In what the Wall Street Journal called a “milestone” in the SEC’s efforts to address public companies’ cybersecurity disclosures, the SEC has filed a civil enforcement action against software company SolarWinds and its Chief Information Security Officer, Timothy Brown. The agency alleges that the company repeatedly misled investors by understating the company’s cyber vulnerabilities and the ability of hackers to penetrate the company’s systems. According to statements from agency officials, the action is intended to send a message about cybersecurity disclosures and disclosure controls. A copy of the SEC’s complaint can be found here. A copy of the SEC’s October 30, 2023, press release about the action can be found here.

Continue Reading SEC Files Cybersecurity Disclosure Suit Against SolarWinds and Exec

I have long thought that there was more than just a kernel of truth to Bloomberg columnist Matt Levine’s oft-quoted quip that “everything everywhere is securities fraud.” Just the same, there are certain circumstances that I have had a hard time seeing as leading to a securities fraud lawsuit. Like, for instance, the migrant crisis at the U.S.-Mexican border. The massive influx of migrants into the U.S. is a serious humanitarian and political emergency. But how on earth could the migrant crisis lead to a securities suit? Well, as it turns out, a securities suit filed last week in the federal court in Manhattan may just answer that question.

Continue Reading Migrant Crisis Circumstances Lead to Securities Lawsuit Filing

It is no secret that I am skeptical of the usefulness of ESG as an analytic tool and even as an intellectual concept. As I have contended, there are fundamental disagreements about what ESG actually means, and the idea that it can be objectively measured and quantified is illusory, at best. Now, in an October 21, 2023, Financial Times op-ed column (here), NYU Business School Professor Aswath Damodaran argues that ESG is “beyond redemption” and it may be time to administer last rites.

Continue Reading Time to Say RIP to ESG?

One of the characteristics of “opt-out” class actions in the U.S. is that class members retain the option of opting out of the class settlements. A new study shows that in recent years, opt-outs are becoming an increasingly common phenomenon in securities class action settlements, particularly in connection with securities cases having certain traits. The Cornerstone Research study, entitled “Opt-Outs in Securities Class Action Settlements: 2019-H1 2022” can be found here. Cornerstone Research’s October 25, 2023, press release about the report can be found here.

Continue Reading Cornerstone Research: Securities Suit Opt-Outs Increasingly Frequent in Large, Complex Cases
Jane Njavro

One of the continuing issues in the world of directors’ and officers’ liability insurance in recent years has been the question of when a U.S.  company should obtain a separate locally admitted D&O insurance policy for its foreign subsidiaries. In the following guest post, Jane Njavro, Senior Vice President and Partner at Woodruff Sawyer, examines the issues surrounding this perennial question. This article was originally published on Woodruff Sawyer’s D&O Notebook, here. I would like to thank Jane for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jane’s article.

Continue Reading Guest Post: Foreign Subsidiaries and D&O Insurance: Are You Prepared to Place?

Some D&O insurance policy exclusions are written with the broad “based upon, arising out of, in any way relating to” preamble. These exclusions sweep broadly, precluding coverage for a wide range of claims. The ever-present question when insurers seek to rely on these exclusions’ sweeping reach is: how broad of a reach it too broad? What is the outer limit of these exclusions’ preclusive effect?

In a decision that is worth reading closely, the Delaware Supreme Court recently concluded that, despite its broad preamble, a management liability insurance policy’s professional services exclusion did not apply to preclude coverage for the underlying claim. The decision not only explores important questions about the reach of exclusions with the broad preamble, but it also underscores the deeper question about the use of the broad preamble for these types of exclusions in the first place. The Delaware Supreme Court’s September 14, 2023, opinion in the case can be found here.

Continue Reading The “Broad Preamble” Problem in D&O Insurance Exclusions

I have been writing this blog for a long time now, and the one thing that I know from the experience is that there is always something new. The latest novelty to develop is the emergence of class action litigation related to employers’ alleged violation of statutorily mandated pay range disclosure requirements. Several states, including the state of Washington, have enacted laws requiring the disclosure in job postings of salary or wage ranges. Class action plaintiffs’ attorneys are quickly targeting employers for alleged violations of these laws, with an at least theoretical potential for massive damage awards. As discussed below, this newly and quickly emerging class of litigation could present some interesting insurance questions. An October 17, 2023, memo from the Ogletree Deakins law firm discussing the new statutory requirements and emerging litigation can be found here.

Continue Reading Emerging Pay Range Disclosure Class Action Suits and Related Insurance Issues

In a lengthy and detailed opinion, the Fifth Circuit has rejected two petitions challenging the SEC’s approval of Nasdaq’s board diversity rules. The rules require most Nasdaq-listed companies to have women and minority directors on their boards or explain why they don’t. The petitioners had argued that the rules violated constitutional free speech and equal protection provisions and also violated the SEC’s obligations under the Exchange Act and under the Administrative Procedures Act (APA). A unanimous three-judge panel rejected these arguments, in effect upholding the rules. The Fifth Circuit’s opinion can be found here.


Background

Nasdaq is private company that operates a securities exchange. In December 2020, Nasdaq submitted to the SEC proposed rules directing its listed companies to add women and underrepresented minorities to their boards. As discussed here, in August 2021, following a public comment period, a divided SEC approved the rules by a vote of 3-2.

Under the Nasdaq rules, each Nasdaq company (other than foreign issuers, smaller reporting companies, and companies with smaller boards) is require to have, or to explain why it does not have, at least two board members of its board of directors who are “Diverse,” including at least one Diverse director who self-identifies as Female and alt least on Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. Reporting companies are to report their compliance or non-compliance with the diversity requirements using a Board Diversity Matrixv. The rules also make complementary board recruiting services available to exchange-listed companies, to provide access to a network of diverse candidates for companies to identify and evaluate.

The Petitions Challenging the Rules

Just days after the SEC approved the rules, a nonprofit group called the Alliance for Fair Board Recruitment (AFBR) filed a petition with the Fifth Circuit challenging the rules on constitutional and statutory grounds. AFBR is headed by Edward Blum, the conservative legal activist who spearheaded the legal challenge brought against Harvard’s and the University of North Carolina’s affirmative action admissions policies; in June 2023, the U.S. Supreme Court entered an opinion striking down the admissions practices. A second petitioner, the National Center for Public Policy Research (NCPPR), filed a separate petition challenging the rules on similar grounds. The two proceedings were later consolidated in the Fifth Circuit.

The petitioners argued that the rules imposed an impermissible quota on companies that violates the equal protection clause of the Fourteenth Amendment by encouraging discrimination against potential board members. The petitioners also argued that the ruled compel disclosure of controversial information in violation of the First Amendment. In addition, the petitioners further argued that the SEC lacked statutory authority to issue the order approving the rules, and that the SEC’s approval also violates the APA.

The October 18, 2023, Decision

On October 18, 2023, in an opinion written by Judge Stephen Higginson for a unanimous three-judge panel, the Fifth Circuit rejected the petitioners’ challenge to the Nasdaq rules.

The appellate court first considered the petitioners’ constitutional arguments, beginning the analysis by noting that the Constitution “only applies to state action.” The petitioners had argued that Nasdaq qualifies as a state actor; the appellate court rejected all of the grounds on which the petitioner sought to rely to try to establish this point, specifically noting that the SEC’s involvement with and approval of the rules did not subject the rules to constitutional scrutiny, and further that Nasdaq does not become a state actor merely because it is regulated.

The appellate court also rejected the petitioners’ argument that the SEC’s approval of the rules exceeded its statutory authority and violated the APA, saying that the petitioners have “given us no reason to conclude that the SEC’s Approval Order violates the Exchange Act or the APA.” The appellate court concluded that the agency was within its authority in approving the rules.

Discussion

The Fifth Circuit’s decision in effect upholding the Nasdaq rules stands in interesting contrast to the outcome of the earlier proceedings challenging the validity of the California board diversity statute. As discussed here, earlier this year, a federal court struck down the California board diversity statute as unconstitutional; indeed, a state court had previously stuck down the California statute on state law grounds. There is of course an important difference between the Nasdaq rules and the California statute, as the action of the California legislature in enacting the statute obviously involves state action.  Interestingly, the federal court challenge to the California board diversity statute was also led by an organization affiliated with Edward Blum, the legal activist who heads AFBR.

The outcome of the Fifth Circuit proceedings is also interesting on another level; it could be argued that the court’s rejection of the petitions challenging the rules is a surprise outcome. AFBR had filed its petition challenging the Nasdaq board diversity rules in the Fifth Circuit because the appellate court is widely perceived as one of the most conservative circuit courts in the country. 12 of the 16 active judges on the Fifth Circuit bench were nominated to the court by Republican presidents. Yet somehow the three judges on the panel that decided the challenge to Nasdaq’s board diversity rules were nominated for the appellate court by Democratic presidents. Given the composition of the three-judge panel as compared to the overall Fifth Circuit bench, the petitioners could well conclude that they would be well-advised to seek en banc review of the three-judge panel’s decision.

Whether or not there is en banc review of the decision, we almost certainly have not heard the last of the petitioners’ challenges to Nasdaq’s board diversity rules. Blum, the legal activist who led the challenge to Harvard and UNC’s affirmative action admissions policies, is steering the challenge to Nasdaq’s board diversity rules; with the benefit of financial backing from numerous conservative groups and think-tanks, Blum undoubtedly is prepared to pursue the legal challenge to the Nasdaq’s rules all the way to the U.S. Supreme Court. Notwithstanding the financial wherewithal to pursue the continued legal challenge, he is going to face an uphill battle trying to establish sufficient “state action” to support the constitutional challenge.

I have long thought that privacy-related issues represent one of the important emerging areas of D&O liability exposure. One case that I thought represented an example of this emerging risk was the securities class action lawsuit brought against Facebook related to the Cambridge Analytica user data privacy scandal. However, when the court granted the motion to dismiss in the case, the relevance of the Cambridge Analytica case to the discussion of privacy-related issues seemed diminished. But the appellate court has now reversed in part the lower court’s dismissal, restoring the relevance of the case to the privacy-related discussion and highlighting the importance of privacy concerns as an area of emerging D&O liability risk. The Ninth Circuit’s October 18, 2023, opinion in the case can be found here.

Continue Reading Ninth Circuit Revives in Part Facebook Privacy-Related Securities Suit

The reach and scope of the federal securities laws is a concern most obviously relevant to publicly traded companies. However, as I have emphasized previously, private companies are not immune from scrutiny under the federal securities laws. The SEC has in fact an extensive history of pursuing enforcement actions against private companies for alleged federal securities laws violations; one needs to go back no further than the high-profile enforcement action brought against the supposed blood testing company Theranos for an example of this phenomenon in action.

A recent memo from Wiley law firm underscores these points about the exposures of private companies; as the memo’s authors put it, “private entities should be aware that an aggressive SEC can investigate and penalize them (and their executives), even if they are not directly involved in issuing securities.” The law firm’s September 23, 2023, memo, entitled “Think Because You Are a Private Company the SEC Is Not Your Problem? Think Again,” can be found here.

Continue Reading Private Companies and SEC Enforcement Actions