I try to explain to people that the motion to dismiss in a securities case is a unique animal; the complaints, and the briefing, are not like motions to dismiss in any other area of law.  When it comes to securities cases – especially class actions – the motion to dismiss is really a mini motion for summary judgment.  This week, in a case called Khoja v. Orexigen Therapeutics, No. 16-56069, the Ninth Circuit tried to draw a line in the sand, but as far as I’m concerned, did not go nearly far enough.

It all begins with the Private Securities Litigation Reform Act, which heightens the pleading requirements in securities cases.  Among other things, the Act requires that plaintiffs “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” Additionally, plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted” intentionally or recklessly. 15 U.S.C. §78u-4.

As Hillary Sale has documented in the context…

As many readers are likely aware, the proposed acquisition of Tribune Media Company by Sinclair Broadcast Group fell through when the FCC referred the matter to an administrative hearing, thus creating a nearly-insurmountable roadblock to closing.  On Thursday, Tribune filed a complaint against Sinclair in Delaware alleging that Sinclair breached the merger agreement by failing to use its best efforts to win regulatory approval.  The complaint is an entertaining read and regardless of the outcome, I’m quite certain it will prove to be a vivid classroom example of best efforts clauses in the merger context.

The basic gist of the complaint is that Sinclair agreed to use its best efforts to win regulatory approval, and it was entirely foreseen by the parties that the relevant regulators – the Justice Department and the FCC – would want divestments in 10 specific markets.  Nonetheless, Sinclair stonewalled the DOJ (at one point actually telling the Assistant Attorney General “sue me”), and submitted sham divestment plans to the FCC that involved, well:

selling WGN-TV in Chicago to Steven Fader, a close associate of [Sinclair Executive Chair David] Smith’s in a car dealership business who had no experience in broadcasting. Sinclair also proposed the

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As most readers of this blog are likely aware, the theory behind initial coin offerings and “smart” contracts is that the code itself is entirely transparent and self-executing; the terms of the contract are set in the programming, thus eliminating the need for enforcement mechanisms or for messy legal disputes over interpretation.  The code dictates the agreement, and the code enforces it; investors curious about terms of an investment can simply read the code and have utter certainty as to the nature of the agreement. 

As Matt Levine described it, “If you invest your Ether in a smart contract, you’d better be sure that the contract says (and does) what you think it says (and does).  The contract is the thing itself, and the only thing that counts; explanations and expectations might be helpful but carry no weight.”  Primavera De Felippi and Aaron Wright dubbed this system “lex cryptographica.”

But problems arise when the code diverges from the white paper summary typically distributed to potential purchasers.  Famously, for example, in the case of one project known as the DAO, a “flaw” in the code allowed a “hacker” to steal Ether currency from investors.  Or did it?  Matt Levine explained…

The indie hit Sorry to Bother You was recently described as “the most overtly anticapitalist feature film made in America.”

Riffing off the well-documented phenomenon that people respond to telephone calls based on the perceived race of the caller, Sorry to Bother You tells the story of a young black man, Cassius Green – Cash is Green, get it? – who goes from rags to riches by using his “white voice” for telemarketing.  As Cash climbs the corporate ladder, he is torn between his newfound prosperity and loyalty to his old friends.

But that bare description of the film’s premise is hardly preparation for the surreal dystopian fantasy that follows.  The plot is nearly beyond description, but most of the action centers on WorryFree, a labor contracting company that offers its employees dormitory-style housing and cafeteria-tray meals in exchange for lifetime work commitments – an arrangement deemed not to be slavery after congressional investigation.  A proto-anarchist movement struggles to disrupt WorryFree’s operations and unionize Cash’s workplace, but mass media and viral marketing allow even the protests to be commodified and sold as entertainment.  As such, the film dramatizes the concept of narcotizing dysfunction, where knowledge of an…

This has been a banner week for embarrassing corporate manager stories.  In addition to the sudden resignation of Texas Instruments CEO Brian Crutcher for unspecified code-of-conduct violations (echoing the earlier, sudden firing of Rambus CEO, also for unspecified conduct violations) and Paramount’s firing of Amy Powell for racist commentary, Tesla’s Elon Musk ran into public relations trouble after a revelation that he donated to a Republican PAC, from which he cannily diverted attention by accusing one of the Thai cave diving rescuers of pedophilia.  Meanwhile, Papa John’s Founder and Chair John Schnatter – who previously was forced to resign as CEO after white nationalists were too enthusiastic about his condemnation of the NFL and protesting football players – was revealed to have used a racist slur on a conference call designed to prevent his racism from creating PR disasters.  That incident caused the Board to strip him of his chairperson title and remove his face from marketing materials, while the University of Louisville took his name off of its stadium.  Later, Forbes published an expose on the sexist and unprofessional culture at Papa John’s that he enabled – which incidentally confirms Ben Edwards’s…

Several months ago, I posted about the Chancery decision finding Elon Musk to be a controlling shareholder of Tesla for the purposes of Corwin v. KKR Financial Holdings, 125 A.3d 304 (2015), despite the fact that he held only a 22% stake.  The decision took into account both Musk’s stock holdings and his other mechanisms of influence.

One of the reasons the decision stood out was because, while there is a long history in Delaware of considering both voting power and other factors to determine controlling shareholder status, after a certain point, you have to wonder whether the “stockholder” piece is doing any work, and whether instead the question should just be whether someone has effective control, either of the corporation generally or of a particular business decision.

Well, last week, we took a few steps more toward answering that question in Basho Technologies Holdco B, LLC et al v. Georgetown Basho Investors, LLC et al.  There, plaintiffs contended that a minority stockholder was a “controller” for purposes of owing fiduciary duties to the corporation.  Vice Chancellor Laster agreed, based on a holistic inquiry that took into account, among other things, the stockholder’s contractual rights via preferred…

One of the topics I’ve repeatedly discussed in this space is how layers of doctrine have been so piled on top of inquiries like materiality and loss causation in the Section 10(b) context that the legal analysis  has become completely unmoored from the ultimate factual inquiry, namely, did the fraud actually result in losses to investors.  As I put it in one post:

[A]ll of our measures of impact and harm and loss are, at this point, so far removed from reality as to border on complete legal fiction.  Materiality is a construct from case law, with numerous additional doctrines piled on to it by courts without any heed for actual evidence of how markets behave. …. [W]hat we call “harm” and “damage” for the purpose of private securities fraud lawsuits have become so artificial that it no longer seems as though we’re even trying to measure the actual real-world effects of fraud.  I believe private lawsuits are an essential supplement to SEC action but a system of fines or statutory damages would make so much more sense.

This week, I call attention to another recent example of the phenomenon.  In Mandalevy v. BofI Holding, 2018 WL 3250154…