Monthly Archives: September 2020

OCIE Publishes Risk Alert Regarding COVID19-Related Compliance Risks and Considerations

Stacey Song and Jessica Forbes are partners and Joanna Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On August 12, 2020, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) published a risk alert (“Risk Alert”) identifying a number of COVID-19-related issues relevant to SEC-registered investment advisers and broker-dealers (collectively, “Firms”). [1] OCIE had previously announced that it was actively engaged in ongoing outreach and having discussions with Firms to assess the impacts of COVID-19 on their businesses, including challenges to operational resiliency and the effectiveness of Firms’ business continuity plans. [2] The Risk Alert outlines risks and practices that OCIE identified through its industry outreach, as well as consultation and coordination with other regulators. OCIE’s observations and recommendations fall into the following broad categories: (1) protection of investors’ assets, (2) supervision of personnel, (3) practices relating to fees, expenses, and financial transactions, (4) investment fraud, (5) business continuity, and (6) the protection of investor and other sensitive information. We summarize these below.


PE Seller May Have Liability for Portfolio Company Concealing Steep Earnings Decline Post-Signing

Gail Weinstein is senior counsel, and Robert C. Schwenkel and Andrea Gede-Lange are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Agspring v. NGP (July 30, 2020) involved the sale of a portfolio company, Agspring LLC, by one PE fund (the “Seller”) to another (the “Buyer”). At the pleading stage of litigation, the Delaware Court of Chancery found it reasonably conceivable that: (i) the Agspring officers deliberately concealed from the Buyer a steep decline in earnings that occurred before and after the signing and closing; and (ii) as a result of the decline, certain of the representations and warranties in the sale agreement and a related financing agreement were false when made. The court concluded that not only the Agspring officers but also the Seller may have known or been in a position to know that the representations were false when made; and that therefore they faced potential liability for fraud.

Key Points. The decision serves as a reminder that:

  • A PE-seller may have liability for its portfolio company’s fraudulent representations. When a PE fund sells a portfolio company, the fund can be liable for fraudulent representations made in the sale (or a related) agreement–even if the fund is not a party to the agreement.
  • A decline in earnings may implicate the accuracy of representations. A steep decline in earnings can support a reasonable inference that certain representations in a sale agreement (or related agreements) may have been false when made. In this case, at the pleading stage, the court found it reasonably conceivable that Agspring’s officers and the Seller were in a position to know that the steep decline in its earnings that began just before the sale agreement was signed may have (i) constituted a Material Adverse Effect and (ii) put the company on a course that would lead to a default under a Material Contract that occurred three years later.


Venture Capitalists and COVID-19

Will Gornall is Assistant Professor of Finance at the Sauder School of Business at the University of British Columbia. This post is based on a recent paper by Professor Gornall; Paul A. Gompers, Eugene Holman Professor of Business Administration at Harvard Business School; Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business; and Ilya A. Strebulaev, the David S. Lobel Professor of Private Equity at the Stanford Graduate School of Business.

Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here); Do Founders Control Start-Up Firms that Go Public? by (discussed on the Forum here); and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley by Jesse Fried and Brian Broughman (discussed on the Forum here).

In this paper, we survey over 1,000 institutional and corporate venture capitalists (VCs) at over 900 VC firms to learn how their decisions and investments have been affected by the COVID-19 pandemic. Understanding how COVID-19 impacted venture capital is important because many of the most innovative young companies depend on a steady inflow of VC money. The sudden arrival of the COVID-19 pandemic has dramatically affected many facets of the global economy, and many commentators worry this shock will choke off venture capital flow. VCs have variously described COVID-19 as the “Black Swan of 2020” and claimed the “global VC market has completely locked up.” If such dire predictions are true, that would have important consequences for the innovation ecosystem.

We measure the impact of COVID-19 using a survey of venture capitalists. Our results are based off answers by VCs who make up a significant fraction of the industry, including over 900 institutional VCs at over 800 VC firms and over 100 corporate VCs representing over 100 corporations. We compare their survey answers to those provided by a large sample of VCs in early 2016 and analyzed in Gompers, Gornall, Kaplan, and Strebulaev (2020), which allows us to see how COVID-19 has changed VC attitudes.


2020 Mid-Year Securities Litigation Update

Jefferson E. BellBrian M. Lutz, and Robert F. Serio are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Bell, Mr. Lutz, Mr. Serio, Monica Loseman, Mark Perry, and Mark H. Mixon, Jr.

The first half of 2020 brought the spread of COVID-19 and unprecedented changes in daily life and the economy. We discuss how, nevertheless, there has still been a variety of securities-related lawsuits, including securities class actions, insider trading lawsuits, and government enforcement actions. We also discuss developments in the securities laws that have occurred against this backdrop.

This post highlights what you most need to know in securities litigation developments and trends for the first half of 2020:

  • In Liu v. SEC, the U.S. Supreme Court affirmed the SEC’s ability to obtain disgorgement as an equitable remedy in civil actions, but left open several questions about the permissible scope of the remedy. In addition, a petition for a writ of certiorari was filed in National Retirement Fund v. Metz Culinary Management, Inc., a case posing the question of how to calculate withdrawal liability based on interest rate assumptions for union pension plans.
  • We discuss the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, which confirmed the facial validity of federal-forum provisions, as well as the Court of Chancery’s treatment of Caremark claims and director independence with respect to a putatively controlling stockholder.
  • We continue to analyze how lower courts are applying the U.S. Supreme Court’s decision in Lorenzo, with a focus on recent district court opinions interpreting Lorenzo’s scope.
  • We survey securities-related lawsuits arising in connection with or related to the coronavirus pandemic, including securities class actions, insider trading lawsuits, and government enforcement actions filed by both the SEC and the Department of Justice.
  • We discuss recent decisions illustrating the difficulty plaintiffs face in attempting to overcome Omnicare’s formidable barrier to adequately pleading securities fraud.
  • We examine the Second Circuit’s noteworthy decision in Goldman Sachs II regarding how defendants may rebut the presumption of reliance under Halliburton II.
  • Finally, we examine the intersection of the federal securities laws and ERISA, discussing the U.S. Supreme Court’s recent Sulyma decision, which clarified the statute of limitations for fiduciary breach claims, and the lower court decisions addressing significant issues in the wake of the Court’s January decision in Jander.


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