The SEC Walks Back “Admit and Deny”: What the Repeal of the Admissions Policy Means for Enforcement Practice

For fifty-four years, in virtually every settlement with the Securities and Exchange Commission (SEC) in which a sanction was imposed, the settling defendant or respondent agreed that as a condition of the settlement the defendant/respondent would not publicly deny the allegations in the SEC’s complaint filed in federal court or in an administrative order. Under this policy, codified in Rule 202.5(e) of the SEC’s Informal Rules of Practice, the settling defendant/respondent would not be required to admit the truth of the SEC’s allegations, but there could be no public denial either, under the threat that the SEC would seek to vacate the settlement and resume its investigation or litigation.  Settling defendants and their counsel disdained the no admit/no deny requirement (sometimes disparagingly called a “gag rule”), but it was the necessary price to pay in order to make peace with the SEC.

But no more.  On May 18, 2026, the SEC formally rescinded this long-standing policy with barely a fare-thee-well. In a prepared statement, SEC Chair Paul Atkins stated “I am pleased that we are rescinding the no-deny policy today. Speech critical of the government is an important part of the American tradition. This rescission ends the policy prohibiting such criticism by settling defendants.”

Further, in light of the rescission, the SEC stated that it will not enforce existing no admit/no deny provisions in prior settlements. “In the event of a breach of an existing no-deny provision, the Commission will take no action to ask a district court to vacate a settlement (or to reopen an adjudicatory proceeding) in connection with the terms of the settlement agreement.”

Origins of the No Admit/No Deny Policy

The “no admit/no deny” policy dates back to 1972, almost simultaneous with the creation of the SEC’s Division of Enforcement and an effort to formalize enforcement procedures. SEC officials were frustrated that defendants, some of whom had substantial legal exposure and settled precisely to avoid even harsher penalties, would immediately declare after the settlement was executed that they were actually innocent and settled only to avoid the expense and distraction of litigation.  Thus, the SEC settled on a compromise: the SEC could obtain injunctive relief, disgorgement, and civil penalties without protracted litigation; defendants could resolve matters without making admissions that would be devastating in parallel private securities litigation or other governmental actions, but they would not be permitted to publicly deny the allegations.

Criticism of No Admit/No Deny Policy

The no admit/no deny policy faced criticism from both the left and the right.  On the left, in the aftermath of the 2008 financial crisis, there were protests about letting malefactors “off the hook” by not requiring admissions of misconduct. See SEC v. Citigroup Glob. Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (concluding that a consent decree that did not require defendant to admit SEC’s allegations was not fair, reasonable or in the public interest), vacated and remanded, 752 F.3d 285 (2d Cir. 2014). Thus, in 2012, the SEC announced that it would no longer permit “no admit/no deny” resolutions where a defendant had already admitted facts in a parallel criminal proceeding. The bigger shift came in 2013, when then-Chair Mary Jo White announced that, in cases involving particularly egregious conduct, harm to large numbers of investors, or obstruction of an investigation, the Division of Enforcement would seek admissions as a condition of settlement. This practice was narrowly applied —used in fewer than two dozen matters per year. The first Trump Administration abandoned this policy, but it was resumed in the Biden Administration, where settlements in certain kinds of cases -- off-channel communications sweeps, certain market manipulation cases, and a handful of high-profile auditor and gatekeeper matters --- all featured admissions language.

Coming from a different direction, conservative legal scholars, the defense bar and the business community asserted that the no admit/no deny policy violated a defendant’s First Amendment free speech rights.  Every Court of Appeals to consider the issue rejected such claims. See SEC v. Romeril, 15 F.4th 166 (2d Cir. 2021); Powell v. SEC, 149 F.4th 1029 (9th Cir. 2025). The Supreme Court declined to take up the Romeril case and a petition in the Powell case is pending before the Supreme Court.  Of course, that action presumably has been mooted by the SEC’s rescission decision.

Criticism of the no admit/no deny policy also was grounded on practical concerns. A settling defendant would face a quandary in discussing an SEC settlement with partners, clients, investors and other regulators.  What was private and what was public? What could the defendant state without the risk that the SEC would assert that the policy had been violated and seek to vacate the settlement?  Because the SEC staff would not provide guidance, defendants and their counsel could only proceed at their own risk.

Going Forward

The future of SEC settlements has now become more unpredictable.  Perhaps nothing will change. On the other hand, the SEC staff may still object to particular statements by a settling defendant in particular situations. The ability to publicly deny the SEC’s allegations may encourage defendants to agree to an earlier settlement, which will conserve resources both for the SEC and the defendant.  On the other hand, the SEC may demand more onerous settlement terms if a defendant insists on publicly denying the SEC’s allegations.  Further, a future SEC may reinstate the no admit/no deny policy.

***

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

April Trade Secrets Litigation Brief: AI Cardiology Dispute, Aviation Engineer’s Guilty Plea, and Insurance Exec Accused of Data Theft

Trade secret litigation often turns on fast-moving disputes over information, competition, and control. Each month, we highlight notable rulings, verdicts, and enforcement actions shaping trade secret risk and litigation outcomes.

Heartflow Sues Rival Cleerly Over AI Cardiology Technology 

Trade secret and patent claims follow consultant's alleged defection 

Medical technology company Heartflow filed suit in the Eastern District of Texas against competitor Cleerly, alleging that Cleerly's AI-powered cardiac imaging products were developed using trade secrets. 

The complaint centers on James Min, who served as a Heartflow consultant from 2012 to 2017. According to the filing, Min secretly founded Cleerly in 2017 while still working for Heartflow, using technology copied from the company to build a competing AI-based heart disease diagnostic tool. 

According to the complaint, two of Cleerly’s products fall within the field defined in Min’s consulting agreement with Heartflow. While he was a Heartflow consultant, the company was well underway with active research, development, and inventions related to AI analysis of coronary anatomy, plaque, and lesion-specific ischemia. Heartflow alleges Min “conceived of these products, or the inventions underlying them, in connection with his services to Heartflow.” 

Heartflow, which went public on Nasdaq last year at a valuation of $2.27 billion, says its platform — developed over more than a decade — enables personalized 3D cardiac modeling from a single specialized scan. Cleerly's CEO Min denied the allegations, which also include patent infringement, stating that the company's work is grounded in "landmark clinical science" it has independently published on cardiovascular disease. Heartflow is seeking an unspecified amount of monetary damages. 

What this means: The case raises a recurring issue in technology disputes: the consultant who transitions from advisor to founder. When a company engages outside consultants with access to proprietary systems and methods, it assumes the risk that those individuals may later build on — or in a plaintiff's framing, misappropriate — what they encountered. Companies that rely on consultants for sensitive development work should consider whether their agreements and confidentiality protections are calibrated to that risk.

Aviation Engineer Pleads Guilty After Customs Agents Find Stolen Trade Secrets

Airport inspection surfaces confidential documents; employer confirms no authorization

A Tulsa, Oklahoma man with access to sensitive aviation data pleaded guilty on April 1 to making a false statement to federal agents after Customs and Border Protection officers discovered proprietary documents on his personal devices at a Dallas airport.

Junjie Zhang, 57, who was a senior material and process engineer at a Wichita, Kansas aviation company, was stopped in 2019 as he attempted to board a flight to China. When agents asked whether he carried any work-related materials, he reportedly said no. A search of his devices uncovered documents marked "Proprietary" and "Confidential," including graphs and blueprints connected to his employer's aviation work. Zhang then changed his account, claiming his employer had authorized him to have the files. His employer confirmed he had no such authorization.

The investigation had begun a year earlier, in 2018, after Zhang's employer reported him to the FBI following suspicious behavior during a work trip to China. Investigators estimated the proprietary data found on his devices was worth more than $100,000. Zhang is scheduled to be sentenced on July 23.

What this means: The case illustrates how border inspections have become an enforcement mechanism in trade secret investigations. When employees carry confidential materials on personal devices across international borders, they expose themselves to scrutiny outside the ordinary employment context — and false statements to federal agents carry independent criminal liability. For companies operating in sectors with foreign counterintelligence concerns, the Zhang matter reinforces the importance of clear device policies, authorization documentation, and employee training on data handling obligations.

Assurant Sues Former Sales Executive and Warranty Rival Over Alleged Data Theft

Departing executive accused of emailing files, wiping devices, and joining direct competitor

Assurant, Inc. and two of its affiliates filed suit on April 28 in the Southern District of Texas against Brent Schouten, a former district manager in Assurant's dealer services division, and his new employer, iA American Warranty Group — a direct competitor in the auto finance and insurance market.

According to the complaint, Schouten told Assurant he was retiring, but Assurant alleges he was actually moving to iA in an executive leadership role. In the weeks before and on his final day of employment, the filing claims, Schouten emailed himself a set of sensitive materials — financial forecasts, pricing model spreadsheets, a "Go-To-Market Strategy" document, customer lists and contact information, and what the complaint describes as "system access credentials." He also, Assurant alleges, used an unauthorized USB device on his company laptop. After being told in writing to preserve everything, Schouten allegedly wiped his email and OneDrive accounts before returning the device.

Adding a contractual dimension to the dispute: Schouten and iA had signed an agreement acknowledging that his Assurant covenants were "valid" and making compliance a condition of his employment. Once Assurant raised its concerns, iA reversed course — characterizing the noncompetition covenant as "unenforceable" and Assurant's allegations as "unfounded."

Assurant is seeking a one-year restraint on Schouten's role, return of all confidential materials, forensic access to devices and accounts on both sides, and damages under the Texas Uniform Trade Secrets Act, the federal Defend Trade Secrets Act, and theories of tortious interference and breach of contract. The allegations have not been tested in court, and Schouten and iA have not yet filed a response.

What this means: The case presents two distinct issues worth tracking. First, the allegation that an executive signed an agreement acknowledging his post-employment obligations and then — at the direction or with the acquiescence of his new employer — disavowed them almost immediately. That sequence, if proven, can support claims against both the individual and the incoming employer. Second, the alleged destruction of data after a written litigation hold demand, if established, is the kind of conduct that can carry consequences well beyond the underlying trade secret claims.

April Securities Litigation Brief: A New Enforcement Director, A Defense Verdict and Ninth Circuit News

Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.

SEC Appoints New Enforcement Director

On April 8, the Securities and Exchange Commission appointed David Woodstock as the new director of the SEC’s Division of Enforcement. Woodstock was chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher and previously had been head of the SEC’s Fort Worth Regional Office.

Woodstock replaces Judge Margaret Ryan, who resigned as the Enforcement Director after only seven months amid reports that she feuded with SEC Chair Paul Atkins about enforcement practices.

Why It Matters: It remains to be seen whether Woodstock changes the Division’s enforcement orientation. On April 7, the SEC announced its enforcement results for Fiscal Year 2025 (ended September 30, 2025), revealing a sharp reduction in enforcement actions. The SEC filed 456 enforcement actions in FY 2025, representing a 22% decrease from FY 2024. The SEC characterized the fewer enforcement actions as a positive development, declaring that it was moving away from the alleged “regulation by enforcement” by the SEC in the Biden Administration.

In particular, the SEC has voluntarily dismissed or settled actions alleging that the offer and sale of crypto assets constituted violations of the federal securities laws because they were unregistered securities. The SEC has also stated that it will not bring enforcement actions based on so-called technical violations but will focus on combating fraud.

Federal Jury Returns Defense Verdict in Vaxart Class Action

On April 28, 2026, a federal jury in San Francisco found that hedge fund Armistice Capital and two of its executives were not liable on securities claims that the firm engaged in market manipulation of the shares of Vaxart, Inc., by inflating its stock price through materially false and misleading press releases in order to sell $250 million in Vaxart stock.

The plaintiffs also alleged in the class action that the defendants engaged in insider trading by selling Vaxart stock while in possession of material, nonpublic information. Defendants had told the jury that they had no involvement in Vaxart’s press releases, which they also contended were accurate. (Vaxart Inc. Securities Litigation, Case No. 3:20-cv-05949, U.S. District Court for the Northern District of California)

Why It Matters: Very few securities class action lawsuits ever reach trial, so the few that manage to get to a verdict provide test cases concerning how juries view these cases. A defense verdict likely will persuade defense counsel and their clients that it is worth risking taking a case to trial or demanding a low settlement amount.

Ninth Circuit Refuses to Vacate FINRA Arbitration Award Because Proceedings Were Not Recorded

The Ninth Circuit Court of Appeals refused to vacate an arbitration award even though the proceedings were not recorded. In Uddin v. TD Ameritrade, Inc., 2026 WL 982854 (9th Cir. Apr. 13, 2026) (Not for Publication), the appellant appealed an award by the Financial Industry Regulatory Authority (“FINRA”) to TD Ameritrade, asserting that the apparently inadvertent failure of the FINRA panel to record or transcribe the proceedings, as required by the arbitration agreement, deprived him of a fundamentally fair hearing.

But the panel ruled that under the Federal Arbitration Act, a court may vacate an arbitration award where the award was procured by corruption, fraud or undue means; where there was evident partiality or corruption in the arbitrators; where a party was “prejudiced” by the arbitrators’ misconduct or misbehavior; or where the arbitrators exceeded their powers. 

The court ruled that even if the inadvertent failure to record the proceedings amounted to “misbehavior,” Uddin failed to show how his rights were prejudiced by an absence of a transcript or recording. The Ninth Circuit therefore affirmed the district court’s decision to confirm the FINRA award.

Why It Matters: This decision demonstrates the difficulty in convincing the federal courts to overturn an arbitration award. Here, even a significant failure by the arbitration panel to adhere to the terms of the arbitration agreement was not deemed sufficient grounds for vacating the award.

Ninth Circuit Reverses Insider Trading Conviction Because of Juror Doubt

The Ninth Court of Appeals reversed a conviction for insider trading because a juror expressed doubts about his ability to be fair to both sides even though defense did not object to the juror’s continued service.

In U.S. v. Bolandian, 2026 WL 1076834 (9th Cir. Apr. 21, 2026), the defendant and his relatives allegedly traded in stocks based on tips about potential mergers from a former college classmate working as a banking analyst at J.P. Morgan. During the trial, a juror sent the trial judge a note stating that his uncle owned a private investment firm that had conducted business with J.P. Morgan and might have a relationship with a witness.

In a colloquy with the judge, the juror was asked if he could be fair to both sides and responded that he “was not sure.” Nonetheless, defense counsel did not object to the continued service by the juror, who became the foreman of the jury.

The Ninth Circuit held that the trial judge had a duty to investigate possible jury bias that could not be waived by defense counsel. The court held that there was plain error because the trial judge impermissibly delegated the responsibility to investigate potential juror bias to the juror himself. The court vacated the judgment and remanded the case for a new trial.

Why It Matters: The court held that the Sixth Amendment guarantees a defendant the right to trial by an impartial jury. Here, the juror volunteered his potential bias, and the trial judge merely instructed the juror to advise the Court if he still believed he could not be fair after he had heard all the evidence.

Counting Interrogatories in the Northern District of California: When Do Subparts Count?

Federal Rule of Civil Procedure 33(a) limits parties to 25 interrogatories, “including all discrete subparts.” The recurring—and often disputed—issue is when subparts are treated as part of a single interrogatory and when they must be counted separately. In the Northern District of California the short answer: it depends on whether the subparts are logically and factually related to a single line of inquiry or instead introduce distinct subjects.

The Rule (and Why It Exists)

Rule 33(a)(1) sets the default cap: 25 interrogatories, including all discrete subparts.

That cap was added to curb abuse. The Advisory Committed explains, the purpose of the numerical limit is not to prevent needed discovery, but to ensure judicial scrutiny before parties make potentially excessive use of interrogatories.[1]

The Advisory Committee also cautioned against gamesmanship: “Parties cannot evade this presumptive limitation through the device of joining as ‘subparts’ questions that seek information about discrete separate subjects.” [2]  The Committee did provide one bright line, rule, however: “a question asking about communications of a particular type should be treated as a single interrogatory even though it requests that the time, place, persons present, and contents be stated separately for each such communication.”[3]

The Rule 33 Framework in the Northern District

The Northern District’s local rules track the plain language of Rule 33(a)(1) and require a motion showing good cause to exceed the limit.[4] Although Rule 33 does not define “discrete subparts,” courts in this district have developed a pragmatic, case-by-case approach grounded in substance over form.[5]

Northern District courts generally apply the principle that interrogatory subparts are counted as a single interrogatory when they are “logically or factually subsumed within and necessarily related to the primary question.”[6]  In contrast, subparts that reach different subjects, theories, or factual areas are treated as separate interrogatories.

In other words:

• If answering the primary question necessarily answers the subparts (because the subparts simply ask for details of the same inquiry), courts tend to treat it as one interrogatory. [7]

• If the subpart can be answered fully and independently—without answering the primary question (or vice versa)—it is more likely a separate interrogatory. [8]

• If the subpart may be admitted and the primary question denied (or vice versa) – it is more likely a separate interrogatory.[9]

Court have recognized that while here is no bright-line test, the “weight of authority” looks to whether the subparts are logically or factually subsumed and bear a direct relationship to the information requested by the primary question.[10]

Substance controls over formatting with courts focusing on whether the subparts create multiple lines of inquiry rather than one coherent inquiry, regardless of whether the subparts are explicitly broken out alphanumerically.[11]

Application in Patent Litigation

Patent cases in the Northern District provide particularly clear guidance. In Synopsys, Inc. v. ATopTech, Inc., the court held that contention interrogatories seeking the facts, documents, and witnesses supporting a single contention or affirmative defense were logically and factually related and therefore counted as one interrogatory.[12] The court explained that where subparts are directed to different types of information—facts, documents, or persons—but all relate to the same contention, they do not multiply the interrogatory count.

This approach reflects the district’s practical understanding of contention discovery, particularly in complex patent cases where identifying supporting evidence is a natural extension of a single substantive inquiry.

The analysis changes when an interrogatory sweeps in multiple distinct products, patents, or subject matters. In Collaboration Props., Inc. v. Polycom, Inc., the court held that interrogatories addressing 26 different accused products contained 26 discrete subparts—each product representing a separate subject of inquiry.[13] The court rejected attempts to evade Rule 33 by packaging unrelated questions as “subparts.”

Courts outside the Northern District—particularly in the Central District of California—have sometimes taken a stricter view, treating requests for facts, documents, and witnesses as separate subparts. Synopsys acknowledged this split but expressly declined to adopt that approach where the requests relate to a single contention or theory.[14] In the Northern District, substance controls: the question is not how many categories of information are requested, but whether the interrogatory pursues one coherent subject.[15]

Takeaways for Litigants

The Northern District’s approach to counting interrogatories under Rule 33 is functional and context-driven. Subparts are counted collectively when they are logically and factually tied to a single primary question. But courts when an interrogatory reaches multiple products, patents, defenses, or otherwise distinct subjects the putative subparts will be regarded as separate interrogatories.

For practitioners, the lesson is straightforward: draft with discipline. Interrogatories that genuinely seek information on one topic are more likely to survive scrutiny as a single interrogatory, while those that combine multiple independent inquiries—no matter how artfully labeled—risk being counted against the Rule 33 limit.

***

[1] “The aim is not to prevent needed discovery, but to provide judicial scrutiny before parties make potentially excessive use of this discovery device. In many cases it will be appropriate for the court to permit a larger number of interrogatories in the scheduling order entered under Rule 16(b)”. Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 676 (1993)

[2] Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 675-676 (1993)

[3] Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 675-676 (1993)

[4] N.D. Cal. Civ. L.R. 33-3.

[5] See Trevino v. ACB Am., Inc., 232 F.R.D. 612, 614 (N.D. Cal. 2006).

[6] Trevino, 232 F.R.D. at 614.

[7] See Superior Commc’ns v. Earhugger, Inc., 257 F.R.D. 215, 218 (N.D. Cal. 2009).

[8] Trevino, 232 F.R.D. at 614.

[9] Safeco of Am. v. Rawstron, 181 F.R.D. 441, 446 (1998).

[10] Chapman v. Cal. Dept. of Ed., No. 01-1780, 2002 WL 3285376 at *1 (N.D. Cal. 2002) (See also Collaboration Props., Inc. v. Polycom, Inc., 224 F.R.D. 473, 475 (N.D. Cal. 2004) (interrogatory limit exceeded where “most of the previous interrogatories asked for information about all of the accused Polycom products (totaling 26 different products)” (emphasis in original).)

[11] Seoul Semiconductor Co., Ltd. v. FEIT Elec. Co., Inc., No. 22-cv-05097, 2024 WL 3086641 at *13 (C.D. Cal. May 23, 2024) (interrogatory seeking priority date for each patent asserted claim constituted discrete subparts where the asserted patents were unrelated); Safeco of Am. v. Rawstron, 181 F.R.D. 441, 444 (C.D. Cal. 1998) (“One question that is easily answered is whether subparts must be separately numbered or lettered to count as multiple interrogatories. The better view is that they need not be, or any party could easily circumvent the rule simply by eliminating the separate numbering or lettering of the subparts.”)

[12] 319 F.R.D. 293, 297–98 (N.D. Cal. 2016).

[13] 224 F.R.D. 473, 475 (N.D. Cal. 2004).

[14] 319 F.R.D. at 298.

[15] Trevino, 232 F.R.D. at 614

***

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Natasha Saputo Joins Alto Litigation

SAN FRANCISCO (April 22) – Experienced patent litigator Natasha Saputo has joined Alto Litigation, the firm announced today.

Saputo will focus on trial and appellate matters before U.S. federal courts and the International Trade Commission. Her practice spans a range of technologies, including semiconductors and genome sequencing. 

Before joining Alto, Saputo practiced at Boies, Schiller & Flexner LLP and served as a law clerk in the Office of the Legal Adviser at the U.S. Department of State. She holds a J.D. from George Mason University School of Law and an L.L.M. in International Business and Economic Law from Georgetown University Law Center. She earned her undergraduate degree in government and international politics at George Mason University.

About Alto Litigation

Alto Litigation advises clients in high-stakes business disputes, regulatory investigations, and litigation, and has represented Fortune 500 companies, a prestigious university, and Silicon Valley technology companies across two decades of practice. The firm is recognized by Chambers USA, Best Law Firms and Benchmark Litigation, which described Alto Litigation as a “powerhouse litigation boutique.”

Learn more at www.altolit.com.

Post-Demand Evidence and Anonymous Sources in Delaware Section 220 Inspection Actions: The Delaware Supreme Court’s 3–2 Decision in Paramount Global

On March 25, 2026, the Delaware Supreme Court issued a significant and closely divided opinion in Paramount Global v. State of Rhode Island Office of the General Treasurer,[1] addressing two unsettled questions in stockholder books-and-records litigation under Section 220 of the Delaware General Corporation Law (DGCL).[2] By a 3–2 vote, the court affirmed the Court of Chancery’s ruling that post-demand evidence may, under appropriate circumstances, be used to establish the “proper purpose” required for a stockholder inspection demand.  Further, the Court held that reports in reputable publications citing anonymous sources can constitute sufficiently reliable evidence of a credible basis to suspect corporate wrongdoing, and thus support a “proper purpose” for inspection.  As one of the first Delaware Supreme Court decisions following the 2025 amendments to Section 220, Paramount Global will have lasting practical significance for stockholders, corporations, and practitioners navigating inspection demand proceedings.

I.   Background: The Paramount Sale Process and the Inspection Demand

The dispute arose from Shari Redstone’s control of Paramount Global through National Amusements, Inc. (“NAI”), which owned a supermajority of Paramount’s voting Class A shares. Beginning in 2023, financial pressures on NAI, including a dividend cut by Paramount’s board and NAI’s difficulty servicing its debt, prompted a flurry of media reporting about whether Redstone would sell NAI’s controlling interest in Paramount potentially in lieu of seeking a sale of the company as a whole.

Over the course of roughly a year, outlets including the Wall Street Journal, the New York Times, Bloomberg Law, the Financial Times, the New York Post, and Variety published dozens of articles—citing confidential sources described as people “familiar with the situation,” “close to the negotiations,” or “briefed on the matter”—reporting that Redstone had fielded acquisition proposals from Amazon, Apple, Netflix, Skydance Media, Apollo Global Management, and others. The articles suggested that Redstone, in her capacity as Paramount’s controlling stockholder, was steering potential buyers toward acquiring NAI’s controlling block rather than the company as a whole—and in some instances appeared to be blocking whole-company sale opportunities in favor of transactions that would benefit her personally.

On April 5, 2024, the Employees’ Retirement System of Rhode Island (“Rhode Island”), a holder of Paramount Class B common stock, served a Section 220 demand on Paramount. The demand alleged that it had a credible basis to suspect that Redstone and NAI had “usurp[ed] Paramount’s corporate opportunity by marketing National Amusements to buyers who otherwise would be interested in Paramount or its assets,” and that the Paramount board had “done nothing to ensure that Redstone is not diverting corporate opportunities or interfering with Paramount’s ability to seek the best deal for Paramount and its other stockholders.” The demand sought board materials, communications concerning proposed transactions, the special committee’s mandate, and informal electronic communications of Redstone and her advisors.

Paramount rejected the demand. Rhode Island filed a complaint in the Court of Chancery on April 30, 2024. During the pendency of the proceeding, additional media reporting and Paramount SEC filings continued to corroborate and amplify the earlier accounts, culminating in the announcement of the Skydance transaction—which closed on August 7, 2025—under which Skydance acquired NAI for $2.4 billion and then merged with Paramount.

II.   The Proceedings Below: The Magistrate and the Vice Chancellor Diverge

The case was tried on a paper record before a Magistrate in Chancery in July 2024. Rhode Island relied on pre-demand news reporting as well as post-demand articles and SEC filings that corroborated the earlier accounts. The Magistrate, however, declined to consider the post-demand evidence, holding that the stockholder could only rely on information that existed when the demand was served. Applying that limitation, the Magistrate found no credible basis to suspect wrongdoing and recommended judgment for Paramount.

Rhode Island disputed the Magistrate’s recommendation, and the Vice Chancellor conducted a de novo review of both the facts and the law. The Vice Chancellor declined to adopt the Magistrate’s recommendation. He held that “there are settings when a stockholder can legitimately rely at trial on post-demand evidence”—specifically, when a material event occurs after the demand but before trial and the stockholder’s reliance on such evidence does not prejudice the corporation.[3] He also held that “articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing” whether a proper purpose exists.[4] On that basis, the Vice Chancellor found that Rhode Island had demonstrated by a preponderance of the evidence a credible basis to infer that Redstone and NAI had breached the duty of loyalty by channeling potential buyers away from a company-level transaction and into an NAI-level transaction, and ordered the matter remanded to the Magistrate to determine the scope of production. Paramount sought and obtained certification for interlocutory appeal.

III.   The Delaware Supreme Court’s Decision: Two Key Holdings

A. Post-Demand Evidence: A Discretionary Standard, Not a Categorical Bar

The central legal question before the Supreme Court was whether a Court of Chancery, when determining whether a stockholder has shown a “credible basis” to suspect wrongdoing, may consider evidence concerning events that are disclosed or occur after the stockholder has served its Section 220 demand.

Paramount argued for a categorical rule: any evidence postdating the demand should be inadmissible for purposes of establishing a proper purpose—by either side. It grounded this argument in the text of Section 220(c), which requires a stockholder to “first establish” a proper purpose, and in Court of Chancery transcript rulings that it read as supporting a time-of-demand limitation. It also raised policy concerns, warning that permitting post-demand evidence would “invite[] stockholders to use the Section 220 demand process to keep corporate books and records open in perpetuity as long as some rumors about the corporation circulate in the news.”

The Supreme Court’s majority, written by Justice Traynor and joined by Justices LeGrow and Griffiths, rejected Paramount’s categorical approach. The court concluded that “[w]e discern nothing in [§] 220’s text that prohibits the consideration of post-demand evidence; on the contrary, we see the same signposts identified by the Court of Chancery, all of which point in the direction of admissibility under appropriate circumstances.”[5] The majority noted that Section 220(c)’s “first establish” language describes what a stockholder must demonstrate to the court after the corporation has rejected a demand, a showing that necessarily occurs well after the demand itself, and thus does not constrain what evidence is admissible at that later proceeding.

The majority determined that the rulings on which Paramount relied did not support a categorical bar. Instead, the courts had declined to consider post-demand evidence for reasons unrelated to timing, such as preventing stockholders from using discovery in a books and records case to obtain the very documents at issue in the proceeding. The majority likewise noted that the Delaware Supreme Court itself had previously relied on post-demand evidence in Wong Leung Revocable Trust v. Amazon.com, Inc., 345 A.3d 965 (Del. 2025), where it credited a federal antitrust court ruling published after the demand was made.

Having rejected a bright-line rule, the court endorsed the standard articulated by the Vice Chancellor: the general rule is that a stockholder is limited to evidence identified in the demand and information available when the demand was served, but under appropriate circumstances the Court of Chancery may, in its sound discretion, consider post-demand evidence that is material to the credible-basis inquiry and not prejudicial to the corporation.[6] On the facts presented—where the post-demand evidence concerned the company’s own public conduct, the parties had stipulated to the admissibility of certain such evidence, and Paramount itself had introduced post-demand evidence—the majority saw no abuse of discretion in the Vice Chancellor’s consideration of that evidence.[7]

B. Confidentially Sourced News Reporting: A Reliable Basis for Credible Suspicion

The majority and dissent were in agreement on the second issue. Both accepted the proposition that hearsay statements in news articles attributed to unnamed, confidential sources may, if sufficiently reliable, support a “credible basis” finding under Section 220.

This was consistent with prior precedent. The Supreme Court had previously stated in NVIDIA Corporation v. City of Westland Police and Fire Retirement System that in the § 220 context, the use of ‘sufficiently reliable hearsay’ is allowed.[8] The “credible basis” standard itself has been described as the “lowest possible burden of proof”—satisfied by “a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.”[9]

Paramount challenged the Vice Chancellor’s statement that “[n]ews articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing whether a stockholder has a credible basis to suspect wrongdoing” as creating an impermissible categorical shortcut.[10] Reading the Vice Chancellor’s opinion as a whole, the majority was satisfied that the court had not relied on outlet reputation as a conclusive proxy for reliability. Rather, the Vice Chancellor properly conducted a multi-factor analysis considering: the volume of articles (47); the level of specificity in the source descriptions; instances where Paramount’s own SEC filings corroborated the reporting; the reputation of both the outlets and the specific journalists; the absence of indicators of unreliability or conspiratorial character; and the fact that Paramount itself had relied on articles with similar characteristics. The majority found this reliability analysis “passes muster.”[11]

IV.   The Dissent: A Categorical Rule Is the Better Policy

Chief Justice Seitz and Justice Valihura agreed with the majority’s conclusion on the confidential source issue but dissented on post-demand evidence. The dissenters acknowledged the majority’s practical observation—that a stockholder denied the use of post-demand evidence at trial can simply serve a new demand, as Rhode Island did here—but concluded that the better policy choice is a categorical bar.[12]

The dissent advanced several structural and policy arguments in support of a bright-line rule. First, the dissenters noted that Section 220(c)’s five-day waiting period—which gives the corporation a brief litigation-free window to consider the demand before suit may be filed—would be undermined if stockholders can supplement their demands with post-filing evidence: a stockholder could serve a thinly supported demand, race to the courthouse, and then rely on subsequently developed evidence to establish a proper purpose that did not exist at the time of the demand.

Second, the dissenters took issue with the practical workability of the majority’s “material event” exception, arguing that “[l]itigation over what events are ‘material’ will add one more layer of complexity to what should be a summary proceeding.”[13] Section 220 proceedings are designed to be prompt and narrow. The dissenters worried that the majority’s discretionary approach would make them more complex and time-consuming.

Finally, the dissenters observed that confining the stockholder to evidence available at the time of the demand is not unworkable—it simply incentivizes stockholders to bring inspection demands only when they have a concrete, contemporaneous basis for suspicion, rather than serving speculative demands in hopes that supporting evidence will emerge before trial.

V.   Key Takeaways for Practitioners

The decision provides clarity on two key questions in Section 220 practice and has immediate practical implications for both sides of books-and-records disputes.

For stockholder plaintiffs, the ruling confirms that post-demand events and disclosures are not categorically off-limits in a Section 220 proceeding. Where material developments occur after the demand is served, whether through SEC filings, additional media reports, or other public disclosures, and where reliance on that evidence would not prejudice the corporation, courts have discretion to consider it. Plaintiffs should preserve and introduce such evidence and be prepared to demonstrate both materiality and non-prejudice.

For corporations, the decision underscores that post-demand evidence is admissible as a discretionary matter, not as a matter of right. The Court of Chancery retains discretion to exclude post-demand evidence—as the Magistrate did in this very case—where, for example, the demand is premature or the evidence would prejudice the corporation. The majority’s affirmance rested heavily on the facts that the post-demand evidence here consisted of publicly available disclosures about the company’s own conduct, that Paramount had stipulated to some of it, and that Paramount itself had proffered similar evidence.

On the anonymous source question, the unanimous agreement across the majority and dissent is itself significant: reporting by reputable news organizations citing anonymous sources close to corporate negotiations can be sufficient to meet the “credible basis” threshold, provided the court conducts a fact-specific reliability analysis of the kind the Vice Chancellor performed here. Parties relying on confidentially sourced reporting should be prepared to demonstrate the reliability factors that carried the day: specificity of sourcing, corroboration by independent events or public filings, outlet and journalist reputation, and the absence of indicators of unreliability.

Finally, the March 2025 amendments to Section 220—which now require that demands be made in good faith, for a proper purpose, and with reasonable particularity as to the books and records sought—were not at issue in this case, which arose under the pre-amendment version of the statute. Practitioners should take note that the new, heightened specificity requirements may bear on both the temporal framing of the demand and the question of which post-demand evidence is “material” under the majority’s standard.

Conclusion

The Delaware Supreme Court’s 3–2 ruling in the Paramount case is an important development in Section 220 jurisprudence. By adopting a discretionary, case-by-case standard for post-demand evidence rather than the categorical bar urged by Paramount, the majority has chosen flexibility over certainty. The dissenters’ concern—that the majority’s rule will encourage premature demands and complicate summary proceedings—reflects real policy tradeoffs that the Court of Chancery will need to manage through the prudent exercise of its discretion. And the court’s unanimous endorsement of confidentially sourced news reporting as a potential basis for credible suspicion reflects the practical reality of how corporate transactions of this magnitude are documented in the public record.

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[1]Paramount Global v. State of R. I. Off. of the Gen. Treasurer, No. 129, 2026 WL 820647 (Mar. 25, 2026).

[2]Del. Code Ann. tit. 8, § 220 (2026).

[3] State of R. I. Off. of Gen. Treasurer v. Paramount Glob., 331 A.3d 179, 191–92 (Del. Ch. 2025), aff'd and remanded sub nom. Paramount Glob. v. R. I. Off. of Gen. Treasurer, No. 129, 2026 WL 820647 (Mar. 25, 2026).

[4] Paramount Glob., 331 A.3d at 199.

[5] Paramount Glob., 2026 WL 820647, at *7.

[6] Paramount Glob., 2026 WL 820647, at *9.

[7] Id. at *10

[8]NVIDIA Corp. v. City of Westland Police & Fire Ret. Sys., 282 A.3d 1, 22 (Del. 2022).

[9]Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 123 (Del. 2006).

[10] Paramount Glob., 331 A.3d at 199.

[11] Paramount Glob., 2026 WL 820647, at *10

[12] Id.  at *12 (Seitz, C.J., & Valihura, J., dissenting).

[13] Paramount Glob., 2026 WL 820647, at *13 (Seitz, C.J., & Valihura, J., dissenting).

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

****

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Inside Alto Litigation: Employee Spotlight with Silvia Kuhn

What is your title and position?

I am a Senior Paralegal at Alto Litigation, where I support attorneys across all stages of the litigation process.

What is your role at Alto Litigation, and what is a typical day like?

My role is to help manage cases from start to finish, which includes drafting and reviewing legal documents, coordinating discovery, conducting legal research, maintaining case files, and working closely with attorneys to keep everything on track. A typical day starts with assessing deadlines and setting priorities, it often involves preparing filings, organizing and managing case files, and coordinating various aspects of discovery.

What drew you to this field, and how did you get started?

I was drawn to the legal field because of its focus on critical thinking and real-world impact. I started my career in a legal support role and quickly found that I enjoyed the detail-oriented and strategic aspects of litigation.

What is your favorite part of your job?

My favorite part of the job is the opportunity to continuously learn—both about the subject matter of each case and from the attorneys I work with. Being exposed to strong legal writing and thoughtful strategy has helped me grow my own skills and deepen my understanding of litigation.

What makes Alto Litigation stand out?

Alto Litigation stands out for its collaborative environment and commitment to delivering high-quality work. What further sets the firm apart is its dynamic group of attorneys who combine strong legal expertise with a fresh, forward-thinking perspective, leveraging technology and innovation to consistently deliver for clients.

What aspect of Alto Litigation makes you most proud to work here?

I’m most proud of the team’s dedication to excellence and strong ethical foundation. It’s an environment where I feel valued and respected, and where everyone is aligned in delivering strong results while maintaining a positive workplace.

March Trade Secrets Litigation Brief: Reduced Jury Award, Apple’s Injunction Request, Alleged Sneaker Extortion and More

Trade secret litigation often turns on fast-moving disputes over information, competition, and control. Each month, we highlight notable rulings, verdicts, and enforcement actions shaping trade secret risk and litigation outcomes. 

Rocket Companies Subsidiary Hit with $175 Million Trade Secret Verdict 

Retrial produces substantial award in decade-old dispute over home valuation technology 

A San Antonio jury found that Rocket Companies subsidiary Rocket Close stole trade secrets from real estate data platform HouseCanary and awarded $175 million in damages, Reuters reported. The verdict followed a retrial in a case that has now spanned a decade.

The dispute centers on allegations that Rocket Close — formerly known as Amrock, a title insurance services company — misappropriated HouseCanary's proprietary technology for valuing home prices. A Texas appeals court had previously overturned an earlier $700 million verdict against Amrock in the case, leading to the retrial. 

Rocket Close called the award "disappointing" but noted the reduction from the original verdict as evidence that HouseCanary's claims had been inflated, and said it was confident the verdict would again be overturned on appeal. HouseCanary's counsel expressed gratitude that a jury had once more found the company's trade secrets were stolen and misused. 

What this means: The case illustrates that a reversed verdict does not end trade secret exposure — defendants who prevail on appeal may face retrial and a second damages award. The significant reduction from $700 million to $175 million also reflects how damages methodologies remain contested well after liability is established. 

Apple Seeks Preliminary Injunction Against Oppo Over Alleged Sensor Trade Secret Theft 

Court skeptical of trade secret definitions as Apple presses for broad relief 

Apple asked a federal judge in San Jose for injunctive relief against Oppo and its Palo Alto-based research arm InnoPeak Technology, Courthouse News reported, following allegations that former Apple Watch engineer Chen Shi gave confidential information on health and thermal sensors to the Chinese smartphone manufacturer.

Apple filed suit in August 2025 against Shi and Oppo, alleging that after Shi joined InnoPeak, he transmitted information from slide presentations and text messages regarding Apple's sensor technology to Oppo personnel. At a multi-hour hearing last month before U.S. District Judge Eumi Lee, Apple counsel argued that its irreparable harm was clear because "the trade secrets are already out there." Apple's proposed injunction would require Oppo to identify and quarantine employees exposed to Apple's information, wipe any developments derived from that information, and audit its data systems. 

Oppo responded that a forensic investigation — conducted after Apple alerted the company — found no Apple documents in its possession, and that any health or thermal sensor products it is developing are entirely its own. Oppo's counsel argued that Apple's definitions of the asserted trade secrets — including terms like "thermal sensors" and "product roadmaps of health sensors" — were too broad to support an injunction and would leave Oppo unable to determine whether it was in contempt or to compete in the market. 

Judge Lee signaled concern about the breadth of Apple's definitions, stating from the bench: "I am having trouble understanding the scope and breadth of the trade secrets." She did not indicate her ruling before closing the courtroom for a third closed session. 

What this means: The hearing reflects a recurring problem in trade secret injunction practice: plaintiffs seeking emergency relief must define the protected information with sufficient precision for the court to craft a workable order. Overbroad definitions risk sinking even well-founded claims for injunctive relief. 

Adidas Sues Sneaker Website, Alleging Extortion and Trade Secret Theft 

Leaked designs and a threatening email form the basis of claims against Sole Retriever 

Adidas filed suit last month in federal court in the District of Oregon against sneaker information website Sole Retriever and its founder, 28-year-old Harris Monoson of New York, alleging misappropriation of trade secrets and extortion, according to KOIN-TV.

According to the complaint, Sole Retriever conspired with five unidentified individuals — some of whom may include unauthorized Adidas employees — to obtain proprietary information including computer-aided designs, sneaker photographs, collaborations, release dates, and pricing. The site then used that access to press Adidas for preferential treatment. 

In an August 2025 email, Monoson told a group of Adidas employees it was his "last attempt" to have the company "make good" on its relationship with Sole Retriever, and stated that he had access to the full Anthony Edwards 2 lineup and would "not hold back on posting" if Sole Retriever did not receive what he believed it was owed. Two days later, the site shared images of the AE2 sneaker to its social media accounts. Adidas informed Sole Retriever the following day that the information had been obtained unlawfully and demanded its return or destruction. Sole Retriever subsequently posted additional leaked designs, including the Anthony Edwards 3 and D.O.N. Issue 8. 

Adidas is seeking a jury trial. Monoson and Sole Retriever did not respond to requests for comment. 

What this means: The case is an example of trade secret misappropriation arising not from a departing employee, but from an outside party with insider access. When third parties obtain and threaten to publish proprietary product information, they can face both a trade secret problem and a potential extortion claim. 

U.S. Strips Citizenship from Couple Convicted of Trade Secret Theft 

DOJ uses denaturalization as enforcement tool in technology theft cases 

The Trump administration secured the revocation of U.S. citizenship from Yu Zhou and Li Chen, a married California couple who emigrated from China and pleaded guilty in 2020 to conspiracy to steal trade secrets and wire fraud, Reuters reported.

U.S. District Judge James Simmons in San Diego granted the Justice Department's request, finding that Zhou and Chen had committed "crimes involving moral turpitude" during a period when they were legally required to demonstrate good moral character as part of their naturalization process. Federal law permits the Justice Department to revoke citizenship obtained by concealing or misrepresenting material facts. 

Zhou and Chen had worked as researchers at Nationwide Children's Hospital in Columbus, Ohio, arriving in the United States on H-1B visas in 2007 and 2008 before becoming citizens nine years later. They admitted to conspiring to steal trade secrets related to pediatric medical treatment for financial gain. 

What this means: Trade secret cases increasingly carry consequences that extend well beyond civil liability or criminal fines. For naturalized citizens, a guilty plea to trade secret charges could provide grounds for loss of citizenship. Companies and counsel confronting suspected misappropriation should account for this expanded enforcement environment when evaluating risk. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

****

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

March Securities Litigation Brief: Crypto Clarity, SEC Enforcement Turnover and More

Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.

SEC Redraws the Line Between Digital Assets and Securities

In a significant regulatory development, the SEC issued an Interpretative Release stating that most crypto assets will not be considered securities under the Federal Securities Laws.

Previously, the SEC took the position that most digital assets were considered investment contracts, which are defined as securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s view was based on the application of the so-called Howey test, based on the Supreme Court’s 1946 decision in SEC v. W. J. Howey Co., defining an investment contract as an investment of money in a common enterprise with a reasonable expectation of profit based on the managerial or entrepreneurial efforts of others. The SEC had employed this test in bringing enforcement actions against firms issuing digital assets, which was criticized as “regulation as enforcement.”
By contrast, the SEC’s Interpretative Release, issued on March 17 for public comment, stated that it was seeking a “tailored regulatory framework” that took into account the uses and functionality of digital assets. In analyzing various categories of crypto assets, the release stated that:

1. digital commodities, like Bitcoin or Ether, would not be considered securities;

2. digital collectibles, which are intended to convey rights to artwork, music or videos, are not securities unless they are sold in a manner where the reasonable expectation of profit is based on the efforts of others;

3. digital tools, which are crypto assets that perform specific functions, are not securities;

4. stablecoins, which are intended to maintain a stable value relative to the dollar, generally are not considered to be securities (the GENIUS Act, enacted by Congress, created a comprehensive regulatory for type of stablecoin known as a “payment stablecoin”); and

5. digital securities, which are securities that are formatted or represented by a crypto asset, are considered securities.

The Release also discussed when a crypto asset would become a security and how it would lose that characteristic.

Why It Matters: This policy shift advances the pro-crypto agenda of the second Trump Administration and provides a framework for possible comprehensive regulatory legislation by Congress.

Jury Holds Elon Musk Liable for Misleading Statements, Rejects Broader Fraud Claims

On March 20, a federal jury in San Francisco found that Elon Musk committed securities fraud in a class action lawsuit brought by former investors In Twitter, which Musk acquired for $44 billion in 2022.

The jury found that Musk made materially false and misleading statements in two tweets in May 2022. One tweet stated that the Twitter acquisition was temporarily on hold while he awaited information about the volume of bots and spam on Twitter. The other tweet stated that fake and spam accounts comprised more than 20 percent of Twitter users.

However, the jury rejected the fraud allegations of the plaintiff class, composed of those who sold Twitter stock or call options or purchased put options between May 13 and October 4, 2022, in connection with Musk’s statements at a technology conference.

The jury also found that the investors failed to prove that Musk engaged in an overall scheme to defraud Twitter investors. One of the plaintiffs’ attorneys estimated the damages at about $2.6 billion. Musk attacked the verdict, and his lawyers alleged that the jury was not impartial based on a purported marijuana joke on the verdict form.

Why It Matters: Few securities class action lawsuits go to trial, so the Musk trial was a test case concerning how a jury would respond to claims against a celebrity defendant. Barring a settlement, the verdict will be appealed, and it will be interesting to see how the Circuit Court of Appeals considers allegations that the trial judge and the jury were not impartial.

Delaware Supreme Court Allows Post-Demand Evidence in Books-and-Records Disputes

The Delaware Supreme Court on March 25 issued an opinion in which it held, by a 3-2 vote, that a stockholder in Paramount could cite news reports occurring after a demand to inspect documents as evidence that the stockholder possessed the required “proper purpose” for the demand.

The stockholder had made a demand to inspect documents under Section 220 of the Delaware General Corporation Code, which permits a stockholder to inspect certain “books and records” of a company if it can demonstrate a proper purpose, which the Delaware courts have held has a low threshold of proof. The Paramount stockholder alleged that the company’s controlling stockholder was seeking to sell her ownership interest rather at the expense of seeking to sell the entire company. When Paramount challenged the demand, the Chancery Court, overturning the decision of a Magistrate, permitted the stockholder to cite news reports after the demand was made.

The court’s majority held that Section 220 itself did not prohibit the introduction of post-demand evidence, and it therefore made sense to allow the Chancery Court to exercise discretion and decide to consider or reject such evidence on a case-by-case basis. The court held that the Chancery Court here did not err in considering the post-demand evidence because it was material, credible and not prejudicial to the corporation.

The dissent, by contrast, asserted that a bright-line rule barring such evidence was preferable to the case-by-case consideration favored by the majority.

On another issue, the court unanimously held that the stockholder could cite anonymous sources in reputable publications where there was a sufficient level of specificity and there was an absence of any indicators of unreliability.

Why It Matters: The Delaware Supreme Court had never squarely confronted the issue of whether post-demand evidence could be used to show a proper purpose for an inspection demand. It is now settled that the Chancery Court has discretion to consider such evidence.

SEC’s Enforcement Director Resigns After Seven Months

On March 16, Margaret Ryan resigned as Director of the SEC’s Division of Enforcement after only seven months on the job. In February, Ryan had given a widely publicized speech outlining both substantive and procedural priorities, including revisions to the Wells Submission process after the Division notifies counsel that its client will be the subject of an enforcement proceeding. That speech was followed by publication of a revised Enforcement Manual that reflected the points made in Ryan’s speech.

Prior to being appointed as Enforcement Director, Ryan had been a judge on the U.S. Court of Appeals for the Armed Forces, an unusual background for an Enforcement Director.

While Ryan’s resignation statement did not provide a reason for her resignation, news reports stated that she had clashed with SEC Commissioners over her desire to take a more aggressive pursuit of fraud, including cases against high-profile individuals such as Elon Musk. Principal Deputy Director Sam Waldon was named acting director and the SEC said a permanent director would be named shortly.

Why It Matters: The resignation may signify that the SEC will pursue a more relaxed enforcement attitude against securities fraud, particularly concerning more controversial cases. In particular, the SEC has stated that it will not bring actions against companies issuing crypto assets based on allegations that they were selling unregistered securities.

Reversal of Fortune: SEC Now States Crypto Assets Are Usually Not Securities

In a major regulatory development, the Securities and Exchange Commission (SEC) has issued an Interpretive Release stating that most digital assets will not be considered securities under the Federal Securities Laws.  The Release, issued for public comment on March 17, signifies a radical shift from prior SEC pronouncements declaring that crypto assets largely would be regulated as securities and advances the pro-crypto agenda of the second Trump Administration.  It is also noteworthy that the Commodity Futures Trading Commission joined the Release and the CFTC’s staff will administer the commodities laws consistent with the Release’s guidance.

Background

In 2017 the SEC issued a report stating that offers and sales of digital assets by an organization called “the DAO” were investment contracts and therefore securities under Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934. The DAO Report and subsequent SEC proceedings relied upon the “Howey” test, based on SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which states that a contract or transaction is an investment contract if it involves the investment of money in a common enterprise where the reasonable expectation of profits depends on the managerial or entrepreneurial efforts of others.  The SEC invoked the Howey standard in bringing enforcement proceedings against crypto entities, which was criticized by some SEC Commissioners and other commentators as “regulation by enforcement” that created uncertainty while ignoring the realities of crypto functionality and usage.

By contrast, the SEC stated that the Interpretive Release seeks to create a “tailored regulatory framework that accommodates crypto asset innovation and entrepreneurship.”  The Release addresses the application of the securities laws to various types of digital assets and transactions and provides support for Congressional efforts to enact a comprehensive crypto market structure statute. 

Categories of Digital Assets

The Release classifies crypto assets into categories based on their characteristics, uses and functions, and analyzes each category concerning whether it would be considered an investment contract, and thus a security, under federal law. As discussed below, the critical analysis is whether any expectation of profit is based on the managerial efforts of others:

1. Digital Commodities – A digital commodity is a crypto asset that derives its value from the operation of a functional crypto system. Well-known digital commodities are Bitcoin, Ether and XRP.  The Release stated that a digital commodity does not have intrinsic economic properties or rights, or assets of a business enterprise, nor is there the expectation of profits based on the managerial efforts of others. Therefore, a digital commodity would not be considered a security.

2. Digital Collectibles – A digital collectible is a crypto asset that is designed to be collected or convey rights to artwork, music, videos, trading cards, or digital references or representations to memes, characters, current events, or trends.  Because a digital collectible’s value is not based on the managerial efforts of others, but on supply and demand, which in turn is based on popularity or scarcity, a digital collectible would not be considered to be a security.  However, the offer and sale of a digital collectible that is either fractionalized or otherwise offers the ability to acquire a fractional ownership interest of a single collectible, could constitute the offer or sale of a security because profits might be derived from the managerial efforts of others.

3. Digital Tools – A digital tool is a crypto asset that performs a practical function, such as a membership, ticket, credential, title instrument or identity badge. They are typically issued to perform certain functions within a crypto system and are non-transferable.  Because digital tools are purchased for their utility and the expectation of any profit is not based on the managerial efforts of others, they are not considered a security.

4. Stablecoins – A stablecoin is a type of digital asset intended to maintain a stable value relative to the U.S. dollar or another asset.  The GENIUS Act, enacted by Congress last year, created a comprehensive regulatory framework for a specific type of stablecoin called a “payment stablecoin,” which is intended to be used for payment or settlement.  Until the GENIUS Act is effective, the offer and sale of certain kinds of stablecoins discussed in an earlier SEC staff statement will not be subject to the securities laws.

5. Digital Securities – A digital security, commonly known as a “tokenized” security, is a financial instrument covered by the definition of a security that is formatted or represented by a crypto asset. Because there are different models of tokenized securities, the rights of the crypto holder may be different from the rights of the underlying security holder.  The Release states that a security remains a security regardless of format or label. To the extent that a purchaser expects economic returns from a third party, the asset is considered a security.

When Crypto Assets Become A Security

A non-security crypto asset becomes an investment contract when an issuer induces the investment of money in a common enterprise with representations that it will undertake managerial efforts that provide a reasonable expectation of profits. But much will depend on the reasonableness of the purchaser’s expectation of profits because of particular promises, including their source. However, a crypto asset subject to an investment contract loses that characteristic in secondary market transactions where purchasers would not reasonably expect such promises or representations to continue, such as where the issuer fulfilled its promises or failed to satisfy them.

Protocol Mining, Protocol Staking, Wrapping And Airdrops

Certain types of transactions, characterized as mining, staking and wrapping, do not involve the offer and sales of securities.  Certain crypto asset disseminations known as “airdrops” do not involve the investment of money under the Howey test and therefore do not qualify as securities.

Conclusion

The SEC’s Interpretive Release marks a significant turning point in the regulatory treatment of digital assets, providing long-awaited clarity for crypto developers, investors, and market participants. By anchoring the analysis in the Howey test's "managerial efforts of others" prong, the Release creates a workable framework that distinguishes speculative investment vehicles from functional crypto assets. While many questions remain — particularly around assets that blur category lines — the Release signals that federal regulators are prepared to engage with the crypto industry on its own terms rather than forcing digital assets into a securities framework designed for a different era. With Congress also moving toward comprehensive crypto market structure legislation, the regulatory landscape for digital assets appears to be entering a period of greater predictability and stability.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

****

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Alter Egos and the Default Judgement Problem: A New Path

California courts have long recognized that a judgment creditor who has prevailed against a corporation should not be left holding an empty bag simply because the real wrongdoer operated behind a corporate shell. Thus, after obtaining a judgment against a corporation, a plaintiff may move in the original action to amend the judgment to add the corporation’s alter ego as an additional debtor. Courts have characterized this as an equitable procedure “based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.” Highland Springs Conference & Training Center v. City of Banning, 244 Cal.App.4th 267, 288 (2016). The judgment creditor must show: (1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding; (2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and (3) an inequitable result will follow if the acts are treated as those of the entity alone. Id. at 280.

But what happens when the underlying judgment was obtained by default? Unfortunately, that question has generated a body of California authority that recently has become more complicated.

The Default Judgment Problem

Consider Motores De Mexicali v. Superior Court, 51 Cal.2d 172 (1958). There, the plaintiff obtained a default judgment against a corporation, then moved to summarily add three individuals as judgment debtors on alter ego grounds. Ultimately, the Supreme Court decided that summarily adding individuals to a default judgment “without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate” the constitutional guarantee of due process under the Fourteenth Amendment. Id. at 176.

The issue popped up again in NEC Electronics, Inc. v. Hurt, 208 Cal.App.3d 772, 780 (1989). In that case, the corporation initially defended the action, but following a period of escalating financial hardship it abandoned the case and informed plaintiff that it would not appear at trial. The trial took place in the absence of the defendant, and judgment was entered in plaintiff’s favor. Shortly thereafter, the corporation filed for Chapter 11 Bankruptcy. The plaintiff filed a motion pursuant to CCP Section 187 to amend the judgment to name defendant’s owner, Porter Hurt, alleging that the corporation was his alter ego. The trial court granted the motion. 

Consistent with Motores, however, the Court of Appeal reversed because the defendant did not appear at trial and did not make any attempt to defend the lawsuit. The court reasoned that the corporation and Hurt’s interests were not the same; the corporation allowed the matter to proceed uncontested because it planned to file for bankruptcy. This strategy insulated the corporation from liability, but it deprived Hurt of an opportunity to defend himself on the merits. Id. at 780. The court also found there was insufficient evidence to show that Hurt controlled the defense of the litigation because “[t]here was no defense for Hurt to control.” Id. at 781.

The reasoning of Motores and NEC Electronics was applied again in Wolf Metals Inc. v. Rand Pacific Sales Inc., 4 Cal.App.5th 698 (2016). There, the trial court entered a default judgment against a corporation and later granted a motion to amend to add the sole shareholder as a judgment debtor, and a successor corporation. The Court of Appeal reversed as to the shareholder. Id. at 708-09. Because the corporation had “offered no defense” in the underlying action, the court held that the summary section 187 procedure was unavailable, regardless of the alter ego’s control over the corporation. Id.

Thus, over the course of fifty years, the rule was simple:  Section 187 is not available if the judgment was acquired by default.

Lopez v. Escamilla: A Distinction that Raises New Questions

Enter Lopez v. Escamilla, which gave rise to a new way for plaintiffs to enforcing a default judgment against alter egos.

Alice Lopez recovered a default judgment for fraud, negligent misrepresentation, and breach of fiduciary duty against Magnolia Home Loans, Inc. Lopez v. Escamilla, 48 Cal.App.5th 763, 764 (2020). She then filed a separate civil action against Jose Escamilla, requesting that he be found the alter ego of Magnolia. Id. at 765. Escamilla moved for judgment on the pleadings, contending that the only procedure for naming a person an alter ego is by motion in the original action, and that adding an alter ego defendant is not a valid cause of action. Id. But the Court of Appeal disagreed, stating that “[i]t does not matter whether the petition alleging Escamilla is an alter ego of the corporation is labeled a complaint or a motion, or whether the petition is assigned a case number different from the underlying action.” Id.

The trial court then granted summary judgment for Escamilla, concluding it would violate due process to hold him responsible for the Magnolia’s liability when he was not a party to the original lawsuit, and no “evidence based” defense was asserted by the defendants in that case. Lopez v. Escamilla, 79 Cal.App.5th 646, 649-50 (2022).  The case then returned to the Court of Appeal, which reversed again. The court held that there was a triable issue of fact concerning Escamilla’s alter ego liability. Id. at 651. Further, and more significantly, the court distinguished Motores and its progeny:  “Lopez did not move to summarily add Escamilla to the judgment . . . . Escamilla will have the opportunity to answer the complaint, engage in discovery, and file pre-trial motions. Lopez must meet her burden of proof to support her theory of alter ego liability claims.” Id. at 652.

The Court of Appeal reasoned that the “ultimate issue was not how the case was defended, but who in the corporation ‘controlled the litigation leading to the judgment’ against the corporation.” Id. at 654. “The sole alter ego who owns the company and makes all corporate decisions may decide that, instead of providing a defense to a meritorious lawsuit, the corporation should incur a default judgment to insulate himself from liability and to save himself from spending money on a frivolous defense.  By doing so, he ‘controlled the litigation leading to the judgment’ against the corporation and he is liable as an alter ego.” Id.

The Tension Between Lopez and Longstanding Precedent

Alas, the distinction between “summary” and “full” proceedings is not always as clean as Lopez suggests. Motores foreclosed the use of the summary amendment procedure when the judgment was obtained by default because it denied the alter ego the chance to litigate “any questions beyond their relation to the allegedly alter ego corporation.” But the very thing that Motores was protecting — the right to contest the underlying merits of the judgment — was not available to the defendant in Lopez, either. In the new lawsuit, Escamilla could litigate his alter ego status, but not the underlying default judgment against the corporation, which was res judicata. In other words, Escamilla could not re-litigate whether the corporation owed the money. The “full opportunity to defend” that Lopez celebrates is thus narrower than it appears: the alleged alter ego gets to defend on alter ego grounds only, not on the merits.

Furthermore, the Motores and NEC courts were concerned that an alter ego’s interests may be at odds with a corporate defendant. The corporation may rationally choose to allow a default judgment to enter because it plans to file for bankruptcy anyway — as was the case in NEC. But that strategy deprives the alter ego of an ability to defend themself on the merits. The court reasoned that the alter ego should not lose their due process right to defend themself because the corporation — which is actually a party to the lawsuit — opts to allow a default judgment to enter against it.

Lopez drew the opposite conclusion. The court reasoned that, if the person controlling a corporation decides to allow a default judgment to enter to “insulate himself,” then they cannot be heard to complain that they have been denied due process. Lopez, 79 Cal.App.5th at 654.

The Practical Implications

Lopez has significant practical consequences for judgment creditors and alleged alter egos alike.

For creditors, Lopez confirms that a corporate default does not permanently foreclose recovery from the person who was truly responsible. Even if a summary Section 187 motion is unavailable under cases like Motores, NEC, and Wolf Metals, the independent action route remains open. Creditors should be aware, however, that this path requires a new lawsuit, potentially including a costly trial.

For alleged alter egos, Lopez narrows the tactical value of engineering a corporate default. Merely ensuring that the corporation does not appear may not provide shelter if you are the sole owner and controller of that corporation, since a court may well infer that you chose the default strategically.

For the courts, Lopez leaves open the question of whether the independent action route is always available as an alternative to Section 187, or whether there are circumstances where Motores’ due process concerns would apply even to a separately-filed complaint. The opinion does not fully grapple with that question, but future litigants and courts presumably will.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Unity of Interest and Alter Ego Doctrine

It is a basic principle of corporate law that shareholders should not be responsible for a corporation’s liabilities and similarly, one corporation cannot be liable for another corporation’s debts.  The purpose is to encourage risk-taking and entrepreneurship.  There is enough risk in putting money into an enterprise, without the additional risk of being liable for the liabilities of the enterprise if it failed. But there are limited circumstances in which the corporate form does not provide a shield from liability – when the corporation is held to be the “alter ego” of the stockholder or other corporations, a doctrine that is commonly referred to as piercing the corporate veil. Most states have similar tests for establishing the alter ego doctrine with one important distinction, discussed below.

There are several versions of piercing the corporate veil. Standard alter ego doctrine is employed to seek the assets of an individual to pay a judgment against a corporation.  But reverse piercing the corporate veil involves allowing creditors to seize a corporation’s assets to satisfy a judgment against an individual. Horizontal piercing the corporate veil applies to companies under common control and functioning as one enterprise, making all liable for the debts of any one.

In determining whether to invoke the alter ego doctrine, courts look to a number of factors in analyzing whether there is a “unity of interest and ownership” between various entities and/or individuals such that any separation is merely fictional. These factors include:

• commingling of assets;

• an individual’s treatment of corporate assets as his own;

• the disregard of corporate formalities such as board meetings, minutes and other corporate records;

• sole ownership of stock in different companies by one individual or family;

• employment of the same employees or attorney by different companies;

• use of a shell corporation that was insolvent or undercapitalized;

• use of the same office or location for different corporations;

• shifting liabilities and/or assets from one enterprise to another; and

• the failure to maintain an arms-length relationship among related entities.

Different states have slightly different versions of the alter ego doctrine.

California

California courts consistently apply a two-part test for piercing the corporate veil under the alter ego doctrine. First, “there must be such a unity of interest and ownership between the corporation [or LLC] and its equitable owner that the separate personalities of the corporation [or LLC] and the shareholder [or member] do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation [or LLC] alone."  Blizzard Energy, Inc. v. Schaefers, 71 Cal. App. 5th 832, 849 (2021).  See also Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc., 217 Cal. App. 4th 1096, 1106-07 (2013) (“Where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the  corporation......”); Hotels Nevada, LLC v. L.A. Pacific Center, Inc., 203 Cal. App. 4th 336, 358-59 (2012) (there must be such a “unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased”).

“No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the (alter ego) doctrine . . . .” Blizzard, 71 Cal. App. 5th at 849. In Blizzard, the court found ample evidence of a unity of interest between a corporation and a married couple: the couple owned 50% of the corporation and the husband used the corporate assets as his personal piggy bank, routinely transferring funds to his personal account. However, the court found that there would be an inequitable result because the (soon to be ex) wife was an innocent third-party and veil piercing would be an injustice to her.  Id., at 850-54.  In Toho-Towa, three separate corporations functioned as a single enterprise and it would be inequitable to allow them to escape debts incurred by one of the corporations to the plaintiff.  217 Cal. App. 4th at 1106-10.   California does not require proof of fraud in order to invoke the alter ego doctrine, only that “an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice . . .” [citation omitted].  Hotels Nevada, 203 Cal. App. 4th at 359 (affirming finding of arbitrators that Hotels Nevada was influenced and governed by one individual and respondent was harmed as a result; also holding that Nevada followed California law).  See also Misik v. D’Arco, 197 Cal. App. 4th 1065, 1068 (2011) (California Code of Civil Procedure § 187 authorized trial court to amend judgment to add debtor who was alter ego of corporate defendant; evidence of fraud was not required, only that adherence to fiction of separate existence would promote injustice).

Delaware

Delaware, as well as other states, follows the same general standard with one significant twist: the alter ego doctrine is invoked only when there is evidence of fraud, not simply an inequitable result.   See Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC, No. 2022-0378-LWW, 2023 WL 5688392, at *5 (Del. Ch. Sept. 5, 2023) (in parent-subsidiary context, piercing the corporate veil requires showing that the subsidiary existed as a sham “for no other purpose than as a vehicle for fraud”); Mason v. Network of Wilmington, Inc., No. 19434-NC, 2005 WL 1653954, at *3 (Del. Ch. July 1, 2005) (Delaware courts “require an element of fraud to pierce the corporate veil,” citing Wallace ex rel. Cencom Cable Income Partners II, L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999)).

In Mason, the plaintiff alleged that she was unable to collect on an employment discrimination because the individual owner of the corporation had transferred funds to another entity, and that therefore the owner should pay the judgment pursuant to the alter ego doctrine.  While describing plaintiff’s predicament as “unfortunate,” the court remarked that “[P]ersuading a Delaware Court  to disregard the corporate entity is a difficult task.” Here, the evidence did not show that her employer had been under-capitalized or that corporate formalities were not followed; the mere fact that the individual ran two separately incorporated entities out of the same building “did not show fraud or sham (or support any inference to that effect).”  2005 WL 1653954, at *2-4. See also EBG Holdings LLC v. Vredezicht’s Gravenhage 109 B.V., No. 3184-VCP, 2008 WL 4057745, at *11-12 (Del. Ch. Sept. 2, 2008) (Delaware applies alter ego theory “rather strictly” and courts generally only disregard corporate entity “when such matters as fraud, contravention of law or contract, public wrong, or equitable considerations” are involved; here, no showing that subsidiary constituted a sham and existed only as vehicle for fraud); ECB USA, Inc. v. Savencia, S.A., No. 19-731-GBW-CJB, 2025 WL 254504, at *2-7 (D. Del. Jan. 16, 2025) (alter ego theory not applicable where no showing corporate form was misused for fraud or improper purpose).

Conclusion

The alter ego doctrine is an important legal concept that prevents a judgment debtor from hiding assets behind a sham corporate façade. But if there is a choice, California is a preferable venue to Delaware in seeking to invoke the doctrine.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

February Trade Secrets Litigation Brief: AI Battle, Criminal Indictment, and Appellate Line-Drawing

Trade secret litigation often turns on fast-moving disputes over information, competition, and control. Each month, we highlight notable rulings, verdicts, and enforcement actions shaping trade secret risk and litigation outcomes.

Federal Court Dismisses xAI’s Trade Secret Suit Against OpenAI — For Now

Pleading standards under scrutiny in AI rivalry

A federal judge dismissed a trade secret lawsuit brought by Elon Musk’s xAI against OpenAI, holding that the complaint failed adequately to plead the existence and misappropriation of protectable trade secrets. The court granted leave to amend, allowing xAI an opportunity to refile.

The dispute arises in the context of intense competition for AI talent and technology. According to reporting on the ruling, the judge concluded that xAI did not allege “any facts indicating OpenAI induced xAI's former employees to steal xAI's trade secrets or that these former xAI employees used any stolen trade secrets once employed by OpenAI.”

Although the dismissal was without prejudice, the ruling reinforces a recurring theme in trade secret litigation: plaintiffs must do more than allege aggressive hiring or competitive harm. They must define the trade secrets at issue with enough specificity to make the claim plausible at the outset.

What this means: In high-profile AI disputes, courts are unlikely to relax traditional pleading standards. Companies pursuing trade secret claims — particularly in fast-moving technology sectors — should expect early scrutiny of trade secret identification and misappropriation theories. Complaints built on inference rather than concrete factual allegations risk early dismissal.

Three Silicon Valley Engineers Indicted for Alleged Trade Secret Theft

Criminal enforcement expands beyond civil litigation

Federal prosecutors unsealed indictments against three Silicon Valley engineers accused of stealing trade secrets from Google and other technology companies.

The charges allege theft of proprietary information relating to advanced technologies, with some allegations involving efforts to benefit foreign entities, including Iran. The indictment alleges the defendants tried to conceal their actions by submitting false signed affidavits and concealing how the data was taken, including taking photos of computer screens.

The indictment underscore the government’s continued willingness to pursue criminal charges in cases involving alleged theft of sensitive technological information.

What to watch: Trade secret disputes increasingly carry parallel civil and criminal risk. Companies confronting suspected misappropriation must evaluate not only civil remedies but also potential engagement with law enforcement.

Seventh Circuit Tightens Proof Requirements for Customer and Business Information

Secrecy measures and economic value must be demonstrated — not assumed

In a published opinion, the U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of trade secret claims arising from a commercial dispute involving alleged misappropriation of customer-related and business information.

The plaintiff asserted that the defendant improperly used materials such as customer lists, pricing information, and internal business data. The Seventh Circuit held that the plaintiff failed to meet its burden under the Defend Trade Secrets Act and parallel state law because it did not adequately establish that the information qualified as a trade secret.

The court emphasized that to qualify as a trade secret, information must derive independent economic value from not being generally known and must not readily be ascertainable. The appeals ruling cited the district court, which explained, “[d]escribing the software functions without disclosing the underlying methods is like saying someone stole your top secret apple pie recipe, but never identifying the secret recipe itself.”

What this means: Plaintiffs must present disciplined proof of both secrecy measures and secrecy-driven economic value. Without that evidentiary foundation, claims are vulnerable at summary judgment.

Fifth Circuit Affirms District Court’s Rejection of $75 Million Trade Secret Damages Award

Failure to apportion leaves plaintiff with injunction but no monetary recovery

In a published opinion, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s decision to set aside a $75 million trade secret damages award after concluding that the plaintiff failed to properly apportion damages to the alleged trade secrets.

The jury had awarded approximately $75 million based on claims that the defendant misappropriated proprietary business information. Following the verdict, however, the district court determined that the plaintiff’s damages theory improperly attributed the defendant’s broader commercial success to the asserted trade secrets without separating their specific economic contribution.

On appeal, the Fifth Circuit agreed. The court emphasized that trade secret damages must reflect the value of the protected information itself — not the entire value of a product or business that may incorporate both protectable and non-protectable elements.

The opinion makes clear that where revenue streams are driven by multiple inputs, the plaintiff bears the burden of disentangling the portion attributable to the trade secret. A damages model that assumes misappropriation equals total revenue, without analytical separation, cannot stand.

Because the plaintiff failed to present a legally sufficient basis to isolate the incremental value of the trade secrets, the district court properly rejected the monetary award. The Fifth Circuit affirmed that ruling, leaving the plaintiff with injunctive relief but no damages recovery.

What this means: The decision reinforces a critical appellate theme: precision in damages is as important as precision in defining the trade secret itself. Even where liability is established, courts will require a disciplined methodology that isolates the economic value of the protected information.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

February Securities Litigation Brief: From Fraud Focus to Funko Fallout

Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.

SEC Signals Shift in Enforcement Priorities and Wells Process

In her first public remarks as the SEC’s Director of Enforcement, Margaret Ryan outlined both procedural and substantive priorities. She stated that recipients of Wells Notices will have four weeks, rather than two, to submit Wells submissions – reflecting current practice – and will have an opportunity to meet with senior members of the Division during the Wells process. She also emphasized that the Enforcement Division will prioritize egregious fraud causing serious harm over non-fraud technical violations.

Following Ryan’s remarks, the Division of Enforcement issued a revised Enforcement Manual that reflected these changes in the Wells Submission and enforcement process.

Why it matters: Ryan’s direction and the new Enforcement Manual could materially affect the course of SEC investigations. Access to senior staff during the Wells process provides a more direct opportunity to shape charging decisions, while the emphasis on egregious fraud may result in fewer SEC actions on technicalities.

Ninth Circuit Clarifies When Risk Factors Become Misleading

In Construction Laborers Pension Trust of Greater St. Louis v. Funko, the Ninth Circuit took up a recurring question: When does a company cross the line by warning that something might happen when, in reality, it is already happening?

The case involves Funko, the company best known for its popular Funko Pop collectible figurines. Investors alleged that Funko failed to disclose it was sitting on a growing pile of “dead” inventory and struggling with inventory management. While the court agreed that some of the challenged statements were mere puffery or not independently false, it held that the company’s risk disclosures spoke only in terms of potential inventory problems. According to the complaint, excess inventory was already accumulating without proper recording, leading to significant write-downs.

The Ninth Circuit also held that scienter was adequately pleaded under the “core operations” theory. Because inventory management was central to Funko’s business model, the court concluded that it was reasonable at the pleading stage to infer that senior executives would have known about serious inventory problems.

Why it matters: The Ninth Circuit’s risk-factor jurisprudence has at times created confusion for district courts. The decision reinforces that companies cannot rely on boilerplate warnings about hypothetical risks when known problems are developing in real time. It also underscores the continued importance of the core operations theory in the circuit, an important consideration for both plaintiffs and defendants at the pleading stage.

Northern District of California Rejects “Fraud by Hindsight” in Liquidity Case

A Northern District of California court dismissed securities claims against Maxeon Solar Technologies and its former CEO and CFO, holding that plaintiffs again failed to allege materially false statements. In Menon v. Maxeon Solar Technologies, Ltd, Plaintiffs had claimed that the defendants concealed a severe liquidity crisis and the company’s dependence on financing from a Chinese shareholder, allegedly jeopardizing a Department of Energy loan. The court found no well-pleaded facts showing that, at the time of certain statements in November 2023, the defendants knew the company would be forced to obtain that financing, a development not announced until months later.

Why it matters: The ruling reinforces a core principle of securities law: Claims cannot rest on “fraud by hindsight.” The mere possibility that an adverse event might occur does not mean that executives knew it would occur. For companies facing liquidity-based claims, what matters is what executives knew at the time – not how the company performed later.

Court Denies Elon Musk’s First Amendment Arguments in SEC Matter

On February 3, the U.S. District Court for the District of Columbia denied Elon Musk’s motion to dismiss the SEC’s action (in SEC v. Musk) alleging violations of Section 13(d) of the Exchange Act, which requires investors who acquire more than 5% of a public company’s stock to make specified public disclosures. Musk argued that Section 13(d) violates the First Amendment as compelled speech and that he was subject to selective enforcement. The court rejected those arguments, allowing the case to proceed.

Separately, in a related class action in the Northern District of California, a judge excused 38 of 92 prospective jurors who stated they could not be fair and impartial due to their views about Musk.

What to watch: The First Amendment challenge tees up a potentially significant appellate issue. The federal securities disclosure framework rests on compelled disclosures, and a ruling that Section 13(d) is unconstitutional could have implications beyond this case. Moreover, the difficulty in jury selection demonstrates the challenge of finding neutral, objective jurors in cases involving polarizing public figures.

SDNY Allows IPO Claims to Proceed in Part Against Hesai Group

The U.S. District Court for the Southern District allowed part of an IPO-related securities lawsuit against Hesai Group to move forward. In Wong v. Hesai Group, the investor claims that the company’s IPO registration statement and prospectus downplayed a shift toward lower-margin products and failed to disclose the risk that Hesai could be labeled a “Chinese Military Group” by the U.S. government.

The court found that the complaint adequately alleged the company was already moving toward lower-margin products at the time of the IPO and allowed that claim to proceed. But it dismissed the claim tied to the military designation as too late; under Section 11, investors have one year to sue after they have enough information to bring a claim. Here, the court held that a Department of Defense memorandum explaining why Hesai was added to the list was publicly available and provided enough detail to put a reasonably diligent investor on notice.

The court also held that the plaintiff lacked standing to bring the Section 12(a)(2) claim because he did not actually buy shares in the IPO, which is required to bring such a claim.

Why this matters: For companies and their counsel, the decision highlights the importance of tracking what information about the company is publicly available (and when). Courts may start the statute of limitations clock once detailed, entity-specific facts enter the public domain, even if they are disclosed in regulatory filings or court memoranda that are not widely publicized. Defense strategy should account for whether and when public materials could be deemed sufficient to put a reasonably diligent investor on notice.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

Stuck With Your Co-Member? The Sharp Divide Between Delaware and California on LLC Expulsion

Delaware law casts a long shadow in California courtrooms.  So much so that California business lawyers are accustomed to the near-ubiquitous footnote observing that Delaware authority is persuasive given the close kinship between Delaware corporate statutes and their California counterparts. But that familiarity can obscure meaningful fault lines. One of the sharpest appears in the member expulsion remedies available in an LLC. 

In Delaware, expulsion is not a default remedy — it exists only if the operating agreement says it does. Freedom of contract reigns, and courts will not supply a removal mechanism the parties failed to draft. California, by contrast, fills the gaps. Under RULLCA, statutory defaults provide pathways to remove a member even when the operating agreement is silent.

For litigators and transactional lawyers alike, this divergence is not academic. It can define leverage, shape strategy, and determine whether an unwanted member can be forced out at all, because most LLC Agreement do not provide an express expulsion remedy. 

Delaware: Expulsion is Only a Remedy If Expressly Stated in the LLC Agreement

Although Delaware’s Limited Liability Company Act (Del. Code. Ann. tit. 6, § 18-101, et seq.) provides default rules for a number of governance issues, member expulsion is not among them.  The Court of Chancery has made clear that “under Delaware law … a majority of the members (or stockholders) of a business entity, unless expressly granted such power by contract, have no right to take the property [i.e., a membership interest in the LLC] of other members (or stockholders).”  Walker v. Res. Dev. Co., Ltd., L.L.C. (DE), 791 A.2d 799, 815 (Del. Ch. 2000); see also PJT Holdings, LLC v. Costanzo, 339 A.3d 1231, 1249 (Del. Ch. 2025) (“The LLC Act does not contain a default provision authorizing members to expel other members.”).  This rule reflects Delaware’s policy “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability agreements.”  Del. Code Ann. tit. 6, § 18-1101(b).  While Delaware’s policy gives LLC members broad flexibility in crafting their operating agreements, it also constrains those members when an issue such as member expulsion is left unaddressed in the operating agreement.

When members of a Delaware LLC attempt to oust a fellow member in the absence of a rule authorizing that remedy, the result can be harsh.  In Walker, three LLC members sought to expel the fourth member when he failed to obtain financing for the business, which was the reason he was offered membership in the company.  791 A.2d at 812.  Despite this failure to perform, the Court of Chancery observed that the operating agreement did not allow members to expel another member, and Delaware law did not provide a default rule.  Id. at 813-15.  As a result, the three members were stuck with the fourth, and the quartet were left to resolve the value of the fourth member’s interest in light of capital contributions the three other members during the purported expulsion of the fourth.  Id. at 817-18.

California: Statutory Expulsion By Default

California has enacted the Revised Uniform Limited Liability Company Act (“RULLCA”). Cal. Corp. Code § 17701.01 et seq.  Unlike Delaware’s Limited Liability Company Act, the RULLCA provides default rules for LLC member removal that supplement operating agreements, or apply when the operating agreement is silent on member removal.

For example, members of an LLC may unanimously vote to oust a member under the following circumstances:

1. It is unlawful to carry on the LLC’s activities with the person as a member;

2. There has been a transfer of all of the person’s interest in the LLC, other than for security purposes or pursuant to a creditor’s charging order;

3. The person is a corporation no longer in good standing; or

4. The person is an LLC or partnership that has been dissolved and whose business is being wound up. 

Cal. Corp. Code § 17706.02(d).

In addition to members voting to oust another member, the LLC may apply for a court order to expel a member because the person has done any of the following:

1. Engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the limited liability company's activities.

2. Willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person's fiduciary duties; or

3. Engaged, or is engaging, in conduct relating to the limited liability company's activities that makes it not reasonably practicable to carry on the activities with the person as a member.

Cal. Corp. Code 17706.02(e). 

Case law on judicial expulsion of LLC members is thin, but a U.S. magistrate judge in the Southern District of California applying California’s RULLCA recommended expulsion of a member who used the LLC’s marks, customers, and contacts for a competing purpose, which constituted wrongful conduct and made it not reasonably practicable for the LLC to carry out activities with the wrongdoer as a member.  Left Coast Wrestling, LLC v. Dearborn Int’l LLC, No. 3:17-CV-00466-LAB-NLS, 2018 WL 2328471 (S.D. Cal. May 23, 2018).  The district court subsequently adopted the magistrate judge’s report and recommendation.  Id., 2018 WL 3032585 (S.D. Cal. June 19, 2018). 

Conclusion

Litigators representing clients on either side of a potential LLC member expulsion must first look to the operating agreement for applicable bases and procedures for LLC member expulsion.  In the absence of rules in the operating agreement, potential outcomes will vary depending on which state’s law applies.  Although California’s RULLCA provides options for members or an LLC to remove a member even in the absence of provision in the operating agreement, no such alternatives exist under Delaware law.  These differences will have a material impact on case strategy and available remedies. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

January Trade Secrets Litigation Brief: Record Filings, High-Stakes Verdicts, and Appellate Guardrails

Trade secret litigation often turns on fast-moving disputes over information, competition, and control. Each month, we highlight notable rulings, verdicts, and enforcement actions shaping trade secret risk and litigation outcomes.

Federal Trade Secret Filings Hit an All-Time High in 2025

Volume up, cases harder to resolve

A new report from Lex Machina shows that federal trade secret litigation reached a record high in 2025, underscoring the growing role of trade secret claims in competitive business disputes.

According to the 2026 Trade Secret Litigation Report, federal courts saw over 1,500 trade secret cases filed in 2025, the highest total recorded over the past decade. The Central District of California led all venues, with 100 newly filed cases, reflecting the continued concentration of trade secret disputes in technology-driven markets.

The report also highlights notable shifts in claim composition. While claims under the Defend Trade Secrets Act (DTSA) continue to appear in more than 80 percent of federal trade secret cases, the past two years have seen increased reliance on state-law-only trade secret claims filed in federal court.

Despite the surge in filings, settlement rates lag behind other categories of civil litigation. Approximately 65 percent of trade secret cases resolved through likely settlement between 2023 and 2025. Cases that reached trial during that period took a median of 1,124 days, and juries awarded more than $716 million in actual damages and $510 million in punitive damages.

What this means: Trade secret disputes are becoming more frequent, more protracted, and more expensive. Early case assessment, venue strategy, and realistic settlement expectations are increasingly critical in a landscape where cases tend to last longer and resolve less often than other civil matters.

Jury Convicts Former Google Engineer of Stealing AI Trade Secrets

Economic espionage charges sustained

A federal jury in San Francisco found former Google software engineer Linwei Ding guilty of stealing trade secrets related to Google’s artificial intelligence and supercomputing technology in a case involving alleged ties to China-based technology companies.

The jury convicted Ding on all 14 counts charged — seven counts of theft of trade secrets and seven counts of economic espionage — based on evidence that he copied and transferred 1,255 internal Google documents between May 2022 and May 2023. Prosecutors alleged that Ding acted while simultaneously working for, or founding, China-based technology companies.

Ding faces up to 10 years in prison and $250,000 in fines for each trade secret count, and up to 15 years in prison and $5 million in fines for each economic espionage count. The court ordered Ding released pending sentencing.

What to watch: The verdict highlights continued DOJ focus on trade secret theft involving sensitive technologies and national security concerns. Criminal enforcement remains a significant risk overlay in trade secret cases involving advanced technology and cross-border activity.

Delaware Court Awards Over $50 Million for Trade Secret Theft

Executives enjoined, punitive damages imposed

The Delaware Court of Chancery issued a sweeping ruling holding a former company founder and two departing executives liable for conspiring to steal trade secrets and launch a competing business.

Following a multi-day trial, the court found that the defendants copied tens of thousands of confidential files — including chemical formulas, customer data, and supplier information — and used them to establish a direct competitor. The court awarded approximately $900,000 in lost profits and $24.2 million in disgorgement, then imposed an equal amount in punitive damages, bringing the total judgment above $50 million, plus legal fees.

The court also enforced restrictive covenants, barring the founder from competing until October 2029 and restricting the other defendants from using the misappropriated information for one year.

What this means: The decision underscores the significant financial and injunctive exposure trade secret defendants face where courts find coordinated misconduct, weak exit controls, and deliberate efforts to conceal activity. Preventive controls around employee departures and data access remain critical risk-management tools.

Fifth Circuit Affirms $194 Million Trade Secret Award

Punitive damages upheld for willful misappropriation

The U.S. Court of Appeals for the Fifth Circuit affirmed a district court judgment awarding approximately $194 million to a DXC Technology subsidiary in a long-running trade secret misappropriation case against Tata Consultancy Services.

The court upheld findings that the defendant willfully and maliciously misappropriated trade secrets, including an award of more than $100 million in punitive damages. The court cited repeated misconduct, misrepresentations, and intentional disregard for the plaintiff’s rights.

What this means: Appellate courts continue to affirm substantial trade secret verdicts where trial courts make detailed findings of willful and malicious conduct. Punitive damages remain a significant driver of exposure in high-stakes trade secret litigation.

Federal Circuit Reinforces Requirement to Clearly Identify Trade Secrets

Summary judgment affirmed

The U.S. Court of Appeals for the Federal Circuit affirmed summary judgment against a trade secret plaintiff that failed to adequately identify its alleged trade secrets under both federal and state law.

The court agreed that high-level descriptions, generalized categories, and voluminous exhibits were insufficient to allow a fact-finder to determine whether the asserted information qualified as a trade secret under the Defend Trade Secrets Act or Utah law. The court emphasized that even where state law does not impose a heightened particularity requirement, plaintiffs must still clearly define the trade secret at issue.

What to watch: Courts continue to scrutinize trade secret identification, and plaintiffs that cannot precisely define the information at issue – and explain why it derives independent economic value – risk losing at summary judgment.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

January Securities Litigation Brief: Fewer Filings, Larger Exposure, and Early Signals for 2026

Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.

Securities Class Action Filings Hit Record Size in 2025

A new year-end report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse shows that while the number of securities class actions declined in 2025, the size of those cases reached historic levels.

According to the report, plaintiffs filed 207 securities class actions in federal and state courts in 2025, down from 226 in 2024 and marking the first year-over-year decline in filings in two years. That drop in volume, however, masks a sharp escalation in potential exposure.

Both Disclosure Dollar Loss (DDL) and Maximum Dollar Loss (MDL) increased dramatically. Total DDL rose from $429 billion in 2024 to $694 billion in 2025, setting an all-time record. MDL climbed to $2.86 trillion, a 75 percent increase year over year and the third-highest level on record.

So-called “mega filings” continued to dominate the landscape. Although only 36 mega cases were filed in 2025, they accounted for 89 percent of total MDL and 81 percent of total DDL, well above long-term historical averages. In other words, a relatively small number of cases drove the overwhelming majority of market risk.

The report also noted modest growth in AI-related filings, with 16 cases filed in 2025, though activity slowed significantly in the second half of the year. Former SEC Commissioner Joseph Grundfest highlighted that larger dollar losses tend to correlate with larger settlements, regardless of whether overall filing volume softens, and noted that private litigation often follows SEC enforcement activity.

What this means: Even with fewer filings overall, exposure risk remains elevated. Companies may face fewer suits, but those suits are increasingly high-dollar and high-impact, particularly where “mega” cases are involved. Settlement exposure tends to track the dollar amounts at issue more closely than filing volume.

Supreme Court to Clarify the SEC’s Disgorgement Powers

On January 9, 2026, the Supreme Court granted certiorari in Sripetch v. Securities & Exchange Commission, a case that will resolve a circuit split over whether the SEC may obtain disgorgement without showing that investors suffered pecuniary harm.

The case arises from allegations that Ongkaruck Sripetch used pump-and-dump schemes involving at least 20 public companies. After consenting to judgment, the district court ordered Sripetch to disgorge approximately $3.3 million in profits and prejudgment interest. On appeal, the Ninth Circuit held that disgorgement does not require proof of investor losses because its purpose is to deprive wrongdoers of ill-gotten gains, not to compensate victims.

That holding aligned the Ninth Circuit with the First Circuit, but conflicted with the Second Circuit’s 2023 decision in SEC v. Govil, which concluded that disgorgement is unavailable absent proof of investor pecuniary harm, relying on the Supreme Court’s decision in Liu v. SEC.

Why it matters: The Court’s decision will determine whether disgorgement remains available in enforcement matters where investor losses are difficult to trace to identifiable victims, a question that bears directly on the scope of the SEC’s remedial authority.

Supreme Court to Test the Boundaries of Jarkesy

The Court also agreed to hear FCC v. AT&T and Verizon Communications Inc. v. FCC, consolidated cases that ask whether the Seventh Amendment permits the FCC to impose monetary penalties through administrative proceedings without a jury trial.

The cases squarely present the question left open after SEC v. Jarkesy: whether a statutory scheme satisfies the jury-trial right when a regulated entity may obtain a jury trial only by refusing to comply with an agency penalty and forcing the government to bring a collection action in federal court.

The government contends that the system is constitutional because a jury trial is technically available. The carriers respond that this “choice” is a fallacy: to reach a jury, they would have to defy a final FCC order and absorb the reputational and business fallout of noncompliance,  a burden they argue the Seventh Amendment does not permit.

Why it matters: A ruling for the carriers could significantly extend Jarkesy beyond the SEC, narrowing Congress’s ability to authorize agencies to impose civil penalties through in-house proceedings.

Ninth Circuit Affirms Dismissal of XRP Securities Class Action

The Ninth Circuit this month affirmed the dismissal of a long-running putative class action alleging that Ripple Labs unlawfully sold XRP tokens as unregistered securities.

The district court had dismissed the case in June 2024, holding that the claims were time-barred under the Securities Act’s three-year statute of repose. On appeal, the Ninth Circuit agreed, rejecting arguments that Ripple’s 2017 distribution of XRP constituted a new offering that would reset the limitations period.

The decision leaves intact an early defense win and reinforces the importance of statute-of-repose defenses in digital asset litigation, particularly where token distributions occurred years before suit was filed.

What to watch: As digital asset litigation matures, courts continue to scrutinize timing defenses closely. Statute-of-repose arguments remain a potent tool, especially where plaintiffs attempt to recharacterize later distributions as new offerings.

D.C. District Court Upholds SEC’s Use of Administrative Proceedings for Industry Bars

In Sztrom v. SEC, the U.S. District Court for the District of Columbia held that Jarkesy does not prevent the SEC from seeking industry bars through administrative “follow-on” proceedings.

Distinguishing civil monetary penalties from equitable and remedial sanctions, the court concluded that longstanding precedent permits the SEC to pursue industry bars administratively following a federal-court injunction. The plaintiffs have appealed.

What this means: While Jarkesy reshaped how the SEC pursues penalties, it did not dismantle the agency’s administrative enforcement regime. The decision reflects courts’ continued distinction between punitive monetary remedies and remedial or equitable sanctions.

Northern District of California Dismisses DocuSign Securities Action With Prejudice

In Weston v. DocuSign, Inc., Judge Vince Chhabria dismissed a securities class action with prejudice, finding that the complaint’s characterization of internal company documents was “misleading and confusing” and incapable of cure.

The court emphasized that plaintiffs’ descriptions of internal materials were materially distorted, noting that the misrepresentations alone could justify dismissal without further analysis.

What this means: Courts remain willing to dismiss securities complaints with prejudice where plaintiffs mischaracterize internal documents or rely on selective, misleading narratives — reinforcing the importance of early, document-driven defense strategies.

Delaware Supreme Court Reverses Chancery Decision in Moelis & Co.

On January 20, 2026, the Delaware Supreme Court reversed the Court of Chancery’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., holding that a challenge to provisions of a stockholder agreement granting CEO Ken Moelis extensive approval rights was time-barred.

The Court held that the challenged provisions were at most voidable – not void – because the company could have lawfully implemented similar governance arrangements through its certificate of incorporation. As a result, the claims were subject to equitable defenses, including laches. Because the stockholder agreement was executed in 2014 and the plaintiff waited nearly nine years to sue, the Court concluded that the challenge exceeded the analogous three-year statute of limitations and was barred.

The decision comes against the backdrop of recent amendments to the Delaware General Corporation Law that expressly authorize certain stockholder governance agreements by contract. Although those amendments did not apply retroactively to the Moelis dispute, the Supreme Court’s ruling underscores the importance of timeliness in challenges to long-standing corporate governance arrangements and confirms that not every statutory defect renders an agreement void from inception.

What this means: The decision underscores the importance of statute-of-limitations and laches defenses in stockholder litigation, particularly where plaintiffs seek to invalidate long-standing contractual arrangements.

SEC Charges ADM and Former Executives Over Accounting Adjustments

Cooperation credited in $40 million settlement

The U.S. Securities and Exchange Commission announced settled charges against Archer-Daniels-Midland Company and two former executives, along with a litigated action against a third former executive, arising from alleged accounting and disclosure misconduct.

According to the SEC, the company’s Nutrition segment used targeted intersegment adjustments, including retroactive rebates and price changes, to meet publicly disclosed profit targets. The SEC alleged that these practices rendered certain public filings materially misleading.

ADM agreed to pay a $40 million civil penalty, while two former executives paid disgorgement and penalties and consented to cease-and-desist orders. One executive also agreed to a three-year officer-and-director bar. The SEC credited ADM’s cooperation and remediation efforts, including an internal investigation and enhanced accounting controls.

What this means: The resolution underscores the SEC’s focus on accounting practices and disclosures around intersegment transactions and segment performance reporting. It also reinforces the tangible benefits the Commission may credit for early cooperation, remediation, and efforts to boost internal controls.

Looking Ahead: Themes for 2026

A year-end analysis by Alyssa Aquino of the New York Law Journal highlighted several issues likely to shape securities litigation in 2026, including:

●      Increased attention to mandatory arbitration provisions following the SEC’s September policy shift

●      The potential for private actions to fill perceived gaps amid reduced SEC enforcement

●      Continued scrutiny of AI-related disclosures

●      Ongoing development of scheme liability theories under Rule 10b-5(a) and (c)

●      Expanded use of price-impact defenses at the class certification stage

What’s next:
Early rulings on arbitration provisions, AI disclosures, and class certification defenses may set the tone for securities litigation strategy in 2026 and beyond, particularly in cases involving emerging technologies or novel pleading theories.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Not Yours for the Taking: Settlement and Unreachable Assets

Smart plaintiffs’ attorneys know to look into a defendants’ assets before pursuing claims for damages.  Wise attorneys know to check how those assets are structured, titled and domiciled, lest they prove unreachable even if the plaintiff prevails on liability.

Consider this common scenario.  You represent a plaintiff in litigation against a defendant who is—at least on paper—wealthy.  Settlement negotiations commence, and you begin preparing a settlement demand.  Knowing what they do (or think they do) about their adversary, your client expects a substantial recovery.  But an important issue arises: how much of the defendant’s assets are really reachable if the case goes the distance?  Are there statutory and/or judicial hurdles to collection?  Other impediments to recovery?  

Nobody wants to bring their client a Pyrrhic victory.  Understanding which of a defendant’s assets are not collectible (or might be collectible only with substantial effort, expense and time) helps counsel assess, inter alia:  (a) whether the defendant meaningfully can pay a lump-sum settlement; (b) whether a payment plan or other structured settlement might be appropriate; and (c) whether non-monetary terms such as injunctions, cooperation, or compliance commitments should play a larger role in resolution.

Below are some common types of protected assets that practitioners may run into:

1.        Retirement and Other Benefits

California law provides statutory protection for retirement accounts.  Public retirement accounts are fully protected. California Code of Civil Procedure (CCP) § 704.110 provides protection for all amounts held, controlled or in the process of a distribution by a public entity or by an officer or employee of the entity for public retirement benefit purposes, and all rights and benefits accrued or accruing to any person under a public retirement system are exempt (except for judgments in favor of a child, family or spousal support).  Private retirement plans and amounts held in accounts qualified under certain IRS provisions are protected under CCP § 704.115, except that certain retirement plans, annuities and retirement funds are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires, and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires.  California also permits a full statutory exemption for funds held in private retirement accounts applied to assets that were rolled over into an IRA that otherwise would have had only a limited exemption.  McMullen v. Haycock, 147 Cal. App. 4th 753 (2007).

2.        Trusts

Assets in a revocable living trust of a deceased settlor are subject to claims of creditors to a probate estate to the extent the estate is inadequate to satisfy these claims. A trustee’s only duty to such creditors is to refrain from affirmative misconduct that defeats creditors’ reasonable expectation for a recovery from trust assets, and there is no obligation to preserve trust assets for the benefit of claims.  Arluk Med. Ctr. Indus. Grp., Inc. v. Dobler, 116 Cal. App. 4th 1324 (2004). However, creditors cannot reach the assets of an irrevocable trust.  Laycock v. Hammer, 141 Cal. App. 4th 25 (2006).

3.        Homestead Exemptions

A homestead exemption is intended to prevent the forced sale of a primary residence to satisfy the demands of creditors, except for mechanic’s liens, mortgages or sales to pay property taxes. Homestead exemptions vary from state to state and are found in state constitutions and statutes. These exemptions are extremely important for defendants seeking to protect assets from judgment creditors in litigation and therefore loom large in negotiating settlements.  They also can differ from state to state.  In California, there is a statutory homestead exemption that is the greater of $300,000 or the countywide median sale price for a single-family home in the prior calendar year up to $600,000.  These amounts are adjusted annually for inflation. CCP § 704.730.

4.        Offshore Assets

An obvious means of hiding assets from creditors is by depositing funds in offshore bank accounts.  This presents creditors with at least two challenges:  finding the offshare assets and collecting them.  Regarding the first challenge, at least, savvy litigants may have some tools available; courts have held that requiring persons using offshore accounts to keep banking records for government inspection did not violate the Fifth Amendment’s right against self-incrimination because having a foreign bank account is not inherently illegal and the required information was not inherently criminal.  In re M.H., 648 F.3d 1067 (9th Cir. 2011); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012) (same).  Retaining a private investigator or forensic accountant; using investigative data software; and searching for unusual or fraudulent transfers may help track down the location of offshore assets.  Actual collection, of course, may present its own array of difficulties, depending in part on where the assets are housed.

Not All that Glitters Is Gold

                  A defendant’s lifestyle and balance sheet may both reflect substantial wealth, but that may be cold comfort to a plaintiff if those assets are not reachable.  Where collectability is an issue, counsel may wish to pursue alternatives forms of relief, such as cooperation, compliance commitments, injunctive relief, and regulatory pressure.  And of course, experienced attorneys understand the importance of tamping down a client’s unrealistic expectations of financial recovery against a party whose assets are partially or entirely shielded.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Representation at First Sight? When (and Why) Courts Sometimes Find an Attorney-Client Relationship Before (or Without) an Engagement Letter, and Why It Matters

Most attorneys, in most cases, are entering into written engagement letters with their clients if and when they intend to initiate representation.  Indeed, California Business and Professions Code Section 6147 requires attorneys to have a written agreement in contingency cases, while Section 6148 requires a written agreement in non-contingency cases where it is “reasonably foreseeable” that fees and costs will exceed $1,000.  But what many attorneys may not realize is that, at least for certain purposes, California courts will find the existence of an attorney-client relationship before a written agreement is executed—and even sometimes when the parties walk away after an initial conversation without any intention of ever signing an agreement.  This is in large part because even initial discussions between an attorney and a prospective client typically involve an expectation of confidentiality and the transmission of information based on that expectation. 

Confidentiality Obligations Routinely Predate Written Engagement Letters

Wise attorneys typically have one, if not several, discussions with prospective clients before formally entering into an engagement—a practice equally wise for the prospective clients themselves.  And because both parties to such discussions are trying to determine whether an engagement makes sense, the discussions frequently involve discussion of confidential information, including everything from material facts not yet disclosed to the other side, to settlement expectations, to legal strategy. 

As such:  “[A] formal retainer agreement is not required before attorneys acquire fiduciary obligations of loyalty and confidentiality, which begin when attorney-client discussions proceed beyond initial or peripheral contacts.”  People ex rel. Dep't of Corps. v. SpeeDee Oil Change Systems, Inc., 20 Cal.4th 1135, 1148 (1999).  Instead, such obligations arise “when attorney-client discussions proceed beyond initial or peripheral contacts.”  Id.  And don’t be fooled by the term “beyond initial”; in SpeeDee Oil Change itself, the California Supreme Court held that that point had arisen despite the fact that the party and attorney had had only preliminary meetings, at the conclusion of which the parties agreed to “prepare a document formally retaining” the attorney—something that never actually happened.  Id. at 1141.

Receipt of Confidential Information, Even Absent Engagement Letter, Can Lead to Disqualification in Subsequent Litigation

Most attorneys presumably understand their obligation to keep confidential those discussions that they had with prospective clients, even if those discussions did not turn into paid engagements.  In fact, if an attorney later takes on a representation adverse to a prospective client who previously approached them (but did not ultimately sign an engagement letter), then that lawyer potential faces disqualification for the prior “representation.”  This was the case in SpeeDee Oil Change, where the California Supreme Court held that the aforementioned preliminary meetings constituted establishment of an attorney-client relationship, at least for purposes of the disqualification analysis.

Disqualification in Subsequent Dispute Involving Prior Client Even Where Confidential Information Is Not an Issue?

Thus far, the reader may be thinking:  Of course an attorney cannot represent a party against someone the attorney previously received confidential information from; whether or not they signed a formal engagement letter, it would be unfair to let the attorney use a party’s confidential information against them!  True enough.  But as it turns out, courts are sometimes willing to disqualify attorneys upon a showing that they previously represented a party, even where there is no danger that the party’s confidential information will be misused.  This situation can arise where an attorney jointly represents two parties, and the parties’ relationship later turns sour. 

Take, for example, Fiduciary Trust Int’l of Cal. v. Superior Court.  In that case, an attorney (Sandler) drafted wills for a married couple (Husband and Wife).  After Husband died, Wife revoked her will and drafted a new one that transferred most of her assets to a new trust, to benefit her daughter.  Wife then died, and a dispute arose between Wife’s representative and the marital trust trustees.  Wife’s representative filed a motion to disqualify Sandler’s law firm, given his prior representation of the couple.  The trial court denied the motion, but the Court of Appeal vacated and instructed the trial court to enter a new order granting the motion to disqualify.  218 Cal.App.4th 465, 470-77 (2013).

The Fiduciary Trust Int’l court acknowledged that under Evidence Code section 962, attorney-client communications made during the course of the joint representation, while privileged as to the outside world, were not privileged as between Husband and Wife.  And yet, disqualification was required to maintain people’s confidence in their attorneys in general:

We are not concerned in this case with discovery of allegedly privileged communications.  Instead, the pertinent issue is the propriety of an attorney’s representation adverse to a former client . . . Not only do clients at times disclose confidential information to their attorneys; they also repose confidence in them.  The privilege is bottomed only on the first of these attributes, the conflicting-interests rule, on both.

Id. at 484-85; see also Western Continental Operating Co. v. Natural Gas Corp., 212 Cal.App.3d 752, 761 (1989) (“We are unpersuaded under the circumstances of this case that there is a joint client exception to the prohibition against representation adverse to a former client.”).

Tread Carefully from the First Step

While “pre-engagement” discussions are important to attorneys and prospective clients alike, both sides should be aware of the potential consequences of such discussions, regardless of they choose to move forward with a more formal engagement.  Because where there is exchange of confidential information, there may be an engagement, and where there is an engagement, there is a risk of future disqualification of the attorney in any action adverse to the would-be client—even if that action itself does not threaten misuse of the previously-obtained information.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Bahram Seyedin-Noor Rated in Band 1 for Commercial Disputes in Legal 500 City Elite Guide for San Francisco & Silicon Valley

Alto Litigation Founder and CEO Bahram Seyedin-Noor has been recognized in Band 1 for commercial disputes in the 2026 Legal 500 US City Elite Guide: San Francisco & Silicon Valley. According to Legal 500, the US City Elite rankings emphasize lawyers who are handling work at the top of the legal market in their respective cities. A Band 1 ranking signifies that Bahram is among the highest rated commercial disputes lawyers in the guide.

The Legal 500 is a leading global research and data platform that benchmarks attorneys and law firms worldwide. The Legal 500 US City Elite rankings are based on interviews with top practitioners, references, and peer feedback, and evidence of key matters worked on by the ranked attorneys during the past year. The selection process begins with Legal 500’s researchers creating a list of prospective candidates that is extensively reviewed by an editorial team.

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-five years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. He is ranked among California’s leading securities litigators by Chambers & Partners and was twice named San Francisco Litigator of the Year by Benchmark Litigation. Legal 500’s analysis calls Bahram “a key choice for those engaged in matters involving trade secrets, securities or boardroom clashes, owing to his skill in applying IP principles to securities frameworks.”

In addition to Bahram’s Band 1 honor, Alto was listed among the top commercial disputes law firms in the City Elite guide. Legal 500’s full analysis of Alto Litigation can be found here.