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Emulex Corp. v. Varjabedian

Issues

Can an individual sue for inaccurate or missing disclosure statements in a firm’s tender offer under Section 14(e) of the Securities Exchange Act of 1934; and, is an alleged violation of Section 14(e) subject to a negligence or scienter standard of proof?

This case asks the Supreme Court to define the private right of action under Section 14(e) of the Securities Exchange Act of 1934. Gary Varjabedian and other Emulex Corporation shareholders contend that they have a right to file a private action against Emulex under Section 14(e). Emulex Corporation and Avago Technologies Wireless Manufacturing, Inc. counter that Section 14(e) does not allow a private cause of action based on negligence, and that a higher scienter standard should apply instead. The Supreme Court’s ruling will have significant implications for shareholders’ interests in the event of a merger.

Questions as Framed for the Court by the Parties

Whether the U.S. Court of Appeals for the Ninth Circuit correctly held, in express disagreement with five other courts of appeals, that Section 14(e) of the Securities Exchange Act of 1934 supports an inferred private right of action based on the negligent misstatement or omission made in connection with a tender offer.

In February 2015, the technology companies Emulex Corporation (“Emulex”) and Avago Technologies Wireless Manufacturing, Inc. (“Avago”) announced that they would be merging. Varjabedian v.

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Matrixx Initiatives v. Siracusano

Issues

Where an individual must show that a company has misrepresented or omitted a material fact in order to claim a violation of the Securities Exchange Act, should a court apply a standard of statistical significance to determine whether the omitted or misrepresented fact is material?

 

Petitioners, Matrixx Initiatives Inc. and three of its officers (“Matrixx”), argue that the Ninth Circuit erred in allowing respondents, James Siracusano and other Matrixx shareholders (“Siracusano”), to sue under the Securities and Exchange Act of 1934 for Matrixx’s alleged failure to share product information with its shareholders. Specifically, Siracusano claims that Matrixx should have disclosed so-called adverse event reports that linked one of its products, Zicam Cold Remedy (“Zicam”), to anosmia, a condition that affects an individual’s ability to smell. Supreme Court precedent provides that, as part of the plaintiff’s case in showing a securities violation, the plaintiff must establish that the defendant misrepresented or omitted a material fact. In arguing that it was not required to disclose the studies, Matrixx relies on a statistical significance standard in determining whether the studies linking the drug to anosmia were material. Siracusano rejects the statistical significance standard, arguing that Matrixx should have shared such studies with investors regardless of the significance of the statistical correlation between Zicam and anosmia. The Ninth Circuit rejected the statistical significance standard and engaged in a factual analysis of Siracusano’s claims, finding that the allegations were sufficient. The Supreme Court will decide whether shareholders' ability to state a claim turns on the statistical significance of the withheld information, or whether a factual analysis is required.

Questions as Framed for the Court by the Parties

Respondents filed suit under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, alleging that petitioners committed securities fraud by failing to disclose "adverse event" reports-i.e., reports by users of a drug that they experienced an adverse event after using the drug. The First, Second, and Third Circuits have held that drug companies have no duty to disclose adverse event reports until the reports provide statistically significant evidence that the adverse events may be caused by, and are not simply randomly associated with, a drug's use. Expressly disagreeing with those decisions, the Ninth Circuit below rejected a statistical significance standard and allowed the case to proceed despite the lack of any allegation that the undisclosed adverse event reports were statistically significant.

The question presented is: Whether a plaintiff can state a claim under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.

Between October 22, 2003 and February 6, 2004, Respondent James Siracusano bought thousands of shares in Petitioner Matrixx Initiatives Inc. (“Matrixx”). See Siracusano v. Matrixx Initiatives, Inc., No. 04-1012, 2005 WL 3970117, at *1 (D. Ariz. Dec.

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Acknowledgments

The authors would like to thank former Supreme Court Reporter of Decisions Frank Wagner for his assistance in editing this preview.

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Merck & Co., Inc. v. Reynolds

Issues

Whether the two-year limitations period to bring a suit under the Securities Exchange Act begins when the plaintiff has obtained knowledge that the defendant acted with the intent to defraud, or simply when the plaintiff obtained general knowledge of facts pointing to potential fraud?

 

Under 28 U.S.C. § 1658(b), a plaintiff must file a claim alleging violation of the Securities Exchange Act of 1934 no later than two years after the plaintiff discovers the facts constituting the violation.  The Courts of Appeals are in general agreement that the two-year period of limitations begins when the plaintiff had, or should have had knowledge of the facts constituting the violation.  What is at issue in this case is whether knowledge that defendant acted with the intent to deceive is a fact constituting the violation for purposes of triggering the two-year period of limitation.  The Supreme Court’s decision will resolve this question of statutory interpretation and, in so doing, will determine the delicate balance between allowing plaintiffs with meritorious claims access to the federal courts and providing certainty and repose to potential securities fraud defendants.

Questions as Framed for the Court by the Parties

Did the Third Circuit err in holding, in accord with the Ninth Circuit but in contrast to nine other Courts of Appeals, that under the "inquiry notice" standard applicable to federal securities fraud claims, the statute of limitations does not begin to run until an investor receives evidence of scienter without the benefit of any investigation?

Under 28 U.S.C. § 1658, claims of “fraud, deceit, manipulation or contrivance” concerning the Securities Exchange Act of 1934 can be made either “[two] years after the discovery of the facts constituting the violation,” or “[five] years after such violation,” whichever is earlier. See 28 U.S.C. § 1658(b). Respondents, Reynolds, et.

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NVIDIA Corp. v. E. Ohman J:or Fonder AB

Issues

Does the Private Securities Litigation Reform Act require plaintiffs alleging scienter (knowledge of fraud by defendants) based on allegations about internal company documents to plead with particularity the contents of those documents? And, does the Act permit expert opinion rather than particularized allegations of fact to satisfy the Act’s falsity requirement?

This case asks the Supreme Court to decide how plaintiffs can demonstrate intent (also called “scienter”) under the Private Securities Litigation Reform Act (“PSLRA”) for the purpose of alleging securities fraud. More specifically, this case asks the Supreme Court to decide whether plaintiffs can allege intent based on allegations about internal company documents without referring to specific content in those documents. It also asks the Supreme Court to determine if plaintiffs can satisfy the Act's falsity requirement by relying on an expert opinion in lieu of particularized allegations of fact. NVIDIA argues that Öhman’s failure to allege with particularity the contents of the internal documents to show that NVIDIA misrepresented its finances to investors does not show a strong inference of scienter that the PSLRA requires in order to reduce frivolous lawsuits, and that Öhman’s reliance on expert testimony to satisfy the PSLRA’s rigorous particularity standard would allow plaintiffs to circumvent it. Öhman counters that the PSLRA evinces a holistic approach in meeting the burden of showing a strong inference of scienter rather than requiring one specific allegation. Öhman also claims that an expert’s conclusion is an allegation of fact since the experts’ assertion is backed by embedded statements of fact to arrive at such a conclusion. The outcome of this case has strong implications for the national economy and access to justice.

Questions as Framed for the Court by the Parties

Whether plaintiffs seeking to allege scienter under the Private Securities Litigation Reform Act based on allegations about internal company documents must plead with particularity the contents of those documents; and (2) whether plaintiffs can satisfy the Act's falsity requirement by relying on an expert opinion to substitute for particularized allegations of fact.

In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to rein in frivolous suits in securities fraud class actions. Choi, Stephen, and Pritchard, A.C., Securities Regulation: Cases and Analysis. 6th ed., Foundation Press, 2024.

Additional Resources

  • Choi, Stephen, and Pritchard, A.C., Securities Regulation: Cases and Analysis. 6th ed., Foundation Press, 2024.
  • Lipton, Ann, NVIDIA, Business Law Prof Blog (16 August, 2024).
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U.S. ex rel. Schutte v. SuperValu Inc.

Issues

Is a defendant’s subjective believe about the lawfulness of its conduct relevant to whether it “knowingly” violated the False Claims Act?

This case asks the Court to determine whether the False Claims Act (FCA), 31 U.S.C. § 3729, which punishes individuals who “knowingly present[], or cause[] to be presented, a false or fraudulent claim for payment or approval,” applies if, regardless of their subjective belief about the lawfulness of their conduct, defendants’ conduct is consistent with an objectively reasonable reading of an ambiguous statute. The United States argues that, under common law and the FCA’s text, when individuals make arguments that they believe are false, they can be liable even if they did not definitively know they were lying. The United States further argues that individuals receiving government funds have a duty to ask for clarification and determine the proper law, and thus are liable for advancing false claims against the government. In opposition, SuperValu argues that an individual’s subjective belief is irrelevant under the FCA because interpretations of ambiguous statutes cannot be objectively verified; thus, an individual is not liable if the statute is ambiguous, and the individual’s interpretation is objectively reasonable. SuperValu also states that, because the FCA is a punitive statute, the burden is on the government to clarify the statute and give individuals notice. This case touches on issues of efficient government fraud prosecution, separation of powers, and Medicare and Medicaid reimbursement.

Questions as Framed for the Court by the Parties

Whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it “knowingly” violated the False Claims Act.

This case arises from the consolidation of two cases, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc, which are factually similar and present an identical question of law. Both cases stem from the same question regarding the False Claims Act (FCA) as it relates to reimbursements under Medicare and Medicaid.

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