I’ve frequently posted about omissions liability under the federal securities laws; you can read many of those posts, in reverse chronological order, here, here, and here.  But, here’s the CliffsNotes version of where we are now, after the Supreme Court’s decision today in Macquarie Infrastructure Corp. v. Moab Partners, L. P..

 

Once upon a time, there was a statute, Section 10(b) of the Exchange Act. That statute made it unlawful:

 

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

The Commission did, in fact, adopt those rules and regulations, in the form of Rule 10b-5, which made it unlawful:

 

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

These subparts, collectively, were intended to prohibit the full extent of conduct prohibited by Section 10(b) itself.  See SEC v. Zandford, 535 U.S. 813 (2002).   That is, if it could fall into the category of a “manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security, then it must be prohibited by at least one of Rule 10b-5’s subparts.

 

Back in kinder, simpler times, U.S. courts throughout the land interpreted Section 10(b) and Rule 10b-5 to prohibit not only “manipulative or deceptive device[s] or contrivance[s]”, but also conduct that aids and abets the “manipulative or deceptive device or contrivance” of someone else.  But, alas, in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164 (1994), the Supreme Court said – nay!  Section 10(b) prohibits “only the making of a material misstatement (or omission) or the commission of a manipulative act”; mere “aiding” someone else’s “manipulative or deceptive device or contrivance” is not prohibited.

 

That, of course, kicked off years of litigation over the distinction between aiding a “manipulative or deceptive device or contrivance” and actually participating in one.

 

Which brought us to Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).  There, investment adviser Janus Capital Management caused its affiliated mutual funds to file false prospectuses about those funds’ policies. The Supreme Court held that the investment adviser had not violated Rule 10b-5(b), because it had not actually “made” a false statement.  The funds made false statements.  Though the funds’ statements had been drafted by its investment adviser, the statements had been filed under the funds’ name, making the funds – and only the funds – responsible for their contents.  This highly technical definition of the word “make,” the Court further explained, was necessary to preserve the line between primary liability and aiding and abetting liability.

 

Oh no.

 

Because, aiding and abetting, we learned from Central Bank, is outside the scope of the Section 10(b) statute.  But the Janus holding was based on a technical definition of the word “make,” which appears only in one subpart of Rule 10b-5.  Was the Court seriously proposing that intentionally causing a captured entity to issue false statements is not a “manipulative or deceptive device or contrivance” within the meaning of Section 10(b)?  Or was the Court merely holding that such conduct does not run afoul of Rule 10b-5(b), but still could run afoul of Rule 10b-5(a) or (c)?

 

In Lorenzo v. SEC, 587 U.S. 71 (2019), we got an answer.  Janus was about Rule 10b-5(b); there may well be conduct – including distributing false statements that someone else made, with an intent to deceive – that falls within Section 10(b), but not Rule 10b-5(b) (i.e., that falls within Rule 10b-5(a) or 10b-5(c)).

 

Which brings us to Moab v. Macquarie, wherein the Supreme Court decided that the Central Bank to Janus to Lorenzo journey was so much fun, it was worthwhile to do it again.

 

In Moab, shareholders of Macquarie Infrastructure Corp. brought a fraud on the market class action, alleging that Macquarie filed its 10-K without including certain information required to be disclosed under Item 303.  The shareholders contended that omitting required information was prohibited by Rule 10b-5(b).

 

The Supreme Court rejected the claim.  According to the Court, Rule 10b-5(b)’s language is limited solely to affirmatively false or misleading statements – not “pure” omissions.  The Court contrasted the language of Rule 10b-5(b) with the language of Section 11 of the Securities Act of 1933.  The latter prohibits not only false statements and misleading omissions, but also failure to disclose required information; Rule 10b-5(b), however, says nothing about failure to disclose required information.  Therefore, concluded the Court, absent an affirmative false or misleading statement, Rule 10b-5(b) does not create liability.

 

Except, we know that Section 10(b) prohibits “pure” omissions.  We know that because the Supreme Court has said so.  See Chiarella v. U.S., 445 U.S. 222 (1980) (“the Commission recognized a relationship of trust and confidence between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation. This relationship gives rise to a duty to disclose because of the ‘necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of the uninformed minority stockholders.’”); SEC v. Zandford, 535 U.S. 813 (2002) (“each [sale] was deceptive because it was neither authorized by, nor disclosed to, the Woods”); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 152-53 (1972) (“The individual defendants, in a distinct sense, were market makers, not only for their personal purchases constituting 8 1/3% of the sales, but for the other sales their activities produced. This being so, they possessed the affirmative duty under the Rule to disclose this fact to the mixed-blood sellers.”).  

 

Which makes perfect sense!  Because whatever the language of 10b-5(b), it seems entirely unobjectionable that it should be considered a “manipulative or deceptive device or contrivance” within the broader meaning of Section 10(b) to intentionally withhold information you have a duty to disclose – from some other source – in order to mislead someone else.

 

The inescapable conclusion, then, is that if pure omissions are not prohibited under 10b-5(b), they must be prohibited under either 10b-5(a) or 10b-5(c).

 

Except Moab included this curious footnote:

 

The Court granted certiorari to address the Second Circuit’s pure omission analysis, not its half-truth analysis. See Pet. for Cert. i (“Whether . . . a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement” (emphasis added)) …The Court does not opine on issues that are either tangential to the question presented or were not passed upon below, including what constitutes “statements made,” when a statement is misleading as a half-truth, or whether Rules 10b–5(a) and 10b–5(c) support liability for pure omissions.

It also included such language as:

 

Neither Congress in §10(b) nor the SEC in Rule 10b–5(b) mirrored §11(a) to create liability for pure omissions…

 So … either pure omissions – even if the omissions were part of an intentional effort to deceive someone to whom there was a duty of disclosure – do not count as “manipulative or deceptive device[s] or contrivance[s]”, which will come as a pleasant surprise to various insider traders and faithless brokers, or Rules 10b-5(a) and (c) prohibit conduct outside the scope of Section 10(b).

 

Or … we’ll be walking all this back in a couple of years.

 

Okay, fine, here’s the actual way out: The Court didn’t exactly say omissions aren’t prohibited; it said “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.”  Only these “pure omissions” are not prohibited.

 

Presumably, circumstances that give meaning to the silence are when one acts as a broker, or a market maker, or trades on the information provided in the context of a trusting relationship.  Or, it is not a “pure” omission – it is an omission coupled with conduct – when one misuses a brokerage account, or acts as a market maker, or trades in stock.

 

Without explanation – or even an acknowledgment of the inferential leap – the Supreme Court apparently concluded that no conduct is involved, or no “circumstances … giv[ing] any particular meaning to that silence” exist, when a defendant engages in the action of filing an official document with the SEC that omits required information. 

 

So I assume that the next smartass who tries to cite Moab as a defense to insider trading will be told “but that’s a circumstance that gives particular meaning to the silence!”

 

In other words, the rule, such as it is, appears to be that it’s not fraud if it’s in connection with a fraud on the market class action, and it is fraud anywhere else.  Which means, we must ask – is it a circumstance that gives particular meaning if someone doesn’t merely leave required information out of a form but fails to file a form at all? 

 

I guess we’ll soon find out. 

 

Finally, as I previously mentioned, the SEC can fix this – or most of this – by adding a line item to every filed form declaring that it is not only accurate, but also complete.  That would be the explicit statement rendered false by a failure to include required information.  Still, such a certification is not a complete panacea – there would still be uncertainty around entire failures to file a form, and over whose scienter would be attributed to the company for a false certification, but it would solve some of the problem.

 

Also, icymi, earlier today I posted a plug about stuff I’ve done recently.

Just posting the obligatory plug of a couple of new things.  First up, I reviewed Stephen Bainbridge’s book, The Profit Motive: Defending Shareholder Value Maximization for the Harvard Law Review.  Here is the abstract:

Professor Stephen Bainbridge’s new book, The Profit Motive: Defending Shareholder Value Maximization, uses the Business Roundtable’s 2019 statement of corporate purpose as a jumping off point to offer a spirited defense of shareholder wealth maximization as the ultimate end of corporate governance. Beginning with an analysis of classroom standards like Dodge v. Ford Motor Co., and continuing through the modern era, Bainbridge argues both that shareholder value maximization is the legal obligation of corporate boards, and that it should in fact be so, partly because of wealth maximization’s prosocial tendencies, but also because of the lack of a viable alternative. Drawing on his decades of work as one of America’s most influential corporate governance theorists, Bainbridge offers up sharp critiques of the kind of enlightened managerialism reflected in the Business Roundtable’s statement, and advocated by academics like Professor Lynn Stout and practitioners like Martin Lipton. Along the way, he also has harsh words for trendy alternatives such as “environmental, social, and governance” (ESG) investing and proposals to reform the structure of the corporation itself.

In many ways, The Profit Motive is an essential resource for any theorist, or student, in this field. Deftly intertwining economic theory with sharp anecdotes and historical retrospectives, Bainbridge offers an entertaining account of the realpolitik of corporate functioning and the major legal developments that brought us to where we are today. However, as I argue in this book review, there are many facets to stakeholderism and the ESG movement, and the very features Bainbridge identifies as flaws could, in fact, turn out to be hidden virtues.

Second, last week, I spoke to students at College of the Holy Cross in Worcester, Massachusetts about ESG and the social responsibility of business.  The talk was somewhat similar to one I gave at Marquette Law School a few months ago, but this was the first time I had the opportunity to present to undergraduate students rather than law-type people.  Anyway, there’s video:

 

 

Andrew Jennings recently featured Nicole Iannarone and her work on the Business Scholarship Podcast.  You can access the episode here.  It focuses on a paper on securities arbitration and some of her recent work.  I’d like to direct your attention to the last five minutes or so.  It discusses being appointed as an arbitrator.  

If you’re a business law professor, you’re probably pretty well qualified to serve as arbitrator.  It might also give you insight into what happens in these kinds of disputes.  Because I’m involved with a securities arbitration bar association, I’m deemed to be a non-public arbitrator so I don’t get selected often.

But if you’re fair-minded and not in a major city, there is a real need for more competent arbitrators.  The paperwork and training doesn’t take all that long, and it’s pretty interesting if you get selected.

Widener University Commonwealth Law School is seeking to hire two visiting professors for the 2024-25 academic year.  We have strong needs in Property, Legal Methods and Contracts.  Additional courses are flexible but we have additional needs in the areas of environmental law, intellectual property, wills & trusts, administrative law and other upper level courses.  Interested persons should submit a cover letter and resume to Professor Robyn Meadows, Chair, Faculty Appointments Committee, at rlmeadows@widener.edu.  

Dear BLPB Readers:

“University of Oklahoma College of Law is pleased to announce that it is currently seeking
applicants for visiting professor position(s) for Spring 2025 of the upcoming academic year. The
law school has a number of curricular needs, but is especially interested in candidates
specializing in bankruptcy, secured transactions, consumer law and finance, and payment
systems.”

The complete announcement is here: Download Spring 2025 Visiting Position University of Oklahoma College of Law

A federal jury found Matthew Panuwat liable for insider trading late last week.  As you may recall, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Mr. Panuwat in the U.S. District Court for the Northern District of California back in August 2021.  In that legal action, the SEC alleged that Mr Panuwat violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, seeking a permanent injunction, a civil penalty, and an officer and director bar. The theory of the case, as described by the SEC in a litigation release, was founded on Mr. Panuwat’s deception of his employer, Medivation, Inc., by using information obtained through his employment to trade in the securities of another firm in the same industry.

Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the August 22, 2016 announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. According to the complaint, Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s stock price. The complaint alleges that Medivation’s insider trading policy expressly forbade Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation’s acquisition, Incyte’s stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.

The SEC’s theory of liability, an application of insider trading’s misappropriation doctrine as endorsed by the U.S. Supreme Court in U.S. v. O’Hagan, has been labeled “shadow trading.”

The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, put it plainly in responding to the jury verdict in the Panuwat case on Friday:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.

Yet, many assert that the SEC’s theory in Panuwat broadens the potential for SEC insider trading violations and enforcement.  See, e.g., here, here, and here. They include:

  • a wide class of nonpublic information that may be determined to be material and give rise to an insider trading claim;
  • the expansive scope of insider trading’s requisite duty of trust and confidence (and the potential importance of language in an insider trading compliance policy or confidentiality agreement in defining that duty); and
  • the potentially large number of circumstances in which employees may be exposed to confidential information about their employer that represents a value proposition in another firm’s securities.

Three of us on the BLPB have held some fascination regarding the Panuwat case over the past three years.  Ann put the case on the blog’s radar screen; John later offered perspectives based on the language of Medivation’s insider trading compliance policy; and I offered comments on John’s post (and now offer this post of my own).  I am thinking we all may have more to say on shadow trading as additional cases are brought or as this case further develops on appeal (should there be one).  But in the interim, we at least know that one jury has agreed with the SEC’s shadow trading theory of liability.

Call for Submissions

The Business Lawyer (TBL) is currently accepting submissions for Volume 79, Summer and Fall issues to be published in 2024. TBL is the peer-reviewed scholarly law review and premier publication of the ABA Business Law Section with over 19,000 readers. The Section welcomes article submissions to TBL on topics that advance the development, understanding, and analysis of business law. The Section also welcomes submissions of scholarly articles from legal academics who are looking for a large audience for their scholarship or who wish to adapt their prior research for use by the judiciary and the practicing bar. Pioneering articles originally published in The Business Lawyer have led to significant practice developments, notably in connection with standard practices for legal opinions and audit response letters.

In addition, the Section’s Diversity, Equity and Inclusion Plan encourages a diverse set of viewpoints and backgrounds for TBL authors. The plan includes the widest range of business law practitioners including but not limited to young lawyers, law students, senior lawyers, international lawyers, lawyers of diverse or underrepresented ethnic and racial backgrounds, lawyers with disabilities, LGBTQ2+ lawyers, and women lawyers.

All submissions should be in Word format, double-spaced (including footnotes), accompanied by author contact information, resumes, and an abstract. Manuscripts, including footnotes, ordinarily should not exceed one hundred pages in length (or about 25,000 words). In general, text and footnotes should follow the style and citation format prescribed in The Bluebook: A Uniform System of Citation (21st Edition). In addition, a manuscript will not be considered, and should not be submitted, if it is under consideration for publication elsewhere.

We look forward to reviewing your manuscripts. Please submit them to The Business Lawyer’s Production Manager, Diane Babal, at diane.babal@americanbar.org. Direct any questions to diane.babal@americanbar.org or 312/988-5507.

It’s the moment we’ve all been waiting for and – the Delaware Supreme Court holds that all conflicted controller transactions require MFW protections to win business judgment review.

It also appears that the special committee must be composed completely of independent directors – none of this, oh, well, one turned out to be conflicted but it didn’t matter much business, which to me actually tightens the standard that I kind of assumed was being employed, and was employed in the Chancery decision in Match itself.

Also, I have previously remarked on the disjunction between requiring MFW for conflicted transactions, but only board independence for considering litigation demands against controlling shareholders.  In my paper, After Corwin: Down the Controlling Shareholder Rabbit Hole, I said:

litigation demands are, in a real sense, different from ordinary conflict transactions. If directors are too conflicted to consider the merits of a transaction, the court evaluates its fairness. By contrast, if directors are too conflicted to consider the merits of bringing litigation, shareholders themselves are permitted to assume control of corporate machinery to bring the action in their stead. For that reason, demand excusal may legitimately be viewed as its own category of problem.

Reading quickly, it appears the Delaware Supreme Court adopted similar reasoning:

Admittedly, there is a tension in our law in these contexts. But Aronson and our demand review precedent stand apart from the substantive standard of review in controlling stockholder transactions. The distinction is grounded in the board’s statutory authority to control the business and affairs of the corporation, which encompasses the decision whether to pursue litigation. 

(They didn’t cite me but that’s okay, they cited me for something else, I can live with it.)

I may or may not have more to say as I read again; it’s a very short opinion and doesn’t seem to address what I believe have become the real issues: who is a controlling shareholder, and what counts as a conflicted transaction?  That’s really what’s created much of the difficulty, but resolution must await another day.

I guess I’ll conclude with: the Council of the Corporation Law Section of the Delaware State Bar Association may be cowed by threats of migration out of Delaware, but the Delaware Supreme Court is holding firm.

 

Calling attention today to Sue Guan’s paper, Finfluencers and the Reasonable Retail Investor, posted on SSRN and forthcoming to the University of Pennsylvania Law Review Online.  The abstract is copied in below.

Much recent commentary has focused on the dangers of finfluencers. Finfluencers are persons or entities that have outsize impact on investor decisions through social media influence. These finfluencers increasingly drive investing and trading trends in a wide range of asset markets, from stocks to cryptocurrency. They do so because they can provide powerful coordination mechanisms across otherwise diffuse investor and trader populations. Of course, the more influence wielded over their followers, the easier it is for finfluencers to perpetrate fraud and manipulation.

The increase in finfluencing has highlighted a gray area in the securities laws: a finfluencer’s statements may not be factually untrue or clearly deceptive, but they can be interpreted as misleading depending on the context and the particular beliefs held by the finfluencer’s social media followers. Moreover, such statements can harm investors who buy or sell based on their interpretation of the finfluencer’s activity. In other words, finfluencers can easily profit off of their followers’ trading activity while steering clear of the securities laws.

A recent case has narrowed finfluencers’ ability to do so. This Piece argues that In re Bed Bath and Beyond provides a path to holding finfluencers accountable even when they have not made clearly untrue statements. In considering materiality, In re Bed Bath and Beyond focuses on the reasonable retail investor. This places primacy on retail investors’ interpretation of social media activity and narrows a gap in securities oversight, demonstrating that existing securities laws can be flexible enough to deter and punish a significant portion of problematic finfluencer behavior. In doing so, it opens a path forward for harmed retail investors to seek redress from careless finfluencers.

Sue offers a video summary here. 

In this work, Sue takes on one of my favorite topics: materiality.  She sees the potential for courts to use the reasonable retail investor–as opposed to the reasonable investor–as the reference point for materiality analysis in securities fraud actions.  Truly interesting.

Social media does move markets.  Investors, retail investors, act on what they read in social media.  They may even act based on interpretations of emojis, as  Sue suggests.  I appreciate her taking on the legal aspects of market behavior in this context.  I am confident more will be said about this as additional cases are brought.

I learned earlier this week of the death of Brooklyn Law Professor Roberta Karmel.  Roberta was extraordinary, and I miss her already.  Much has been written about her role in our profession–including her service as the first female commissioner at the Securities and Exchange Commission.  I will only add a few personal reflections here.

Roberta was both exacting and compassionate–traits that we sometimes think of as being mutually exclusive.  Small in stature, she somehow was still formidable.  When I first met her in a setting where she was commenting on academic work, I was impressed and intimidated.  Despite my extroversion, I was hesitant to introduce myself and reach out to her in friendship.  When I later admitted that to her, she laughed and (in that inimitable voice we all know and will remember) let me know how silly that was.

Roberta was the honored keynote speaker at our 2009 law graduation (hooding) ceremony at The University of Tennessee College of Law.  She was invited by a student committee that understood well her significance to the law and legal education communities.  She shared details of her life and career with us.  It was inspirational for me, even though I knew parts of the story.  Hearing that history in her own voice was priceless.

I was blessed to be part of a symposium held back in May 2021 to honor Roberta’s career.  My paper from that symposium reflects on and extends an earlier published piece of her work.  I offered a post on that paper here.  As I note in that post, having the opportunity to review and dissect Roberta’s work helped me in my own.

Thinking about all of this today does make me sad. Roberta’s wisdom and voice will no longer add new ideas to the mix.  However, there also is cause for gratitude and hope.  She has left a strong legacy–one that we all can continue to reflect on and use in our work for many years to come.