According to Law360’s breakdown of securities litigation to watch this year, the new year holds new challenges for securities lawyers. Securities lawyers can expect a carryover of issues from last year, sparked by the financial industry’s activity involving online trading, “the legality of the largest-ever special purpose acquisition company,” and cryptocurrency (crypto) and the U.S. Securities and Exchange Commission’s (SEC) ‘s jurisdiction. The online legal publication also ponders if this could be the year that wraps up the decade-long securities lawsuit against Goldman Sachs.
Here’s our take on Law360’s musings about securities litigation in the coming months.
Attack on Ackman’s SPAC
2020 saw an explosion of the market for SPACs. These “blank-check” companies, with no ongoing business operations, raise money with an initial public offering with the goal of acquiring a yet-to-be-determined private company through a merger.
Picture the SPAC as a publicly-traded pile of cash, waiting to purchase a business. Since the SPAC has already gone through the IPO process, the private company, which actually conducts the business, can go public via the merger without having to comply with the normal regulations and disclosure requirements for an IPO.
In 2007, SPACs raised a total of $12 billion in capital. This grew to $83.4 billion raised in 2020 but then nearly doubled in a single year to $144 billion raised in 2021. This rapid growth fed a spike in class actions early last year, with cases typically focusing on a company’s disclosures around its merger.
Hedge fund titan Bill Ackman’s Pershing Square Tontine Holdings Ltd., which raised a record-breaking $4 billion in 2020, was hit with a derivative suit in August 2021. The lawsuit claims the SPAC was operating as an unregistered investment company and that Ackman’s hedge fund serves as its investment adviser under federal securities laws. The complaint argues that because Pershing Square has invested its funds in securities such as government bonds and money market funds since its inception — a standard practice for SPACs while they seek out a merger target — it should be registered under the Investment Company Act of 1940.
The lead plaintiff, George Assad, a shareholder, is represented by Yale Law School professor John Morley and New York University School of Law professor Robert Jackson, a former SEC commissioner. Within weeks of bringing the Pershing Square case, Assad and his attorneys filed similar claims in federal court against two other SPACs.
Dozens of law firms signed a joint statement in late August, insisting SPACs should not be subject to regulation under the ICA, in part because the SEC has signed off on more than 1,000 SPACs in the past two decades without ever taking that stance. Pershing Square is making similar arguments in a motion to dismiss the claims against it, but Assad claims the SPAC’s operations are different from most.
There’s a lot riding on how the court rules on Pershing Square’s dismissal motion. The ruling could focus on Ackman’s SPAC and its unique attributes, but the securities bar will also be looking to see whether there is a broader effect on how SPACs function. A broad decision could have major effects on the SPAC market.
SEC v. Ripple
Ripple Labs Inc., the San Francisco-based company, accused of violating registration laws with the years-long offering of its signature crypto asset, XRP, is in the crosshairs of the SEC.
The SEC has been cracking down on crypto offerings for years, often targeting smaller and mid-sized token projects with allegations that the digital assets are being sold as investments and therefore require registration under federal securities laws. But, the regulator shocked the crypto industry in late 2020 with a civil suit against Ripple, the operator of a global payments network that runs on blockchain technology and uses XRP, the blockchain’s native cryptocurrency, to settle transactions.
According to the SEC, Ripple and two of its top executives have sold $1.4 billion worth of XRP, which trades on crypto exchanges, since 2013 to fund the company’s operations without ever seeking registration for a securities offering. The suit follows the same formula as the regulator’s previous actions against crypto offerings, but XRP’s prominence and longevity make it stand out.
Ripple has spent the past year vigorously attacking the SEC and arguing that XRP is subject to securities, both in court and in online posts. The company’s defiance has translated into a year of fiery disputes over discovery — one that led to the deposition of a former SEC official — and heated court hearings attended virtually by thousands of XRP holders, who’ve also taken it upon themselves to inundate the SEC’s online postings with messages of contempt and ridicule.
The suit is set to serve as an acid test of the SEC’s stated view that most digital assets are securities under its regulatory purview. This position has drawn criticism from the crypto community and raised questions about where other federal agencies fit in the still nebulous regulatory regime around crypto assets and decentralized finance.
The case may give the judiciary a say in how the SEC will define securities in the cryptocurrency field. A victory for the SEC would give them more regulatory authority over crypto, while a loss could spur Congress to finally establish clear jurisdictional lines around crypto.
‘Short Squeeze’ in Miami
Robinhood Markets Inc., Citadel Securities LLC and other financial services firms caught up in last January’s “meme” stock trading frenzy are facing sprawling MDL over billions of dollars allegedly lost due to trading restrictions that were put in place on Gamestop, AMC, and other stocks. The suits, centralized in Miami last spring, assert a medley of claims against Robinhood, particularly over its decision to temporarily restrict purchases when these stocks were experiencing unprecedented volatility.
The volatility has been attributed to a surge of retail investors rapidly buying up stocks that large financial institutions had heavily shorted. As a result, the short-sellers incurred substantial losses and were simultaneously forced to cover their positions by purchasing those stocks and driving their prices even higher. When the so-called “short squeeze” hit a fever pitch in late January, Robinhood and other brokerages forced retail investors to pump the brakes.
Robinhood maintains that it had to restrain purchases to meet clearinghouse deposit requirements, which skyrocketed amid the volatility. Still, the decision sparked intense public backlash and accusations that brokerages suppressed share prices to benefit Wall Street. U.S. District Judge Cecilia M. Altonaga has divided the MDL into four tranches or groups, focused on state law claims against Robinhood, similar claims against other brokers, antitrust claims and federal securities law claims.
The Robinhood could resolve novel questions about the intersection of trading technology and the federal securities laws, first passed in 1933 and 1934.
Goldman Rolls On
A class of shareholders filed a class action lawsuit against Goldman Sachs more than a decade ago, and the class action lawsuit continues. The shareholders claim that Goldman Sachs misled them about conflicts of interest over a transaction it underwrote. The transaction occurred during the 2007-2008 financial crisis. While the class action appears to be ready to move forward in New York federal court, Goldman Sachs may have a third challenge to the class’ certification up its sleeve.
The shareholders assert that Goldman Sachs kept its stock price artificially inflated by misrepresenting its conflicts of interest until an SEC action against the company revealed Goldman Sachs helped a client default on a collateralized debt obligation (CDO) while turning around and selling it somewhere else. Defaulting CDOs were a major contributor to the 2007-2008 financial crisis. The particular SEC action against Goldman Sachs settled in 2010 for $550 million.
The shareholders were granted class certification in 2015. They initially lost class certification in 2018 but regained it later that year. The defendant bank filed a second appeal over class certification “this time claiming it had successfully rebutted the presumption of classwide reliance — established under the 1988 Supreme Court case Basic v. Levinson — by showing that the allegedly misleading corporate statements were too generic to have affected the bank’s stock price,” Law360 wrote. In June 2021, the Supreme Court remanded the case, directing “lower courts to include the generic nature of alleged misstatements as one of the many factors considered during a price impact analysis.”
On remand and with new guidance from upper courts, U.S. District Judge Paul A. Crotty certified the class in December, which was the third time in a decade, holding that the case should move forward as a class action. Judge Crotty found that Goldman Sachs failed “to prove its corporate statements were too generic to have kept its share price artificially inflated,” according to Law360.
Goldman has asked the Second Circuit to take its third look at the case. The outcome could significantly impact how price inflation maintenance cases play out in the courts.
Google Cybersecurity Suit Makes a Comeback
Over the summer, the Ninth Circuit revived part of a suit accusing Google parent Alphabet Inc. of misleading investors about software issues that exposed half a million users’ data. The company admitted in October 2018 to finding and patching a software “bug” months earlier that gave third-party app developers the ability to access the private profile data of 500,000 users of its now-shuttered Google+ social media site.
Google said it declined to disclose the incident as soon as it was discovered because the data did not trigger reporting standards. Still, investors claim the information was material and concealed from them to keep Google’s stock price artificially inflated.
A California federal judge tossed the suit in early 2020, saying the statements being challenged as “misleading” were just generic affirmations about the importance of privacy to users and Alphabet’s general commitment to transparency and data protection, and thus “too vague.” However, a Ninth Circuit panel said that at least two of the challenged statements, pulled from SEC filings published after the bug was allegedly discovered, failed to disclose the bug when discussing cybersecurity risks. Google appealed the decision to the Supreme Court in October.
Whether the high court takes up the case or not, the suit will be interesting to follow as the SEC continues to make cybersecurity a priority and public companies increasingly find themselves at the center of investor litigation over data breaches.
These are just a few looks at what is occurring in the securities litigation world. Our firm is involved in securities litigation, and our lawyers Dee Miles, Demet Dasar, James Eubank, Rebecca Gilliland and Paul Evans are available to help consumers with these complicated issues.