The Securities Litigation Review: USA

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 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; and
  4. 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 other securities statutes.

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. Supplementing these government actors are self-regulatory organisations such as FINRA and the securities exchanges, which 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.

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. 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.

Up until the 1994 decision of the Supreme Court in Central Bank of Denver,3 a majority of US courts had held that civil liability could also 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. Building on that decision, the Supreme Court later clarified that Rule 10b-5(b) liability may only be imposed on the 'maker' of a statement alleged to be materially false or misleading.4 Most recently, however, the Court has signalled a potential departure from this line of decisions, holding that defendants who merely 'use' misstatements may be held liable under other subsections of Rule 10b-5. That decision, Lorenzo v. SEC,5 could well herald an expansion of secondary liability, although the first crop of decisions from the federal courts has taken a mixed stance on that broad interpretation.6

Importantly, these restrictions on aiding-and-abetting liability do not apply to SEC civil enforcement actions. Section 20(e) of the Exchange Act and Section 15(b) of the Securities Act allow the SEC to pursue actions against parties who knowingly or recklessly aid and abet another party's violation of the securities laws.

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.

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 generally been unwilling to imply new private rights of action where Congress has not explicitly provided one. 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.7 These standing requirements are reviewed where relevant in the discussion below.

Because the federal securities laws are broadly 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. The leading case on materiality is TSC Industries, Inc v. Northway, Inc,8 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.9 In applying this standard, some courts have held that false statements or omissions are not materially misleading as long as the market possessed the correct information.10 Additionally, 'vague and non-specific' statements are routinely held to be inactionable as 'puffery'.11

Under SLUSA, plaintiffs are barred from bringing class actions asserting certain securities fraud claims under state law.12 This restriction was enacted to prevent 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 SLUSA broadly to block fraud class actions premised on any alleged misrepresentation that 'coincides with a securities transaction – whether by the plaintiff or by someone else'.13

Notably, while SLUSA restricts plaintiffs' ability to circumvent federal law, the Supreme Court recently held in Cyan Inc v. Beaver County Employees' Retirement Fund14 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 rise 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.15

Defendants have adopted a range of approaches to contain the post-Cyan explosion in state litigation. Most prominently, following a March 2020 decision of the Delaware Supreme Court holding 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,16 a number of corporations have adopted such provisions to redirect litigation from state courts. Courts have generally enforced these forum-selection provisions.17 In addition, even absent such structural protections against duplicative litigation, defendants have met with occasional success in staying state proceedings in favour of first-filed federal actions.18 Failing that, several recent decisions from the New York appellate courts have made clear that the courts of that state will carefully apply federal precedent.19

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'.20 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.

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.

In Omnicare, Inc v. Laborers District Council Construction Industry Pension Fund,21 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 can 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.22 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.23

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.24

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 fact25 (2) with scienter (3) in connection with the purchase or sale of a security (4) upon which the plaintiff justifiably relied26 and (5) that proximately caused (6) the plaintiff's economic loss.27 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'.28 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,29 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'.30 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 information. 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.

More recently, in Halliburton Co v. Erica P John Fund, Inc,31 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 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,32 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'.33 Meanwhile, courts across the country have endorsed the '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 pre-existing market misapprehension.34

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,35 the Court unanimously held that 'an inflated purchase price will not itself constitute or proximately cause the relevant economic loss'.36 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.37

Insider trading in violation of Section 10

Since the decision of the SEC in Cady, Roberts & Co,38 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.39 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.40 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.41

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,42 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.43 As the Supreme Court reaffirmed in United States v. Salman,44 insider-trading liability extends to circumstances where an insider gifts non-public information to a 'trading relative or friend'.45

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'.46 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.47 In recent years, this provision has frequently been invoked by plaintiffs seeking to challenge merger disclosures. In 2018, for example, some 76 per cent of large mergers were challenged in federal court.48 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.49

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.50 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.51

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.52 Recently, however, the Ninth Circuit diverged from this position, holding that Section 14(e) only requires proof of negligence.53 Given the disagreement among the federal circuits, it is likely that the dispute will find itself 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 effectively broadens the scope of insider-trading liability in the tender-offer context by dispensing with the requirement that a breach of fiduciary duty be shown.54

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'.55 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.

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 the complexity, expense and likely duration of the litigation and the risk-reward calculus of proceeding to judgment.56 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 for reasonableness in the securities class action context.57

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.58

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.59 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. For Rule 14a-9 claims, 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.

Public enforcement

i Forms of action and procedure

The agencies charged with enforcing the securities statutes can proceed through civil proceedings in court, internal administrative proceedings, or criminal prosecutions. 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.60 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 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.

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.

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.

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.

Both DPAs and SEC settlements must be filed with and approved by a federal judge. Historically, this review has been lenient, but on occasion judges will scrutinise proposed settlements critically and sometimes reject them outright, though such decisions are controversial.61 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.62 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 advisory 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 a range of other factors, including 'the need to deter the particular type of offense' and 'extent of cooperation with [the] Commission and other law enforcement'.63

Cross-border issues

Following the Supreme Court's 2010 decision in Morrison v. National Australia Bank, Section 10(b) of the Exchange Act does not apply to securities transactions that take place wholly outside the United States.64 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'.65 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-5.66 This decision has been interpreted to apply to the Securities Act as well.67

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.68 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.69

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. In 2019, the Tenth Circuit endorsed that position, creating the possibility for a significant expansion in the US government's power to patrol extraterritorial conduct.70

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.71 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'.72 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.73

Year in review

According to statistics compiled by NERA Economic Consulting, private plaintiffs filed 326 new federal class-action securities cases in 2020, a pandemic-driven 22 per cent decline from the two-decade high reached in 2018 and 2019. Continuing a recent trend, this number was buoyed by merger-related lawsuits, sparked by developments in state law that have rendered the federal forum more attractive. The number of these merger-related class actions dipped to 106 (compared with 162 in 2019), while traditional securities class actions fell to 186 (compared with 202 in 2019). Meanwhile, the average settlement rose to US$44 million from US$28 million the previous year.74

In the realm of public enforcement, the SEC charged 33 people in cases involving insider trading in FY 2020. Overall, the SEC filed 715 enforcement actions, and obtained orders totalling a record-high US$4.68 billion in disgorgement and penalties.75 The Commodity Futures Trading Commission also recorded a record-breaking year, filing 113 enforcement actions and securing US$1.3 billion in monetary relief – US$920 million of which arose from a single action directed at manipulation of the derivatives markets through 'spoofing'.76 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.

Outlook and conclusions

While the 2020 election brought a significant shift in political power, it is unclear where securities legislation will rank among legislative priorities in a nation still digging out from covid-19. Among the bills sidelined by the pandemic was 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 remains to be seen.

Whatever legislation ultimately emerges from the legislative branch, it will face a judiciary refigured by four years of conservative control over government. In the final tally, the Trump administration appointed three new justices on the nine-member Supreme Court, 54 judges on the powerful federal courts of appeals (out of 179 judgeships) and 174 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).

To date, the Supreme Court's newly reinforced conservative bloc has not yet targeted the Court's securities-law precedents. That may soon change. In the coming months, the Court will issue a decision in Goldman Sachs Grp. Inc. v. Arkansas Teacher Retirement Sys.,77 which raises several important procedural issues related to the Basic presumption of class-wide reliance. In Goldman Sachs, the Court will resolve whether defendants can inject the issue of materiality into the determination of class certification by pointing to the generic nature of alleged misstatements. In addition, the Court will decide whether a defendant seeking to rebut the Basic presumption has the burden of persuasion. A defendant-friendly decision on either point would bolster issuers in their efforts to resist the certification of costly class actions.

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

4 Janus Capital Grp, Inc v. First Derivatives Traders, 564 U.S. 135, 142–43 (2011). See also Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc, 552 U.S. 148 (2008) (rejecting effort to extend liability under a 'scheme' theory to advisers who did not actually participate in preparing a challenged statement).

5 139 S. Ct. 1094 (2019).

6 See, for example, Malouf v. Sec. & Exch. Comm'n, 933 F.3d 1248, 1259 (10th Cir. 2019), cert. denied, No. 19-909 (U.S. 9 March 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); In re Teva Sec. Litig., 2021 WL 1197805, at *6 (D. Conn. 30 March 2021) (holding that Lorenzo does not permit plaintiffs to plead 'scheme liability' based on misrepresentations and omissions); Puddu v. 6D Glob. Techs., Inc., 2021 WL 1198566, at *11 (S.D.N.Y. 30 March 2021) (holding that Lorenzo permits plaintiffs to plead 'scheme liability' based on misrepresentations and omissions); Geoffrey A. Orley Revocable Tr. U/A/D 1/26/2000 v. Genovese, 2020 WL 611506, at *8 (S.D.N.Y. 7 February 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. 11 April 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. 6 December 2019) (Lorenzo inapplicable because defendants had not 'disseminated any false statements'). See also Malouf, 933 F.3d at 1260 (applying Lorenzo to SEC claim brought under Section 17(a)(3) claim because it is “virtually identical to Rule 10b-5(c)); Sec. & Exch. Comm'n v. Rio Tinto PLC, 2021 WL 818745, at *3 (S.D.N.Y. 3 March 2021) (declining to extend Lorenzo to SEC claims brought under Section 17(a)(2)).

7 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).

8 426 U.S. 438 (1976).

9 ibid. at 449 (defining 'material' in the context of Section 14 of the Exchange Act).

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

11 Geffner v. Coca-Cola Co., 928 F.3d 198, 200 (2d Cir. 2019).

12 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).

13 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).

14 138 S. Ct. 1061 (2018).

15 Compare Dentsply Sirona, Inc. v. XXX, 2019 WL 4695724, at *6 (N.Y. Sup. 26 September 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. 25 November 2019) (same and collecting cases). See also In re Pivotal Software, Inc. Securities Litigation, 2021 WL 841299, at *4 (Cal. Super. 4 March 2021) (PSLRA stay not applicable in state court).

16 Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).

17 See, for example, Wong v. Restoration Robotics, 2020 Cal. Super. LEXIS 227, *35 (Cal. Super. Sept. 1. 2020) (enforcing federal forum-selection provision in corporate charter to dismiss claims against Delaware issuer, officers, and directors, but declining to dismiss claims against underwriters and other non-signatories to the charter).

18 See, for example, In re Nio Inc. Securities Litigation, 2020 WL 4932073, at *1 (N.Y. Sup. Ct. 21 August 2020) (declining to vacate stay of securities claims despite significant differences between state proceeding and first-filed federal action); In re CVS Health Corp. Securities Litigation, 2020 WL 5392078, at *11 (R.I. Super. 1 September 2020) (staying state securities proceeding in favour of first-filed federal action). But see Convery v. Jumia Technologies Ag, 2020 WL 4586301, at *3 (N.Y. Sup. Ct. 7 August 2020) (denying stay of state proceeding in favour of first-filed federal action); Volonte v. Domo, Inc., 2020 WL 5247052, at *4 (Utah Dist. Ct. 20 July 2020) (same).

19 Labourers' Pension Fund of Cent. & E. Canada v. CVS Health Corp., 192 A.D.3d 424 (N.Y. App. Div. 2021) (reversing denial of motion to dismiss Section 11 claim); Lyu v. Ruhnn Holdings Ltd., 189 A.D.3d 441 (N.Y. App. Div. 2020) (same).

20 15 U.S.C. Section 77k(a).

21 135 S. Ct. 1318 (2015).

22 See Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016).

23 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).

24 15 U.S.C. Section 77z-2(c)(1)(B); 15 U.S.C. Section 78u-5(c)(1)(B).

25 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), 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).

26 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); United States v. Vilar, 729 F.3d 62, 88 (2d Cir. 2013).

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

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

29 485 U.S. 224 (1988).

30 ibid. at 247.

31 573 U.S. 258 (2014).

32 See Waggoner v. Barclays Plc, 875 F.3d 79, 101 (2d Cir. 2017); In re Quorum Health Corp., 2019 WL 3949704, at *2 (6th Cir. 31 July 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).

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

34 See ibid.; In re Vivendi, SA Sec Litig, 838 F.3d 223, 259 (2d Cir. 2016) (endorsing a price-maintenance theory).

35 544 U.S. 336 (2005).

36 ibid. at 341.

37 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).

38 40 S.E.C. 907, 912 (1961).

39 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).

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

41 United States v. O'Hagan, 521 U.S. 642 (1997).

42 463 U.S. 646 (1983).

43 ibid. at 663.

44 137 S. Ct. 420 (2016).

45 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').

46 17 C.F.R. Section 240.14a-9(a).

47 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).

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

49 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.

50 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).

51 See SEC v. Das, 723 F.3d 943, 953–54 (8th Cir. 2013).

52 See, e.g., Chris-Craft Industries, Inc v. Piper Aircraft Corp, 480 F.2d 341 (2d Cir. 1973); In re Digital Island Securities Litig, 357 F.3d 322 (3rd Cir. 2004).

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

54 17 C.F.R. Section 240.14e-3.

55 15 U.S.C. Section 78u-4(b)(2).

56 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).

57 See 15 U.S.C. Section 78u-4(a)(6); Fed. R. Civ. P. 23(h). 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. 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).

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

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

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

61 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').

62 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).

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

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

65 ibid. at 273.

66 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).

67 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.

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

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

70 See SEC v. Scoville, 913 F.3d 1204 (10th Cir. 2019), cert. denied No. 18-1566 (U.S. 2019).

71 677 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).

72 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, Cavello Bay Reinsurance Ltd. v. Shubin Stein, 986 F.3d 161, 167 (2d Cir. 2021) (misstatements made in New York involving a subscription agreement partially executed in New York nevertheless 'predominantly foreign' and thus inactionable); Banco Safra S.A.-Cayman Islands Branch v. Samarco Mineracao S.A., 2021 WL 825743, at *5 (2d Cir. Mar. 4, 2021) (Summary Order) (bond transaction 'predominantly foreign' even though bonds were purchased in U.S. currency wired from New York bank accounts); 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).

73 See Stoyas v. Toshiba Corp, 896 F.3d 933 (9th Cir. 2018), cert. denied No. 18-486 (U.S. 2019).

74 Janeen McIntosh and Svetlana Starykh, 'Recent Trends in Securities Class Action Litigation: 2020 Full-Year Review', pp. 4, 13, 24, (NERA Economic Consulting 2021).

75 SEC, Division of Enforcement 2019 Annual Report (2020), available at http://www.sec.gov/files/enforcement-annual-report-2020.pdf.

76 CFTC, Division of Enforcement 2019 Annual Report (2020), available at http://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download.

77 Case No. 20-222 (argued 29 March 2021).

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