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In an opinion last week, Judge Engelmayer dismissed most of the SEC’s fraud claims against the software company SolarWinds over the so-called “SUNBURST” cyberattack in 2020 that is generally attributed to state-sponsored Russian hackers.

Judge Engelmayer allowed the SEC’s claims to proceed as to certain pre-SUNBURST statements on SolarWinds’ website touting its cybersecurity practices, but dismissed the SEC’s claims based on statements the company made after the fact, finding that those claims “impermissibly rel[ied] on hindsight and speculation.” For example, a Form 8-K filed after the attack allegedly left out certain details about the extent of the harm, but Judge Engelmayer noted that “perspective and context are critical,” including that the filing was made as the facts were evolving and that, overall, the Form 8-K “by any measure bluntly reported brutally bad news for SolarWinds.”

Judge Engelmayer rejected a novel theory advanced by the SEC that SolarWinds’ cybersecurity failures violated a provision of the Securities Exchange Act requiring issuers to maintain “internal account controls sufficient” to prevent unauthorized “access to assets,” finding that the language concerned “financial accounting,” not cybersecurity:Continue Reading Judge Engelmayer: Securities Law Requiring “Internal Accounting Controls” Does Not Reach Cybersecurity Deficiencies

In an opinion last week, Judge Engelmayer denied defendant’s motion for summary judgment regarding the “unorthodox transaction” exception to Section 16(b) of the Securities Exchange Act. Previously, the Second Circuit had vacated and remanded Judge Engelmayer’s earlier decision, which had granted summary judgment, on the grounds that the defendant had not “carried his burden” to show that there was no genuine dispute that he “did not have access to inside information.”

In line with the Second Circuit’s mandate, the Court reopened discovery on this limited factual issue. Ultimately, the only evidence on the relevant issue was testimonial. The plaintiffs allege that the defendant received inside information during a phone call, but the two participants to the call say they only discussed public information. Reviewing the evidence on remand, Judge Engelmayer held that the defendant still had not carried his burden to “indisputably” prove his affirmative defense.

As an initial matter, Judge Engelmayer pointed out that there is no consensus from appellate courts on the moving party’s burden at summary judgment when the moving party has the burden of proof on the merits of the issue:Continue Reading Judge Engelmayer: Summary Judgment Is Not Appropriate Where “Uncontradicted” Testimonial Evidence Could Still Be Disbelieved By Jury

A class action complaint filed last week against online brokerage firm Robinhood accuses the company of manipulating the open market after it removed GameStop’s stock from its trading platform in the midst of volatile trading last month.  GameStop (ticker symbol GME), a struggling retailer of video games and accessories, saw its stock rise almost 1,700% in one day as small investors drove up the price of the stock as part of an effort encouraged by the Reddit page Wall Street Bets (see full NYT coverage here).  The Southern District complaint is one of 30 cases across the country, reports Law360.

According to the complaint:
Continue Reading Class Action Seeks Damages Over Robinhood’s Removal of GameStop Stock from Trading Platform After Meteoric Rise

In an opinion yesterday, Judge Wood dismissed a securities fraud case against Papa John’s that arose from two articles in Forbes in 2018 (see here and here), describing (among other things) an allegedly “toxic” culture of workplace sexual harassment.  The stock price dropped after the articles were published, and the theory of the complaint was that investors had been deceived by various public statements portraying a different culture—such as the company Code of Ethics stating that Papa John’s was governed by “principles of honesty, fairness, mutual respect, trustworthiness, courage and personal and professional commitment.”

Judge Wood had dismissed an earlier version of the complaint, and in yesterday’s opinion, concluded that the amended version still failed to state a claim because the statements at issue were “vague, broad, and merely aspirational.” The amended complaint emphasized for the first time that the Code promised that employees who violated its terms would be subject to “corrective action,” but Judge Wood concluded that this statement was still not specific enough:
Continue Reading Judge Wood: “Puffery” in Papa John’s Code of Ethics Cannot Support Securities Fraud Claims

In a detailed 74-page opinion yesterday, Judge Failla dismissed a securities fraud complaint against Chipotle arising from its alleged failure to properly disclose to investors various matters relating to the food-borne illness outbreaks that caused its stock to drop.  She had dismissed an earlier version of the complaint last year, as we covered here.

Judge Failla ruled (among other things) that generalized statements in Chipotle’s filings about its commitment to food safety could not be the basis for fraud:
Continue Reading Judge Failla Again Dismisses Securities Fraud Case Over Food-Borne Illness Outbreaks at Chipotle

The Second Circuit today held, in a shareholder class action accusing Pfizer of concealing the cardiovascular risks of two drugs, that Judge Swain should not have excluded entirely the testimony of the plaintiffs’ damages expert — a decision which had effectively ended the case (see our prior posts here and here).  The Second…

Last week, Judge Rakoff granted Pricewaterhouse Coopers’ motion to dismiss Section 10(b) claims brought as part of the ongoing class action over an alleged bribery and kickback scheme at Brazilian oil giant Petrobras.  PwC’s Brazilian member firm had served as Petrobras’ independent auditor.  PwC argued that the fourth amended complaint had failed to properly allege scienter, and Judge Rakoff agreed, noting that “mere receipt of compensation and the maintenance of a profitable professional business relationship for auditing services does not constitute a sufficient motive for purposes of pleading scienter.”  Plaintiffs also failed to allege any facts connecting PwC’s auditing services to “red flags” of fraud at Petrobras.
Continue Reading Judge Rakoff Dismisses 10(b) Claims Against PwC for Alleged Petrobras Bribery Scheme, But Allows Section 11 Claims to Proceed Despite Omnicare

In an opinion today, Judge Oetken allowed portions of securities class action against the asset management firm Och-Ziff Capital Management to proceed past a motion to dismiss.  Och-Ziff had said in a series of public filings: “We are not currently subject to any pending regulatory, administrative or arbitration proceedings that we expect to have a material impact on our results of operations or financial condition.”  In an amended 10-K following a Wall Street Journal story, however, the company admitted that the DOJ and SEC had been investigating potential FCPA violations and that an “adverse outcome could have a material effect on our business, financial condition or results of operations.”

Judge Oetken concluded that these facts amounted to a “plausible” claim of securities fraud because the company chose to speak on the subject of government investigations, but did so in an incomplete and inaccurate manner:
Continue Reading Judge Oetken Denies Motion to Dismiss Securities Case Accusing Och-Ziff of Incomplete Statements Regarding Government Investigations

In an opinion Friday, Judge Koeltl dismissed a shareholder class action against the movie studio Lions Gate.  The case concerned how the company disclosed an SEC enforcement action over how Lions Gate handled various transactions designed to ward off efforts by investor Carl Icahn for control.  The SEC action was ultimately settled for $7.5 million, and the plaintiffs alleged that the company should have disclosed the SEC investigation when it received “Wells” notices. Judge Koeltl disagreed:
Continue Reading Judge Koeltl: Movie Studio Had No Duty to Disclose “Wells” Notices Regarding Control Fight With Carl Icahn