Business Law Prof Blog

Section 16(b) is Unconstitutional, Apparently

On March 13, 2023, Magistrate Judge Wicks dismissed a claim for disgorgement of short-swing profits against a 10% beneficial owner of 1-800 Flowers, on the grounds that the plaintiffs lacked Article III standing.  See Packer on Behalf of 1-800 Flowers.com v. Raging Capital Mgmt LLC, 2023 WL 2484442 (E.D.N.Y. Mar. 13, 2023).  The decision is currently on appeal.

Section 16(b) of the Exchange Act provides:

For the purpose of preventing the unfair use of information which may have been obtained by [a] beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer … within any period of less than six months, … shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction …

The statute was enacted in 1934 to prevent insider trading; Congress believed that corporate insiders regularly misused information they obtained in their capacity as fiduciaries, and that the only feasible way to prevent such misuse was to bar insiders from earning profits (or avoiding losses) via short swing trading.  See, e.g., Kern Cnty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973); Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418 (1972); Smolowe v. Delendo Corp., 136 F.2d 231 (2d. Cir. 1943).  Rather than being enforced by the SEC, the statute is enforced by the issuing company or, more commonly, derivatively by its shareholders.

It is well established that in order to have standing to bring a case in federal court, a private plaintiff must demonstrate that he or she experienced a concrete injury.  In TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), the Supreme Court held that Congress cannot create such an injury merely by granting the plaintiff a statutory right of action.  Instead, any statutorily-created rights and injuries must have a “close historical or common-law analogue” to satisfy Article III of the Constitution.  141 S. Ct. at 2204.

In 1-800 Flowers, Judge Wicks relied on TransUnion to hold that the mere fact that an insider earns short-swing profits does not itself demonstrate that there was an injury to the corporation, and therefore no Section 16(b) action may be maintained, either by the issuer itself or, in this case, derivatively by its shareholders.  The court allowed for the possibility that some kind of injury might be associated with such profits in a particular case, but held that such an injury must be alleged and proven in order for plaintiffs to maintain an action; the fact of trading alone would be insufficient.

Now, a lot could be – and has been – written about the TransUnion decision, but taking it at face value, it raises the question what kind of “historical or common-law analogue” is sufficient.  Let’s start with some basics: First, it’s blackletter common law that fiduciaries may not make personal use of their principal’s property and confidential information. See, e.g., Restatement (First) of Agency § 395.  Second, it’s blackletter common law that the principal may disgorge any profits associated with such use without showing any injury; or, to put it another way, the injury is the principal’s loss of exclusive control over his property.  See, e.g., Restatement (First) of Agency § 404 (1933).  The rule is partially prophylactic in nature; it serves to ensure that the agent acts solely to benefit the principal, and does not abandon or alter his performance for personal gain. 

Those axioms map very well to the notion that insider trading is a violation of a fiduciary’s duty to the corporate principal, see Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949), and were apparently among the concerns that animated the 1934 Congress.  Now, my understanding is, at the time of the statute's enactment, there were few common law prohibitions on insider trading, but then, many of the cases seemed to be brought by stockholders in their individual capacities rather than on the corporate principal’s behalf.  See Kenneth L. Yourd, Trading in Securities by Directors, Officers and Stockholders: Section 16 of the Securities Exchange Act, 38 Mich. L. Rev. 133 (1939).  So the real question should be whether Section 16(b) is similar enough to the common law agency principles (and even TransUnion does not hold that there needs to be an exact match) to satisfy Article III.  I think there’s a pretty close family resemblance; the bright line prohibition against short swing profits was established merely to avoid difficulties of proof.  We can call it an irrebuttable evidentiary presumption that such trades were predicated on inside information. 

To be sure, there is more distance from agency law when the trader is a 10% owner than when the trader is an officer or director, because 10% owners do not usually have fiduciary duties to the company, but the statute is rooted in a presumption that 10% owners have either the influence of a fiduciary or access to information that comes from fiduciaries, and that kind of relationship to the corporation would be covered even under the common law rule.  So, in my view, under TransUnion, the cause of action should survive without any additional showing of injury.  I guess we’ll see if the Second Circuit sees it the same way.

Alliance Defending Freedom: "JPMorgan Chase loses SEC challenge, must allow shareholders to consider viewpoint diversity proposal"

The following is from the ADF press release, which you can find here.

The U.S. Securities and Exchange Commission has ruled against JPMorgan Chase’s attempt to exclude a shareholder resolution on viewpoint diversity from its ballot for its annual shareholder meeting.... Submitted by the Bahnsen Family Trust, the proposal directs Chase’s board of directors to evaluate and issue a report on the bank’s disturbing trend of politicized debanking.... In the past two years, Chase has denied payments or canceled accounts associated with people and organizations who hold mainstream American values, such as former Ambassador Sam Brownback, the Arkansas Family Council, and Defense of Liberty.... The SEC ruling comes amid a rising wave of opposition to Chase’s engagement in cancel culture through politicized debanking. Chase was featured prominently in the “Statement on Debanking and Free Speech,” signed in November of last year by a group of nearly 60 financial professionals. Last week, Nebraska State Treasurer John Murante led a group of 14 colleagues in a letter to Chase CEO Jamie Dimon calling on him to address and correct the issue by adopting policies recommended by ADF’s Viewpoint Diversity Score 2022 Business Index and providing necessary shareholder transparency by participating in the survey portion of the 2023 Business Index. Citing analysis from the 2022 Business Index, where Chase scored just 15% overall, the Bahnsen Family Trust proposal also calls on Chase to adopt those policies and participate in the survey. Along with criticizing Chase’s actions as “an affront to public trust,” the proposal highlights the vague and subjective terms-of-use policies (including terms like “hate speech” and “intolerance”) that allow companies like Chase unbridled discretion to discriminate against customers for their views.

Inaugural Peter J. Henning Lecture

I am pleased to share with you that the inaugural Peter J. Henning Lecture at Wayne State University Law School will be held next Monday, April 3rd, at 6:00 pm.  The speaker is the Honorable Jed S. Rakoff (United States District Court for the Southern District of New York) who knew Peter and valued his work.  See the flyer below.  Come if you are able.

As readers may recall, Peter was a mentor and friend.  His work and my work in insider trading law and practice intersected.  I offered some comments on my relationship with him here on the BLPB shortly after his untimely passing last year.  I also shared some thoughts at the 2022 National Business Law Scholars Conference and wrote a short related tribute to Peter forthcoming in the Wayne Law Review.  I will be at the lecture on Monday. 

I know many of you also have been touched by Peter or his work.  He was a special man who made great contributions in many spheres.  Please note in the flyer below that financial support for the lecture series is being solicited.  I hope that some of you will take advantage of this opportunity to honor Peter and his legacy.

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Stetson Law Symposium: Elon Musk and the Law

Last Friday, I had the privilege of speaking, with other colleagues, at the 2023 Stetson Law Review Symposium on "Elon Musk and the Law."  (See the flyer on the program, below.)  This symposium grew out of a discussion group I organized at the 2022 Southeastern Association of Law Schools Conference.  I posted about it here back in May of last year.

I could not have been happier with the way the symposium worked out.  The Stetson Law students, faculty, and administration were well organized, kind, and fun--a total pleasure to work with.  And I got excellent questions and feedback on my early draft paper, Representing Elon Musk, which focuses attention on the lawyer-client relationship under the American Bar Association's Model Rules of Professional Conduct.  I look forward to seeing the final published proceedings in two forthcoming books of the Stetson Law Review.

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Zoom Procedure

When covid first hit and we were all in lockdown, a number of courts held proceedings virtually rather than live.  Since then, questions have been raised about how the technology should continue to be used, given that it may make courts proceedings easier for litigants and witnesses to attend, but may also make it difficult to question hostile witnesses and present documentary evidence, as Scott Dodson, Lee Rosenthal, and Christopher Dodson discuss when weighing the benefits and drawbacks of Zoom proceedings. 

There has not been a ton of empirical work on this (yet), but David Horton found that arbitrations conducted with at least one Zoom hearings resulted in worse outcomes for plaintiffs.  And Jill Gross at Pace recently posted an analysis of customer win rates in FINRA arbitration.  She found that early in the pandemic, customers who had at least one Zoom hearing fared substantially worse than customers who proceeded entirely live, though, as the pandemic wore on, the two became virtually indistinguishable.  At least one explanation might be that, over time, customers were able to choose “mixed” formats more easily, where only one or two witnesses appeared by Zoom and most were live, making the Zoom category of cases indistinguishable from live ones.  Another might simply be that customers had a Zoom learning curve.  Mostly, though, she finds customers in general fared worse during lockdown, regardless of how hearings were conducted.

One question I have about Zoom, however, concerns not just the original hearings themselves, but the standard of review when the outcome is appealed.  Not long ago, VC Laster issued an opinion reviewing the conclusions of Master Patricia W. Griffin.  Reviews of Masters in Chancery are de novo, and VC Laster wrote, “The trial was recorded so that a constitutional judge could review the proceedings de novo.”  Because it was de novo review, VC Laster, among other things, engaged in credibility determinations regarding witnesses (see op. at 5, 14), which he was able to do because he was seeing exactly what Master Griffin had seen.

Ordinarily, of course, a standard thing for appellate courts to say is that trial judges are in a unique position to determine the credibility of a witness.  They do so even when the standard of review is de novo, see, e.g., State v. Emery, 2011 WL 3795021 (N.J. Sup. Ct. App. Div Aug. 29, 2011), and standards of review often shift from de novo to something more deferential if the question turns on determinations of credibility, see, e.g., State v. Godwin, 2004 WL 3217722 (Tex. Ct App. July 22, 2004); Burton v. State, 2007 WL 1417286 (Del. May 15, 2007).  The fact that trial judges view witnesses live when appellate courts cannot is one reason for deferential review in the first place.

So my question is, if hearings are held by Zoom, and recorded (and there’s certainly no reason not to record), should appellate standards of review change?  Or, perhaps more relevantly, will they change sub rosa even if they don’t change formally?

SEC Brings More Crypto Enforcement and Influencer Actions

As regular readers of this blog will know, you can't go touting crypto-securities without disclosing how much you've been paid to push those products.  I first wrote about this issue in 2018 after Evander Hollyfield attracted attention for promoting the fraudulent AriseBank coin. The same issue showed up again with Kim Kardashian last year.  Now, we've got the SEC taking action against eight more:

• Lindsay Lohan

• Jake Paul

• DeAndre Cortez Way (Soulja Boy)

• Austin Mahone 

• Michele Mason (Kendra Lust)

• Miles Parks McCollum (Lil Yachty)

• Shaffer Smith (Ne-Yo)

• Aliaune Thiam (Akon)

They all allegedly touted TRX and BTT without disclosing that they were paid to do so or the amount they were paid.  The enforcement actions arise out of the SEC's pursuit of Justin Sun for allegedly fraudulently manipulating the secondary market for TRX through wash trades.  

I remain skeptical about much of the asset valuation in the crypto and NFT space.  I'd expect that the SEC will continue to pursue these kinds of actions when it has evidence that much of the market for a particular cryptocurrency or type of NFT is largely illusory wash trading designed to generate the appearance of value to suck in money.

Soulja Boy and Austin Mahone have not yet reached an agreement with the SEC to resolve the matter.  Hopefully, going forward, Soulja Boy will tell 'em to stop touting crypto without disclosing what they have been paid.  To help with that, I asked ChatGPT to write a song in the style of Soulja Boy to warn people not to tout crypto for compensation without disclosure.  And here it is:

Listen up, y'all, I got something to say 'Bout this crypto game that people play Everyone's talking 'bout how much they make But some of y'all ain't being straight

Chorus: Don't tout your crypto without disclosure SEC will bring that regulatory exposure If you're being paid, you gotta let people know Or else you might end up in a world of woe

Verse 2: I know it's tempting to flex on the 'gram Posting pics with your new Lambo, damn But you gotta remember the rules of the game Or else you might end up in shame

Chorus: Don't tout your crypto without disclosure SEC will bring that regulatory exposure If you're being paid, you gotta let people know Or else you might end up in a world of woe

Verse 3: It's all good to be excited 'bout your gains But don't forget to disclose the chains That tie you to the coins you're promoting Or else you might find yourself floating

Chorus: Don't tout your crypto without disclosure SEC will bring that regulatory exposure If you're being paid, you gotta let people know Or else you might end up in a world of woe

Verse 4: So listen up, my friends, and hear me loud Don't be a shill, don't be part of the crowd Just be honest, disclose what you're paid And you'll be safe in the crypto game

Chorus: Don't tout your crypto without disclosure SEC will bring that regulatory exposure If you're being paid, you gotta let people know Or else you might end up in a world of woe

Outro: That's my message, hope you learned something new Don't be a scammer, be honest and true And you'll succeed in the crypto space Just remember to disclose, and keep up the pace.

 

 

This Friday - Wilkinson Family Speaker Series at OU College of Law

Dear BLPB Readers:

My colleague Professor Joseph Thai  at OU College of Law shared the following:

"Do you have an interest in securities fraud and investor protection? Want to ask national experts about the current banking crisis and its implications for regulators, investors, and the general public?

On behalf of OU College of Law, please join us for the Wilkinson Family Speaker Series (WFSS) in the Bell Courtroom at OU College of Law on Friday, March 24, 2023, from 9:15 a.m. – 1:15 p.m. The event is free, breakfast and lunch are included, and you are welcome to come and go if you cannot stay the entire duration.

Please see the flyer and attached program, and RSVP at the link below. Thank you!"

Program flyer is here: Download WSS Program

RSVP here

When Corporations Outsource Racial Discrimination

Earlier this month, Daniel Lennington, deputy counsel at the Wisconsin Institute for Law and Liberty, published a piece at The Federalist entitled, “How Corporations Launder Their Race Discrimination Through Third Parties.” Here is an excerpt:

[T]he world’s largest corporations desperately want credit for being “woke” and advancing “racial equity” through programs targeted solely at certain races. Such practices — involving blatant race discrimination — are immoral and contrary to core American values, despite being in fashion with corporate elites. Yet the typical guide rails — state and federal law — may be less available remedies if corporations launder their discrimination through third parties. Corporations should avoid this temptation to outsource their discrimination and perhaps take a lesson from Comcast, one of the first corporations to face legal scrutiny for its race-based program. Following the settlement with our clients, Comcast renewed its efforts toward something called “Project Up,” which, from all indications, is a race-neutral program designed to “advance economic mobility, and open doors for the next generation of innovators, entrepreneurs, storytellers, and creators.” Comcast will run this program itself and reap the goodwill that will undoubtedly come, while adhering to (lawful) nondiscrimination principles.

In response to this piece, Scott Shepard, director of the Free Enterprise Project at the National Center for Public Policy Research, published “States Can Stop the Outsourcing of Race Discrimination by Corporations” over at RealClearMarkets. Here is an excerpt:

The clearest route to ending this practice is through state corporations laws. A very short amendment would serve the purpose. Add to the law this phrase at an appropriate spot: “Corporate donations or other pecuniary grants to entities that discriminate, facially or in fact, on grounds forbidden by the civil rights acts of this state have breached their fiduciary duty to shareholders unless they have secured from each shareholder written confirmation of their desire to contribute corporate assets to discriminatory entities.”… [A] second move by states inclined to rein in the new discrimination …. [is to] add to their civil rights statutes a line to the effect that “publicly traded corporations doing business in this state violate this statute if they use corporate assets to fund entities that discriminate in violation of this statute” unless getting the express permission of all shareholders.

“The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

From a New Civil Liberties Alliance press release (here):

In a thorough and well-reasoned decision, Judge Terry A. Doughty of the U.S. District Court for the Western District of Louisiana has denied government defendants’ motion to dismiss in State of Missouri, et al. v. Joseph R. Biden, Jr., et al. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represents renowned epidemiologists Drs. Jay Bhattacharya and Martin Kulldorff, as well as Dr. Aaron Kheriaty and Ms. Jill Hines, in a lawsuit that has exposed an elaborate, multi-agency federal government censorship regime. Judge Doughty wrote, “The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

UPDATE (3/21/23): Keith Bishop was kind enough to pass along a related post of his entitled "Government Censorship By Proxy?" wherein he notes:

Last week, I wrote about an unsuccessful challenge to the activities of the Office of Elections Cybersecurity within the California Secretary of State's office: Is The California Secretary of State Monitoring What You Publish Online? In that case, O'Handley v. Weber, 2023 WL 2443073, the Ninth Circuit Court of Appeals found that the Secretary of State did not violate federal law when it notified Twitter of tweets containing false or misleading information that potentially violated the company's content-moderation policy. More recently, Judge Terry A. Doughty, who sits in the Western District of Louisiana, refused to dismiss claims for "alleged coercion by the Biden Administration and various government agencies and officials of social-media companies, urging those companies “to censor viewpoints and speakers disfavored by the Left". In this memorandum ruling, Judge Doughty distinguishes O'Handley as follows: ....

ComplianceNet 2023 - March 31 Submission Deadline

This just in from friend-of-the-BLPB Josephine Sandler Nelson:

 

ComplianceNet 2023's deadline to apply has been extended to March 31, 2023. This is an amazing conference. See info below and at the website here. There is also a best paper prize that attendees should know about.

ComplianceNet 2023 will be hosted by American University's Washington College of Law in Washington, DC on June 21-23, 2023. It will have an anti-corruption theme, though papers on all topics related to compliance will be welcome. We are currently accepting panel or paper submissions, with an extended deadline of Friday, March 31, 2023. 
 
ComplianceNet seeks to bring together scholars from a range of different disciplines to study the interaction between rules (broadly defined) and individual, group, or organizational behavior. The first five meetings have been highly successful, bringing together academics from business, criminology, economics, law, political science, psychology and sociology, among other fields. See the ComplianceNet website at www.compliancenet.org for more details about the organization’s structure and goals.

Call for Papers - DePaul Law Review "Succession" Symposium Issue

The DePaul Law Review will devote the third issue of its 73rd volume (slated for publication in Spring 2024) to a Symposium addressing the Emmy-winning scripted drama Succession from a legal and pedagogical point of view. The aim of this special issue is to collect in one place the insights of a variety of faculty members with different legal subject-matter expertise, as a resource for all who are interested in the use of this award-winning work for the teaching, practice, and study of law. The DePaul Law Review has already secured the participation of a number of distinguished scholars. 

The DePaul Law Review invites proposals from others for two to four additional contributions to be included in this special issue. Proposals for a contribution of between 5,000 and 10,000 words are welcome from all who teach any area of law. (The print symposium will be accompanied by simultaneous online publication with live hyperlinks, allowing readers to access video links if the author desires.)

Potential contributions to the special issue might take a variety of forms. For example, these essays might:

• explore the legal implications of various plotlines through a variety of doctrinal lenses (e.g., mergers and acquisitions, wills and trusts, corporate law, employment law, criminal law);
• share classroom techniques for using Succession, and its scenarios or characters, in law teaching;
• consider how matters such as race, gender, sexual orientation, and class are represented on Succession, or how the show depicts law, law enforcement, and lawyers; or 
• draw on literary techniques to illuminate (or critique) Succession's approach to the myriad legal issues it presents.

Interested individuals should send an abstract outlining the topic and substance of their proposed contribution to the DePaul Law Review by email to Lizzie Carroll, Managing Editor of Lead Articles at lawreviewdepaul@yahoo.com, or to Prof. Susan Bandes, sbandes@depaul.edu, or Visiting Professor Diane Klein, dklein14@depaul.edu.  Abstracts (of 250 words at most) should be submitted by April 30, 2023. Proposals will be reviewed and invitations issued by June 1, 2023. Initial drafts will be due August 15, 2023, with final drafts due by October 1, 2023.

Baylor Law is Recruiting Business Law Faculty!

The following opportunities come to us from Patricia Wilson at Baylor Law.  The first two positions are directly related to business law.  The last two are more litigation-oriented but may be of interest to business litigation folks. *          *          * Baylor Law is currently recruiting to fill multiple faculty positions, as described below. The starting date for each position is no later than August 1, 2023. If you know of someone who may be interested in these positions, please encourage them to visit the Baylor Law employment opportunities webpage. Interested individuals are also welcome to contact Associate Dean Patricia Wilson by email or phone for more information. We are particularly interested in expressions of interest from individuals who would add to the diversity of our faculty. Please note that three of the listings are for full-time positions. However, if you or someone you know is interested in teaching as an adjunct, we regularly have adjunct positions available and are currently seeking adjunct instructors to teach transactional drafting and persuasive writing/litigation drafting. We are flexible in scheduling adjunct-taught classes, including developing a schedule that allows an adjunct to teach most classes remotely on Zoom.  Assistant Professor of Business/Transactional Law Tenure-track Baylor Law seeks an instructor who will have responsibility for electives in the areas of transactional, commercial, or business areas based upon Baylor Law's curricular needs and the applicant's experience. Such courses could include real estate finance, construction, oil and gas/alternative energy, debt financing, business succession planning, individual or entity income taxation, nonprofit organizations, digital/cybersecurity, elder law/special needs, retirement, international business transactions, international trade, consumer protection, bankruptcy, creditors remedies, negotiable instruments/payment systems, franchising, sports law, healthcare. More Information/Apply Full-time Lecturer Transactional Drafting; Non-tenure-track Baylor Law seeks a lecturer who will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program. Responsibilities include working collaboratively with other faculty members of the Baylor Law Writing Program to create, teach and grade assignments for the LARC 4 course (Transactional Drafting) and coordinating all of the writing efforts across all three years of the curriculum to ensure consistency and best management of resources. The ideal candidate will have at least three years of transactional legal writing experience, including drafting and analyzing a variety of different contracts and business entity governing documents. More Information/Apply Full-time Lecturer Persuasive Writing; Litigation Drafting; Non-tenure-track Baylor Law seeks a lecturer with substantial experience in persuasive writing and litigation drafting, including drafting appellate briefs and a variety of different pleadings, trial motions, and similar work product. The selected individual will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program, specifically LARC 3 (persuasive writing) and LARC 5 (litigation drafting). He or she will teach several sections of both courses each year and will be one of several LARC 3 instructors. With respect to the LARC 5 course, the candidate will be expected to collaborate and coordinate project planning with instructors for the LARC 4 course (transactional drafting). Thus, the ideal candidate will also have experience in analyzing and drafting a variety of contracts. The candidate will share additional responsibilities as well, such as periodically serving as a judge in the Practice Court program and collaborating with other legal writing faculty members to create problems for writing competitions. More Information/Apply Part-time Temporary Adjunct LARC 5 Baylor Law seeks a temporary adjunct to teach a section of the LARC 3 course, a course on persuasive writing, and LARC 5 course, a course that focuses on litigation drafting. The candidate should have experience in  drafting appellate briefs or producing similar work product, or litigation drafting, including drafting a variety of different pleadings, trial motions, and similar work product. More Information/Apply Prospective applicants can direct questions to Associate Dean Patricia Wilson at 254.710.6591 or 254.722.2564, or Patricia_Wilson@baylor.edu.

There's no joking in securities law

I’ve previously blogged about confusion regarding Section 10(b)’s requirement that a false statement be made “in connection with” a securities trade, when the speaker is a subsidiary of the securities’ issuer.  We have a new entry in the genre in In re Volkswagen AG Sec. Litig., 2023 U.S. Dist. LEXIS 43031 (E.D. Va. Mar. 14, 2023).

This case concerns Volkswagen’s stupid joke from two years ago where it announced that it was changing its name to “Voltswagen,” which roiled the stock for a couple of days until the company admitted that it was just kidding.  An equally stupid securities fraud lawsuit naturally followed, resulting in what is actually a fairly baffling dismissal.  Because whatever one thinks of the claim or its merits, the legal reasoning matters, not just for this case but for future cases. 

The setup:

Volkswagen is a German company, and its stock is not listed on a U.S. exchange.  Its “unsponsored” ADRs trade in the U.S. 

VWGoA is Volkswagen’s American subsidiary.  It is wholly owned by Volkswagen.

The original press release announcing the name change came from VWGoA and its officers, who posted it to the VWGoA website on March 29, 2021.  The press release was taken down, but news media got wind of it, and it popped back up again on March 30, 2021, including quotes from VWGoA’s CEO.  A Volkswagen twitter account – apparently controlled by VWGoA – also announced the change.  VWGoA’s Head of Technology confirmed the story to the Associated Press.  By the close of business on March 30, though, the press release was gone again, and the WSJ was reporting that it was all a joke.

The price of ADRs fell in response, and investors filed a Section 10(b) lawsuit against Volkswagen, VWGoA, VWGoA’s CEO, and VWGoA’s Head of Technology.

In dismissing the complaint, the court actually took the claims seriously, and conducted a thorough analysis of some of the knotty issues concerning Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), but I think its reasoning faltered when it came to the ultimate holding.

The first issue: did plaintiffs allege a “domestic transaction” for Morrison purposes?  In Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018), the Ninth Circuit held that if the ADRs are traded in the U.S., transactions in them are domestic for Morrison purposes.  If they are unsponsored – the subject company truly had no involvement in their creation – there might be a question whether the subject company’s false statements are made in connection with a domestic transaction, but the transaction itself remains domestic and subject to U.S. law.

The Volkswagen court followed this reasoning, and concluded that the plaintiffs’ ADR purchases were domestic.  (Recently, the district court in Toshiba held that even a domestic ADR purchase might be treated as “foreign” if it involved the creation of a new ADR via an overseas purchase of the underlying shares, Stoyas v. Toshiba Corp., 2022 WL 220920 (C.D. Cal. Jan. 25, 2022), but the Volkswagen court questioned that reasoning, see op. at *32 n.8, and in any event, found that such determinations were inappropriate on a motion to dismiss). 

So. Domestic purchase.

Next, the court turned to the potential liability of the Volkswagen parent.  And here, the court employed Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) to hold that the plaintiffs had not alleged sufficient facts to show that Volkswagen had exercised “ultimate authority” over the statements issued by VWGoA; therefore, Volkswagen had not “made” a statement for Janus purposes.

I mean, I could go on a riff about the artificiality of treating Volkswagen as distinct from its wholly-owned subsidiary, which the court recognized as being completely under the control of its parent, but the court gave the plaintiffs leave to replead on this and I’ll skip it. 

That left the liability of VWGoA and its officers.  The court agreed that the officers had acted at least recklessly when issuing the press release, their scienter could be attributed to VWGoA, and that plaintiffs had established materiality and loss causation. 

So, the court turned to the defendants’ arguments that, because the ADRs were unsponsored, any statements by VWGoA were not made “in connection with” ADR transactions.

The court first held that, given the relationship between the subsidiary and the parent, the statements by VWGoA were not so attenuated from securities of Volkswagen as to eliminate 10(b) liability.  Op. at *67. 

The court next held that, while it was possible that statements about underlying securities may not be made “in connection with” unsponsored ADRs, in this case, plaintiffs had sufficiently alleged that Volkswagen had had some approval power/involvement with the creation of the ADRs, such that statements about Volkswagen stock would also be “in connection with” its ADRs.  The court thus concluded, “because Plaintiffs have implicated a specific depositary institution, which has publicly confirmed it requires the approval of the foreign issuer prior to launching an unsponsored ADR program, Plaintiffs’ allegations provide a plausible basis that the alleged misstatement ‘touches’ or ‘coincides’ with ‘the purchase or sale of any other security in the United States.’” Op. at *70-71.

Finally, the court held that the statements themselves were distributed in a medium on which investors would rely: “Plaintiffs have adequately averred that VWGoA publicly disseminated a press release on multiple occasions and that such announcement was material. Not only did the announcement itself detail an upcoming significant rebranding effort by the Company across North America, but it also generated a widespread public response.  Given the alleged seriousness with which the market perceived the name change, it is entirely reasonable that investors would have relied upon the press release.” Op. at *71.

But did the claims against the VWGoA defendants survive?

They did not.  The court concluded:

This Court will not contravene Janus by holding that the statements of a non-publicly traded wholly-owned subsidiary and its employees may be actionable upon the parent issuer when the Amended Complaint fails to adequately plead that the alleged material misstatements may be attributed to the parent issuer. Without a plausible theory of liability ascribed to the issuer, Plaintiffs’ purchase or sale of Volkswagen ADRs cannot be said to “touch[]” or “coincide” with the alleged false statements of the Individual Defendants and VWGoA.

In sum, Plaintiffs have sufficiently alleged that Volkswagen continues to play an active role in the unsponsored ADR program and that it was reasonable for investors to rely upon those alleged false statements. But they have not sufficiently pleaded that the alleged false statements by the Individual Defendants and VWGoA “coincide” with or “touch[]” the ADRs purchased by Plaintiffs because the issuer of the underlying securities has not been shown to be liable under § 10(b).

Op. at *72-73.

I ... do not follow.  The court seems to be hung up on Volkswagen’s liability, when the question of the liability of VWGoA and its officers is distinct.  Why should VWGoA’s liability for false public statements turn on whether Volkswagen parent is liable?  We have three actors: VWGoA, its CEO, and its head of tech, all of whom, with scienter, made false statements about Volkswagen’s business – about, the court found, Volkswagen’s securities – in a medium on which investors would (and did) rely.  It’s now well-established – the court even says in its opinion, at *65-66 – that actors other than issuers can be liable for issuing fraudulent statements in connection with the issuers’ securities.  Analysts, auditors, brokers, all might lie about a company’s securities; the company may be entirely innocent, but that does not absolve the speaker.  If I adopt some kind of pseudonymous identity and go online and make false statements about a publicly traded security, I would surely expect the SEC to come after me, even if the issuer had nothing to do with it.  

Nonetheless, the court seemed to hold, that logic only extends to actors who are independent of the issuer.  It does not extend to actors who are related to the issuer, such as wholly owned subsidiaries.  Those speakers, uniquely, get a free pass.

In other words, VWGoA and its officers escape liability because there is both too much control by Volkswagen – it would contravene Janus to hold a controlled subsidiary liable for statements it actually made about its parent – and too little, because there was not enough control by Volkswagen to make Volkswagen the legal “maker” of the statements.

Notably, the court’s holding would seem to create an open season for subsidiaries to make false statements about parent companies – which is particularly bizarre because, earlier in its opinion, that’s exactly what the court wanted to avoid:

For purposes of standing, Plaintiffs’ fulsome allegations demonstrate the appropriateness of extending Rule 10b-5’s reach to securities of a parent company, when that parent company exercises substantial involvement over the day-to-day operations of a wholly-owned subsidiary alleged to have violated federal securities laws. If this were not so, issuers exercising such concrete control over their subsidiaries would never be legally responsible for the statements of their non-publicly traded wholly-owned subsidiaries. That would reward issuers with a scapegoat mechanism through their unlisted subsidiaries to avoid§ 10(b)’s remedial scheme.

Op. at *66-67. 

Yes!  I agree!  But still, the court says there’s no liability even for the subsidiary that made the statements, with scienter.

In any event, the plaintiffs have leave to replead (including to replead Volkswagen’s involvement in the whole thing), so we’ll see what happens.

A Review of Some of Larry Fink's Recent Letters

Some word counts that may be of interest to BLPB readers (please check my work and let me know if I've gotten any of these wrong):

Letter	“ESG”	“stakeholder”	“stakeholder capitalism”
2023 Letter to Investors	0	3	0
2022 Letter to Shareholders	0	7	0
2022 Letter to CEOs	1	18	5
2021 Letter to CEOs	4	13	0

Compare word counts for "Wachtell Lipton Discusses Larry Fink’s [2023] Annual Letters to Investors": "ESG" = 0; "stakeholder" = 6; "stakeholder capitalism" = 2.

Addendum: The Wachtell post notes that "[f]or more than ten years, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, has published separate annual letters — one to CEOs and another to BlackRock’s shareholders. This year, Fink combined the two letters into one."

Wake Forest Law - ESG and Blockchain

I am honored to be speaking later today on ESG, blockchains, and corporate governance at this symposium at Wake Forest University School of Law.  This practitioner-centered symposium promises to offer significant information useful to my teaching and scholarship.  My fellow speakers hail from law firms and other organizations across the United States.  I am excited to share and learn!

Yale Law Clinical Fellowships

I just heard about this a few days ago, but I do not think anyone has posted on it yet.  Sadly, it looks like the formal application deadline has passed.  But they may still be accepting applications.  Those considering applying may want to inquire . . . .

*          *          *

YALE LAW SCHOOL CLINICAL FELLOWSHIPS

in the Veterans Legal Services Clinic   
and Housing and Community & Economic Development Clinics

Yale Law School seeks applicants for two clinical fellowships in the Jerome N. Frank Legal Services Organization, within Yale Law School's clinical program. These Fellowships are two-year positions with a third-year option, beginning on or about July 1, 2023, and are designed for lawyers with at least three years of practice who are considering a career in law school teaching. Each fellow will work with a different clinic. Responsibilities include representing clients, supervising students, assisting in teaching classes, and pursuing a scholarship agenda. Fellows also have an option to co-teach a section of a six-week fall program for first-year students, Introduction to Legal Analysis and Writing, for additional compensation. Candidates must be prepared to apply for admission to the Connecticut bar (candidates may qualify for admission without examination). All work will be conducted with the support of the clinical faculty and will focus on providing legal assistance to low-income and civil rights clients and organizations. 

The Jerome N. Frank Legal Services Organization is committed to building a culturally diverse and pluralistic faculty and staff to teach and work in a multicultural environment. Candidates must be able to work both independently and as part of a team, and must possess strong written and oral communication skills. Experience in creative and community-driven advocacy is a strong plus. Annual salary is $75,000-80,000. In addition, Fellows will receive health benefits and access to university facilities. 

Email a resume, cover letter, writing sample, and names, addresses and telephone numbers of three references to Osikhena Awudu, Program Manager, The Jerome N. Frank Legal Services Organization, osikhena.awudu@yale.edu.  Please indicate the clinic or clinics to which you are applying. Applications will be accepted until March 15, 2023 but will be reviewed on a rolling basis (early applications encouraged).

More details about each fellowship follow below.

Veterans Legal Services Clinic (VLSC)

VLSC is a semester-long, in-house clinic whose students represent veterans and their organizations in VA benefits, record correction, and civil rights litigation in administrative, state, and federal courts, and in state and federal policy advocacy.

Illustrative cases include representation of individual veterans seeking disability compensation benefits for injuries incurred during military service, in initial applications, administrative appeals, and judicial review in federal court; former service members in applications to upgrade a less-than-honorable discharge before Defense Department boards and on judicial review in federal court; plaintiffs in federal civil rights cases, such as a woman raped while a cadet at the U.S. Military Academy at West Point and Black veterans seeking reparations for historic discrimination in VA benefits programs; three nation-wide classes of Iraq and Afghanistan Era veterans who received less-than-fully-honorable discharges, despite having PTSD or related conditions attributable to their military service; a nation-wide class of U.S. Air Force veterans exposed to radiation after cleaning up two hydrogen bombs accidentally dropped on Spain in 1966, in the first appeals class action certified in the history of the U.S. Court of Appeals for Veterans Claims; and local and national veterans' organizations in campaigns to address gender discrimination in congressional nominations to the military service academies; curb retaliation against servicemembers who report sexual harassment or assault; and make veterans with bad paper eligible for state veterans' benefits.

The principal supervisor for the position will be Professor Michael Wishnie.

Housing and Community & Economic Development Clinics

The Community & Economic Development (CED) is a semester-long, in-house clinic that provides transactional legal services to clients seeking to promote economic opportunity and mobility. CED's clients include affordable housing developers, community development financial institutions, farms and farmer's markets, fair housing advocates, and neighborhood associations. CED's legal services help our clients to expand access to financial services, bring arts institutions and grocery stores to chronically under-resourced communities, break down barriers to affordable housing development in high-opportunity communities, promote access to healthy foods, and facilitate entrepreneurship among low-income people.

The Housing Clinic is a semester-long, in-house clinic that represents tenants facing evictions and substandard housing conditions; homeowners facing foreclosures and seeking affirmative relief for illegal behavior by mortgage lenders and servicers; and individuals and advocates in affirmative fair housing litigation.

On behalf of our clients, our students represent clients in federal and state courts; negotiate and draft contracts; provide advice on the tax consequences of deal structures and entity choices; structure and carry out real estate transactions; represent borrowers and lenders in financings; engage in legislative and regulatory advocacy; form for-profit and not-for-profit entities; and resolve land use and environmental issues. In addition to representing clients, students in their first semester of the clinic take a seminar which covers federal, state and local policies affecting urban and suburban places; substantive law in tax, real estate development, and corporate governance; and transactional and regulatory lawyering skills, such as negotiation and drafting contracts.

The principal supervisor for the position will be Professor Anika Singh Lemar.

Yale University considers applicants for employment without regard to, and does not discriminate on the basis of, an individual's sex, race, color, religion, age, disability, status as a veteran, or national or ethnic origin; nor does Yale discriminate on the basis of sexual orientation or gender identity or expression. Title IX of the Education Amendments of 1972 protects people from sex discrimination in educational programs and activities at institutions that receive federal financial assistance. Questions regarding Title IX may be referred to the University's Title IX Coordinator, at TitleIX@yale.edu, or to the U.S. Department of Education, Office for Civil Rights, 8th Floor, Five Post Office Square, Boston MA 02109-3921. Telephone: 617.289.0111, Fax: 617.289.0150, TDD: 800.877.8339, or Email: ocr.boston@ed.gov.

Michigan Law - Entrepreneurial Teaching Fellowship

The University of Michigan Law School is seeking a clinical teaching fellow in its Zell Entrepreneurship Clinic (ZEC). Law students in the ZEC provide transactional legal services to early-stage startups and play a significant role in the entrepreneurial ecosystem of Ann Arbor. Typical matters include business entity formation, intellectual property, contract drafting, and other common early-stage legal issues. This is a two-year appointment with the possibility of extension for a third year, beginning in the summer of 2023.

You can find more info about the clinic here: www.law.umich.edu/clinical/ec, and the job posting here: careers.umich.edu/job_detail/231796/...

Professor Sitaraman on Deplatforming

This week, I read Professor Ganesh Sitaraman's fascinating article, Deplatforming (forthcoming, Yale Law Journal).  As he states in the introduction, "Deplatforming has also not been limited to individuals and content on social media."  My research isn't focused on tech platforms or social media.  However, it does encompass banking, financial market infrastructures, and other evolving financial market platforms where this issue either has arisen or might arise in the future.  I'm grateful that this article will help me in thinking about such questions.  Here's the abstract:

"Deplatforming in the tech sector is hotly debated, and at times, it might even seem unprecedented. In recent years, scholars, commentators, jurists, and lawmakers have focused on the possibility of treating social media platforms as common carriers or public utilities, with the implication that imposing a duty to serve the public would restrict them from deplatforming individuals and content.

But in American law, the duty to serve all comers was never absolute. In fact, the question of whether and how to deplatform—to exclude content, individuals, or businesses from critical services—has been utterly common and regularly debated throughout American history. In the common law and the major infrastructural and utility sectors—transportation, communications, energy, and banking—American law has long provided rules and procedures for when and how to deplatform.

This Article offers a history and theory of the law of deplatforming across networks, platforms, and utilities. Historically, the American tradition has not been one of either an absolute duty to serve or an absolute right to exclude. Rather, it has been one of reasonable deplatforming—of balancing the du-ties to serve and the need to, in limited and justifiable cases, exclude. Theoretically, deplatforming raises common questions across sectors: Who deplatforms? What is deplatformed? When does deplatforming occur? What are permissible reasons for deplatforming? How to deplatform? The Article uses the history of deplatforming to identify these and other questions, and to show how American law has answered them.

The history and theory of deplatforming shows that the tension between service and exclusion is an endemic issue for common carriers, utilities, and other infrastructural services—including contemporary tech platforms. The Article considers ways in which past deplatforming practices can inform current debates over the public and private governance of tech platforms."  

Tomorrow!! Virtual Teach-In: The Failure of Silicon Valley Bank

Dear BLPB Readers,

Professor Nadav Orian Peer at the University of Colorado Boulder Law School shared that tomorrow, Wednesday March 15th at 2pm ET (noon MT), there will be a "virtual teach-in at Colorado Law about SVB and its significance."  Interested readers can join the event at:  www.cu.law/svb 

LSU Law is Seeking a Visitor or Adjunct for Business Associations Courses

This just in from friend-of-the-BLPB Christina Sautter:

The Louisiana State University Paul M. Hebert Law Center seeks visiting or adjunct professors for the 2023-2024 academic year to teach Business Associations I (fall and spring) and Business Associations II (spring).  Additional courses, such as Mergers & Acquisitions or Securities Regulation will also be considered. Interested individuals should email Pamela Hancock at phancock@lsu.edu for more information, as well as to obtain a link and instructions for uploading a CV and cover letter.

LSU is committed to providing equal opportunity for all qualified persons in admission to, participation in, or employment in the programs and activities which the University operates without regard to race, creed, color, marital status, sexual orientation, gender identity, gender expression, religion, sex, national origin, age, mental or physical disability, or veteran's status. LSU is committed to diversity and is an equal opportunity/ equal access employer. LSU believes diversity, equity, and inclusion enrich the educational experience of our students, faculty, and staff, and are necessary to prepare all people to thrive personally and professionally in a global society.