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.