Kevin LaCroix recently blogged about the filing of what may be the first securities fraud lawsuit based on allegedly misleading disclosure about the business impact of the Trump administration’s tariff regime. This excerpt summarizes the complaint’s allegations:
On August 29, 2025, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of Michigan against Dow and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between January 30, 2025, and July 23, 2025.
The complaint alleges that during the class period the defendants failed to disclose that “(i) Dow’s ability to mitigate macroeconomic and tariff-related headwinds, as well as to maintain the financial flexibility needed to support its lucrative dividend, was overstated; (ii) the true scope and severity of the foregoing headwinds’ negative impacts on Dow’s business and financial condition was understated, particularly with respect to competitive and pricing pressures, softening global sales and demand for the Company’s products, and an oversupply of products in the Company’s global markets; and (iii) as a result, Defendants’ public statements were materially false and misleading at all relevant times.”
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 plaintiffs seek to recover damages on behalf of the plaintiff class.
I’m sure it won’t come as a shock to readers that Kevin thinks this may be the first of many tariff-related securities lawsuits. President Trump’s unpredictable and ever-evolving approach toward tariffs creates a situation where companies may find themselves facing some unpleasant surprises during any given quarter. Kevin points out that companies should expect plaintiffs to scour prior company statements for optimistic tariff-related comments that they can fashion into allegations of securities fraud.
Our SEC All-Stars panel will have critical insights about tariff-related disclosures during our upcoming Proxy Disclosure & Executive Compensation Conferences to be held in Las Vegas and virtually on October 21-22. Don’t miss out! You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271.
Over on the Cooley’s “Governance Beat,” Broc recently blogged about how analysts and investors use AI to review corporate earnings releases. Here’s a selection of some of the uses he identified:
Sentiment analysis: AI analyzes the tone of management’s language in earnings calls, MD&A sections and press releases. AI measures optimism, uncertainty, hedging, confidence or risk language. It can help predict stock movements based on management sentiment shifts.
Keyword and phrase tracking: Investors use AI to flag specific words or disclosures that signal risk or opportunity. For example, the terms “supply chain disruption,” “macroeconomic uncertainty” or “beat guidance” might be flagged.
Trend and anomaly detection: AI compares current earnings disclosures against past filings or peer disclosures. AI helps to identify outliers in margins, CapEx trends or unexpected shifts in accounting policies.
Financial metric extraction: AI automates the pulling of KPIs (e.g., EPS, EBITDA and revenue growth) from text, tables and footnotes. One benefit is quicker ingestion into models and dashboards without manual review.
In June, Dave blogged about how companies are responding to AI-induced pressure when it comes to the language they use in their MD&A discussions. Based on Broc’s blog, it looks like that the same dynamic is likely at work when it comes to drafting earnings releases.
It isn’t just investors and analysts that are increasingly leaning on AI tools – a recent CLS Blue Sky blog discusses the current and potential uses of AI by proxy advisors. It points out that proxy advisors currently use AI tools for preliminary activities like information extraction, classification, and scoring. However, the blog says that the use of AI to help proxy advisors formulate voting recommendations may be right around the corner. This excerpt says that using AI for this purpose involves significant risks, but also offers significant potential advantages:
Such use entails serious risks – including the black-box nature of decision-making processes, the acceleration of unjustified convergence within a single proxy adviser’s recommendations as well as divergence across different proxy advisers, and the institutional embedding of conflicts of interest through training on historical data – which could exacerbate opacity, undue influence, and conflicts of interest. Moreover, AI obscures who is involved in making judgments and where accountability lies, potentially undermining the institutional basis for contesting recommendations or demanding explanations.
Despite these potential concerns, AI can, if properly designed and employed, offer two advantages: accelerating information processing and enhancing the consistency of judgments. AI can quickly and efficiently process large volumes of unstructured data, enabling faster analysis of complex proposals and legal documents. It also allows for pre-formulated evaluation logics, which can reduce subjective variability and arbitrariness, thereby facilitating more impartial assessments.
The blog highlights the elements of the kind of regulatory framework necessary to address the risks of AI while effectively harnessing its benefits, and points to the EU’s Rating Regulation as a potential model.
Apparently, some nice folks in Moscow decided to jam the GPS navigation of a plane carrying EC President Ursula von der Leyen over the weekend. That’s just the latest in a series of high-impact cyber attacks that have allegedly orchestrated by nation-states over the past several years. In the current geopolitical environment, boards need to be prepared to address threats like these. This Harvard Governance blog summarizes a recent report that says that boards aren’t doing enough and also offers recommendations what directors should do to help their companies address these emerging risks.
The report says that while 79% of directors at companies with international exposure view geopolitical risks as a threat, less than 10% are prioritizing the management of those risks.The report identifies several key areas on which the board should focus to help ensure that their companies are prepared to deal with these threats. Here are some specific recommendations:
– Supporting a culture of security across the organization. Foster employee awareness regarding security risks by encouraging accountability at all levels and providing continuous training and education. Demonstrate the importance of this culture by leading from the top, including considering national security risk in governance decisions and setting a responsible tone.
– Establishing a risk management framework that takes into consideration national security issues. Develop a holistic risk management framework that accounts for national security threats so that they can be properly assessed and mitigated. This framework should not remain static but instead be regularly reviewed for evolving threats and updated as needed. Beyond this framework, the organization’s policies and procedures should also compensate for national security threats.
– Strengthening protections around critical assets. Invest in protection measures like network segmentation, multifactor authentication and endpoint detection to secure critical assets and limit access if breached. Conducting regular cybersecurity program assessments is also necessary to identify vulnerabilities and allow for adaptations based on the evolving threat landscape. Critical assets can be further protected by ensuring that sensitive IP is encrypted at rest and in transit and by deploying data loss prevention solutions to prevent unauthorized data exfiltration.
The report also recommends collaborating with advisors with expertise in national security issues and complex regulatory environments, and urgest companies to develop and test a crisis communication plan that includes identifying reporting obligations in advance.
It’s no secret that the number of public companies has fallen off a cliff in recent decades, but this excerpt from a recent DLA Piper Blog provides some specifics using stats from the SEC’s new Statistics & Data Visualizations page:
– The total number of reporting issuers declined from 9,656 in 2004 to 7,902 in 2024, an approximately 18.2 percent decline. This period saw a peak of 10,598 reporting issuers in 2009 followed by a steady decline to a low of 7,475 reporting issuers in 2020.
– The percentage of reporting issuers that are US-domiciled exchange-listed companies has fluctuated, ranging from 40.1 percent in 2009 to 50.5 percent in 2022.
– The number of US-domiciled exchange-listed companies has decreased from 4,461 in 2004 to 3,929 in 2024, an approximately 12.1-percent decline, with some fluctuation.
– After declining to a low of 3,542 in 2018, US-domiciled exchange-listed companies increased to 4,408 in 2022 – an approximately 24-percent increase – before declining approximately 11 percent by 2024.
– The number of foreign-domiciled exchange-listed companies steadily increased from 392 in 2004 to 937 in 2024 (reaching a high of 1,009 in 2022).
– The percentage of reporting issuers that are foreign-domiciled exchange-listed companies nearly tripled from 4.1 percent in 2004 to 11.9 percent in 2024.
– The steepest decline in the number of issuers occurred among issuers of asset-backed securities (ABS), which rose to 2,102 in 2006 and decreased to just 236 in 2011.
I think it’s interesting to note that the decline in reporting issuers hasn’t been a straight line, and even more interesting to see how much foreign issuers have increased their presence in the US markets over the past two decades. Whether that trend will continue in the “America First” era remains to be seen. Given the role that mortgage-backed securities played in the financial crisis, it’s probably not a surprise to see the magnitude of the wipeout of asset-backed issuers that took place during the Great Recession.
A few years ago, I compared the rise of retail investors that manifested itself in the first wave of the meme stock craze to the Star Trek episode, “The Trouble with Tribbles.” If you know the episode, you’ll remember that tribbles were adorable and soothing creatures, but they quickly got out of control and threatened to overwhelm the Enterprise. There’s a tendency among corporate execs to consider retail investors to be adorable and soothing as well, but they can also get out of control – especially if they decide to show their teeth.
As this WSJ article explains, that’s something that the former CEO of Opendoor Technologies recently discovered to her chagrin:
The army of retail traders who rallied around AMC Entertainment and GameStop a few years ago recently set their sights on Opendoor Technologies OPEN 4.22%increase; green up pointing triangle. They got the stock up, which is par for the course. Then they turned on Chief Executive Carrie Wheeler, which isn’t.
Wheeler’s ouster showed the renewed power of these investor mobs, who are starting to make demands on their favorite stocks much as traditional activist shareholders do—only with more online memes and name calling.
In Opendoor’s case, the manager of a tiny Canadian hedge fund emerged in July as the unlikely ringleader. Eric Jackson and his followers have since made additional demands for Opendoor’s board, and the directors appear to be listening.
The article discusses how Opendoor came to be a meme stock and how the company has tried to respond to what the WSJ calls “investor mobs” (personally, I think “tribbles” is a less judgmental term). It points out that the meme stock crowd may have moved on from Gamestop & AMC, but their influence on the market persists. In that regard, the article also says that retail accounts for nearly 20% of the stock market’s trading volume, up from 10% in 2010, and that retail investors are moving into the options market as well. God help us (and them).
There are reasons to believe that the Atkins SEC may be less inclined than its predecessor to bring enforcement actions based on “hypothetical risk factors,” but the same can’t be said for private plaintiffs. In that regard, the 2nd Circuit’s recent decision in City of Hialeah Employees’ Retirement System v. Peloton Interactive (2d. Cir; 8/25) to revive fraud claims premised on hypothetical risk factor disclosure is likely to bolster their appeal to members of the plaintiffs’ bar.
In that case, the 2nd Circuit overruled the SDNY’s prior decision and reinstated Rule 10b-5 claims against Peloton arising out of, among other things, hypothetical risk factor disclosure concerning excess inventory levels. Here’s an excerpt from the Court’s opinion:
In its SEC filings of May 7, August 26, and November 4, 2021, Peloton warned: “If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of products available for sale. Inventory levels in excess of consumer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margins to suffer.”
We agree with the district court that the risk disclosure in the Form 10-Q of May 2021 was not actionable. But the risk disclosures in the Form 10-K and the Form 10-Q of August and November 2021 were plausibly false or misleading. The SAC plausibly alleged that by August 26, 2021, the specific financial consequences described in these disclosures were not merely hypothetical “but had already materialized and resulted in significant disruption to [Peloton’s] business.” Teladoc, 2024 WL 4274362, at *5.
The SAC alleged that following the earnings call on August 26, 2021, Peloton reduced the price of the original Bike by $400. See App’x 237 (¶ 187). According to CW1, this reduced price was a direct response to Peloton’s “excess inventory.” Id. at 184 (¶ 31). Moreover, on November 4, 2021, Peloton disclosed that 91 percent of its inventory was unsold and reduced its earnings guidance by approximately $1 billion. See id. at 178 (¶ 7); id. at 252-53 (¶¶ 219-23). In other words, Peloton was already engaging in “the sale of excess inventory at discounted prices.” Id. at 424.
The Court concluded that, accepting the plaintiffs’ allegations as true, the presentation of these inventory-related risks as hypothetical in Peloton’s August and November 2021 SEC filings was potentially misleading.
Dual class capital structures remain common in IPOs, but in response to investor pressure, many companies have opted to include a time-based sunset provision in their charter documents that will eventually eliminate the high-vote class of stock. When the ride sharing company Lyft went public in 2019, it took some heat from the CII for turbo-charging its high vote stock (20 votes per share v. the typical 10) and for failing to include sunset provisions in its charter. Last month, Lyft and its founders decided to unwind that structure.
That move came in connection with the departure of the company’s two founding shareholders from the board and was effectuated by their decision to convert their high-vote Class B common stock into low-vote Class A common stock. Here’s an excerpt from Lyft’s press release:
Lyft, Inc. (Nasdaq: LYFT) today announced that its co-founders, Logan Green, Chair of the Board, and John Zimmer, Vice Chair of the Board, intend to step down from the Lyft Board of Directors (the “Board”) on August 14, 2025, marking the successful completion of a two-year transition plan. Green and Zimmer will also convert all shares of Lyft Class B common stock to Lyft Class A common stock on August 15, 2025. Following the conversion, all holders of Lyft common stock will hold Class A common stock with equal voting rights, and Green and Zimmer will collectively own approximately 9.69 million shares of Lyft Class A common stock.
According to a recent ValueEdge Advisors blog, Green and Zimmer’s decision to convert their Class B shares reduced their voting power in the company from 30% to under 2%. The Class A common stock’s price popped by over 8% on the day after the announcement and has tacked on another 2.5% since then.
Last month, a Texas federal court refused to dismiss the state’s antitrust claims against BlackRock, Vanguard and State Street associated with their engagement with portfolio companies on ESG-related matters. This Cleary memo says that the Court’s decision is going to add another layer of complexity to engagements between companies and shareholders. This excerpt lays out why companies and shareholders are likely to proceed even more cautiously as a result of the decision:
Companies may be taking on greater risk when they take an action advocated by one or more shareholders (or other climate change advocates) that are also lobbying for actions at competing firms. Companies should avoid engaging with their competitors and overlapping shareholders in a group setting, or taking action because shareholders promise that they will also pressure competing firms to act similarly. The Texas case provides new contours to risk of a finding of collective action through industry or other groups, by including shareholders as a nexus to potential coordination.
Similarly, we expect shareholders may also refresh their engagement effort strategies in light of this case and take a more conservative, thoughtful and tailored approach to outreach with each company to avoid any optics of coordination among themselves or among their portfolio companies.
The blog contends that the potential for conspiracy liability raised by this decision together with the SEC’s guidance narrowing the path for major investors to file short form Schedule 13G beneficial ownership disclosures may have a cooling effect on the frequency of shareholder engagements and reduce the pressure placed on companies to make changes in line with investor policies.
As we previously blogged, the DOJ and FTC submitted a Statement of Interest in the Texas lawsuit. While the antitrust agencies weren’t supportive of the defendants on most of the issues raised by the lawsuit, they did clarify that engagements on governance topics wouldn’t typically jeopardize shareholders’ status as passive investors for purposes of the antitrust laws.
Yesterday, Corp Fin released a batch of updates to the Financial Reporting Manual. I am very happy that the Staff keeps this resource current! As a young associate attempting to understand securities law, I remember feeling like I’d stumbled upon a hidden treasure when I first encountered the FRM in its current form almost 20 years ago (although I must confess that I still did not use it quite as much as TheCorporateCounsel.net, which of course covered the current Manual’s debut in a blog).
The latest updates follow a batch released in July and address a variety of items. The revisions that are likely of most interest to this crowd are the ones made for:
– The May 20, 2020 amendments to the S-X Acquisition Rules (S-X 3-05, S-X 3-14, S-X 8-04, and S-X 8-06) from SEC Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” which were effective January 1, 2021. The updated Sections are 1140.8, 2200.2, 2200.5, 2340 2345, 2360, 5210, 6120.11, 6220.7, 6340.2, 6410.8, 6410.10, 10220.5, and 12250.
– Exchange Act Reporting Requirements for Transition Period – Section 1360.2
– Acquired or To-Be-Acquired Business is Not a Foreign Business But Would Be an FPI – Section 2935.22.
– FPIs Voluntarily Filing on Domestic Forms – Section 6120.6.
– FPI Disclosures of Changes in Accountants & Disagreements – Section 6830.
As a reminder, the Staff includes a disclaimer on the FRM landing page, which states in part:
Because of its informal nature, the Manual does not necessarily contain a discussion of all material considerations necessary to reach an accounting or disclosure conclusion. Such conclusions about a particular transaction are very fact dependent and require careful analysis of the transaction and of the relevant authoritative accounting literature and Commission requirements. The information in this Manual is non-authoritative. If it conflicts with authoritative or source material, the authoritative or source material governs. The information presented also may not reflect the views of other Divisions and Offices at the Commission. The guidance is not a rule, regulation or statement of the Commission and the Commission has neither approved nor disapproved this information.
