In 2022, there were 197 federal securities class actions filed, which is a 6.6% drop from the 211 filings in 2021, and a significant drop from the over 400 filings in 2017, 2018, and 2019, and over 300 in 2020. Despite a decrease in the number of overall cases, there were several notable developments in the fourth quarter of 2022 and trends we anticipate continuing in 2023. In this edition, we examine: (1) the Supreme Court taking up review in the Slack Technologies case; (2) an update on securities litigation around the world; (3) the continued rise in crypto; and (4) ESG-focused trends.

Supreme Court Granted Certiorari in Pirani v. Slack Technologies, Inc.

In the fourth quarter of 2022, the Supreme Court granted certiorari in Pirani v. Slack Technologies, Inc., which arose from a 2021 decision by the Ninth Circuit holding that where shares are purchased following a direct listing, the claimant was not required under Section 11 of the Securities Act of 1933 (the “Securities Act”) to “trace” his or her shares to a registration statement. By way of background, in 2018, the Securities and Exchange Commission (SEC) allowed privately held companies to become public through the selling of shares held by early investors and corporate insiders, called “direct listings.” This vehicle was intended to create a more efficient and economical alternative to traditional IPOs for private companies, though relatively few companies have utilized direct listings. In June of 2019, Slack became public via a direct listing, after which point 283 million shares became available for sale. Out of that number, 118 million shares were registered on the registration statement and 165 million were for sale under exempt transactions.

The central issue in Slack was how Section 11 of the Securities Act applied to shares sold through direct listings. Under Section 11, plaintiffs are generally required to establish standing by demonstrating that their shares could be traced to the challenged registration statement. However, in Slack, the lead plaintiff stated that he could not determine whether the 30,000 shares he purchased in the direct listing were registered or unregistered. Thus, the defendants argued that he could not meet the traceability requirement under Section 11.

Breaking with well-established precedent, the Ninth Circuit determined that it was not critical whether the shares were registered or unregistered because the public offering could not have occurred if the company had not issued a registration statement. As such, the stock sold in the offering was necessarily connected to the registration statement. The majority explained that its ruling kept with the purpose of the Securities Act, the goal of which is to protect investors from misleading offering documents. According to the majority, to retain the traceability requirement for direct listings, where both registered and unregistered shares are sold, would create a “loophole” significant enough to undermine the purpose of Section 11 as it has been interpreted since its origin. In its petition, Slack argued that the panel’s holding was a departure from precedent requiring investors to demonstrate that their shares were sold in connection with an allegedly misleading registration. Slack further argued that the Ninth Circuit’s decision resulted in uncertainty that discouraged private companies from utilizing direct listings as part of their transition to becoming public.

In granting certiorari, the Supreme Court implicitly emphasized the importance of the case: out of the 7000 – 8000 petitions for certiorari filed each term, the Court only agrees to hear arguments in about 80. Undoubtedly, the Supreme Court’s decision will have implications for the ongoing viability of direct listings.

Update Regarding Global Securities Class Action Litigation and Settlements

As the complexity of securities class actions continues to evolve, so too does the geographical scope of such actions. There has been an increase in global class actions over the past decade, and this trend will likely continue into 2023.¹ Beginning in 2016, investors filed approximately 60 securities fraud lawsuits annually in courts outside of North America.²  Following the increase in filings, global securities class action settlements spiked in 2021,³ reaching $3 billion, an increase driven by the rise in special-purpose acquisition companies (“SPACs”) and cryptocurrency-related securities litigation.⁴ This increase in settlement amount was in large part a result of substantial settlements in the Netherlands, Australia, and the United Kingdom, as well as the settlement of cross-border disputes.

The Netherlands is a leader in this arena in terms of settlement amount, as it lays claim to 3 of the 5 largest securities related settlements on the list, totaling over $4 billion.⁵ This amount does not include the Steinhoff International settlement in 2022, which was an $8 billion settlement of claims across the jurisdictions of Netherlands, South Africa, and Germany.⁶ This settlement represents the largest non-North American class settlement in history, and signals the viability of settling related actions across various jurisdictions. Australia and the United Kingdom have a sizable representation on the list, each with settlements totaling approximately $1.52 billion.⁷

China recently made headlines in this arena as well with the Kangmei case,⁸ in which Kangmei Pharmaceuticals was alleged to have inflated its revenue by $4.1 billion, along with its cash positions and operating profits.⁹ While the case did not result in a settlement, it was China’s first securities class action case and the largest securities case in Chinese legal history, both in terms of the number of participants involved and the damages ordered: $385 million.¹⁰

As non-U.S. jurisdictions begin to claim larger pieces of the securities class action pie, it behooves companies to understand the legal, economic, and socio-political factors driving this change.  These factors include an evolving legal landscape, an increase in ESG disclosures (discussed more fully below), and unique features of non-U.S. litigation that may incentivize filing in these jurisdictions.¹¹ Initially, the landmark decision of Morrison v. National Australia Bank in 2010 limited the scope of claims under the Securities and Exchange Act of 1934 (the “Exchange Act”), holding that the Act only applied to misconduct arising in U.S. exchanges and closing the door on plaintiffs bringing “F-cubed” cases (foreign investors sue a foreign issuer based upon a security traded on a foreign exchange).¹² Following the limitation on actions that can be brought in the United States, the legal landscape in non-U.S. jurisdictions continued to evolve.

While the United States has long functioned as the “Shangri-La” of securities class actions, given the relative predictability provided by its developed jurisprudence in this area,¹³ the development of jurisprudence in other jurisdictions has provided investors alternatives, and may have driven the increase in filings outside the United States. This evolution is reflected in newly enacted laws and regulations, such as the European Union’s Collective Redress Directive (2020) which will enable EU consumers to file class actions in June 2023.¹⁴ The directive also defines which entities may file suit, provides for cross-border actions, and grants force to decisions made in foreign Member States by permitting their introduction as evidence in domestic courts.

Other initiatives such as the Netherlands’ Collective Damages Act (2020), Scotland’s Civil Litigation Bill (2020), and Germany’s Extension of the Capital Investor Model Proceedings Act (through 2023) further demonstrate efforts foreign policymakers have made to provide recourse outside the U.S. Some observers have also noted the unique benefits that non-U.S. jurisdictions provide which potentially encourage the filing of claims.  These features include the use of statutory fee schedules and limitations on pre-trial discovery, both of which limit risk and provide increased predictability for litigation costs. Additionally, broader access to third-party litigation funding may also drive non-U.S. securities class actions. For example, there has been an increase in third-party litigation funding in the UK, with UK Litigation Funders holding 2 Billion GBP under management in 2021.¹⁵

Ultimately, the increased globalization of securities class actions signals a need for companies to anticipate legal challenges to actions involving securities in jurisdictions outside of the United States. Invested stakeholders should monitor new and evolving regulations governing domestic and foreign transactions as they develop. To that end, stakeholders should remain abreast of direct changes to the regulations themselves, monitor cases and settlements that arise pursuant to these regulations, and retain the expertise of individuals familiar with these regulations when necessary. As litigation shifts abroad, familiarity with foreign courts and dispute resolution mechanisms will become increasingly important. While the United States may very well continue to attract the majority of securities class action filings, evolving legal frameworks outside the United States suggest that plaintiffs’ choice of available jurisdictions will continue to expand.

Continued Rise in Crypto Securities Filings May Continue Into 2023

The 2022 decline in the cryptocurrency and digital assets market resulted in a year with more crypto securities class action litigation than any previous year--almost twice as many as any previous year. The following includes some notable trends:

• A yearly comparison of the number of crypto securities class action lawsuits by year identified by Cornerstone Research shows: 2017 (5 filings), 2018 (14 filings), 2019 (4 filings), 2020 (13 filings), 2021 (11 filings), 2022 (23 filings).[16]  Cryptocurrency filings include blockchain or cryptocurrency companies that engaged in the sale or exchange of tokens (commonly initial coin offerings), cryptocurrency mining, cryptocurrency derivatives, or that designed blockchain-focused software.¹⁷
• By the end of the year, a number of cryptocurrency companies collapsed.  Of the 23 crypto securities class action filings in 2022, 7 of them were filed in December of this past year, accounting for approximately 30% of the securities class action filings in December.¹⁸
• Of the 2022 crypto securities class action cases, eight were filed in federal court in California and seven in New York.¹⁹
• In addition to securities class actions, the SEC also brought 30 enforcement actions related to cryptocurrency against 79 defendants or respondents, and of these actions 24 were litigated in US district courts.²⁰
• Stock or crypto asset price drops were also more extreme than that of other securities litigation cases, and crypto securities class action litigation progressively increased as the crypto asset market declined.²¹

As we head into 2023 with high profile crypto-related investigations, a volatile market, increased regulatory oversight, and crypto-related filings becoming more prevalent, we most likely will see a continued uptick in the number of crypto-related securities class action lawsuits in 2023.²²

Companies Adopting ESG Measures Targeted for Shareholder Suits, SEC Enforcement Actions

Corporate Environmental, Social, and Governance (ESG) initiatives, first met with a general positive reaction, have begun to draw increased shareholder and government attention.

In November, a plaintiff-shareholder filed a putative securities class action alleging claims against Enviva, Inc., which describes itself as the “world’s largest producer of sustainable wood pellets, which provide a low-carbon alternative to fossil fuels,”²³ and certain senior officers of the company. The Complaint, filed in the U.S. District Court for the District of Maryland,²⁴ alleges that Enviva made materially false and misleading ESG-related statements about the environmental sustainability of its wood pellet production and procurement and about the financial viability of its business model.²⁵ According to the Complaint, the truth emerged about these misstatements when Blue Orca Capital published a research report on October 12, 2022 that “stated that ‘new discovered data suggests . . . the company is flagrantly greenwashing its wood procurement’ and characterized Enviva’s claim to be a ‘pure play ESG Company with a healthy, self-funded dividend and cash flows to provide a platform for future growth’ as ‘nonsense on all counts.’”²⁶ That day, Enviva’s stock price fell 13.13%.²⁷ The Complaint asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The defendants have not yet filed a response to the Complaint.

This investor lawsuit comes on the heels of an ESG-related enforcement action brought by the Securities and Exchange Commission against Brazilian mining company Vale S.A. (“Vale”), in the U.S. District Court for the Eastern District of New York.²⁸ The SEC action was brought in the wake of a January 2019 dam collapse. In its Complaint, the SEC alleged that Vale “deceived investors concerning the safety and stability of damns that it built to hold waste from its mining operations.”²⁹ The SEC further alleged that “Vale’s concealment of the true condition of the [dams] caused Vale’s sustainability reports, periodic filings, and other Environmental, Social, and Governance (‘ESG’) disclosures to be materially false and misleading.”³⁰ Gurbir S. Grewal, Director of the SEC’s Division of Enforcement announced the charge and explained that “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions. By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the . . . dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.”³¹

Vale moved to dismiss the SEC’s complaint on December 16, 2022, and the fully briefed motion is pending before the court.  Vale made four arguments in its motion to dismiss:  (i) the SEC’s complaint failed to allege a strong inference of scienter; (ii) the alleged misstatements the SEC identified are inactionable; (iii) the SEC failed to adequately plead materiality; and (iv) the SEC failed to adequately plead scheme liability.³² On the ESG front, Vale argued that the SEC’s reliance on a December 2018 ESG webinar as actionable misstatements is wrong because Vale simply listed applicable legal requirements.³³ Vale also argued that two statements the SEC identified as alleged misstatements should be dismissed as puffery.³⁴ The first was Vale’s statement that “all of its dams in the Iron Ore Business are safe.”³⁵ The second was Vale’s statement that “the panels of national and international experts are of great importance and contribute by brining a critical view on Vale’s management model, the methodologies used throughout the process and acting as consultants on safety issues.”³⁶

It remains to be seen how these lawsuits will play out and whether this ESG-focused trend continues to gather momentum in 2023. To the extent companies make generic and neutral statements about appliable regulations or the existence of regulators or compliance mechanisms, those statements seem unlikely to form the basis of a material misrepresentation claim focused on ESG or “greenwashing.” Facing both investor and SEC scrutiny, companies should carefully consider their ESG claims and ensure those claims are based on verifiable metrics.

Footnotes:

1. See Matthew Bultman, Investors Gain Traction Overseas in Securities Fraud Litigation, BLOOMBERG (Dec. 7, 2022), https://news.bloomberglaw.com/securities-law/investors-gain-traction-overseas-in-securities-fraud-litigation.
2. See id.
3. A list of the Top 25 Collective Investor Action Settlements Outside of North America provides helpful insight into which nations are leading the charge in providing fora for dispute resolution in these matters. ISS Securities Class Action Services, The Top 25 Non-North American Settlements (2022).
4. See Broadridge Financial Solutions, 2021 Global Class Action Annual Report 3, 5 (2021).
5. [5] See ISS Securities Class Action Services, The Top 25 Non-North American Settlements (2022).
6. Janice Kew, Steinhoff Wins Approval for $1.6 Billion Global Settlement, BLOOMBERG (Jan. 24, 2022), https://www.bloomberg.com/news/articles/2022-01-24/steinhoff-wins-approval-for-1-6-billion-settlement-to-investors.
7. ISS Securities Class Action Services, The Top 25 Non-North American Settlements (2022).
8. China Securities Investor Services Centre v. Kangmei Pharmaceutical Co, Ltd.
9. Samuel Shen et al., China launches first class-action lawsuit in war against corporate fraud, REUTERS (April 16, 2021), https://www.reuters.com/article/china-markets-classaction-idUSL4N2M93GB.
10. Shanghai Newsroom, Chinese court rules against Knagmei in ‘milestone’ case, REUTERS (Nov. 12, 2021), https://www.reuters.com/business/healthcare-pharmaceuticals/chinese-court-rules-against-kangmei-milestone-case-2021-11-12/.
11. See Trip Chong, The Rise of Global Securities Class Actions, International Corporate Legal Guides (Apr. 13 2022), https://iclg.com/briefing/17827-the-rise-of-global-securities-class-actions/amp.
12. 561 U.S. 247 (2010).
13. See Matthew Bultman, Investors Gain Traction Overseas in Securities Fraud Litigation, BLOOMBERG (Dec. 7, 2022), https://news.bloomberglaw.com/securities-law/investors-gain-traction-overseas-in-securities-fraud-litigation.
14. Council Directive 2020/1828, art. 22, 2020 O.J. (L. 409/1) (noting effective date).
15. UK Class Actions Are on the Rise, Thanks to Litigation Funding, U.S. Chamber of Commerce Institute for Legal Reform (Sep. 1, 2022), https://instituteforlegalreform.com/blog/uk-class-actions-are-on-the-rise-thanks-to-litigation-funding/.
16. Cornerstone Research, Securities Class Action Filings 2021 Year in Review, https://www.cornerstone.com/wp-content/uploads/2022/02/Securities-Class-Action-Filings-2021-Year-in-Review.pdf (last visited Jan. 21, 2023), at 5; Cornerstone Research, Securities Class Action Trend Cases, https://www.cornerstone.com/insights/research/securities-class-action-trend-cases/ (last visited Jan. 21, 2023); Stanford Law School, Securities Class Action Clearinghouse a collaboration with Cornerstone Research: Cryptocurrency Litigation, https://securities.stanford.edu/current-trends.html (last visited Jan. 21, 2023); Cornerstone Research, Securities Class Action Filings 2022 Year in Review, https://www.cornerstone.com/wp-content/uploads/2023/01/Securities-Class-Action-Filings-2022-Year-in-Review.pdf
17. Cornerstone Research, Securities Class Action Trend Cases, https://www.cornerstone.com/insights/research/securities-class-action-trend-cases/
18. 22 securities class actions were filed in December.  Stanford Law School, Securities Class Action Clearinghouse a collaboration with Cornerstone Research: Cryptocurrency Litigation, https://securities.stanford.edu/filings.html?page=2
19. Stanford Law School, Securities Class Action Clearinghouse a collaboration with Cornerstone Research: Cryptocurrency Litigation, https://securities.stanford.edu/current-trends.html (last visited Jan. 21, 2023).
20. Cornerstone Research, SEC Cryptocurrency Enforcement, https://www.cornerstone.com/wp-content/uploads/2023/01/SEC-Cryptocurrency-Enforcement-2022-Update.pdf
21. See Universal Navigation Inc. Cryptocurrency Securities Litigation, 22-CV-02780, (S.D.N.Y. Apr. 4, 2022) (describing numerous price drops of tokens down over 99% from their all time highs); see also, e.g., Yuga Labs, Inc.: ApeCoins, NFTs Securities Litigation, 22-CV-08909, (C.D. Cal. Dec. 8, 2022), CAC at ¶ 212 (90% drop from high); . Iris Energy Limited Securities Litigation, 22-CV-07137, (D.N.J. Dec. 7, 2022), CAC at ¶ 10 (90% drop from offering price); Voyager Tokens Securities Litigation, 22-CV-09590, (S.D.N.Y. Nov. 9, 2022), CAC at ¶ 114 (90% decline).
22. Kevin LaCroix, 2022 Federal Court Securities Suit Filings Decline Slightly Relative to Recent Years, The D&O Diary, https://www.dandodiary.com/2023/01/articles/securities-litigation/2022-federal-court-securities-suit-filings-decline-slightly-relative-to-recent-years/ (last visited Jan. 21, 2023); Kevin LaCroix, What to Watch Now in the World of D&O, The D&O Diary, https://www.dandodiary.com/2022/09/articles/director-and-officer-liability/what-to-watch-now-in-the-world-of-do-11/ (last visited Jan. 21, 2023).
23. https://www.envivabiomass.com/about-us/
24. Case No. 8:22-cv-02844-DKC.
25. Compl. at 2, ¶ 3.
26. Compl. at 3, ¶ 4.
27. Id. at 3, ¶ 5.
28. 1:22-cv-02405-LDH-SJB
29. Compl. ¶ 1.
30. Id. at ¶ 16.
31. https://www.sec.gov/news/press-release/2022-72
32. See ECF Docket No. 32.
33. Id. at p. 33.
34. Id. at p. 37.
35. Id. (quoting Compl. ¶ 222).
36. Id. (quoting Compl. ¶ 245).