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.
Delaware Chancery Court Holds That Independent Committee Did Not Act in Good Faith in Considering Conflicted Transaction
On October 16, the Delaware Chancery Court issued an important opinion concerning the requirements of a special committee of the Board of Directors to approve a conflicted transaction. In In re Cloudflare, Inc. Stockholder Litigation, Vice Chancellor Laster in a lengthy opinion granted a motion for a preliminary injunction to block Cloudflare from proceeding with a recapitalization that would have allowed the co-founders to retain voting control of the company.
Cloudflare, which provides internet services, went public in 2019. Subsequently, the company’s two co-founders sold much of their stock, reducing their combined voting power to just over 50%. In order to maintain the co-founders’ voting power, the Board created a special committee to consider a plan for the founders to exchange high-vote shares for low-vote shares plus a new class of preferred stock carrying nine votes each and little economic value. Stockholder plaintiffs challenged this recapitalization plan, alleging that the co-founders breached their fiduciary duties as controlling stockholders and the company’s directors breached their fiduciary duties by approving the deal.
The court examined the 2025 amendments to Section 144 of the Delaware General Corporation Law, which created a safe harbor for conflicted transactions that are approved in good faith and without gross negligence by a committee consisting of at least two disinterested directors. While the court found that the directors were presumptively disinterested, it also found that the committee likely did not satisfy the requirements of acting in good faith and without gross negligence because the record showed that the committee may have been working toward a predetermined result and built a narrative to support it.
The record showed that a committee member told one of the co-founders that the committee could satisfy the co-founders’ demand. The record also showed that the co-founders, committee members, and other directors used Signal for substantive discussions where messages were set to disappear “[d]espite having been advised about the prospect of stockholder litigation.” Because the good faith safe harbor did not apply, the entire fairness standard, which requires that both the process for approving the transaction and the price were entirely fair, controlled. The court found that plaintiffs had a reasonable probability of succeeding under that standard. Because the transaction could not be unwound after it occurred, an injunction against the recapitalization was appropriate.
Why It Matters: Delaware courts have been interpreting the scope and application of the 2025 amendments to Section 144, including the safe harbor for conflicted transactions. Here, the Vice Chancellor concluded that the mere fact that the members of the independent committee were presumptively disinterested did not end the analysis. Rather, the court provided a detailed examination of the evaluative process to determine whether the committee acted in good faith, including communications with the co-founders and evidence of an effort to conceal those communications. The decision serves as a warning to independent committees that they cannot tilt the transaction process to favor conflicted directors and officers.
Fifth Circuit Rejects Class Certification Based on Finding That Stock May Not Have Traded in an Efficient Market Because of Meme Stock Factors
At class certification in a securities class action, the fraud-on-the-market presumption permits courts to presume an investor’s reliance on material misrepresentations incorporated into the stock price. Otherwise, each member of the plaintiff class would be required to show his or her individual reliance on the misrepresentations, making class certification – and class action lawsuits – virtually impossible. But an element of the presumption is that the stock traded in an efficient market that reflected all publicly available information.
In Bozorgi v. Cassava Sciences, Inc., plaintiffs alleged that the defendants defrauded investors by misrepresenting the success of an experimental drug to treat Alzheimer’s. While the district court granted plaintiffs’ motion for class certification, the Fifth Circuit Court of Appeals reversed, ruling that the lower court had not sufficiently analyzed whether Cassava stock traded in an efficient market.
Defendants had argued that the class period coincided with the “meme stock phenomenon” where retail traders use social media platforms to drive stock prices up or down in ways that are divorced from a company’s fundamentals or broader market trends. But the district court rejected this argument as “legally and factually inaccurate,” holding that the stock satisfied the so-called Cammer/Krogman factors, including:
the stock’s trading volume;
the number of analysts following the stock;
the number of market makers;
the company’s ability to file Form S-3 registration statements;
the existence of empirical facts showing that the stock price immediately reacted to unexpected corporate events or news releases;
the bid-ask spread for stock sales; and
the size of the float.
See Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989); Krogman v. Sterritt, 202 F.R.D. 467 (N.D. Tex. 2001).
But the Fifth Circuit held that these factors were not exhaustive, and that courts must weigh all the evidence for and against market efficiency. Here, the district court failed to consider evidence of the stock price’s volatility in the absence of news, which undermined the premise that the stock was incorporating information efficiently. Further, short-selling constraints may have provided evidence of market inefficiency. The case was remanded with instructions that the district court must assess evidence of both market efficiency and market inefficiency.
Why It Matters: It is noteworthy that the Fifth Circuit held that satisfaction of the traditional Cammer/Krogman factors was not sufficient and that courts must consider whether “meme stock dynamics” may have caused stock price movements. Further, courts must consider evidence of market inefficiency as well as market efficiency. If followed by courts in other circuits, the decision would provide defendants with another argument in opposing class certification.
Second Circuit Affirms Dismissal of Administrator’s Claims Against Bank for Participation in Crypto Platform’s Misconduct
The Second Circuit Court of Appeals affirmed a district court’s dismissal of claims brought by the administrator of Voyager Digital, LLC, a bankrupt cryptocurrency brokerage platform, and its affiliates, against Metropolitan Commercial Bank, holding that the administrator did not meet the heightened pleading standard for fraud.
The administrator, as the assignee of claims held by 31,867 former customers of Voyager, alleged 53 claims, including securities fraud, common law fraud, and consumer fraud, against the bank, based on the premise that the bank either participated in or aided and abetted Voyager’s fraudulent activity, or was vicariously liable for Voyager’s conduct.
The administrator argued that the heightened requirements for pleading fraud under Rule 9(b) of the Federal Rules of Civil Procedure should be relaxed so that he could plead on information and belief. The administrator asserted that this standard was warranted because he lacked knowledge of what each assignor saw, knew, or relied upon, which he contended was necessary to allege particularity under Rule 9(b).
But the Second Circuit in a non-precedential summary opinion on October 9 noted that the administrator did not dispute that he could have discovered the information necessary to plead fraud with particularity. The administrator had ample opportunity to gather sufficient facts from both the assignors and the bank. The administrator also had access to all of Voyager’s internal documents, including communications between Voyager and the bank. The potential inefficiency of serving pre-complaint subpoenas on all the assignors did not justify relaxing the pleading standard.
Further, the administrator failed to plead sufficient facts showing that the bank had actual knowledge of Voyager’s fraudulent conduct to support the fraud claims. The administrator asserted that the bank was in close contact with Voyager, maintained oversight and control over Voyager’s programs, and was an active participant in the Voyager scheme. But general assertions of proximity and control were insufficient to plead with particularity that the bank actually knew of Voyager’s improper conduct. Similarly, allegations that bank employees were aware of business or regulatory uncertainties, or of potentially misleading language in a draft debit cardholder agreement, did not show actual knowledge.
Why It Matters: The Second Circuit imposed a high bar on administrators or trustees of bankrupt firms seeking to bring fraud claims against third-party entities. Such administrators/trustees must meet the heightened pleading standards under Rule 9(b) if they could have discovered the necessary information, even if the effort would have been expensive and difficult, such as serving subpoenas on more than 31,000 assignors. Moreover, the third party’s close contact and connections to the bankrupt firm were not sufficient to provide an inference that the third party had actual knowledge of the fraud.
Supreme Court Denies Appeal of Class Certification in Zillow Case, Leading to Settlement
One of the most significant events in October was something that did not happen. On October 5, the U.S. Supreme Court denied a petition for certiorari to hear an appeal by Zillow Group, Inc. from a decision by the Ninth Circuit Court of Appeals affirming class certification in a securities class action.
Plaintiffs alleged that the defendants had made material misstatements and omissions relating to the company’s direct home-buying and selling business, and that the stock price fell sharply following an announcement in November 2021 that Zillow was winding down that business and taking a $304 million write-down on housing inventory purchased in the third quarter of 2021. The complaint also alleged that Zillow disclosed that it anticipated a loss of $240 million to $265 million on homes that it expected to purchase in the fourth quarter of 2021.
Zillow had argued in its cert petition that the Ninth Circuit, in affirming the lower court’s class certification, had failed to follow the Supreme Court’s decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 594 U.S. 113 (2021). That decision held that courts must examine, in determining whether defendants had rebutted the fraud-on-the-market presumption, if there were a “mismatch” between alleged corrective disclosures and purported “front-end” generic misrepresentations, in order to analyze whether there was any price impact from the misstatements. Zillow asserted that the Ninth Circuit also had created a circuit split with the Second Circuit’s decision decertifying a plaintiff class following remand of the Goldman Sachs case from the Supreme Court.
The parties settled shortly after the Supreme Court’s decision not to hear the appeal. On October 28, the parties announced a $212.5 million settlement to end the litigation.
Why It Matters: The Supreme Court’s decision to pass on the opportunity to elaborate on and clarify its Goldman Sachs decision means that there will be continuing division among the lower courts in interpreting the scope of the decision and analyzing whether there was any price impact from alleged generic misrepresentations. The quick settlement following the Court’s action illustrates the importance of granting class certification, because that significantly increases the potential damages resulting from an adverse verdict at trial and applies pressure on defendants to resolve the litigation.