fililng cabinetTwo securities suit filing trends that emerged during 2013 were the filing of securities class action lawsuits against companies that had recently completed IPOs (about which refer here) and the filing of securities suits  in the wake of investigative or regulatory actions (as discussed here). Based on the recent filings, it appears that these trends have carried over into 2014, as plaintiffs’ lawyers have continued to file securities complaints following the announcement of regulatory investigations and following public securities offerings (both IPOs and secondary offerings).  


Regulatory Investigations 


LifeLock: First, with respect to the investigative follow-on civil litigation, on March 3, 2014, a plaintiff filed a securities class action lawsuit in the District of Arizona against LifeLock, Inc. and two of its officers. In the complaint, a copy of which can be found here, the plaintiff asserts allegations related to the company’s alleged noncompliance with certain regulatory settlement orders.


The complaint alleges that in March 2010, the company had entered into a settlement order with the Federal Trade Commission n which the company settled allegations that certain of the company’s advertising and marketing practices were deceptive or violated the FTC Act. The company also entered into companion orders with 35 states’ attorneys general relating to the company’s advertising and marketing. On February 19, 2014, the company announced in its filing on Form 10-K that had met with the FTC to discuss alleged noncompliance of the settlement order after a whistleblower had reported alleged violations to the FTC. The company stated that based on its meetings it expected further FTC investigative activity.


The complaint alleges that the company’s shares declined on this news. The complaint alleges that the company had misled investors about its regulatory compliance and its compliance with the requirements of the FTC settlement agreement. The company’s disclosures about it its meetings with the FTC and the pending FTC investigation were the subject of a February  24, 2014 article on Seeking Alpha.


Hyperdynamics Corporation: On March 13, 2014, a plaintiff filed a class action lawsuit in the Southern District of Texas against Hyperdynamics Corporation and two of its officers. A copy of the complaint can be found here. The lawsuit follows two announcements by the company relating to its activities in Guinea. First, on September 30, 2013, the company announced that it had received a subpoena from the U.S. Department of Justice relating to the company’s business in Guinea. for potentially violations of the FCPA or U.S. anti-money laundering statutes. On March 12, 2014, the company announced that its partner in Guinea, Tullow Oil plc had halted activities in Guinea due to DoJ and SEC investigations into Hyperdynamics’ alleged fraud and corruption in obtaining drilling licenses in Guinea. Tullow asserted that these investigations constituted a Force Majeure event under its agreement relating to exploration rights in offshore Guinea.


The plaintiffs allege that the company had failed to disclose that it had obtained and retained oil and drilling concessions in violation of the FCPA or U.S. anti-money laundering statutes; and that the company had inadequate internal controls. The complaint alleges that the company’s share price declined when the investigations were disclosed.


These lawsuits against LifeLock and Hyperdynamics follow the lawsuit filed earlier this year involving NuSkin Enterprises, which as discussed here was itself a follow-on to the company’s announcement of anticorruption investigation in China.  In addition, as discussed in the same blog post about NuSkin, Archer Daniels Midland was hit in January 2014 with a shareholders’ derivative suit after the company announced that it had settled a pending FCPA investigation.


Public Securities Offerings 


Coty, Inc.: As discussed here, on February 13, 2014, a plaintiff filed a securities class action lawsuit in the Southern District of New York against Coty, Inc., certain of its directors and officers and its offering underwriters relating to the company’s June 13, 2013 initial public offering. The complaint, a copy of which can be found here, alleges that the company’s offering documents contain misleading statements about the consumption of the company’s products in the quarter leading up to the IPO, as well as the fact that during the same period the company’s U.S. and European retailers were returning products to Coty. The complaint further alleges that in the months preceding the offering, sales of certain key company products were declining.


The complaint alleges further that as result of these negative trends that preceded the IPO and continued thereafter, the company experienced a material revenue decline in the two full months after the offering.  The complaint alleges that the company’s share price declined following the offering.


CytRx: According to plaintiffs’ counsel’s March 15, 2014 press release (here), plaintiffs’ have filed an action in the Central District of California relating to the February 5, 2014 securities offering of CytRx. As of the date of this post, the complaint is not yet available on PACER or on the plaintiffs’ attorneys’ website. According to the plaintiffs’ attorneys’ press release, the complaint alleges that “defendants CytRx, its CEO, and two stock promotion firms made false and/or misleading statements and/or failed to disclose that numerous articles issued by the stock promotion firms were paid stock promotions.  According to the suit, when the market began to learn of the true facts through partial disclosures, the value of CytRx stock dropped damaging investors.”


Because, according to the press release, the complaint purports to be brought on behalf of investors who purchased the company’s share between November 22, 2013 and March 13, 2014, the February 5, 2014 offering apparently was a secondary offering, not an initial public offering.


Readers interested in the circumstances surrounding the CytRx lawsuit will want to take a look at the March 15, 2014 Barron’s article discussing the company, as well as another company, Galena Biopharma. According to the Barron’s article, Seeking Alpha and other publications removed from their sites articles about CytRx and Galena that had been submitted by a stock promotion firm called The Dream Team that had not disclosed its paid affiliations in submitting supposedly free-lance copy. The Barron’s article (and the Seeking Alpha article to which it refers) makes for interesting reading.


For the record, and as discussed here, on March 5, 2014, Galena Biopharma was also hit with a securities suit alleging that articles submitted by the Dream Team to various publications (including Seeking Alpha) had driven up the company’s share price, after which its CEO allegedly sold $3.8 million of his shares in the company.



The filings following the regulatory investigation announcement are at one level unsurprising, as these types of announcements typically are followed by share price declines. There is certainly nothing new about a shareholder suit following the announcement of an FCPA investigation, but one detail of the Hyperdynamics complaint that is particularly interesting is that the issues allegedly under investigation is money laundering. I suspect both that in the months ahead we will be seeing more about money laundering investigations and, if I am right about, that we will see more civil litigation following in the wake of the announcement of the investigations.


The two most recent civil suits following on after the announcement of investigations mirror  the follow-on civil suits filed in 2013, in that they involve an increasingly broad array of types of investigations. Not only does the Hyperdynamics suit involve possible money laundering investigations but the LifeLock suit involves alleged deceptive advertising and marketing and allegedly deceptive trade practices. As regulators become increasingly active in an increasingly broader range of regulatory arenas, a broader range of investigative actions seems likely to emerge, resulting in an increasingly broader array of follow-on civil suits.


The involvement of the alleged whistleblower in the LifeLock case is particularly interesting. In an era when the SEC is offering potentially rich whistleblower bounties under the Dodd Frank Act, it seems likely not only that more whistleblowers might step forward, but that the matters that the whistleblowers disclose will involve a potentially broad range of kinds of activities, and that the ensuing investigations will in many cases result in follow-on civil actions.


The recurring involvement in the litigation of reports in Seeking Alpha –including the odd role of the Seeking Alpha articles about CytRx – suggests that these kinds of publications both might spur investigation and lead to follow on civil suits. Certainly during the period in 2010 to 2012 articles in Seeking Alpha (and other online sites) were the source of the allegations raised against many of the Chinese reverse merger companies that were hit with securities suits.


The number of cases filed involving IPO companies is itself a reflection of the relative increase in IPO activity. As I have previously noted, the number of IPOs in 2013 was at the highest level since 2007. The pace has not only continued but increased so far during 2014. According to March 17, 2014 Investors’ Business Daily article (here), the 45 IPOs so far this year is double the number of initial offerings at this point last year. With average price of new issues up 40% its seems likely that the number of IPOs will continue, particularly with the anticipated marquee offerings by Alibaba, Sina Weibo and Dropbox lining up for later this year. As was the case in 2013, the increased levels of IPO activity is likely to lead to increased levels of offering-related litigation.  


Though it now seems less likely that the U.S. Supreme Court will set aside the fraud on the market theory in the pending Halliburton case (as discussed here), if the Court were to set aside the fraud on the market theory in Section 10 misrepresentation cases, plaintiffs’ lawyers might find cases against IPO companies even more attractive. The cases against the IPO companies typically would be filed under Section 11 of the ’33 Act. Plaintiffs in Section 11 cases are not dependent on the fraud on the market theory in order to be able to proceed on behalf of a plaintiff class. If as a result of Halliburton plaintiffs lawyers are unable to pursue Section 10 claims as class actions, the lawyers may have even greater interest in pursuing IPO-related claims.