Legal Law

Highlights From The 12 months In Securities Litigation – Above the Regulation

Far fewer securities class-action lawsuits were filed in 2021 than any year in recent memory.

This according to Brad S. Karp, the chairman of Paul Weiss, who moderated the Private Securities Litigation panel at Practising Law Institute’s 53rd Annual Institute on Securities Regulation and is a member of its faculty.

Karp offered a few explanations for the drop in the number of cases. First, he said the plaintiffs bar has stopped filing federal court class actions objecting to mergers, perhaps because of increased judicial scrutiny. Instead, merger objections are being filed as individual actions.

Second, (at least before the emergence of the Omicron variant of COVID-19), the equity markets were skyrocketing, with the Dow and the Standard and Poor’s indices “up seemingly almost every day.”

As a result, few companies experienced big drops in their stock price that traditionally generate a lot of cases. Of course, the effect of Omicron remains to be seen.

What cases were filed split into a few different clusters, Karp said.

“We’re seeing a lot of SPAC- (special purpose acquisition company) related litigation,” he said. “There were some 700 SPAC IPOs over the past 20 months. Of those, 40 have resulted in securities class-action lawsuits and about a dozen SPAC shareholder derivative lawsuits.”

COVID-related class actions are still making their way through the courts. Karp reported that roughly 40 such cases have been filed since the pandemic began, plus about a dozen COVID-related derivative lawsuits.

A Representative COVID Case

An example of a securities class action that arose from the pandemic is Gutman et. al. v. Lizhi Inc., et al., filed in the U.S. District Court for the Eastern District of New York in January. The defendant company operates a social audio platform for user-generated content in China, according to the complaint.

The claims, brought under the Securities Act of 1933 pursuant to Sections 11, 12(a)(2), and 15, stem from Lizhi’s 2020 initial public offering.

“The Offering Documents used to effectuate Lizhi’s IPO . . . were negligently prepared,” the complaint said, “and, as a result, contained untrue statements of material facts or omitted to state other facts necessary to make the statements made therein not misleading. Specifically, the Offering Documents failed to disclose Lizhi’s direct and escalating exposure to the devastating coronavirus epidemic, then already raging in China and engulfing its business, customers, and employees at the time of the IPO.”

It remains to be seen if the case will make it past a motion to dismiss. The docket shows the defendants’ reply brief is due in January 2022.

An Interesting Development

The dearth of cases did not mean an absence of attention-grabbing decisions in 2021.

According to Maeve O’Connor, a partner at Debevoise & Plimpton, co-chair of the firm’s securities litigation practice and chair of its insurance litigation practice, “the most interesting development this year was the Supreme Court’s decision in the Goldman case in June.”

A PLI faculty member, O’Connor offered remarks about this case at PLI’s 53rd Annual Institute on Securities Regulation. The full name is Goldman Sachs Group, Inc., et al. v. Arkansas Teacher Retirement System, et al.

Per the syllabus in the opinion, the shareholder plaintiffs (the respondents in the matter before the court) filed a securities-fraud class action alleging that Goldman and some of its executives violated securities laws and regulations prohibiting material misrepresentations and omissions under Section 10(b)5 of the Securities Exchange Act of 1934.

“Plaintiffs allege that Goldman maintained an artificially inflated stock price by repeatedly making false and misleading generic statements about its ability to manage conflicts,” the syllabus said. Therefore, the plaintiffs alleged, the stock price remained inflated “until the market reacted to the truth about Goldman’s practices — at which point Goldman’s stock price dropped and Plaintiffs suffered losses.” 

As they sought class certification, the shareholders invoked the presumption endorsed by the Supreme Court in Basic Inc. v. Levinson, “that investors are presumed to rely on the market price of a company’s security, which in an efficient market will reflect all of the company’s public statements, including misrepresentations,” the syllabus said.

The presumption allows class-action plaintiffs to prove reliance through evidence common to the class.

Goldman aimed to defeat class certification by rebutting the Basic presumption through evidence that the alleged misrepresentations had no effect on its stock price, the syllabus said.

From a class-certification perspective, O’Connor identified a few issues.

“One was whether a defendant can establish a lack of price impact by pointing to the generic nature of [any] alleged misstatements. . . . [O]r whether that evidence is too tied to the substantive issue of materiality” to be addressed in the class-certification context.

“Our customers always come first,” is an example of a generic statement, O’Connor said.

The court held that the question of generic misrepresentations could be considered at the class-certification stage, including in cases that deal with the maintenance of an inflated stock price.

“That is true even though the same evidence may be relevant to materiality, an inquiry reserved for the merits phase of a securities-fraud class action,” the syllabus said.

The Goldman decision also addressed the question of which party has the burden of rebutting the presumption that a generic statement will affect stock price, O’Connor continued. The court held that defendants bear the burden of persuasion as well as the burden to produce evidence.

“The Supreme Court said, look, we don’t think this is going to make much difference in most cases,” O’Connor said. “Unless the evidence is in equipoise, it doesn’t really matter. They sent the case back down[.]”

O’Connor described herself as “a dissenter on the significance of the Goldman case,” adding that “if the burden of persuasion had gone to the plaintiffs, that would have been a signal from the Supreme Court to trial courts about the fact that it actually is possible for defendants to overcome [such cases] at the class-certification stage. And I think right now district courts are having trouble wrapping their minds around that possibility. I would love for the Goldman case to have a very significant impact.”

The point of view from the plaintiffs’ side was similar with a twist. Gerald H. Silk, a partner with plaintiffs’ securities firm Bernstein Litowitz Berger & Grossmann, LLP — also presenting at PLI’s 53rd Annual Institute on Securities Regulation and a member of its faculty — agreed with O’Connor on the limited significance of the Goldman decision, but was optimistic.

“I think the decision was very reassuring for plaintiffs in these cases in that it really didn’t change much. I think it . . . created the standard that weeds out what I would say are marginal cases about generic statements that are really nothing more than puffery. Those are the kinds of statements the Supreme Court said could be challenged with defendants having the burden. But I think for the most part, good cases will get certified that are based upon strong statements or omissions. And so I think that was a real victory for the investors and the plaintiffs’ bars.”

Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.

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