As we close out 2023 and begin the first quarter of 2024, securities and derivative litigation continues to evolve. In this quarterly update, we examine trends in federal securities class action filings, which saw an uptick in 2023, with a notable rise in cases against commercial banks, even as pandemic-related, cryptocurrency, and SPAC-related suits declined. We also discuss the Second Circuit’s decision in a securities fraud case against Philip Morris International, which clarified the scope of liability for statements of opinion, and the Supreme Court’s taking up review of Macquarie Infrastructure Corp. v. Moab Partners L.P., No. 22-1165 (U.S. 2024), a case that could redefine the scope of liability under the securities laws.

2023 Securities Class Action Landscape: A Shift in Trends Amidst an Uptick in Filings

Last year saw a marked increase in federal securities class action filings, with plaintiffs filing 213 cases in 2023, up from 197 in 2022 and ending an overall decline in filings since 2019.¹ Although these numbers are significantly lower than the 400+ filings of 2017-2019, 2023 had the eighth highest number of filings in the last twenty years.²

As in previous years, the Second, Third, and Ninth Circuits were the jurisdictions with the highest number of filings. In 2023, approximately half of all filings in the United States were filed in federal courts in either California (58 cases) or New York (47 cases).³

In terms of industry concentration, in 2023, biotech and high-tech firms, which typically see the most federal securities class action filings, together accounted for approximately 31% of the total, with approximately 66 filings.⁴ Of these, 43 securities class action lawsuits were filed against life sciences companies, representing almost one in five securities class action lawsuits.⁵ Non-U.S. issuers were named defendants in 33 securities class action lawsuits in 2023.⁶

A review of the federal court securities class action lawsuits reveals several trends. SPAC-related securities suits fell off significantly in 2023, with 19 suits filed compared to 29 in 2022, in tandem with the fall-off in SPAC IPOs and de-SPAC transactions since their peak in 2021.⁷ In addition, as we moved further away from the height of the pandemic, suits alleging pandemic-related outlook misrepresentations became less common, with the number of COVID-related securities suits falling from 20 in 2022 to 11 in 2023.⁸

Meanwhile, filings related to banking turmoil marked a new trend, with securities class action lawsuits filed against banks at the center of the Spring 2023 banking crisis. Nine banks faced securities class action claims in 2023 in response to declines in their share prices following a rapid series of bank failures.⁹ By contrast, amidst recovery in the cryptocurrency market, the number of cryptocurrency-related cases fell to 14 in 2023 from the 23 cases filed in 2022.¹⁰

Second Circuit Smokes Securities-Fraud Case Against Philip Morris International in Decision Clarifying Scope of Liability for Statements of Opinion

On December 26, 2023, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative securities fraud class action brought by investors (“Plaintiffs”) against Philip Morris International Inc. (“PMI”) and several of its current and former executives (collectively “Defendants”).¹¹ Plaintiffs alleged that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements about PMI’s “IQOS” smoke-free tobacco product. In its opinion, the Second Circuit addressed two matters of first impression in the Circuit: (1) whether a defendant’s statements that its scientific studies complied with a methodological standard that is published and internationally recognized, but stated in general and inherently subjective terms, are properly analyzed as statements of opinion rather than fact; and (2) whether the FDA’s endorsement of a defendant’s interpretation of scientific data renders the defendant’s statements expressing that interpretation per se reasonable and thus not actionable as a false statement.¹² Answering both questions in the affirmative, the Second Circuit affirmed the lower court’s ruling dismissing Plaintiffs’ complaint.

The case related to PMI’s product IQOS, an electronic device that heats but does not combust tobacco. PMI sought FDA authorization to market IQOS in the United States as a “reduced-exposure” or “reduced-risk” tobacco product. Defendants characterized the scientific studies PMI conducted on IQOS as “rigorous,” the “best science” and “very advanced.” Defendants also represented that the studies were “conducted according to Good Clinical Practice,” and made statements about the long-term health effects that could be inferred from PMI’s scientific studies. Separately, PMI’s then-CEO stated that there was nothing on the horizon that would cause any change in PMI’s performance in Japan, as compared to previous years. Based on these statements and others like them, Plaintiffs alleged that Defendants made false or misleading statements regarding (1) the methodology and results of scientific studies that PMI conducted in support of its application to the FDA, and (2) the projections for IQOS’s sales performance in Japanese markets. Analyzing each group of statements, the Second Circuit held that Plaintiffs had failed to allege any actionable misstatements.

Statements Regarding Methodology: Beginning with PMI’s characterizations of the IQOS studies, the court held that Defendants’ statements that the studies were “rigorous,” “very advanced,” and “the best science” were “inactionable as mere puffery.”¹³ It explained that such “vague descriptions of the studies’ methodology offer[ed] only generally optimistic opinions” and were “too general to cause a reasonable investor to rely upon them.”¹⁴ The court rejected Plaintiffs’ argument that those statements were not puffery because they were “determinate, verifiable statements,” reasoning that there was no “objective, black-and-white standard by which to verify whether PMI’s scientific studies were in fact ‘rigorous,’ ‘very advanced,’ or ‘the best science.’”¹⁵

Turning next to Defendants’ representations that the studies were conducted according to Good Clinical Practice, the court held that those representations were non-actionable statements of opinion.¹⁶ It rejected Plaintiffs’ formalistic argument that because Defendants had not couched those statements with words such as “we think” or “we believe,” they were statements of fact, not opinion. Instead, the court held that because Defendants’ compliance with Good Clinical Practice required “inherently subjective assessments,” the challenged statements were properly viewed as matters of opinion.¹⁷ Moreover, the court held that Plaintiffs’ allegations that a former PMI scientist purportedly confirmed violations of Good Clinical Practice whereas the FDA found no violations further demonstrated that PMI’s statements were “necessarily statements of opinion,” rather than verifiable facts.¹⁸ The court rejected Plaintiffs’ argument that PMI’s omission of this contrary view rendered its opinion statements misleading, explaining that “we have never held that a statement of opinion can be rendered actionable by the speaker’s failure to mention the possibility of contrary opinions.”¹⁹

Statements Regarding Results: Focusing next on the alleged misrepresentations regarding the results of the studies, the court found that PMI’s interpretation of the studies was a reasonable statement of opinion and therefore not actionable.²⁰ Noting that it had previously rejected the proposition that a mere dispute about the proper interpretation of data can form a basis for liability under Section 10(b), the court explained that as long as a defendant’s interpretation is reasonable, there is no false statement. Extending this line of cases, the court held that “the FDA’s ultimate endorsement of Defendants’ interpretation of the clinical-studies data conclusively establishes that Defendants’ statements were reasonable, and therefore not actionable . . . .” ²¹ That is, the court held that Defendants’ interpretation, which had regulatory backing, was “per se reasonable as a matter of law.”²² Accordingly, the fact that others may have held contrary views was “immaterial.”²³

Statements Regarding Projections for IQOS Sales in Japan: Finally, the court held that a former PMI executive’s statement regarding the future prospects for IQOS sales in Japan was “not false at all” when read in the full context in which the statement was made.²⁴ Additionally, the court rejected Plaintiffs’ argument that Defendants violated Items 303 and 105 of Regulation S-K, which require disclosure of “known trends or uncertainties that . . . are reasonably likely to have a material . . . unfavorable impact on net sales or revenues” and “a discussion of the material factors that make an investment in the [company] speculative or risky.”²⁵ Instead, the court concluded that PMI’s public filings adequately disclosed the very trend and risks that Plaintiff erroneously claimed was omitted about the level of saturation among early adopters in Japan and how that might impact IQOS sales.²⁶

The Second Circuit’s decision in In re Philip Morris is a potentially important decision for securities fraud defendants contesting falsity of statements of opinion at the motion to dismiss stage. The court’s decision makes clear that while language such as “we believe” or “we think” is sufficient to render a statement one of opinion rather than fact, such language is not always necessary. Even without such qualifications, statements expressing “inherently subjective assessments” likewise constitute opinions and must be analyzed as such for purposes of determining falsity. Moreover, where companies provide an interpretation of scientific data that is ultimately endorsed by the FDA, the Second Circuit’s decision provides a defense as a matter of law. While it remains to be seen whether this holding will be extended outside the FDA context, the court’s rationale would appear to apply more generally to other regulatory settings where a company’s statements of opinion are ultimately endorsed by a regulatory body.

Supreme Court Case Tests the Reach of Section 10(b) and Rule 10b-5

The Supreme Court is poised to weigh in on federal securities laws issues. Specifically, the court will address the scope of corporate liability under the securities laws and the Securities and Exchange Commission’s (SEC) ability to impose fines and disgorgement through an administrative proceeding.²⁷

One case before the Supreme Court this term is Macquarie Infrastructure Corp. v. Moab Partners L.P., in which the court will determine whether the failure to make a disclosure required by Item 303 of the SEC’s Regulation S-K can support a private right of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.²⁸ While the SEC may bring litigation against corporations for failing to disclose material risks, the Supreme Court is set to decide whether the plaintiff hedge fund, Moab Partners, or any private actor can bring suit premised on a violation of Item 303 of Regulation S-K where there is no affirmative statement that is rendered misleading as a result of the omission. The case is set to resolve a circuit split, as the Third, Ninth, and Eleventh Circuits have all held that a misleading statement must underlie any claims brought by private parties, while the Second Circuit here allowed the claim to proceed despite the absence of a misleading statement. At oral argument, the justices appeared to agree with the former group and will likely require that plaintiffs be able to point to a disclosed statement, but they debated the scope of what exactly would constitute an affirmative statement sufficient to trigger Rule 10b-5 liability.

Background

In 2016, the International Maritime Organization (IMO) signaled that it would be implementing a ban on shipping fuel, known as “No. 6 fuel oil,” containing a certain level of sulfur that defendant Macquarie Infrastructure, an energy supply company, sold in significant quantities. Macquarie Infrastructure did not disclose that it faced a risk related to the regulation, in part, because it was unclear at the time whether shippers would be able to continue using No. 6 fuel oil in conjunction with abatement methods. Ultimately, shippers completely avoided purchase of the fuel and, in an earnings call in 2018, Macquarie Infrastructure disclosed to investors that it expected a structural decline in the market for No. 6 fuel oil. The company’s stock dropped 41% on the day of the announcement.

Shareholders of the company filed suit in the Southern District of New York alleging that Macquarie Infrastructure violated Section 10(b) of the Exchange Act and SEC Rule 10b-5 because it was allegedly aware of the significant impact that the IMO’s regulation would have on its business and failed to disclose the risks to investors. More specifically, Moab Partners alleged that the purported omission violated disclosure requirements under Item 303 of Regulation S-K.²⁹ Item 303 of Regulation S-K, which governs what companies must disclose in the narrative portion of their financial statements, broadly requires companies to provide an outlook for the company, including material risks. The district court ruled in favor of the defendants.

The Second Circuit reversed on appeal, holding that the plaintiff had adequately alleged material omissions based on a “known trend or uncertainty” that are required to be described by Item 303.³⁰ Relying in part on SEC guidance, the Second Circuit reasoned that disclosure of the IMO regulation was required because there was a reasonable likelihood that the regulation would have a material effect on Macquarie Infrastructure and therefore the generic disclosures provided in the company’s financial statements were inadequate.

Analysis

If the Supreme Court’s decision tracks the justices’ discussion at oral argument last January, the court seems likely to rule that plaintiffs cannot base a private right of action solely on a failure to disclose under Item 303. Instead, for a Section 10(b) claim to survive a motion to dismiss, plaintiffs will be required to identify a statement that is rendered materially misleading as a result of the purported omission. The specific ruling may involve a remand to the district court to consider whether Macquarie Infrastructure’s failure to disclose the IMO regulation rendered any other statements in the company’s financial disclosures misleading. Given the rarity with which securities law cases are considered by the Supreme Court, the decision in Macquarie Infrastructure Corp. v. Moab Partners L.P. will be worth examining.

Footnotes:

1. The years with the most filings were those with a significant amount of federal M&A-related litigation, which has dissipated in recent years. Depending on the source, the number of federal securities class action filings may slightly differ. Here, unless otherwise noted, our count tracks the count used in the filings database of the Stanford Law School Securities Class Action Clearinghouse in collaboration with Cornerstone Research. See Securities Class Action Clearinghouse: Filings Database, (last visited Feb. 17, 2024); see also Cornerstone Research, Securities Class Action Filings 2023 Year in Review (2024), 
2. Id. Federal securities class action filings in 2023 were surpassed in several years, including 2004 (239), 2008 (223), 2016 (271), 2017 (411), 2018 (402), 2019 (402), and 2020 (317). Id.
3. Id.
4. Kevin LaCroix, Federal Court Securities Class Action Lawsuit Filings Increased in 2023, The D&O Diary (Jan. 1, 2024).
5. Securities Class Action Clearinghouse, supra note 1.
6. Id.
7. Id.
8. Id.
9. Id.
10. Id.
11. In re Philip Morris Int'l Inc. Sec. Litig., 89 F.4th 408 (2d Cir. 2023).
12. Id. at 414.
13. Id. at 417.
14. Id.
15. Id.
16. Id.
17. Id. at 419 (alteration in original).
18. Id.
19. Id. at 420.
20. Id. at 422.
21. Id.
22. Id. at 421-22.
23. Id. 422-23.
24. Id. at 426.
25. Id. at 427 (cleaned up).
26. Id.
27. The Supreme Court will also decide a case determining the scope of the Securities and Exchange Commission’s (SEC) ability to impose fines and disgorgement through an administrative proceeding. Dechert covered that decision and its significant implications in a prior OnPoint published on May 25, 2022. The Supreme Court heard oral argument in late-November, and as predicted the justices appeared to split along ideological lines. We will continue to provide updates regarding any developments.
28. No. 22-1165 (U.S. 2024)
29. 17 CFR § 229.303
30. Moab Partners, L.P. v. Macquarie Infrastructure Corporation, 2022 WL 17815767 at *2 (2d Cir. Dec. 20, 2022).