. Where the SEC has determined that a violation of securities laws is potentially criminal, it can refer the matter to the Department of Justice for criminal enforcement. In a criminal enforcement, the defendant is entitled to trial before a jury and conviction turns on whether the government can prove guilt beyond a reasonable doubt. Referrals can also be made to self-regulatory authorities (such as FINRA), other agencies (such as the Public Company Accounting Oversight Board) or state agencies.

Because the government authorities have the power to conduct extensive investigations before bringing action, they effectively enjoy discovery rights that greatly exceed even the liberal discovery provisions available in private civil litigation. For example, a criminal investigation can draw upon warrants, wiretaps and other investigative tools that are unavailable to both the SEC and private litigants.

ii Settlements

In negotiating settlements to securities claims, the public authorities have a number of tools at their disposal. In criminal investigations of corporate wrongdoers, the Department of Justice will often negotiate a deferred prosecution agreement (DPA) or non-prosecution agreement (NPA). In a DPA, the Department of Justice files a criminal case but defers prosecuting it, subject to the defendant's agreement to comply with agreed conditions. In an NPA, the government does not file a complaint, but the result is otherwise much the same. Under either agreement, the defendant typically admits to wrongdoing, waives applicable statutes of limitations, agrees to no longer violate the law, agrees to help the government prosecute other securities-law violators and agrees that it will not disclaim the terms of the agreement. To secure such an agreement, the defendant often must also pay a substantial fine. In weighing whether to prosecute a corporation or negotiate a plea agreement, the Department of Justice looks to a range of factors, including: the corporation's willingness to cooperate; collateral consequences for the corporation's employees, investors and customers; collateral non-penal sanctions; the pervasiveness of criminal conduct; and the adequacy of the corporation's compliance programmes.75

Settlements are also a common conclusion for civil and administrative proceedings initiated by the SEC. Such agreements can impose many of the same conditions as DPAs and NPAs, including stipulated facts and assurances of remedial action to improve compliance and prevent future securities violations. SEC settlements have traditionally not required corporate defendants to admit wrongdoing, although the SEC briefly shifted to a more aggressive posture under the Obama administration.76

Both DPAs and SEC settlements must be filed with and approved by a federal judge. Historically, this review has been very lenient, but on occasion judges will scrutinise proposed settlements critically and sometimes reject them outright, though such decisions are controversial.77 Indeed, recent decisions from the DC and Second Circuits have sharply limited the discretion of courts within those Circuits to review and reject DPAs, as well as district judges' role in monitoring compliance with DPA conditions.78 NPAs are not filed with the courts, and are thus not subject to judicial review.

iii Sentencing and liability

Criminal convictions under the securities laws can result in both fines and, for individual defendants, imprisonment. The maximum fines and terms of imprisonment are established by statute, with sentencing guidance provided by the US Federal Sentencing Guidelines. Fines for certain security frauds default to the actual loss associated with the fraud, while in other cases penalties are committed more liberally to the discretion of the sentencing authority.

Where the SEC assesses a civil monetary penalty for a corporation's violations of the securities laws, it principally looks to two considerations: 'the presence or absence of a direct benefit to the corporation as a result of the violation' and 'the degree to which the penalty will recompense or further harm the injured shareholders'. The SEC also considers seven additional factors: (1) 'the need to deter the particular type of offense'; (2) 'the extent of the injury to innocent parties'; (3) 'whether complicity in the violation is widespread throughout the corporation'; (4) 'the level of intent on the part of the perpetrators'; (5) 'the degree of difficulty in detecting the particular type of offense'; (6) the 'presence or lack of remedial steps by the corporation'; and (7) the 'extent of cooperation with [the] Commission and other law enforcement'.79

In its recent decision in Kokesh v. SEC, the Supreme Court held that disgorgement in SEC proceedings is subject to the five-year limitations period applicable to SEC 'penalties'.80 In addition, the Court suggested in a footnote that the availability of disgorgement as a remedy in SEC proceedings may be subject to challenge.81 While the full impact of this decision is still developing, it has the effect of limiting the remedies available to the SEC against long-running frauds, hampering efforts to claw back a portion of defendants' gains – particularly in light of the Court's 2013 decision in Gabelli v. SEC, holding that the relevant limitations period commences on the date of alleged wrongdoing, not the date that wrongdoing is discovered.82 Following Kokesh, the lower courts have struggled to evaluate whether other SEC sanctions are similarly subject to the 'penalty' limitations period.83

IV Cross-Border Issues

For many years, US courts held that securities claims could be pursued against foreign entities where there was sufficient domestic 'conduct' or 'effects' to warrant extraterritorial application. In its 2010 decision in Morrison v. National Australia Bank, the Supreme Court overturned this line of precedent and held that Section 10(b) of the Exchange Act does not apply to securities transactions that take place wholly outside the United States.84 The Court held that Section 10(b) 'reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States'.85 In reaching this determination, the Court looked to the 'focus' of the statute's text, and concluded that 'the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases or sales of securities in the United States'.86 Though Morrison dealt with civil liability, the Second Circuit has held that Morrison's holding applies equally to criminal prosecutions under Section 10(b) and Rule 10b-5.87 This decision has been interpreted to apply to the Securities Act as well.88

Since Morrison, plaintiffs have unsuccessfully advanced two arguments for allowing at least some foreign transaction claims to proceed under Section 10(b). First, some plaintiffs have contended that a security transaction takes place 'in the United States' if the purchase or sale order is made from the United States. Courts have not allowed civil actions relating to foreign issuers to proceed on that ground.89 Second, some plaintiffs have argued that if a foreign issuer lists any portion of its securities on an American stock exchange, all foreign transactions in all foreign shares would be fair game. This theory has also been rejected as contrary to Morrison.90

While private litigants have thus failed to overcome Morrison, the government has recently met with success in arguing that the Dodd-Frank Act allows the SEC and the Department of Justice to bring securities fraud claims against foreign parties in certain circumstances. Recently, the Tenth Circuit endorsed that position, creating the possibility for a significant expansion in the US government's power to patrol extraterritorial conduct.91

In applying Morrison's transactional analysis, the focus is on where the purchase or sale actually occurs. Transactions on an exchange presumptively take place where the exchange is located, but for other types of securities the answer is less clear. Where a transaction does not occur on a domestic exchange, courts generally look to the location where 'the parties incur[red] irrevocable liability' for the transaction or where 'title pass[ed]', following the Second Circuit's decision in Absolute Activist Value Master Fund Ltd v. Ficeto.92 Notably, there is an ongoing debate among the federal circuits concerning the application of Morrison to unsponsored American depository receipts (ADRs), which facilitate domestic transactions in the shares of foreign issuers. The Second Circuit has held that a domestic transaction in securities similar to ADRs could not defeat Morrison's presumption against extraterritoriality where the transaction and the allegations of law were 'predominately foreign'.93 The Ninth Circuit subsequently adopted a less stringent interpretation of Morrison, holding that the foreign nature of the underlying fraud is irrelevant so long as it occurred 'in connection with' a domestic ADR transaction.94

V Year In Review

i Public and private enforcement

According to statistics compiled by NERA Economic Consulting, private plaintiffs filed 433 new federal class-action securities cases in 2019, matching the 2018 total, which marked a nearly two-decade high. This number was driven by a dramatic increase in merger-related lawsuits over the past several years, most likely borne of developments in state law that have rendered the federal forum more attractive. In 2018, the number of these merger-related class actions dipped to at 170 (compared with 2,00 in 2018), while traditional securities class actions rose to 204 (compared with 191 in 2018). The average settlement in 2019 fell to US$30 million from US$69 million the previous year, with median settlement amounts of US$12.8 million and US$11.3 million, respectively.95

In the realm of public enforcement, the SEC charged 30 people in cases involving insider trading in FY 2018. Overall, the SEC filed 862 enforcement actions, and obtained orders totalling US$4.35 billion in disgorgement and penalties.96 And, of course, the mere fact of an investigation – no matter whether it proves grounded in law or fact – can cause extreme injury to target companies and individuals. Among the notable enforcement actions pursued by the SEC in the past year was a case against a major German car manufacturer and its former CEO for allegedly defrauding investors by raising funds in the public markets while making deceptive claims about the environmental impact of the manufacturer's vehicles.97 The SEC also pursued several significant cases against public companies and individuals that fell short in their securities disclosures.98 And the SEC's Cyber Unit continued its enforcement initiative targeting the perpetrators of fraudulent 'initial coin offerings' and other cryptocurrency fraud.

The SEC reported a steep decline in payments made under its whistle-blower programme in 2019, following outlier growth in 2018. In its report for the fiscal year, the SEC announced that it had issued total awards of US$60 million to 8 whistle-blowers, a significant drop from the US$168 million paid out in the prior year.99 The lion's share of this total came from two large awards totalling US$50 million. The SEC also announced a slight drop in total whistle-blower tips, which fell from 5,282 in 2018 to 5,212 in 2019. Following the rapid expansion of the whistle-blower program over the past several years, in June 2018 the SEC proposed controversial amendments to its regulations that would give it more discretion to reduce awards where penalties exceed US$100 million and narrow the definition of the term 'whistle-blower', but compensate for these reductions by expanding the types of actions where awards are available.100 Those amendments remain in regulatory limbo, after the last-minute cancellation of the meeting at which the SEC was slated to approve them.101

The past year also saw the continued implementation of several recent developments in the Department of Justice's approach to prosecuting corporate crime, including securities violations. First, in July 2018, the newly installed leader of the DOJ's Criminal Division issued a memorandum limiting the government's recent practice of requiring companies that resolve charges through settlement agreements to hire independent monitors to observe their efforts at remediating compliance failures.102 Second, in November 2018, the Department of Justice announced that it was relaxing its stringent requirements for crediting corporate defendants' cooperation in investigations. Under the policy, corporations are eligible for full cooperation credit so long as they identify individuals who are 'substantially involved' in misconduct,103 whereas previously full credit was contingent on the identification of 'all individuals involved in or responsible for the misconduct at issue'.104 Third, the government announced that it had begun broadly applying a non-binding policy under which it would decline to prosecute companies that promptly self-disclose identified misconduct, cooperate with the government's investigation, fully and timely remediate and disgorge all ill-gotten gains.

DOJ and federal regulators pursing securities violations in the federal courts also added several new weapons to their arsenal in 2019. Most significantly, as discussed further below, in December 2019 the government scored an important victory expanding the scope of insider-trading liability. Together with the Commodity Futures Trading Commission (CFTC) and the SEC, prosecutors also continued their campaign against spoofing activity by both domestic and overseas traders. This anti-spoofing initiative included a successful joint investigation of a proprietary trading firm that resulted in a $67.4 million settlement and two individuals pleading guilty to wire fraud, commodities fraud and spoofing.105 In addition, following several unsuccessful spoofing prosecutions, DOJ adopted the aggressive tactic of indicting four alleged spoofers under the Racketeer Influence and Organization Act, a federal criminal statute originally enacted to target organized criminals.106 For its part, the SEC brought spoofing charges against 18 China-based traders who allegedly manipulated thousands of thinly traded securities.107

ii Significant decisions

United States v. Blazczak

In December 2019, the Second Circuit held that the Dirks and Newman requirement of a personal benefit does not apply to criminal insider-trading prosecutions under the wire fraud statute and 18 U.S.C. § 1348, a securities law provision introduced by the Sarbanes-Oxley Act of 2002. In Blaszczak,108 the jury acquitted the defendants of insider-trading charges under Section 10(b), but convicted on the wire fraud and § 1348 counts. The Second Circuit held that the personal-benefit element is unique to the securities-law context and should not be carried over to the criminal provisions at issue. Separately, the Second Circuit also held that the inside information in that case – which concerned upcoming FDA regulatory rulings – constituted 'property' in the hands of the government for purposes of the criminal fraud statutes. The net effect of Blazczak will be to broaden tippee criminal liability to include circumstances where inside information is passed indirectly without any clear personal connection between tipper and tippee.

North Sound Capital LLC v. Merck & Co.

In September 2019, the Third Circuit introduced an important new limitation on the scope of SLUSA's preclusion of state-law securities fraud claims. The North Sound109 decision held that SLUSA does not preclude individual 'opt-out' claims under state law after the settlement of an underlying securities class action in federal court. Applying a SLUSA provision that precludes litigation if greater than fifty plaintiffs' state-law securities fraud actions are 'joined, consolidated, or otherwise proceed as a single action for any purpose', the Third Circuit concluded that the challenged state actions were not precluded because they had not been 'somehow combined, in whole or in part, for case management or for resolution of at least one common issue'.110 While this interpretation of SLUSA would still preclude opt-out litigation that is coordinated with parallel securities litigation, it means that – in the Third Circuit, at least – defendants will meet more difficulty in seeking to snuff out post-settlement opt-out litigation.

Salzberg v. Sciabacucchi

In March 2020, the Delaware Supreme Court provided an avenue for companies incorporated in that state to channel securities litigation into the federal courts. In Salzburg,111 the court held that Delaware corporations can include forum-selection provisions in their charters and by-laws requiring plaintiffs to file any Securities Act claims against them in federal court. If such provisions are broadly adopted, they could diminish the recent rise in state court securities litigation following the US Supreme Court's Cyan decision, which recognised that federal and state courts have concurrent jurisdiction over Securities Act claims. The Salzberg decision did not address the validity of corporate by-laws designating a forum for claims arising under the Exchange Act.

VI Outlook and conclusions

With covid-19 sweeping the country and Congress focused on pumping money into the domestic economy, it appears unlikely that 2020 will see any significant federal securities legislation. Among the bills sidelined by the pandemic is an overhaul of insider trading law, which would have eliminated the 'personal benefit' requirement and broadened the ability of DOJ and the SEC to prosecute trading on stolen information. Whether such legislation remains viable post-pandemic will likely turn on the outcome of the coming federal elections, which will determine the political (and hence regulatory) valence of both the White House and Capitol Hill.

However, notwithstanding this continued legislative inaction, conservatives in the Senate have continued to make significant headway in appointing judges to the federal courts: in addition to placing two new justices on the nine-member Supreme Court, Republicans in the US Senate have confirmed 51 judges on the powerful federal courts of appeals (out of 179 judgeships) and 140 new federal district court judges (out of 663 judgeships). The lifetime appointments of conservative judges to these positions may limit the expansion of US securities liability in the coming years (and decades).

The pandemic is also likely to slow the SEC's rule-making process, though even before the crisis the agency had advanced nothing of significant relevance to securities litigation. And while the SEC's Division of Enforcement had re-committed itself to the five 'core principles' that it announced in 2018 – protecting retail investors, combating cyber-related threats, focusing on individual culpability, increasing reliance on non-monetary sanctions and shifting away from 'street-sweeps' – the national crisis is likely to re-orient the SEC's focus to covid-19 related securities violations. Indeed, the SEC has already suspended trading in the shares of several companies in response to false statements related to covid-19.112 The DOJ, meanwhile, has also turned its focus to fraud related to the virus.113

However, while the pandemic slows legislative and regulatory progress, it is widely expected to bring a glut of litigation targeting the disclosures of public corporations that have been impacted by covid-19 or that are involved in the economy that has sprung up around fighting its spread. Should this boom produce novel claims, they may provide occasion for the federal courts to explore – or revisit – seldom-examined nuances of the federal securities law.

Liu v. SEC

Although the Supreme Court's docket for the coming term is light on cases relevant to the federal securities laws, the Court has granted review of a significant appeal addressing whether the SEC has authority to seek disgorgement in injunctive actions. In Liu,114 the Court will deal with the continuing fallout from its 2017 Kokesh decision, which held that SEC claims for disgorgement are 'penalties' that must be sought by the SEC within five years of the defendants' violation. After Kokesh expressly declined to address whether disgorgement can be sought in injunctive actions, the unresolved question has been percolating in the federal district and circuit courts. While a decision barring the disgorgement remedy would eliminate a form of relief commonly sought by the SEC, the SEC would still be able to seek disgorgement in administrative proceedings. As such, the practical impact of an adverse decision from the Supreme Court would be to channel more SEC actions into the administrative forum.


Footnotes

1 William Savitt is a partner and Noah B Yavitz is an associate at Wachtell, Lipton, Rosen & Katz.

2 15 U.S.C. Sections 77x, 78ff. While the requirement of 'wilfulness' has traditionally been understood to mean only that the prohibited conduct was undertaken voluntarily, the D.C. Circuit recently endorsed a more stringent definition. See Robare Grp., Ltd. v. Sec. & Exch. Comm'n, 922 F.3d 468, 480 (D.C. Cir. 2019) (holding that to demonstrate wilfulness, the SEC must show that the defendant acted with scienter, a mental state typically understood to require intentional or reckless violation of law).

3 17 C.F.R. Section 230.405.

4 Central Bank of Denver, NA v. First Interstate Bank of Denver, NA, 511 U.S. 164 (1994).

5 Janus Capital Grp, Inc v. First Derivatives Traders, 564 U.S. 135, 142–43 (2011). See In re Pfizer Sec Litig, 819 F.3d 642 (2d Cir. 2016) (finding a genuine dispute of material fact over whether a defendant was the 'maker' of allegedly misleading statements by a party in privity, where defendants had final approval over the statements at issue).

6 Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc, 552 U.S. 148 (2008).

7 139 S. Ct. 1094 (2019).

8 See, for example, Malouf v. Sec. & Exch. Comm'n, 933 F.3d 1248, 1259 (10th Cir. 2019), cert. denied, No. 19-909 (U.S. Mar. 9, 2020) (reading Lorenzo expansively to affirm finding that employee was liable under Rule 10b-5(a) and (c) for knowingly failing to correct misstatements and omissions in employer's public disclosures); Geoffrey A. Orley Revocable Tr. U/A/D 1/26/2000 v. Genovese, 2020 WL 611506, at *8 (S.D.N.Y. Feb. 7, 2020) (adopting a narrowing interpretation of Lorenzo, in an effort to resist an interpretation that would 'serve to erase the distinction between primary liability . . . and secondary liability . . .'); In re Longfin Corp. Sec. Class Action Litig., 2019 WL 1569792, at *8 (S.D.N.Y. Apr. 11, 2019) (citing Lorenzo in holding that a defendant could 'be liable regardless of whether it “made” any misrepresentations or omissions'); EnSource Investments LLC v. Willis, 2019 WL 6700403, at *13 (S.D. Cal. Dec. 6, 2019) (Lorenzo inapplicable because defendants had not 'disseminated any false statements').

9 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731–32 (1975) (offerees of unconsummated offers to purchase cannot sue under Rule 10b-5).

10 426 U.S. 438 (1976).

11 Ibid. at 449 (defining 'material' in the context of Section 14 of the Exchange Act). The definition is now nearly universally applied under all securities liability provisions.

12 United States v. Litvak, 808 F.3d 160, 176 (2d Cir. 2015).

13 See, e.g., In re Convergent Techs Sec Litig, 948 F.2d 507 (9th Cir. 1991).

14 In re N Telecom Ltd Sec Litig, 116 F. Supp. 2d 446, 466 (S.D.N.Y. 2000) (alteration in the original and internal quotation marks omitted).

15 Singh v. Cigna Corp, 918 F.3d 57, 63 (2d Cir. 2019). See also ibid. at 60 (critiquing the complaint as 'a creative attempt to recast corporate mismanagement as securities fraud' that failed because 'generic statements do not invite reasonable reliance' by investors); Retail Wholesale & Dep't Store Union Local 338 Ret Fund v. Hewlett-Packard Co, 845 F.3d 1268, 1275–77 (9th Cir. 2017) (corporate code of conduct 'inherently aspirational' and unable to support a securities fraud claim); In re Rockwell Med, Inc Sec Litig, 2018 WL 1725553, at *7 (S.D.N.Y. 30 March 2018) (optimistic statements about a product's 'imminent success' not actionable).

16 15 U.S.C. Section 78bb(f)(1). Separately, Section 27 of the Exchange Act grants the federal courts exclusive jurisdiction over claims brought under the Act. 15 U.S.C. Section 78aa(a). The Supreme Court recently held that Section 27 does not extend exclusive federal jurisdiction to claims under state law that are themselves premised on federal securities law. Merrill Lynch, Pierce, Fenner & Smith, Inc v. Manning, 136 S. Ct. 1562, 1570 (2016) (holding that Section 27 does not expand federal jurisdiction).

17 Merrill Lynch, Pierce, Fenner & Smith Inc v. Dabit, 547 U.S. 71 (2006). In 2014, the Supreme Court clarified that SLUSA preclusion does not extend to misrepresentations involving securities that are not traded on a national exchange, but that were claimed to have been backed by exchange-traded securities. See Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (2014).

18 See In re Kingate Management Ltd Litig, 784 F.3d 128 (2d Cir. 2015) (to be precluded by SLUSA, allegations must be 'necessary to' or 'form the basis' of a plaintiff's state-law claims, although the allegations need not be 'essential' to the state-law claims); Freeman Investments, LP v. Pacific Life Ins Co, 704 F.3d 1110 (9th Cir. 2013). The Third and Seventh Circuits apply broadly similar standards, see LaSala v. Bordier et Cie, 519 F.3d 121, 141 (3d Cir. 2008) (dismissal is warranted where proof of a material misstatement or omission is either a necessary element of the cause of action or otherwise critical to a plaintiff's success in the case); Holtz v. JPMorgan Chase Bank, NA, 846 F.3d 928 (7th Cir. 2017). The Sixth and Eighth Circuits have adopted a somewhat different approach, precluding any complaint that features allegations of misrepresentations in connection with the purchase or sale of securities, while scrutinising other complaints for 'artful pleading' to avoid such allegations. See Segal v. Fifth Third Bank, NA, 581 F.3d 305, 311 (6th Cir. 2009); Zola v. TD Ameritrade, Inc, 889 F.3d 920, 924 (8th Cir. 2018). However, there is disagreement among the federal courts as to whether these standards actually differ. See In re Kingate, 784 F.3d at 144–45 (distinguishing the Third Circuit's standard); Goldberg v. Bank of America, NA, 846 F.3d 913, 925 (7th Cir. 2017) (Hamilton, J. dissenting) (describing a 'three- or four-way' division of authority among the Second/Ninth, Sixth, Holtz and the Seventh Circuit's prior decision in Brown v. Calamos, 664 F.3d 123, 127 (7th Cir. 2011)); Northstar Fin Advisors, Inc v. Schwab Investments, 904 F.3d 821, 830 (9th Cir. 2018) (concluding that the law of SLUSA preclusion 'appears to be uniform across the circuits', over a dissenting opinion).

19 138 S. Ct. 1061 (2018).

20 Compare Dentsply Sirona, Inc. v. XXX, 2019 WL 4695724, at *6 (N.Y. Sup. Sep. 26, 2019) (PSLRA stay not applicable in state court) with In re Everquote, Inc. Sec. Litig., 65 Misc. 3d 226, 240, 106 N.Y.S.3d 828, 837 (N.Y. Sup. 2019) (PSLRA stay applicable in state court) and Greensky, Inc. Securities Litigation, 2019 WL 6310525, at *1 (N.Y. Sup. Nov. 25, 2019) (same and collecting cases).

21 15 U.S.C. Section 77k(a).

22 Bernstein v. Crazy Eddie, Inc, 702 F. Supp. 962, 972 (E.D.N.Y. 1988), vacated on other grounds, 714 F. Supp. 1285 (E.D.N.Y. 1989).

23 See In re Ariad Pharm, Inc Sec Litig, 842 F.3d 744, 756 (1st Cir. 2016); DeMaria v. Andersen, 318 F.3d 170, 178 (2d Cir. 2003); In re Supreme Specialties, Inc Sec Litig, 438 F.3d 256, 274 n. 7 (3d Cir. 2006); Rosenzweig v. Azurix Corp, 332 F.3d 854, 871–73 (5th Cir. 2003); Lee v. Ernst & Young, LLP, 294 F.3d 969 (8th Cir. 2002); In re Century Aluminum Co Sec Litig, 729 F.3d 1104, 1106 (9th Cir. 2013); Joseph v. Wiles, 223 F.3d 1155, 1159–61 (10th Cir. 2000).

24 Notably, an underwriter typically cannot rely on indemnification to shift its liability to an issuer. See, for example, Perry v. Duoyan Printing, Inc, 232 F. Supp. 3d 589, 593–95 (S.D.N.Y. 2017) (holding that public policy prohibits indemnity for defendants found to have 'committed a sin graver than ordinary negligence').

25 135 S. Ct. 1318 (2015).

26 See Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016) (suggesting that the analysis under Omnicare may be more forgiving where plaintiffs are not 'sophisticated'). See also Martin v. Quartermain, 732 F. App'x 37 (2d Cir. 2018). See also Carvelli v. Ocwen Financial Corp., 934 F.3d 1307, 1323 (11th Cir. 2019) (dismissing complaint under Omnicare standard where plaintiff failed to plead that defendants' 'statements of opinion [were] mutually exclusive of – or even inconsistent with [defendant company's] alleged knowledge').

27 See, for example, Tongue, 815 F.3d at 209-10; City of Dearborn Heights Act 345 Police & Fire Ret Sys v. Align Tech, Inc, 856 F.3d 605, 610 (9th Cir. 2017); In re Sinclair Broad. Grp., Inc. Sec. Litig., 2020 WL 571724, at *8 (D. Md. Feb. 4, 2020).

28 15 U.S.C. Section 77z-2(c)(1)(B); 15 U.S.C. Section 78u-5(c)(1)(B).

29 15 U.S.C. Section 77l(b).

30 It is blackletter law that an omission may be fraudulent only if the omitted information is necessary to make an affirmative statement not misleading. Basic Inc v. Levinson, 485 U.S. 224 (1988) ('silence, absent a duty to disclose, is not misleading under Rule 10b-5'). However, there is presently a division of authority over an issue that potentially conflicts with this landmark feature of the securities law. Specifically, the Second Circuit is at odds with several others over whether a company can face liability under Section 10(b) for a failure to disclose 'known trends and uncertainties' in compliance with Item 303 of Regulation S-K. Compare Oran v. Stafford, 226 F.3d 275, 287 (3d Cir. 2000) (holding that 'a violation of Item 303 cannot be used to show a violation of Section 10(b) and Rule 10b-5'), In re Nvidia Corp Sec Litig, 768 F.3d 1046 (9th Cir. 2014) (same), and Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1331 (11th Cir. 2019) (same, observing that 'Item 303 imposes a more sweeping disclosure obligation than Rule 10b-5, such that a violation of the former does not ipso facto indicate a violation of the latter'), with Indiana Public Retirement System v. SAIC, Inc, 818 F.3d 85 (2d Cir. 2016) (holding that a defendant can be liable under Section 10(b) for failure to make a required Item 303 disclosure, where that omission is material). The Supreme Court granted certiorari to resolve this split in 2017 – but that grant was dismissed after the parties settled.

31 Where a Rule 10b-5 claim is based on omissions, rather than misrepresentations, the Supreme Court has held plaintiffs are entitled to a rebuttable presumption of reliance once the materiality of the omissions is shown. Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc, 552 U.S. 148, 159 (2008) (citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154 (1972)). In addition, there is no requirement that reliance be shown in SEC injunctive or criminal actions under Rule 10b-5. See SEC v. Morgan Keegan & Co, 678 F.3d 1233, 1244 (11th Cir. 2012) (reliance is not an element of an SEC enforcement action brought under Rule 10b-5); United States v. Vilar, 729 F.3d 62, 88 (2d Cir. 2013) (reliance is not an element in criminal action brought under Rule 10b-5).

32 See, for example, Dura Pharm Inc v. Broudo, 544 U.S. 336, 341 (2005).

33 Fed. R. Civ. P. 23(b)(3).

34 485 U.S. 224 (1988).

35 Ibid. at 247.

36 Notably, the Second Circuit has held that a plaintiff seeking class certification need not introduce evidence showing that a company's stock price moved in response to the release of information, so long as the record reflects some other evidence of market efficiency. In re Petrobras, 862 F.3d 250, 277–78 (2d Cir. 2017). In addition, the Second Circuit has held that plaintiffs need not present any direct evidence of price impact under certain circumstances, suggesting that such evidence may be required only where indirect factors such as trading volume and extent of analyst coverage are less persuasive. Waggoner v. Barclays Plc, 875 F.3d 79, 101 (2d Cir. 2017).

37 573 U.S. 258 (2014).

38 See Waggoner v. Barclays Plc, 875 F.3d 79, 101 (2d Cir. 2017); Arkansas Teachers Ret Sys v. Goldman Sachs Grp, Inc, 879 F.3d 474, 482–85 (2d Cir. 2018) (emphasising that defendants are not required to provide 'conclusive evidence' showing the absence of a link between price impact and misrepresentation, reversing a lower court's decision to discount an event study showing the absence of any price decline); In re Quorum Health Corp., 2019 WL 3949704, at *2 (6th Cir. July 31, 2019) (agreeing that defendant bore the burden of rebutting the Basic presumption by a preponderance of the evidence). See also Vizirgianakis v. Aeterna Zentaris, Inc., 775 F. App'x 51, 53–54 (3d Cir. 2019) (holding that an expert report showing inconclusive evidence of stock price movement was insufficient to demonstrate a lack of price impact).

39 See IBEW Local 98 Pension Fund v. Best Buy Co, 818 F.3d 775, 782 (8th Cir. 2016).

40 See ibid.; In re Vivendi, SA Sec Litig, 838 F.3d 223, 259 (2d Cir. 2016) (endorsing a price-maintenance theory); Arkansas Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 2020 WL 1682772, *8 (2d Cir. Apr. 7, 2020) (reaffirming In re Vivendi); Glickenhaus & Co v. Household Intern, Inc, 787 F.3d 408, 419 (7th Cir. 2015) (same); FindWhat Investor Grp v. FindWhat.com, 658 F.3d 1282, 1314 (11th Cir. 2011) (same).

41 544 U.S. 336 (2005).

42 Ibid. at 341.

43 But see Erica P John Fund, Inc v. Halliburton Co, 563 U.S. 804 (2011) (holding that plaintiffs need not prove loss causation at the class-certification stage). The courts have been relatively plaintiff-friendly in crafting a loss-causation standard. See, for example, Financial Guaranty Ins Co v. The Putnam Advisory Co, 783 F.3d 395 (2d Cir. 2015); Loreley Fin (Jersey) No 3 Ltd v. Wells Fargo Sec, LLC, 797 F.3d 160 (2d Cir. 2015) ('[It] is sufficient [for purposes of surviving a motion to dismiss] that the allegations themselves give [d]efendants 'some indication' of the risk concealed by the misrepresentations that plausibly materialised in [p]laintiffs' ultimately worthless multimillion-dollar investment'); Glickenhaus & Co v. Household Int'l, Inc, 787 F.3d 408 (7th Cir. 2015) (approving of a 'leakage' loss-causation analysis that attempted to model the impact of a gradual disclosure); Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015).

44 532 U.S. 588 (2001). Since Zandford, the federal circuit courts have dealt with many variations on this issue. See, for example, Lampkin v. UBS Fin. Servs., Inc., 925 F.3d 727, 736 (5th Cir.), cert. denied, 140 S. Ct. 389 (2019) (grant of stock options to employees was not a 'purchase or sale of securities' for purposes of Section 10(b) claim).

45 535 U.S. 813 (2002).

46 Merrill Lynch, Pierce, Fenner & Smith, Inc v. Dabit, 547 U.S. 71 (2006).

47 40 S.E.C. 907, 912 (1961).

48 SEC v. Tex Gulf Sulphur Co, 401 F.2d 833, 848 (2d Cir. 1968), aff'd in part, rev'd in part, 446 F.2d 1301 (2d Cir. 1971).

49 See Cady, Roberts & Co, 40 S.E.C. 907, 912 (1961); Chiarella v. United States, 445 U.S. 222 (1980).

50 521 U.S. 642 (1997).

51 463 U.S. 646 (1983).

52 Ibid. at 663.

53 137 S. Ct. 420 (2016).

54 Ibid. at 427–28. The Second Circuit recently reiterated that insider-trading liability based on the gift of information to a friend requires evidence of 'a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the latter'. United States v. Martoma, 894 F.3d 64, 77 (2d Cir. 2018) (noting that 'there are many ways to establish a personal benefit'). See also Gupta v. United States, 913 F.3d 81, 86 (2d Cir. 2019) ('Where the recipient of the tip is the tipper's 'frequent' 'business' partner, the tipper's anticipation of a quid pro quo is easily inferable').

55 17 C.F.R. Section 240.14a-9(a).

56 To sustain a Rule 14a-9 claim based on a material omission, a plaintiff must also allege either that a statement was rendered false or misleading by the omitted information or that the defendant had an independent duty of disclosure. See, for example, In re Willis Towers Watson plc Proxy Litig., 937 F.3d 297, 304-06 (4th Cir. 2019); In re Vivendi, SA Sec Litig, 838 F.3d 223, 239-40 (2d Cir. 2016).

57 See, for example, Campbell v. Transgenomic, Inc, 916 F.3d 1121, 1124–25 (8th Cir. 2019) (complaint stated a claim under Section 14(a) and Rule 14a-9 based on allegation that merger proxy was materially misleading in its omission of merger target's projected net income/loss figures, which were alleged to be significantly lower than disclosed gross profit projections).

58 Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon, Randall S. Thomas, Mootness Fees, 72 Vand. L. Rev. 1777, 1787 (2019).

59 Ibid. at 1790. Mootness fees, which typically range from $50,000 to $300,000, ibid. at 1781, are subject to a lower standard of review than class-action settlements. See generally ibid.

60 See Dekalb County Pension Fund v. Transocean Ltd, 817 F.3d 393, 408 & n. 90 (2d Cir. 2016); Beck v. Dobrowski, 559 F.3d 680, 682 (7th Cir. 2009) (same); Herskowitz v. Nutri/Sys., Inc., 857 F.2d 179, 190 (3d Cir. 1988) (same).

61 See SEC v. Das, 723 F.3d 943, 953–54 (8th Cir. 2013). See also Ind State Dist Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc, 719 F.3d 498, 507 n. 3 (6th Cir. 2013) ('In this Circuit § 14(a) does in fact require proof of scienter to state a claim.'), vacated and remanded on other grounds sub nom. Omnicare, Inc v. Laborers Dist Council Constr Indus Pension Fund, 135 S. Ct. 1318 (2015). See also In re Willis Towers Watson plc Proxy Litig., 937 F.3d 297, 308 (4th Cir. 2019) (recognising the division of authority, but remanding the question to the district court for further consideration).

62 See Chris-Craft Industries, Inc v. Piper Aircraft Corp, 480 F.2d 341 (2d Cir. 1973); Smallwood v. Pearl Brewing Co, 489 F.2d 579, 606 (5th Cir. 1974); Adams v. Standard Knitting Mills, Inc, 623 F.2d 422 431 (6th Cir. 1980); In re Digital Island Securities Litig, 357 F.3d 322 (3rd Cir. 2004); SEC v. Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2002).

63 Varjabedian v. Emulex Corp, 888 F. 3d 399 (9th Cir. 2018).

64 17 C.F.R. Section 240.14e-3(a).

65 15 U.S.C. Section 78u-4(b)(2).

66 Khoja v. Orexigen Therapeutics, Inc, 899 F.3d 988, 999–1018 (9th Cir. 2018).

67 In re Prudential, 148 F.3d 283, 317 (3d Cir. 1998) (reviewing the settlement of claims brought under Sections 10(b) and 20(b) of the Exchange Act).

68 15 U.S.C. Section 78u-4(a)(6).

69 Fed. R. Civ. P. 23(h).

70 See Lynn A Baker, Michael A Perino and Charles Silver, 'Setting Attorneys' Fees in Securities Class Actions: An Empirical Assessment', 66 Vand. L. Rev. pp. 1677 and 1683–91 (2013).

71 Deckert v. Independence Shares Corp, 311 U.S. 282, 287–90 (1940).

72 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 155 (1972).

73 Aaron v. SEC, 446 U.S. 680, 695–97 (1980); United States v. Naftalin, 441 U.S. 768, 773–74 (1979).

74 Raymond J Lucia Cos., Inc. v. SEC, 138 S. Ct. 2044 (2018).

75 US Attorney's Manual 9-28.300, 9-28.1000, 9-28.1100.

76 See Remarks to the American Bar Association's Business Law Section Fall Meeting (Washington, DC, 21 November 2014) (announcing change in enforcement strategy), available at www.sec.gov/News/Speech/Detail/Speech/1370543515297.

77 See, for example, SEC v. Citigroup Global Markets, Inc, 827 F. Supp. 2d 328 (S.D.N.Y. 2011), rev'd 752 F.3d 285 (2d Cir. 2014) (rebuking the lower court for failing to accord the SEC the 'significant deference' its policy judgments are owed, and holding that '[t]he job of determining whether the proposed SEC consent decree best serves the public interest [. . .] rests squarely with the SEC').

78 United States v. Fokker Services BV, 818 F.3d 733 (DC Cir. 2016) (reversing the rejection of a DPA outside the securities context); United States v. HSBC Bank USA, NA, 863 F.3d 125, 135–37 (2d Cir. 2017).

79 SEC, 'Statement of the Securities and Exchange Commission Concerning Financial Penalties' (4 January 2006), available at www.sec.gov/news/press/2006-4.htm.

80 Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017).

81 Ibid. at 1642 n. 3.

82 568 U.S. 442 (2013).

83 See, for example, SEC v. Gentile, 939 F.3d 549, 561 (3d Cir. 2019), cert. denied 2020 WL 1906575 (U.S. Apr. 20, 2020) (holding that injunctions do not function as penalties, and collecting cases addressing the issue); SEC v. Collyard, 861 F.3d 760, 764 (8th Cir. 2017) (holding that an injunction barring an individual from acting as an unregistered broker was not a penalty, since its purpose was protecting the public from future violations, not retrospective punishment); Saad v. SEC, 873 F.3d 297 (DC Cir. 2017) (remanding for further consideration of whether a permanent bar on a broker dealer's registration was remedial or punitive); SEC v. Cohen, 332 F. Supp. 3d 575, 595 (E.D.N.Y. 2018) (holding that an SEC injunction is a penalty).

84 Morrison v. Nat'l Austl Bank, Ltd, 561 U.S. 247 (2010).

85 Ibid. at 273.

86 Ibid. at 266.

87 United States v. Vilar, 729 F.3d 62, 67, 70 (2d Cir. 2013). See also In re Petrobras Securities, 862 F.3d 250, 271–75 (2d Cir. 2017) (explaining that Morrison extraterritoriality issues must be addressed at the class-certification stage).

88 Notably, Morrison's restriction has been interpreted not to bar the extraterritorial application of equitable relief provided by Section 21 of the Exchange Act, including by repatriating and freezing offshore assets.

89 See, for example, Cornwell v. Credit Suisse Grp, 729 F. Supp. 2d 620, 624 (S.D.N.Y. 2010).

90 See, for example, City of Pontiac Policemen's & Firemen's Ret Sys v. UBS AG, 752 F.3d 173, 176 (2d Cir. 2014).

91 See SEC v. Scoville, 913 F.3d 1204 (10th Cir. 2019).

92 677 F.3d 60, 66 (2d Cir. 2012). See also Choi v. Tower Research Capital LLC, 890 F.3d 60 (2d Cir. 2018) (holding that a defendant incurred irrevocable liability even where a domestic transaction was contingent on the subsequent approval of a foreign exchange).

93 Parkcentral Global Hub Ltd v. Porsche Automobile Holdings, 763 F.3d 198 (2d Cir. 2014) (holding that domestic listing is necessary to state claim under Section 10(b), but not sufficient). The Second Circuit has applied its 'predominantly foreign' standard in scrutinising a range of foreign transactions. See, for example, Giunta v. Dingman, 893 F.3d 73 (2d Cir. 2018) (transaction between Bahamian entities was subject to US law where the parties entered the relevant agreement in New York and alleged misrepresentations occurred in New York); Prime Int'l Trading, Ltd. v. BP P.L.C., 937 F.3d 94, 105 (2d Cir. 2019) (futures and derivative contracts pegged to foreign crude oil not subject to Commodity Exchange Act provision against manipulation of commodity prices); see also Biofrontera AG v. Deutsche Balaton AG, 2020 WL 1489788, at *7 (S.D.N.Y. 27 March 2020) (claim stemming from German issuer's tender offer not domestic, even though the issuer had American depository shares trading on a domestic exchange that were convertible to foreign shares).

94 See Stoyas v. Toshiba Corp, 896 F.3d 933 (9th Cir. 2018), cert. denied (No. 18-486).

95 Janeen McIntosh and Svetlana Starykh, 'Recent Trends in Securities Class Action Litigation: 2019 Full-Year Review', pp. 4, 13, 24, (NERA Economic Consulting 2020), available at www.nera.com/content/dam/nera/publications/2020/PUB_Year_End_Trends_012120_Final.pdf.

96 SEC, Division of Enforcement 2019 Annual Report (2019), available at www.sec.gov/files/enforcement-annual-report-2019.pdf.

97 See SEC v. Volkswagen AG, Case No. 19-cv-1391 (N.D. Cal. 14 March 2019).

98 See SEC v. Facebook, Inc., Case No. 19-cv-4241 (24 July 2019); SEC v. Mylan N.V., Case No. 19-cv-2904 (D.D.C. 27 September 2019).

99 See SEC, 2019 Annual Report of Congress: Whisteblower Program, available at www.sec.gov/files/sec-2019-annual-report-whistleblower-program.pdf.

100 See SEC Release No. 34-83557 (18 June 2018).

101 See Katanga Johnson, Chris Prentice, Exclusive: U.S. regulator rethinking changes to whistleblower program after backlash - sources (Reuters, Nov. 15, 2019), available at www.reuters.com/article/us-usa-sec-whistleblower-exclusive/exclusive-us-regulator-rethinking-changes-to-whistleblower-program-after-backlash-sources-idUSKBN1XP26U.

102 Department of Justice, Memorandum for All Criminal Division Personnel: Selection of Monitors in Criminal Division Matters (11 October 2018), available at www.justice.gov/opa/speech/file/1100531/download.

103 See Deputy Attorney General Rod J. Rosenstein, Remarks at the American Conference Institute's 35th International Conference on the Foreign Corrupt Practices Act (29 November 2018), available at www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0.

104 Deputy Attorney General Sally Q. Yates, Individual Accountability for Corporate Wrongdoing (9 September 2015), available at www.justice.gov/archives/dag/file/769036/download.

105 See In re Mohan, CFTC No. 19-06, 2019 WL 978808 (Feb. 25, 2019); In re Gandhi, CFTC No. 19-01, 2018 WL 5084650 (11 October 2018); Press Release, U.S. Dep't of Justice, Tower Research Capital LLC Agrees to Pay $67 Million in Connection With Commodities Fraud Scheme (7 November 2019), www.justice.gov/opa/pr/tower-research-capital-llc-agrees-pay-67-million-connectioncommodities-fraud-scheme.

106 Indictment, United States v. Smith, 19-cr-669 (EEC) (N.D. Ill. Aug. 22, 2019), ECF No. 1, www.justice.gov/opa/pressrelease/file/1202466/download.

107 SEC v. Shuang Chen, No. 19-cv-12127 (D. Mass. 15 October, 2019)

108 947 F.3d 19 (2d Cir. 2019).

109 938 F.3d 482, 492 (3d Cir. 2019).

110 Ibid. at 492.

111 2020 WL 1280785 (Del. 18 March 2020).

112 See, for example, Exchange Act Release No. 88142, 2020 WL 870115 (7 February 2020), available at www.sec.gov/litigation/suspensions/2020/34-88142.pdf (noting that third parties disseminated false information about the efficacy of the company's product in treating covid-19); In the Matter of Praxsyn Corp., 2020 WL 1611114 (25 March 2020), available at www.sec.gov/litigation/suspensions/2020/34-88479-o.pdf (noting false statements about the company's access to protective masks).

113 Press Release, US Dep't of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (20 March 2020), available at www.justice.gov/opa/pr/attorney-generalwilliam-p-
barr-urges-american-public-report-covid-19-fraud.

114 Case No. 18-1501 (argued 3 March 2020).