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.
Third Circuit Discards Bright-Line Rule, Adopts New Materiality Stand for Securities Actions
The Third Circuit Court of Appeals has overturned parts of four major circuit precedents concerning the standard of materiality in securities actions, holding that these decisions were no longer valid in light of the Supreme Court’s decision in Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011).
In In re Ocugen, Inc. Securities Litigation, issued on September 30, the Third Circuit rejected the holdings in In re Burlington Coat Factory Securities Litigation, 114 F. 3d 1410 (3rd Cir. 1997) and Oran v. Stafford, 226 F. 3d 275 (3rd Cir. 2000), which established the rule that a rebound or increase in the stock price between one and four days after allegedly corrective disclosure would demonstrate the lack of materiality, an essential element in a securities fraud case. The Third Circuit held in Ocugen that the Supreme Court’s Matrixx decision discarded “bright-line” rules for determining materiality and instead held that materiality must be based on a fact-specific assessment of information available to, and hidden from, investors. Thus, the court concluded, the Oran-Burlington rule had to be discarded. (Ironically, Justice Alito, who was part of the unanimous decision in Matrixx, wrote the decision in Burlington when he was on the Third Circuit). Ocugen also abrogated passages in two other decisions, In re NAHC, Inc. Securities Litigation, 306 F. 3d 1314 (3d Cir. 2002) and In re Merck & Co., Securities Litigation, 432 F. 3d 261 (3rd Cir. 2005).
In Ocugen, plaintiffs alleged that a small pharmaceutical company had made false disclosures and employed improper accounting. The district court dismissed the lawsuit on the ground that a corrective disclosure was not material under the Oran-Burlington standard, since the stock price recovered to pre-disclosure levels in two days. Ruling that the Oran-Burlington rule was no longer valid, the Third Circuit reversed and remanded the case for further consideration.
Why It Matters: Oran and Burlington were still cited by attorneys and courts throughout the country as good law and as binding precedent within the Third Circuit. The decision in Ocugen now removes these cases as a basis for arguments by defense counsel that a supposedly truthful disclosure was not material because of the subsequent stock price movement.
SEC Proposes Repeal of Long-Standing Shareholder Access Rule
On September 16, the Securities and Exchange Commission proposed rescinding Rule 14a-8, which requires corporations to include certain shareholder proposals on their annual ballots. A rule requiring such access has existed in some form since 1942.
The SEC Release stated that the Commission never had authority to issue the rule in the first place because the determination of shareholder proposals and the conduct of shareholder meetings is governed by state law. While Section 14(a) of the Securities Exchange Act of 1934 gave the SEC authority to regulate the proxy solicitation process, Rule 14a-8 had evolved in a manner that infringed on core state law responsibilities. Further, even if the SEC had authority to issue the rule, many of the justifications for its adoption have not been substantiated or have become less compelling since its adoption. Further, the release noted that the rule has had and would continue to have unintended consequences.
Why It Matters: The repeal of Rule 14a-8 will harm shareholder activists and those groups who seek votes on shareholder proposals to promote social policy objectives. Such groups had used Rule 14a-8, sometimes with support from the SEC staff, to force proposals to be considered at stockholder meetings. Corporations will now be in a much stronger position to oppose allowing such proposals to be considered.
District Court Grants Class Certification in Lucid Securities Litigation
The class certification process has become much trickier in light of the Supreme Court’s decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 594 U.S. 113 (2021), which held that the fraud-on-the-market presumption underlying securities class actions may be rebutted by showing a “mismatch” between a generic corporate misrepresentation and a specific corrective disclosure.
In In re Lucid Group, Inc. Securities Litigation, the court rejected the “mismatch” argument advanced by defendants. First, defendants argued that certain disclosures could not be corrective because disclosures concerning missed production targets did not relate to alleged flawed logistic processes. But Judge Martinez-Olgun of the U.S. District Court for the Northern District of California, in a decision issued on September 25, held that the missed production targets were the consequence of Lucid allegedly concealing internal logistics difficulties. An event could be corrective when it merely discloses the consequences of concealed information even if the connection between the cause and its consequences is not explicit. Defendants also asserted that disclosures of later-emerging internal logistics problems could not correct statements implying that it earlier had no such problems. But a corrective disclosure need not be an admission of fraud; defendants’ assertions concerning when the problems were discovered were of “no moment.” The court granted plaintiffs’ motion for class certification after concluding that the requirements were satisfied.
Why It Matters: The Lucid decision is one more case applying the Goldman decision and subsequent decisions by Circuit Courts. Judge Martinez-Olgun held that the “mismatch” argument could not be invoked simplistically to show a lack of price impact by alleged misstatements as a means of defeating class certification, which is essential for a successful class action lawsuit.
Court Rules That Presidential Pardon for Criminal Conviction Does Not Bar Civil Claims
Does a presidential pardon voiding a criminal conviction for securities law claims bar civil claims based on the identical conduct? A U.S. District Court in Arizona held that the pardon did not preclude the conviction in the criminal action from serving as collateral estoppel in a civil securities fraud action.
In Borteanu v. Nikola Corporation, plaintiffs in a securities class action lawsuit alleged that Nikola had made numerous material misrepresentations concerning the development of electric trucks. Plaintiffs moved for partial summary judgment based in part on the assertion that founder and former Chairman Trevor Milton was liable for securities fraud based on collateral estoppel arising from his criminal conviction, an arbitration award, and the company’s bankruptcy proceedings.
Milton argued that collateral estoppel based on the guilty verdict in the criminal action was not warranted. But he also argued that the pardon he received from President Trump in March 2025 provided an additional basis for declining to apply collateral estoppel. However, Judge Steven P. Logan in a September 8 order held that there was no authority supporting a finding that the pardon erased the issues litigated and determined by the jury in the criminal action.
The court concluded that, “Having found that the prior conviction was for a serious offense, the issues are identical, there was a full and fair opportunity to litigate the issue at the criminal trial, and the issue was actually litigated and necessarily decided at that trial, collateral estoppel applies based on the criminal conviction.”
Why It Matters: There is no apparent authority for the issue of whether a criminal conviction which is later the subject of a presidential pardon could still serve as collateral estoppel in a civil action. But unless overturned on appeal, Judge Logan’s decision stands for the proposition that the pardon does not bar the criminal conviction from serving as collateral estoppel.