There was abundant federal securities litigation activity in 2019. Plaintiffs not only continued to file securities lawsuits at record numbers, but repeatedly secured victories in cases on significant issues of law. The tone was set at the top with the Supreme Court’s landmark decision in Lorenzo v. SEC. There, the Supreme Court clarified, in contrast to its 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, that a person who does not “make” a fraudulent misstatement can nonetheless be held primarily liable for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder for his or her role in disseminating the misstatement. In so ruling, the Supreme Court effectively eviscerated a popular defense in fraud lawsuits since Janus and reaffirmed that the antifraud provisions of the securities laws cover a “wide range of conduct.”
In multiple other cases, federal courts ruled in favor of plaintiffs and established expanded theories of liability for defendants. For example, in North Sound Capital LLC v. Merck & Co., the Third Circuit held that plaintiffs who opt out of a securities class action are not precluded under the Securities Litigation Uniform Standards Act of 1998 (SLUSA) from bringing state law fraud claims in follow-on individual actions, even if federal claims are time-barred. This opens a potentially significant new avenue for plaintiffs to evade heightened federal pleading standards and limitations periods. The Tenth Circuit, in SEC v. Scoville, clarified that the SEC and DOJ may avail themselves of the expansive “conduct and effects” test under the Dodd-Frank Act to reach securities fraud defendants whose U.S.-based conduct affects foreign defendants or who commit frauds abroad that affect U.S. investors. Courts also adopted expansive views of a “security” subject to federal antifraud rules and registration requirements, applying the concept to an internet traffic exchange service (Scoville) and a new digital “coin” (Balestra v. ATBCOIN LLC).