SEC Proposes Rule Amendments Requiring Climate — Related Disclosures

On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed rule amendments that would require domestic and foreign registrants to include climate-related information in their registration statements and periodic reports. In a fact sheet accompanying the proposed rule amendments, the SEC recognized that “investors are concerned about the potential impacts of climate-related risks to individual businesses” and “are seeking more information about the effect of climate-related risks on a company’s business to inform their investment decision-making.” The proposed rule amendments “are intended to enhance and standardize climate-related disclosures to address these investor needs.” 

According to the SEC’s press release, the proposed rule amendments “would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (including severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.” In addition, the proposed rule amendments “would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2).”- “[A] registrant would [also] be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.” Large accelerated filers and accelerated filers would need to obtain an attestation report from an independent attestation service provider covering, at a minimum, Scope 1 and Scope 2 emissions disclosures.

The proposed rule amendments include a phase-in period that makes the compliance date dependent on the registrant’s filing status — large accelerated filer, accelerated filer, or smaller reporting company — and sets forth a separate compliance date for the Scope 3 emissions disclosures. Smaller reporting companies would be exempt from the Scope 3 emissions disclosure requirements, and Scope 3 emissions disclosures for large accelerated filers and accelerated filers would be subject to a safe harbor for liability.

The comment period will remain open for the longer of 30 days after the publication of the proposed rule amendments in the Federal Register or 60 days after the March 21, 2022, date of issuance and publication on the SEC’s website. If adopted, the proposed rule amendments would create new enforcement and litigation risks for registrants around their climate-related disclosures.

Southern District of New York Dismisses Securities Fraud Claims Against U.S. Stock Exchanges for Lack of Standing

On March 28, 2022, in City of Providence v. BATS Global Markets, Inc., Judge Furman of the U.S. District Court for the Southern District of New York dismissed a long-standing putative securities class action complaint against seven major U.S. stock exchanges because plaintiffs could not establish that they were harmed by the stock exchanges’ conduct. 

The case was filed on the heels of the publication of “Flash Boys: A Wall Street Revolt” in 2014, which analyzed the impact of high-frequency trading (“HFT”) firms in the market and asserted that trading had become rigged in the favor of those HFT firms. The operative complaint alleged that the stock exchanges violated Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by selling products to HFT firms that provided those firms an advantage over ordinary investors and failing to fully disclose the effects of these products to the market. 

The district court dismissed the case in 2015, finding that the stock exchanges were self-regulatory organizations and absolutely immune from suit based on their creation of the products at issue because the creation of those products fell within the scope of the quasi-governmental powers delegated to the stock exchanges. On appeal, the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision and remanded the case, finding that the stock exchanges were acting as regulated entities — not regulators — when they created the products for HFT firms and were not therefore immune from suit. After their renewed motion to dismiss was denied in 2019, the stock exchanges moved for summary judgment.

The only evidence plaintiffs submitted of the harm they allegedly suffered were the reports of their expert. The district court held that those reports were inadmissible because, among other things, they did not fit the facts of the case and were not supported by a reliable methodology. Specifically, the expert reports failed to show that the HFT firms identified in the reports actually used the products at issue and that the HFT firms’ counterparties did not use those same products. After excluding plaintiffs’ expert reports, the district court dismissed the case without prejudice, concluding that plaintiffs had neither set forth specific facts demonstrating that they had suffered an injury in fact nor presented evidence from which a jury could reasonably conclude that they suffered an injury that could be traced to the stock exchanges’ conduct. The district court found that plaintiffs’ “marketwide” theory of injury failed because they did not present evidence that every trade made on the stock exchanges by investors like plaintiffs resulted in a financial loss due to the sale of the at-issue products to certain HFT firms. The district court also found that plaintiffs failed to present evidence of at least one trade made on behalf of each plaintiff where that plaintiff suffered a financial loss due to the stock exchanges’ conduct. For these reasons, the district court held that plaintiffs lacked Article III standing.

Southern District of New York Dismisses Securities Fraud Claims Against Pharmaceutical Company and its Former Executives

On March 21, 2022, Judge Liman of the U.S. District Court for the Southern District of New York dismissed a putative securities class action complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, against Intercept Pharmaceuticals, Inc. (“Intercept”) and Intercept’s former President/CEO and former CFO.

The complaint alleged that the defendants made public statements about Ocaliva, Intercept’s drug for treating non-viral liver diseases that were false and misleading because they failed to disclose that certain significant adverse events (“SAEs”) were not included on Ocaliva’s label and that the U.S. Food and Drug Administration had notified Intercept that the FDA had identified a Newly Identified Safety Signal (“NISS”) with Ocaliva. Plaintiffs further alleged that the failures to disclose the SAEs and the NISS were actionable because the undisclosed information was material to the safety and continued use of Ocaliva for treatment of one form of liver disease and to the regulatory approval of Ocaliva for treatment of another form of liver disease, nonalcoholic steatohepatitis (“NASH”).

The court dismissed the complaint because it did not adequately allege any material misrepresentations or omissions, scienter, or loss causation. Specifically, the court held that the alleged omission of the SAEs was not material because only two SAEs were not covered by Ocaliva’s labeling, and plaintiffs failed to allege that either one of those SAEs were caused by Ocaliva. The court rejected plaintiffs’ argument that the omission of the SAEs was material based on the SAEs’ “risk odds ratio” because the risk odds ratio for one of the SAEs did not “warrant attention” and the other SAE had been disclosed to the FDA, which did not require it to be added to Ocaliva’s label. The court also found that the SAEs had been disclosed on the FDA’s FAERS database, which is publicly available. Similarly, the court held that the alleged omission of the NISS was not material because the NISS was classified as a “potential risk” — i.e., the lowest level of risk — and did not reflect that the FDA believed there was a plausible causal relationship between Ocaliva and the safety signal.

The court held that, even assuming that the complaint had alleged the required falsity, the complaint only alleged scienter as to one statement because that statement was made after Intercept had received the NISS. The court rejected the remainder of plaintiffs’ scienter allegations, including allegations that Intercept’s former CEO had sold Intercept stock at artificially inflated prices; that the development of Ocaliva was part of Intercept’s core operations; and that certain Intercept executives resigned shortly after the class period ended. The court also held that the former CEO’s stock sales were not suspicious because, among other things, they were made pursuant to a 10b5-1 trading plan and that the core operations doctrine and executive resignations could not fill the gaps in plaintiffs’ scienter allegations.

The court also held that the complaint failed to allege loss causation because two of the three alleged corrective disclosures related to Intercept’s new drug application to use Ocaliva to treat NASH — and not the SAEs or NISS — and the third corrective disclosure contained no new information about the SAEs or NISS.

New York Federal Judge Rejects Former MiMedx CFO's Dismissal Bid

On March 28, 2022, Judge Buchwald of the U.S. District Court for the Southern District of New York denied defendant Michael J. Senken’s (“Senken”) motion to dismiss a complaint filed by the SEC alleging, among other claims, violations of Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; and Section 304(a) of the Sarbanes-Oxley Act of 2002, all arising out of Senken’s role as the former CFO of MiMedx Group Inc. (“MiMedx”).

The SEC alleged that MiMedx, a regenerative medicine biotechnology company, and its executives inflated the company’s reported revenues in an effort to meet its publicly-disclosed revenue targets. Specifically, the SEC alleged that the defendants concealed the existence of a side agreement with its largest customer (“Distributor E”), which sold the company’s tissue grafting products to the U.S. Department of Veteran Affairs. Contrary to the terms of the direct sales contract between the parties, the side agreement allegedly allowed Distributor E to receive the product and then remit payment only once it received reimbursement from the VA. Because the company recognized revenue from Distributor E when the products were shipped, rather than when payment was received, the SEC alleged that this practice resulted in improper revenue recognition and reporting for every period from the first quarter of 2013 until the third quarter of 2017. Senken signed and certified all of the company’s 10-K, 10-Q, and 8-K forms during that period, and also signed the management letters provided to MiMedx’s auditors. When the company later announced in June 2018 that it would be restating its financial results from the prior periods, MiMedx’s stock price fell by approximately 73%, eliminating over $1 billion in value for MiMedx stockholders.

Shortly after the SEC filed its complaint on November 26, 2019, the court entered a final judgement on consent against MiMedx, requiring the company to pay a civil penalty of $1.5 million and to cease and desist from future securities violations. The U.S. Attorney’s Office for the Southern District of New York commenced a parallel criminal action against MiMedx’s former chairman and CEO (“Petit”) and its former president and COO (“Taylor”), which resulted in a stay of the SEC proceedings. On November 19, 2020, following a jury trial, Petit was found guilty of securities fraud and Taylor was found guilty of conspiracy to commit securities fraud. Senken then filed his motion to dismiss the SEC complaint on June 21, 2021.

Senken challenged the sufficiency of the allegations to support a strong inference of scienter. The court found that the SEC had pled sufficient facts to show at least “conscious misbehavior or recklessness,” given the allegations of Senken’s training and experience as a CFO, as well as the facts alleged concerning his access to emails showing, among other things, how Distributor E’s receipt of purchase orders from the VA were tracked. The court held that these alleged facts supported the strong inference that Senken “knew facts or had access to information” suggesting that the company’s public statements concerning revenue recognition were not accurate. The court also considered allegations that Senken hid information about the side agreement from the Audit Committee as supporting the inference that Senken was aware that the Distributor E account was being handled in a manner different from what was being presented to the Audit Committee.

The court also found that the statements certified by Senken were material, since information about the company’s reported revenue “is the exact type of information that would be important to a reasonable investor,” particularly where Distributor E was responsible for a substantial portion of the company’s reported revenue during the relevant period.

In response to Senken’s argument that he could not be liable under Section 17(a)(2) because the SEC had failed to allege that he obtained money or property through his alleged misstatements, the court adopted Judge Rakoff’s reasoning in SEC v. Stoker, finding that it was sufficient for the SEC to allege that Senken “obtained money or property for his employer while acting as its agent” or “personally obtained money indirectly from the fraud.”

The court further found that the complaint adequately pled scheme liability, since it alleged that Senken engaged in deceptive acts beyond issuing misstatements, including concealing material facts about the Distributor E side agreement from the company’s Audit Committee and outside auditors.

Finally, the court summarily rejected Senken’s challenges to the alleged violation of Section 304 of the Sarbanes-Oxley Act and the other claims asserted against Senken.

Lawyers in Goodwin’s Securities and Shareholder Litigation and White Collar Defense practices have extensive experience before U.S. federal and state courts, legislative bodies and regulatory and enforcement agencies. We continually monitor notable developments in these venues to prepare the Securities Snapshot — a bi-weekly compilation of securities litigation news delivered to subscribers via email. This publication summarizes news from the civil and criminal securities law arenas in a succinct, digestible format. Topics covered include litigation and enforcement matters, legislation, rulemaking, and interpretive guidance from regulatory agencies.

Editorial Board
Charles A. Brown
Meghan K. Spillane

Contributing Authors
Dorothy Hazan
Catherine Tremble
Anna Wittman