The PSLRA requires that complaints alleging Section 10(b) violations plead facts that raise a “strong inference” that the defendant acted with intent or recklessness.  15 U.S.C. § 78u-4.  A “strong inference” is one that, taking into account “plausible opposing inferences,” is “at least as compelling as any opposing inference one could draw from the facts alleged.”  Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

It has long been an axiom of PSLRA pleading that a strong inference may be raised by alleging that the defendant knew his or her statements were false, or knew facts that contradicted his or her public statements.  See, e.g., Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000); Miss. Pub. Emples. Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75 (1st Cir.2008); Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 665 (8th Cir.2001); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009); Pugh v. Tribune Co., 521 F.3d 686 (7th Cir. 2008).  Indeed, allegations of actual knowledge of falsity are sufficient to plead scienter even in the context of forward-looking statements, which are subject to their own special heightened pleading requirements.  See 15 U.S.C. §78u-5.

In Maguire Fin. LP v. PowerSecure Int’l Inc., 4th Cir., No. 16-2163, the Fourth Circuit concluded that even when a plaintiff pleads that a CEO had knowledge of the falsity of the statements he issued on an analyst conference call, that is not sufficient to allege scienter under the PSLRA.

The basic claim was that the CEO told analysts that the company was “blessed to announce securing a $49 million three-year contract renewal, both the renewal and expansion with one of the largest investor [owned] utilities in the country,” when, in fact, the referenced contract was a new contract with an existing client, rather than a renewal.  As it turned out, the expenses on this new contract caused the corporation to experience losses and, eventually, a dramatic stock price drop.

The Fourth Circuit accepted that the CEO knew the nature of the new contract when he described it to market analysts, but refused to accept the inference that the mischaracterization was intentional or reckless.  Instead, the court argued that the CEO had no reason to believe the new contract would be unprofitable – and thus no reason to want to deceive the market about it – and though ordinary persons may have read the CEO’s statement to mean that a contract had been renewed, the CEO might not have realized that this was the common interpretation.  The court reasoned that if the CEO had, in fact, intended to deceive investors about whether the contract was new, he would have elaborated on his statement, and offered additional false claims about it.  The fact that he had not done so, the court concluded, contributed to an inference that he had not intended to deceive in the first place.  The court ultimately opined, “Appellant alleges facts that permit an inference that Hinton knew his statement was false, and then asks us to infer from that inference that Hinton acted with scienter. We decline to do so because stacking inference upon inference in this manner violates the statute’s mandate that the strong inference of scienter be supported by facts, not other inferences.”

Look, I agree that on these facts, it’s very possible that the CEO misspoke.  And I personally would like to know whether analysts reacting to the original conference call made their misunderstanding clear (so that the company could not claim to be unaware that the market had misunderstood the CEO’s representations).  But this is a complaint.  The issue is whether the plaintiffs have identified sufficient facts to get to discovery.  The Fourth Circuit seems to have lost sight of this basic function of the pleading requirements, and instead interpreted its mandate to require dismissal so long as there is any nonculpable interpretation of the facts.  The Circuit’s eagerness to draw exculpatory inferences from the CEO’s failure to tell an even greater lie bears a resemblance to pre-Tellabs caselaw reasoning that if an executive fails to dump his stock when making allegedly false statements – thus coupling a deceptive statement with a violation of insider trading prohibitions – the executive must not have acted with scienter.  Such logic was, of course, rejected by the Supreme Court in Tellabs: not every instance of fraud is part of a carefully-calibrated scheme.

Meanwhile, the Court ignored the very damning fact that the company’s highest officer issued a knowing falsehood and allowed it to stand uncorrected for several months.  The Circuit’s extraordinarily technical reason for rejecting the plaintiffs’ inferences – that the plaintiffs asked for an inference based on other inferences, rather than on facts – not only introduces an entirely unnecessary level of technicality into PSLRA pleading, but also contradicts the basic manner in which humans understand the world and attribute motivations and intentionality to other humans.  When someone says things he knows are untrue, we infer that there was deceptive intent.  Maybe that’s not the case, but the burden’s now on the speaker, not the listener.  And if plaintiffs are not entitled to the basic inference that the defendant knew what his own words meant, the pleading standard serves no legitimate screening function; it’s simply an arbitrary barrier to the filing of securities claims.

If nothing else, the case highlights the essential folly at the core of the PSLRA heightened pleading requirements.  Whether a complaint raises a “strong inference” of scienter depends entirely on the court’s background assumptions about plausible behavior from corporate officers.  To some, it is plausible that a CEO could make such an innocent misstatement and fail to correct it for nearly a year; but surely one could plausibly believe that CEOs carefully prepare before they speak to analysts, and do not often make these kinds of mistakes unintentionally.  One could plausibly believe that if the misstatement was innocently made, then the company would have corrected it shortly thereafter, and the fact that it did not do so suggests the statement was not so innocent after all.  It might also be plausible that CEOs calibrate just how much they’re willing to lie to analysts, and are willing to be somewhat vague on certain matters in hopes of leaving a false impression, without being willing to go so far as to outright invent new facts to mislead the market.  What seems plausible is entirely a function of one’s understanding of, and experience with, the world – and that’s quintessentially the function of the jury. 

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About five months ago, on June 18, 2017, my paternal grandmother, Septima “Buddy” Holmes Porcher Murray, passed away at age 91. At the time, she was my last living grandparent.

Relevant to this blog, she also provided me a place to live during my second and third years of law school, as she transitioned, slowly on my account, from Atlanta to Charleston. 

Buddy was one of the most positive and generous people I knew. On this Thanksgiving, I am especially thankful for the time I had with Buddy, and that she was able to meet and interact with her great-grandchildren a number of times.

While I am still processing her death, I have decided to post something I wrote shortly after hearing the news and also read at her funeral. These thoughts on Buddy and her life are posted below the break. Buddy’s formal obituary is posted here. 

Continue Reading Thanksgiving 2017: In Memory of Septima Holmes Porcher Murray

Greetings from Barcelona. Perhaps it’s the time diference and it’s still early in the U.S. but for the first time in days I haven’t been overwhelmed with text messages from news outlets about another senator, congressman, policial candidate, actor, talk show host, porn star, or other public figure being accused of sexual harassment by multiple women.  

I spent twenty years in the employment law field investigating and defending harassment claims both as outside counsel and in house. None of what I’m hearing now surprises me. I am surprised by some of the jaw dropping settlement amounts for some single-plaintiff cases.

I agree with the sentiments in this recent NPR story. Sexual harassment training often fails because employees believe it’s a check the box exercise, especially, I would imagine in states like California where it’s mandatory for certain employers every two years. More important, it fails because until now, very few men in power paid any consequences for their actions. Dov Charney of American Apparel was a notable exception of a CEO who cost the company so much in settlements that the board had to oust him. 

When I conducted training, I told employees that if they didn’t want someone saying or doing  the same thing to their wife, sister, or daughter as they were about to say or do in the workplace then they should know it’s wrong. That common sense lecture took about 5 minutes in training that usually lasted a few hours (covering other kinds of harassment and discrimination as well).

Unconscionable behavior will persist, however, as long as companies turn a blind eye to it. In the current environment, that will be nearly impossible. Companies are now terminating contracts  with accused public figures even before they have had a chance to do a thorough investigation and even when the accused denies the wrongdoing. 

Companies  lose talented women or potential recruits because of perceptions of a culture that ignores harassment and discrimination. They pay astronomical settlements because they choose to retain superstars who repeatedly violated company policy and/or the law. Boards and shareholders must therefore pay closer  attention to what has always been but is now becoming a steep financial, and more important, high human capital cost. 

I have had the pleasure to work with a diverse and impressive group of people on the law faculties upon which I have had the privilege to serve.  One of those people is  David C. Hardesty, Jr., President Emeritus of West Virginia University and Professor of Law at the WVU College of Law. President Hardesty holds degrees from West Virginia University, Oxford University (which he attended as a Rhodes Scholar), and Harvard Law School, but more impressive is the time he spends mentoring students and faculty.  He remains committed to the college, university, and state, and we are fortunate he continues to share his time with us.  

President Hardesty teaches a course on leadership, called Lawyers as Leaders, which would be highly relevant at any law school, but it especially important at a school like ours where we are the only law school in the state.  In addition to serving clients big and small, our students consistently go on to hold public office, advise legislators and regulators, and run large companies in the state.  President Hardesty recently wrote an article for the West Virginia Law Review Online that explains part of how he helps prepares lawyers to be leaders.  The article is Law Students as Future Leaders: Using Neutral Facilitation Techniques to Teach Leadership Skills, 120 W. Va. L. Rev. Online 1 (2017).  The introduction explains: 

Lawyers lead in America. They always have. They probably always will. This Article suggests the reasons why. It also argues that if lawyers are destined to lead, then law schools should help law students develop an understanding of leadership theory and foster leadership skill development. The Article describes how a course called “Lawyers as Leaders” is taught at the West Virginia University College of Law, employing neutral facilitation techniques, as well as lectures, group discussions, journaling, and simulation activities. It then describes a powerful pedagogical tool that can be used to develop future leaders: “student-centered neutral facilitation.” It explains why neutral student-centered facilitation is an effective method for teaching leadership skills to law students. The Article begins and ends with two “facilitation stories,” highlighting the use of facilitation by experienced lawyers and law students alike. The first story is about the use of facilitation to help clients achieve their goals. The second is about a student in the midst of learning how to facilitate a discussion.

As we continue to evolve how we think about educating lawyers, and what we hope to accomplish, courses that discuss options and expectation in context can play a significant role in preparing our students.  Hardesty explains:  

Research has found that the student-centered discussion process enriches student learning. In particular, the incorporation of the student-centered discussion process into the classroom “has the potential of enhancing the level of student learning about the course content and about the way they and others think about difficult issues.” This finding makes sense given that students tend to remember course content based on their level of involvement it.  Faculty members have reported that content coverage in their courses has not declined in student-centered classrooms; rather, they have found that their students experience a deeper understanding of the course’s fundamental concepts. One explanation for this deeper level of understanding is that students discover for themselves the essential concepts that would normally be presented through course readings or lecture material. In addition, “[f]aculty report that they have seen students who have not been ‘stars’ in previous classes suddenly ‘blossom’” in the student-centered classroom environment. Because students feel safe and comfortable working with their teammates, student-centered discussions can bring out the potential that some students have but may not otherwise reveal in more traditional classroom environments. (footnotes omitted)

As the semester draws to a close, I thought this one was worth a look as you gear up for next semester’s courses.  It helped me think about some new ideas, anyway. Happy Thanksgiving! 

 
 
 

The Oklahoma Law Review recently published an article I wrote for a symposium the law review sponsored last year at The University of Oklahoma College of Law.  The symposium, “Confronting New Market Realities: Implications for Stockholder Rights to Vote, Sell, and Sue,” featured a variety of presentations from some really exciting teacher-scholars, some of which resulted in formal published pieces.  The index for the related volume of the Oklahoma Law Review can be found here.  I commend these articles to you.

The abstract for my article, “Selling Crowdfunded Equity: A New Frontier,” follows.

This article briefly offers information and observations about federal securities law transfer restrictions imposed on holders of equity securities purchased in offerings that are exempt from federal registration under the CROWDFUND Act, Title III of the JOBS Act. The article first generally describes crowdfunding and the federal securities regulation regime governing offerings conducted through equity crowdfunding — most typically, the offer and sale of shares of common or preferred stock in a corporation over the Internet — in a transaction exempt from federal registration under the CROWDFUND Act and the related rules adopted by the U.S. Securities and Exchange Commission. This regime includes restrictions on transferring securities acquired through equity crowdfunding. The article then offers selected comments on both (1) ways in which the transfer restrictions imposed on stock acquired in equity crowdfunding transactions may affect or relate to shareholder financial and governance rights and (2) the regulatory and transactional environments in which those shareholder rights exist and may be important.

Ultimately, the long-term potential for suitable resale markets for crowdfunded equity — whether under the CROWDFUND Act or otherwise — is likely to be important to the generation of capital for small business firms (and especially start-ups and early-stage ventures). In that context, three important areas of reference will be shareholder exit rights, public offering regulation, and responsiveness to the uncertainty, information asymmetry, and agency costs inherent in this important capital-raising context. Only after a period of experience with resales under the CROWDFUND Act will we be able to judge whether the resale restrictions under that legislation are appropriate and optimally crafted.

Those familiar with the literature in the area will note from the abstract that I employ Ron Gilson’s model from “Engineering a Venture Capital Market: Lessons from the American Experience” (55 Stan. L. Rev. 1067 (2003)) in my analysis.

I know others are also working in and around this space.  I welcome their comments on the essay and related issues here and in other forums.  I also know that we all will “learn as we go” as the still-new CROWDFUND Act experiment continues.  Securities sold in the early days of effectiveness of the CROWDFUND Act (which became effective May 16, 2016) are just now broadly eligible for resale.  Stay tuned for those lessons learned from the school of “real life.”

Quietly, just over two months ago, we got our Lady Vols back.  As you may recall, back in 2014, The University of Tennessee, Knoxville decided to consolidate its athletic branding behind the ubiquitous orange “Power T.” The women’s basketball team was exempted from the brand consolidation and retained the Lady Vol name and old-school logo in honor of our beloved departed coach, Pat Head Summitt. (See here.)

Many can be credited with the revival of the Lady Vols brand (and I do consider it to be an accomplishment), although perhaps these five heroic women are owed the largest debt of gratitude for the achievement.  I guess my earlier envisioned dreams of profiting from the abandonment of the trademarked Lady Vols logo will not soon be realized . . . .

There are lingering lessons in this affair for businesses and their management–and universities (as well as their athletic departments) are, among other things, businesses.  Knoxville’s former Mayor weighed in with comments on the matter in a recent local news column, advising “you need to be sensitive to what the customer likes.” He concludes (bracketed text added by me):

People will speculate for a long time on how UT let itself get caught up in this unfortunate situation for three years. It did not have to happen. It can be a valuable lesson, if once leaders realize a mistake has been made, postponing a resolution does not improve it. Better to make amends and move on.

Hopefully, DiPietro [the university’s President] has learned from this that it is better to get ahead of a volatile issue than to be consumed by it. Currie [the university’s new Director of Athletics] and Davenport [the campus’s new Chancellor] solved it for him. They have won considerable good will for themselves and the university.

From Coca-Cola and its disastrous New Coke introduction (mentioned in the article) to Google Glass (which may have better applications, for the moment, than the general consumer market), businesses and their management have learned these lessons over and over.  Listen to the customer, and if you make a miscalculation, admit it and move on.

As law schools and law instructors continue to innovate to serve students, our universities (for those who are part of one), and the profession (among other constituencies), we may be able to learn a lesson or two from some of the broader experimentation in the business world in the introduction of new products and services.  Change for the sake of change or for the sake of branding simplicity, without an understanding of the relevant constituents, certainly is a risky proposition.  I hope that we can be thoughtful and consider all affected interests as we innovate.  And I also hope that when we fail in our change efforts (and some of us will fail) we can cut our losses and re-appraoch change with new knowledge and renewed energy to succeed. 

Getting back to those Lady Vols, our women’s basketball team is now 2-0 with convincing wins over ETSU and James Madison.  The next game is Monday against Wichita State, followed by a Thanksgiving evening match against Marquette.  Go Lady Vols!

Paul Caron (Pepperdine) reports that Wake Forest Law has become the 10th law school to accept the GRE. The law school will continue to accept the LSAT.  

Those ten law schools (in chronological order, from earliest adopter to most recent adopter) are:

This shift to accepting the GRE at Wake Forest Law has, apparently, been in the works for over 18 months, and Christine Hurt (BYU) had a nice post on some of the early discussion. Around that time, in February of 2016, Arizona became the first law school to accept the GRE.

Like Christine Hurt, I think this move to including the GRE is probably a good thing, especially if the GRE is shown to be just as predictive as the LSAT. The GRE is offered much more frequently than the LSAT and some pre-law students will have already taken the GRE. Also, I am generally in favor of competition, and the LSAC/LSAT has had a monopoly on law school admissions tests for quite a long time.  

It looks like U.S. News is already converting GRE scores into comparable LSAT scores for ranking purposes. If U.S. News had not acted, this would have been a pretty big loophole for law schools to exploit. 

For pre-law advisors, like me, I think we should definitely let students know of the GRE option at some schools. The GRE may be an especially good option for students who are likely to go to graduate school, but are not yet entirely sure which direction they will go. It also may give students more options if the LSAT’s limited testing dates do not work for them. Finally, I don’t think the GRE has logic game questions, which some students really struggle with, and therefore students could avoid those questions with the GRE. On the downside, only about 5% of ABA-accredited schools currently accept the GRE. That said, I expect the number of law schools accepting the GRE to rise rapidly over the next few years.