In the immediate aftermath of the banking crisis in mid-March, several of the key banks at the center of the crisis – including Silicon Valley Bank, Signature Bank, and Credit Suisse – were quickly hit with securities class action lawsuits. First Republic, another bank that suffered massive deposit withdrawals in March and that received a $30 billion infusion from J.P. Morgan and other large banks, has now been hit with a securities class action lawsuit after it announced its fiscal first quarter financial results on Monday. This latest lawsuit, only coming in as it does now, may fuel further uneasiness that the March banking crisis-related events, might not represent the end of the banking crisis story, nor the end of the related lawsuits.

Continue Reading First Republic Bank Hit with Banking Crisis-Related Securities Suit   
Sarah Abrams

In this guest post, Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty, examines Sovereign Wealth Funds’ increasing investment in U.S. private equity firms and considers whether there are unique regulatory and professional liability risk exposures for PE firms that partner with Sovereign Wealth Funds. I would like to thank Sarah for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.

**************************

Institutional investors have been aggressively seeking out opportunities to direct and co-invest in recent years to have more control of private equity (PE) transactions and bypass hefty fees charged by commingled PE funds. These funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%)[i]. Sovereign Wealth Funds (SWF) have not only sought out this control, but in the past year have surpassed US institutional investors in executing on this strategy.[ii] 

All of this activity begs the question, are there unique regulatory and professional liability exposures to PE firms that partner with SWFs?

April 2023 PitchBook data revealed that the Limited Partners (LPs) completing the most buyout and growth investments outside of a fund last year were SWF managers based in the Middle East, Europe and Asia.[iii] The majority of the SWF transactions were co-investment and direct investment opportunities.[iv]

D&O underwriters of PE risk must consider the liability and regulatory exposure the increased SWF investment brings along with its capital.  As with all foreign investment, there needs to be consideration as to whether a direct or co-investment would fall under scrutiny by the Committee on Foreign Investment in the United States (CFIUS).[v][vi]

CFIUS has the authority to review transactions that could result in foreign control of a US business, which includes certain investments in US companies by foreign investors, including SWFs. CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, and, through Executive Order, allows for the agency to review transactions for national security risks. New CFIUS rules published February 13, 2020 under the Foreign Investment Risk Review Modernization Act (“FIRRMA”) overhauled how CFIUS will review inbound investments into the U.S.[vii]  On September 15, 2022 President Biden issued Executive Order 14083 underscoring critical role of CFIUS in responding to foreign investment.[viii]

The 2022 Executive Order by President Biden provides formal Presidential direction on the risks to consider when reviewing a covered transaction. The five specific sets of factors include (1) effect on resilience of critical U.S. supply chains (2) effect on U.S. technological leadership in areas affecting U.S. national security (AI, biotech, climate adaption), (3) industry investment trends that may have impact on U.S. national security, (4) Cybersecurity risks that threaten to impair national security and (5) risks to U.S. persons’ sensitive data.[ix]

The FIRRMA rules must be considered by PE funds with SWF investors, as certain non-controlling minority investments will be subject CFIUS scrutiny including those involving advanced technologies, critical infrastructure, or significant personal data of U.S. residents.  PE fund insurers should be asking whether a fund’s non-U.S. limited partner interests may be subject to CFIUS review, and whether a non-U.S. fund entity may still be deemed a U.S. person falling outside of CFIUS’s reach.[x]  

Coverage under PE D&O insurance for CFIUS regulatory exposure is certainly a legal defense cost underwriting risk, particularly responding to CFIUS document and interview requests of foreign nationals.  In addition, other PE firm investments may come under federal or investor scrutiny after data production and any settlement.  Along with this D&O exposure comes the added professional liability exposure to PE GP investors.

According to PitchBook data, Singapore wealth fund GIC completed 148 such deals last year—the same number as French state bank Bpifrance. [xi] Other active LPs include Abu Dhabi’s sovereign wealth managers Mubadala Investment Company and Abu Dhabi Investment Authority.[xii]  Given the number of deals that SWFs are closing with PE firms, the financial impact to non-SWF LPs should also be considered.

Notably, a November 2022 FinReg paper review concluded with a large sample of international data showing that sovereign wealth funds (SWFs) earn lower returns and are slower to fully liquidate their positions relative to other types of institutional investors.[xiii] The involvement of SWFs as a limited partner is associated with a lower Internal Rate of Return (IRR) and Total Value Paid-In (TVPI) relative to the capital invested.[xiv]

Data presented in an October 2022 paper by business school professors Douglas  Cumming and Pedro Monteiro indicates that SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks.[xv]  The investment horizon of the alternative asset fund may be longer when SWFs are involved if there is a political and strategic benefit to delay investment.

This is in contrast to the institutional, usually US based PE limited partners who generally prefer a shorter investment horizon as they may have liquidity constraints. Because, SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks[xvi], PE firms disclosure to LPs tied to deals with SWFs should be done to level set return expectations.

PE firm underwriters of blended policies including E&O coverage for investment should be aware of both the lower return and slower liquidation timeline that may stem from SWF direct and co-investment.  While the outside investment in current market conditions may be attractive, consideration of future E&O liabilities must be considered by financial lines underwriters. LPs seeking the increased and shorter returns may Monday morning quarterback firm GP decisions to include SWFs.   

Financial lines underwriters armed with this recent trend should ask about SWF investment in client PE firms. Of critical importance if SWFs are coinvesting or direct investing, will be partner law firms with CFIUS experience to assist in minimizing regulatory exposure.  In addition, disclosure to non-SWFs LPs to level set return expectations may decrease E&O risk.

[i] Private Equity Management Fees and Regulations (investopedia.com)

[ii] The 20 most active LPs in direct PE investments | PitchBook

[iii] The 20 most active LPs in direct PE investments | PitchBook

[iv] Co-investments allow SWFs to back individual PE deals alongside a deal and direct investing allows SWFs to target a specific fund asset for acquisition often independent of the traditional PE general-limited partner (GP)(LP) relationship.

[v] CFIUS is a US government interagency committee that reviews certain transactions involving foreign investment in the United States to determine their effect on national security.

[vi] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury

[vii] Summary-of-FIRRMA.pdf (treasury.gov)

[viii] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury

[ix] FACT SHEET: President Biden Signs Executive Order to Ensure Robust Reviews of Evolving National Security Risks by the Committee on Foreign Investment in the United States | The White House

[x] New Rules for CFIUS: How Investment Funds Can React and Take Advantage | Paul Hastings LLP

[xi] The 20 most active LPs in direct PE investments | PitchBook

[xii] Id.

[xiii] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)

[xiv] Id

[xv] Cumming, Douglas J. and Monteiro, Pedro, Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds (October 24, 2022). Available at SSRN: https://ssrn.com/abstract=4258254 or http://dx.doi.org/10.2139/ssrn.4258254

[xvi] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)

As readers of this blog know, in the last couple of years a significant number of SPAC-related securities lawsuits have been filed, often arising after the post-merger de-SPAC company stumbles following the SPAC merger. In many of these cases, the securities suit plaintiffs often allege that the pre-merger private company made misleading statements about its business or operations, the truth about which only became apparent after the merger with the SPAC was completed.

In an interesting decision in a securities suit involving the used car consignment company CarLotz, which merged with a SPAC in January 2021, the court held that the named plaintiffs, one who purchased shares of the pre-merger SPAC and another bought shares in the post-merger de-SPAC, did not have standing under the securities laws to sue for alleged misrepresentations made by the pre-merger private company. Because this issue often comes up in SPAC-related securities suits, the court’s ruling potentially could have important implications in other SPAC lawsuits. A copy of the Southern District of New York’s March 31, 2023, order can be found here.

Continue Reading Plaintiffs Lack Standing to Sue Over Pre-Merger Statements of SPAC Target Company

If you own a device connected to the Internet, then you know that on Tuesday Dominion Voting Systems and Fox Corp. agreed to a $787.5 million settlement of Dominion’s defamation lawsuit against Fox relating to Fox News’s coverage of the 2020 Presidential election and its aftermath. The settlement doesn’t mean the end of related litigation, however; there is, for example, the separate lawsuit that voting-machine company Smartmatic brought against Fox Corp. in New York state court that remains pending. There are a host of other lawsuits that Dominion is pursuing related the 2020 Presidential election conspiracy theories, including, for example, lawsuits against Mike Lindell, the MyPillow executive, and news outlets such as Newsmax.

And then there is the derivative lawsuit that a Fox Corp. shareholder filed in Delaware Chancery Court last week against Fox Corp. Chairman Rupert Murdoch and four other Fox executives, in which the plaintiff alleges that the defendants breached their fiduciary duties by permitting the company’s news subsidiary to make false reports about the 2020 presidential election in order to avoid losing viewers. The shareholder suit, in and of itself, presents some interesting issues, but in light of Tuesday’s settlement in the Dominion lawsuit, and the threatening prospects of the additional litigation still pending against Fox Corp., the shareholder lawsuit may now be even more interesting.

Continue Reading The Derivative Suit Against the Fox Board Just Got a Lot More Interesting

ESG is of course one of the current hot button topics, in the corporate, legal, and financial world. One of the many issues surrounding ESG is the question of how ESG initiatives fit with traditional notions surrounding corporate purposes. In the following guest post, Greg Markel, Giovanna Ferrari, and Sarah Fedner of the Seyfarth Shaw law firm take a comprehensive look at the ways in which ESG fits within the basic principles of corporate governance and corporate purpose . I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics to the readers of this blog. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

Continue Reading Guest Post: ESG and Corporate Purpose:  Their Current Status and How They Relate
Joseph Gross

Earlier this week, the U.S. Supreme Court heard oral argument in the Slack case, the  high-profile securities law case the Court is considering this term. In the following guest post, Joseph Gross of the Wiley firm provides a detailed overview of the legal issues in the case and summarizes the parties’ oral arguments. I would like to thank Joe for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Joe’s article.

Continue Reading Guest Post: Will the Supreme Court Cut Securities Plaintiffs Some Slack? 

As I noted in my year-end round up of D&O related issues (here), plaintiffs’ lawyers have continued to file securities class action lawsuits following cybersecurity incidents, even though the plaintiffs’ track record in these kinds of lawsuits generally has been poor. Among the cybersecurity-related securities lawsuits filed last year was the suit against cloud-based software company Okta relating in part to the cybersecurity incident at the company earlier in the year. Consistent with the general trend, on March 31, 2023, the court presiding over the Okta securities lawsuit granted the defendants’ motion to dismiss the cybersecurity-related allegations, although the court denied the dismissal motion with respect to certain of the plaintiffs’ other unrelated allegations. The court granted the plaintiff leave to amend the dismissed allegations. The court’s March 31, 2023, order can be found here.

Continue Reading Cybersecurity-Related Securities Suit Allegations Against Okta Dismissed

When the SEC established a Climate and ESG Task Force in March 2021, the agency said that the group would “develop initiatives to proactively identify ESG-related misconduct.” Since that time the Task Force has indeed filed enforcement actions alleging ESG-related misrepresentations. Now the agency has reached a settlement with the Brazil-based mining company Vale, S.A. of the Task Force’s first-filed enforcement action, in connection with alleged misrepresentations in the company’s sustainability report about the safety of the company’s mining dams. In the settlement, the company agreed to pay a total of $55.9 million. The enforcement action and its settlement signify the agency’s increasing focus on ESG-related disclosure and its willingness to pursue enforcement actions using existing procedural mechanisms. A copy of the SEC’s March 28, 2023, press release about the Vale settlement can be found here.

Continue Reading Mining Company Settles SEC’s ESG Task Force’s First-Ever Enforcement Action

              

In the current economic environment, companies are wrestling with a host of macroeconomic issues, including rising interest rates, economic inflation, continuing labor shortages, and the war in Ukraine. In addition, another issue companies are facing in the wake of the pandemic is supply chain disruption, which continues to challenge some companies. In the latest sign of ways in which these macro factors can translate into securities litigation, earlier this week the fuel cell company Plug Power was hit with a securities class action lawsuit after its share price declined following the company’s announcement of disappointing financial results driven in part by supply chain issues. A copy of the April 12, 2023, complaint filed against Plug Power can be found here.

Background

Plug Power is a hydrogen fuel cell company that develops power systems for use in electric vehicles. In August 2022, when releasing its 2Q22 financial results, the company emphasized its “strong business outlook” as well as the strength of its supply chain, noting that the company did “not foresee supply chain issues this year.”

However, in October 2022, the company forewarned that its 2022 revenues could be as much as 10% below prior projections, as some projects previously scheduled for 2022 completion were now slated for 2023 completion. The company’s share price declined 6% on this news.

On January 25, 2023, despite what the complaint characterized as “previous assurances that revenue growth would be at least 60% on a year-over -year basis,” the company “revealed” that it now expected to generate revenue growth of just 45% to 50% for 2022. The company’s CEO explained that “new products came out a little slower than we hoped” and manufacturing issues “added complexity to supply chain.” The company’s share price declined another 6% on this news.

On March 1, 2023, when the company release its financial results for the fourth quarter and full year 2022, the company announced revenue growth of just over 40%, “missing even the reduce guidance range” provided just weeks earlier. The company’s share price declined another 6% on the news.

The Lawsuit

On April 12, 2023, a plaintiff shareholder filed a securities class action lawsuit in the District of Delaware against Plug Power and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased securities of Plug Power between August 9, 2022, and March 1, 2023.

The complaint alleges that during the class period, the defendants misrepresented or failed to disclose that the Company “was unable to effectively manage its supply chain and product manufacturing, resulting in reduced revenues and margins, increased inventory levels, and several large deals being delayed until at least 2023, among other issues.” As a result, the complaint alleges, “Defendants statements about the Company’s business, operations, prospects, and ability to effectively manage its supply chain and production lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

One of the consequences from the pandemic outbreak was a huge disruption in the global supply chain. Although the Wall Street Journal reported earlier this year that supply chain issues have largely resolved for many companies and many industries, supply chain issues continue to affect many companies, and it appears that in late 2022, supply chain issues disrupted this company’s operations.

As I noted at the outset, supply chain issues are only one of several macroeconomic issues disrupting companies in the current business environment. In many cases, these macro challenges have translated into securities lawsuits, including challenges related to supply chain issues. For example, last month retailer Target Corp. was hit with a securities suit, after the company reported that its response to earlier supply chain issues had resulted in an inventory overhang. A similar fact-pattern previously led to a securities lawsuit against tool maker Stanley Black & Decker, involving similar allegations. In 2022, supply chain related issues led to securities suits against Tupperware (here), Torrid Holdings (here), FIGS, Inc. (here), and Cerence (here).

It is entirely possible – and indeed seems likely – that as the pandemic-caused disruption in the global supply chain continues to ease, not only will companies generally experience fewer and less severe supply chain issues, but the phenomenon of supply chain-related securities lawsuit filings should ease as well. In that regard, it is noteworthy that while Plug Power is only now being sued in April 2023, the supply chain issues that disrupted its operations appear to have taken place in the third and fourth quarters of 2022. It may be that as we move forward in time, earlier supply chain issues will have less affect on operations and are less likely to translate into securities lawsuits.

That said, other macroeconomic factors, especially interest rate increases and economic inflation, are likely to continue to create difficulties for operating companies, and may continue to translate into securities suits. The March 2023 collapse of Silicon Valley Bank and the subsequent securities litigation filings (discussed here) provide a rather stark example of the ways that interest rate issues can undermine company operations and financial results and result in securities litigation.

This new lawsuit has only just been filed and it remains to be seen how it will fare. That said, however, I think it is fair to point out that when the time comes for the sufficiency of the plaintiff’s allegations to be put to the test, the Court will have to look long and hard to find anything in this complaint responsive to the plaintiff’s allegations to present sufficient allegations of scienter.

What a world we live in where a company that produced revenue growth of “only” 40% is getting hit with a securities suit.

The number of securities class action lawsuit filings involving accounting allegations increased slightly in 2022 compared to 2021, but the number of 2022 accounting-related securities suit filings remained below the long-term annual average of such filings, according to the latest annual report from Cornerstone Research. At the same time, the total number, aggregate total value, and median and average values of accounting-related securities suit settlements increased in 2022 compared to the 2021. The Cornerstone Research report, which is entitled “Accounting Class Action Filings and Settlements: 2022 Review and Analysis,” can be found here. Cornerstone Research’s April 12, 2023, press release about the report can be found here.

Continue Reading Cornerstone Research: Accounting Related Case Filings and Settlements Increased in 2022