March 26, 2018

Whistleblowers: Not Quite Powerball, But Still. . .

I read that somebody in Pennsylvania apparently hit the $457 million Powerball jackpot last week. That lucky individual is probably the only person in America who had a better week than the three people who the SEC announced hit its whistleblower jackpot to the tune of $83 million – the largest payday in the history of the SEC’s whistleblower program.

The SEC doesn’t disclose information that might identify a whistleblower – but according to this Reuters article, the trio earned their “” payday for their assistance in an enforcement action involving Merrill Lynch that resulted in a $415 million settlement.

Here’s an excerpt from the SEC’s press release:

The SEC today announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million. The previous high was a $30 million award in 2014.

“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”

The SEC’s press release also noted that it has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.

Be sure to check out this blog from Kevin LaCroix addressing some of the implications of these recent awards in light of the Supreme Court’s Digital Realty Trust decision.  His bottom line is that these developments add fuel to the already burgeoning cottage industry in whistleblowing – and that even more whistleblowers will be encouraged to come forward.

SCOTUS: ’33 Act State Court Jurisdiction Lives!

Last week, in Cyan v. Beaver County Employees Retirement Fund, a unanimous Supreme Court held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court.

This Woodruff Sawyer blog notes that the Cyan decision is a big win for the plaintiffs’ bar – and bad news for IPO companies & their D&O carriers. Here’s an excerpt:

Companies that have recently gone public: buckle up. This is especially true for companies that are headquartered outside of California since California-based companies have already been living with this reality for several years.

While there have been some non-California-headquartered companies that were sued in California state courts over their S-1 filings, most of the suits brought against IPO companies in California state court have a clear California nexus.

With the ruling in Cyan, other state courts will be opening their doors for IPO-suits.

As we’ve previously blogged, California courts have been a preferred venue for plaintiffs in IPO lawsuits due to their relaxed pleading standards – which result in a lower dismissal rate than cases filed in federal court. Filing suit in a California state court also avoids application of the automatic stay in discovery that would apply to federal cases under the PSLRA.

Now it looks like IPO companies in other jurisdictions need to be prepared to be on the receiving end of Securities Act claims in plaintiff-friendly state courts as well. We’re posting the horde of memos in our “Securities Litigation” Practice Area.

Blockchain: “Solving Section 11 Tracing Problems Since ’20??”

If this Katten memo is right, then the Supreme Court’s Cyan decision may soon not be the only reason that Securities Act plaintiffs have to rejoice.  It turns out that our new pal blockchain may solve the 1933 Act’s version of the “Riddle of the Sphinx” – Section 11’s tracing requirement.  Here’s an excerpt:

The manner in which stock transactions are currently cleared, settled and recorded makes it impossible to trace a single share of stock once the issuer makes a second offering or other shares enter the market through, for example, the exercise of options or the lapse of share restrictions. As a result, broad swaths of stockholders are effectively barred from maintaining claims under Section 11 or Section 12(a)(2).

The application of blockchain technology to stock ledgers could result, over the ensuing years, in the gradual movement away from the masses of fungible stock held by investors indirectly through the DTC, which makes tracing currently impossible, to a system in which stock transactions for each individual share of stock are recorded in a blockchain ledger.

The only good news for potential defendants is that the shift to blockchain technology hasn’t happened yet.  But once DTC implements blockchain ledgers, the most formidable impediment to Section 11 claims may well be eliminated.

John Jenkins