LAW DISRUPTED_JESSE BERNSTEIN_TRANSCRIPT

[00:00:00] JOHN QUINN: This is John Quinn, and this is Law Disrupted. And today we're going to be talking about securities litigation. Fascinating, interesting, ever evolving subject. And to tell us about securities litigation, we have with us my partner, Jesse Bernstein, who is co head of the securities litigation practice. He's based in New York city.

And let me begin by, I don't know if it's a question or an observation, Jesse, you kind of came to this practice naturally. Didn't you? I mean, you grew up with securities law. 

[00:00:36] JESSE BERNSTEIN: I did grow up with it. Uh, my, my dad is a securities litigator on the plaintiff side.

[00:00:42] JOHN QUINN: He's a very, very well known and successful securities.

Uh litigator who i've uh, i've met and I think our firm has worked with from time to time over the years 

[00:00:53] JESSE BERNSTEIN: Yeah, I think that's right. And so I definitely had a lot of Knowledge about securities litigation just from from growing up and and seeing it And getting to see the cases that my dad worked on Ironically enough that was actually the reason that I did not Really want to do securities litigation when I when I started at quinn My goal was to mainly do antitrust and General commercial and maybe a small portion of securities litigation 

[00:01:27] JOHN QUINN: Yeah as a child, I mean you you maybe got a little tired of hearing about cyanter and fraud on the market And reliance and You want to try something else, but turns out as often happens, Apple doesn't fall far from the tree.

[00:01:42] JESSE BERNSTEIN: That is right. I, uh, when I got here, I started enjoying the securities cases a lot more than I enjoyed the other cases. I thought I was a little bit better at them than I was at the other cases, which was perhaps part of the reason why I was enjoying them more. And so over time, securities became a larger and larger part of my practice.

Now it's 85 percent plus of my time spent on securities and shareholder litigation matters. 

[00:02:11] JOHN QUINN: But Jesse has become a huge resource within our firm for anyone who has a question about securities litigation. Jesse is a, he's kind of an encyclopedia and I know his days, he handles pop flies, uh, one after another questions from people in the firm.

But let's start with first principles. What is a security? What are we talking about here? 

[00:02:34] JESSE BERNSTEIN: Well, it's a, it's a good question. Uh, and the Supreme court answered it in the forties, I think 1946 in a case called SEC V Howie, and. Many things can be a security. I think we, we typically think about securities as stocks and bonds.

[00:02:54] JOHN QUINN: Yeah. You think about things that are traded on public markets, you know, the average lay person, probably that's what they think of as a security. 

[00:03:01] JESSE BERNSTEIN: That, that is the main thing that we think of options, derivatives, but the Supreme court said that many things can meet the definition of an investment contract or a security, and they kind of laid out a test, which was if you.

Invest money into it. It's part of a common enterprise Meaning you're joining With with other investors and you're pooling resources together and you have a reasonable expectation of profits from the efforts of The management that you're investing with or of others Then that can be a security and the in the howie test which comes from the secv howie case that case actually was about the sale of Tracks of land in an orange grove.

So not your typical, you know, share of Microsoft that we all think of is that's a security. 

[00:03:55] JOHN QUINN: Right. Did the court in that case find that those tracks were securities? Yes. I know an issue that's been mooted a lot in recent years is the circumstances under which various, uh, crypto coins, instruments. Whether they are securities can be securities.

I guess we still don't know whether some of the best known, uh, you know, crypto assets are securities or not. There's still, these issues are still open and, and haven't been resolved to a large degree. Like Ethereum, is either a security, the second largest crypto, uh, instrument out there. It's an unresolved question about whether that's a security.

[00:04:37] JESSE BERNSTEIN: Yeah. I think there's, there's a lot of debate out there about different. Cryptocurrencies and Most of the cases that have I think gone forward so far they've been finding that a lot of these tokens are in fact securities because if you just apply the The how we test to them people are investing money whether it be cash or other cryptocurrencies Because that is a a very frequent way of buying cryptocurrencies is with other cryptocurrencies uh, you're pooling the money together and often there people are expecting some expectation of profits based on the efforts of the the management of the cryptocurrency company that's selling those tokens As it relates to ethereum, I think the the general consensus is that is not a security.

You're not really relying on anyone's uh efforts That's not how you're profiting based on the efforts of management or anyone else 

[00:05:45] JOHN QUINN: Well, we could have a whole podcast on uh on this is on this issue alone I know but let's take a step back and just to sort of generalize What is the focus? Of securities law securities litigation, would you say?

[00:05:58] JESSE BERNSTEIN: the focus of Our securities laws tends to be disclosure based Uh, it's not a Qualification based test so much you can kind of sell whatever you want so long as you you register it and make it make proper disclosures and because of that the the natural focus of securities litigation Is disclosure focused and whether the disclosures were adequate whether they were misleading It it essentially is litigation about lying Is most of securities litigation is someone saying you lied to me when I bought this And I was misled and I would not have bought it if you had told me the truth About how your company was doing about how much revenue you actually had or something else 

[00:06:50] JOHN QUINN: What are the sources of securities law?

We have a, we know in this country, we have kind of a complex, uh, set of rules and laws, uh, which govern securities disputes, which, uh, say where there is private rights of action, what the elements are, what are the basic sources of securities law? 

[00:07:11] JESSE BERNSTEIN: So historically, uh, it was governed by state law known as the blue sky laws.

And there's a lot of. Background on where that blue sky kind of got their name and it 

[00:07:22] JOHN QUINN: was like somebody would sell you the blue sky You know, like it's not true. 

It's like the 

brooklyn bridge the blue sky, right? 

[00:07:29] JESSE BERNSTEIN: Yeah, that's that's one of the theories as to the origin of the name uh, but following the the great depression and stock market crash There were a number of new deal era federal laws that were passed that were focused on Regulating The purchase and sale of securities, the two principle ones, sort of the twin killers of securities law are the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Securities Act of 1933 focuses on initial issuances.

IPOs when a company first goes public and sells their shares directly to investors And the securities exchange act of 1934 is focused on Secondary market purchases which most of us buy our shares on the secondary market you go on robin hood Buy some shares of facebook. That's the secondary market.

[00:08:33] JOHN QUINN: How do claims under the 33 act and the 34 act? Differ in essence 

[00:08:39] JESSE BERNSTEIN: the 33 act as I mentioned is focused on Uh initial issuances, so it only applies to Purchases that you made so directly with the company Um, or with the underwriters of the company So there are two main provisions of the securities act of 1933 as it relates to the private civil Uh securities litigation that's section 11 and section 12 Section 11 gives investors the right to sue if there's a misleading statement or a material omission that was required to be disclosed under the securities laws that was not disclosed in the registration statement.

And section 12 governs misstatements in prospectuses. So under section 11, you need to show that you, the shares you bought were traceable To that registration statement, which is not usually an issue for an ipo because they only typically have one registration statement Though with direct listings that's become a little bit trickier and there was a recent supreme court case on that the slack case But sometimes companies do secondary offerings where they already have shares out there.

They do a new offering And they sell more shares to the public to raise more money and in those situations traceability can be a real issue 

[00:10:05] JOHN QUINN: Do the claims under those sections require intent to defraud? 

[00:10:09] JESSE BERNSTEIN: They do not they don't require intent to defraud That's a big difference between the securities act of 1933 and the exchange act of 1934 The exchange act 1934 requires intent to defraud securities act does not doesn't require intent to defraud and it doesn't require Loss causation does provide In affirmative defense to both sort of so uh as to intent to defraud the securities act gives Securities act actually as amended by the private securities litigation reform act of 1995 We could talk about it.

[00:10:48] JOHN QUINN: We'll get to that. 

[00:10:49] JESSE BERNSTEIN: Yeah, uh gives a loss causation defense Where if the defendants can show that some amount of the loss Was not You Caused by the misrepresentations They can cut that portion out of damages As it relates to scienter defendants other than the issuer have the right to show that they acted in good faith or or engaged in proper due diligence Such that they didn't know there was a misstatement and they couldn't have known That there was a misstatement.

[00:11:28] JOHN QUINN: So those are affirmative defenses to these claims under the Securities act of 1933 correct, which is otherwise basically strict liability or negligence doesn't require intent 

[00:11:40] JESSE BERNSTEIN: It's it's for the for the issuer It is effectively strict liability for all other defendants and that the statute under section 11 provides a specified list of People who are responsible, which includes the underwriters, the people who signed the, uh, registration statement for those people.

It is effectively a negligence based statute. 

[00:12:05] JOHN QUINN: Okay, so let's turn to the exchange act of 1934. How is that different? What types of claims and isn't this the mother of the sec, the Securities Exchange Commission? 

[00:12:17] JESSE BERNSTEIN: This is the the main Law that that 

[00:12:21] JOHN QUINN: keeps you busy Puts puts bread on the table. 

[00:12:24] JESSE BERNSTEIN: That's correct the vast majority of securities cases involves section, uh section 10 of the exchange act and rule 10b 5 Which is a rule that the SEC passed pursuant to section 10 of the Exchange Act, which gave the SEC authority to create regulations to restrict the use of manipulative or deceptive devices in the purchaser sale of, of securities.

Uh, the SEC has actually passed, uh, I think approximately a dozen laws pursuant to Section 10, but rule 10 B five is by far the most famous. And and by far the the most prominent Of the rules that that the sec has passed pursuant to section 10 

[00:13:13] JOHN QUINN: And in a nutshell, what does it provide? 

[00:13:16] JESSE BERNSTEIN: It provides that you can't Make misrepresentations in connection with the purchase or sale of securities.

There's also that's 10b 5b 10b 5a and c Provide that you can't use manipulative acts or manipulative schemes You They are far less utilized than 10b 5b. Uh, 10b 5b essentially says that, uh, you can't make material misrepresentations with the intent to defraud. And if you do, a plaintiff can sue you if they can show that you made a material misrepresentation, you did it with the intent to defraud them, they relied on it, it caused them loss and damages.

[00:14:00] JOHN QUINN: I mean, Jesse, you've told us that the, uh, SEC promulgates these rules, 10b. Five, uh, being the most well known do each of these rules provide for private rights of action? If you don't comply with these rules, can somebody damaged by a failure to comply with these rules bring a claim? 

[00:14:18] JESSE BERNSTEIN: Well rule 10b5 Uh does have an implied private right of action and before you ask me Uh, what are the sources of securities law as we know it today?

One of the biggest one is arguably just judicially created law, including the implied private right of action. The Supreme Court has pretty much said That if this issue were before then today, is there a private right of action under 10b 5? And this were presented to the Supreme Court as a fresh issue, there had been no history behind it.

They would say no. 

[00:14:53] JOHN QUINN: Really? That's astonishing. Because I, I just assume with my whole professional career I've been hearing of dealing with private rights of, private cases brought under Rule 10b 5. And that's, that's implied by judicial interpretation. 

[00:15:08] JESSE BERNSTEIN: That was implied by judicial interpretation. The first case that implied the private right of action was back in 1946, which is a district court I think in Pennsylvania.

That was before even I was born. It's a few years before I was born too. 

[00:15:26] JOHN QUINN: Right. So you, you referred also to the, uh, what's known colloquially as the PSLRA. The Private Securities Litigation Reform Act of 1995, uh, what did that do? 

[00:15:40] JESSE BERNSTEIN: The Private Securities Litigation Reform Act of 1995, which was part of Newt Gingrich's contract with America, the, the statute actually has a, a, quite an interesting history, John.

It is one of, I believe, two laws that President Clinton vetoed, and the veto was overturned. And what it did was or what it was intended to do was curb the perceived abuses of the plaintiff's bar with respect to securities litigation and in particular securities class actions and the way it did that was Or the way it intended to do that we could discuss whether it was effective or not the way it intended to do that was by Raising the pleading standards In particular around Scienter, uh, it required what's called a strong inference of Scienter at the pleading stage in order to get past the motion dismissed.

Supreme Court has ruled that that means you need to consider competing inferences, and the inference of intent to defraud must be cogent and as compelling as any alternative competing inference that could be drawn from the facts. And if you if you read a securities class action decision Something that is kind of unusual for lawyers Your normal motion to dismiss is you'll see the courts looking outside of the pleadings Worthy Insiders selling stock not selling stock if they weren't selling stock Even if this isn't on the face of the complaint courts will say well, I don't think you know I think that the the better inference is that Maybe they were negligent, but they weren't intending to defraud anyone.

Uh, so that's one of the big Big items the other ones include an automatic stay of discovery during Motion to dismiss so not only do they make it harder to get over the motion dismiss But you're not getting any documents while that motion to dismiss is pending Uh, this was to ensure that a people didn't have to spend a lot of money Defending a case that had no merit And which would force them to settle meritless cases and to not allow plaintiffs to go on fishing expeditions looking through documents in order to create a case that they otherwise would not be able to create.

Another thing that the PSLRA did was it created what's known as the PSLRA safe harbor for forward looking statements. Most people who have listened to an earnings call will know that earnings calls often almost always I think Start with a disclaimer that there will be forward looking statements And that just means this is what we think is going to happen.

This is what we think is going to happen but here's a lot of risk factors that could impact that outcome and What the pslra did is it says if you identify a statement as forward looking and you give It Adequate risk factors The statements inaction. 

[00:19:00] JOHN QUINN: Okay. Well, I actually do remember when the P-S-L-R-A was passed in 1995, and I do remember that there was a lot of talk, uh, really a chorus of, uh, talk that the, uh, securities laws were being abused, that you'd have these, uh, whole plaintiff bars that would bring these securities class actions whenever there was bad news, immediately a case would be filed.

No, obviously no investigation gone into it. Copycat cases all over the place, uh, cases that couldn't be the benefit of any kind of research, uh, but would immediately create some leverage and some value. The company has to deal with that, but because of the PSLRA, the cases stopped dead in the tracks, they're going to be subject to a very, uh, strict, uh, pleading standard.

And cases are often dismissed post PSLRA. That's the battleground. Is that motion to dismiss right at the beginning? 

[00:20:02] JESSE BERNSTEIN: That has historically been a big battleground for the cases is the motion to dismiss. I think one thing we're seeing is cases going further and further along in, in their life and going past class third and summary judgment and even cases going to trial.

Uh, and I think we're going to see. Defendants taking cases further and further along but the the Historical battleground, let's say historical. It's really just since 1995. It's not all that long um has been the motion to dismiss and once you get past the motion to dismiss the Common thought is it's probably going to settle right and we're just dealing with What number is it going to be 

[00:20:49] JOHN QUINN: right these cases?

Uh, you know, I described what the What people saw as abuses before the pslra was passed the you know stock drop cases That's sometimes called like strike suits. I haven't heard that term in a while Uh for some people listening to this might say nothing's changed that still happens. There's bad news the next day There's a case on file.

[00:21:12] JESSE BERNSTEIN: So they're they're they're not wrong. And this is why I said before You There's, I think, a good question to be asked whether the PSLRA has really changed all that much. I think we're still seeing 200 plus securities class actions a year. Uh, it certainly hasn't curbed filings and what we've seen since the passage of the PSLRA is settlements have gone up significantly.

You mean that settlement amounts? Settlement amounts have gone up significantly. Now you could argue that the PSLRA has curbed the weak cases. And those are getting dismissed because there's approximately a 50 percent dismissal rate and that the cases that are getting through Are the really strong ones and because the pleading standard is so high That in order to get through the motion dismiss to begin with you need to have a really strong claim that is likely to Drive a high settlement to begin with but there's there's certainly no doubt that That the PSLRA has not ended securities class actions, uh, and has not curbed, uh, securities class actions in any way.

[00:22:35] JOHN QUINN: You know, I have to admire, uh, people like you that, uh, brief motions to dismiss in securities cases, because usually there are multiple counts. There are multiple defendants. You're dealing with multiple, uh, regulations, causes of action, statutes often. They're all some version of fraud. So the briefs are often kind of repetitive.

You know, you're talking about reliance on page four, seven, 13, 19. It wasn't reasonable. I mean, it's like you're going, it sometimes seems like you're addressing the same issues again and again. And again, this just seems like a feature of briefing, uh, in securities cases. I mean, is there some truth to that?

[00:23:19] JESSE BERNSTEIN: There's certainly some truth to that. There's a, there's a lot of. Overlap between the issues and case to case but they are also pretty fact specific and disclosure specific so you are you're often looking at the Always looking at the specific disclosures and looking at what specific risk warnings that company made Whether the insiders were selling shares or not And so there are a lot of unique things in motion to motion But certainly the The issues from case to case will look similar once you've done two or three of these there there is a lot of similarity between case to case and and they will feel familiar which I I I personally enjoy I find it a little bit less stressful to get a securities to have to do a securities class action motion to dismiss then to do Um, you know some other case Some other emotion in some other case Where it's not as familiar.

[00:24:28] JOHN QUINN: Right. What's the role of insurance? In securities litigation, there's almost always a carrier involved, isn't there? 

[00:24:35] JESSE BERNSTEIN: There is almost always a, a carrier. Uh, sometimes there's, there's not enough of a, uh, tower, insurance tower to cover the whole case, but there, there certainly is a, a big role that insurance companies play in these cases.

And perhaps part of the reason why You don't see as many securities trials securities class action trials as you see in let's say major patent cases Which I think go to trial a bit more than

[00:25:12] JOHN QUINN: I think statistically they do patent cases go To trial more often than other civil cases. 

[00:25:17] JESSE BERNSTEIN: So I think the insurance companies have their upper limit and if the company If the insurance company is willing to pay and it's within the company limits, there's not a whole lot of incentive for anyone to go to trial.

[00:25:32] JOHN QUINN: So tell us a little bit about what the securities bar is like. There are firms that specialize on the plaintiff's side, your father's firm, plaintiff's securities class actions lot, maybe all they do, I don't know. And then there are defense firms that, it's like shirts and skins. You know, you're, you're up against the same, uh, the teams you're just trading in this case, you know, you're, uh, against this group that you were on the same, you know, you were against last week and next week.

It's another group, but you're encountering the same lawyers the same time all the time. Is that a fair statement? 

[00:26:06] JESSE BERNSTEIN: That, that is a fair statement. Uh, of course, Quinn Emanuel is, is neither shirts nor skins. We have half a shirt on and half a shirt off. Um, because we obviously have a, not doing securities class actions, but certainly during the financial crisis, we did the FHFA cases where we sued the banks related to their sale of, of mortgage backed securities.

And we've done some other plaintiff side securities cases Which I think gives us a little bit more insight into the plaintiff brain than perhaps our our peers at at other defense firms But there certainly is a specialized plaintiff's Securities bar and a specialized defense bar as well And we're kind of on on both sides of of that Uh more focused on the defense bar, but we we do both You And and yeah, you see the same players over and over again and the briefing is Almost always good from both sides You you can pick up almost any securities brief in a major securities class action or pretty much any securities class action And the briefing is good, right?

Uh, the the lawyers on the plaintiff side. This is an area where I think you get some of the best of the best as far as the plaintiff's bar goes within that there are certainly Uh tears. Yes Uh, and I obviously have I have a bias for for for my uh, my dad's firm But there there certainly are You know, the best of the best on the securities plaintiff's bar.

And then, you know, the less good, it is a, it is a very good plaintiff's bar and the defense bar is very good too. So you get good matchups, you get good on fights. 

[00:27:59] JOHN QUINN: People, people in the white color bar say that, uh, the fact that they're always. Seeing the same lawyers on the other side, and it's a relatively small group that that lends, uh, to more collegiality, uh, more professionalism that you can't pull dirty tricks because you're going to have to be dealing with that lawyer, you know, next month, next year that you develop a reputation.

Uh, and that, uh, that's good. In terms of the quality of practice and professionalism, do you think that that's true in the securities bar as well? 

[00:28:33] JESSE BERNSTEIN: I think there's some truth to it. I would say based on your description, uh, pro of the, of the white collar bar, I would say it's not quite at that level of collegiality and professionalism.

There are certainly some firms and some lawyers that are very collegial and very professional, and you can have. Really sort of open and honest conversations with them about the strengths of a case the weaknesses of a case um Issues you're having in discovery be transparent. Hey, here's an issue we're having but I promise i'm not it's not I'm, not trying to hide the ball from you.

I'm not trying to do anything. It's just complicated for me to get you that And and they'll they'll believe you If you've earned it Uh, and there are others, uh, who you better watch your wallet. They're all lawyers after all. So there there's there's going to be some Who are a little bit less collegial and they want to fight about everything Uh, I can't say that i've seen those lawyers getting better results than the other lawyers I suspect they probably are not getting better results.

[00:29:43] JOHN QUINN: Yeah, it seems in my case, I've often remarked on the fact that before I was 40 years old, it seemed like all my adversaries were just jerks and impossible to get along with. And then I got to over 40 and that changed. And then you became the jerk who was impossible to get along with. Well, I think I learned something, you know, like, like Mark Twain said, he couldn't believe what his father learned between the time he was 15 years old and 21.

It was really a comment on my own, own development. So what, how about the pace of change in securities law? I know in some practice areas, you know, it seems like every week or every month there's going to be a decision That's impactful and moves the needle and you really need to be on your toes for the pace of change in the law Is securities law like that?

[00:30:32] JESSE BERNSTEIN: I don't think so They're every couple of years Every year or two and there's a supreme court decision. There's a recent one Uh in the mcquarry case that just came out last week, but they typically don't Make massive changes in the law um, you know, they move things and they tend to move things in predictable ways, I think The McClary decision, for example, where the Supreme Court recently said pure omissions, true pure omissions are not actionable under Rule 10b 5, because Rule 10b 5, at least Rule 10b 5b, Speak to statements and if you are saying nothing you cannot have made a statement 

[00:31:16] JOHN QUINN: It took decades for it.

It did judges Figure that out 

[00:31:21] JESSE BERNSTEIN: Oddly enough it did take decades For the supreme court to get to that place where they said and and they overturned the second circuit But they said silence alone can't be Actionable, uh, silence, even if you have a duty to disclose that information, They said can't be actionable under 10b5b because it talks about making a statement.

[00:31:44] JOHN QUINN: Yeah. All right. So that's about that's an example That's about omissions and to me. That's a pretty big change. That's that's that's pretty basic and it seems like Every year, 18 months, two years, there's something like that, a rat, some, something important that then becomes a leading case. It's going to be cited a lot.

And this kind of reminds me about contract law is in law school. 1st year. We take a contract law course, because typically the whole year and you think, oh, I got that. It's pretty simple offer acceptance consideration claim for breach. Here's the elements. You think you've got it. And I'm in my fourth decade of practice and I'm still encountering new contract law issues, things that I haven't encountered before.

And it turns out contract law is far more complex than it seemed when I was a first year law student. Maybe the same is true of fraud, especially with this overlay of legislation and regulation. 

[00:32:45] JESSE BERNSTEIN: It could be. Um, I think we haven't seen a real massive change. In a while, I think that people often predict that cases will have massive changes.

The biggest the biggest potential change that was going to happen in the past 10 15 years was when the supreme court agreed to Reconsider whether the what's called the fraud on the market presumption Can apply is a thing. Yeah, and whether to overturn that and fraud on the market presumption is You The linchpin of that's, that's bedrock.

That's . Without the fraud on the market presumption, there are no securities class actions. At least under section, uh, 10, you would still have section 11 and section 12 cases. 'cause reliance isn't an element for, for class actions under section 10 B, rule 10 B five. The fraud in the market presumption is the only way that those cases Stick together and I said earlier that some of the biggest development In securities law at least securities litigation has been judicially made.

That's an example of one the fraud in the market presumption is Not not done by statute. It was not done by congress There was no law that was passed the president didn't sign it into law and nothing like that The supreme court in a case called basic came up with it And said here's this theory.

There's an economic theory, which is that we Live in a world with very efficient markets and so Any piece of public information that's in the marketplace is going to very quickly be incorporated Into a company stock price and therefore so long as people are relying on the stock price as an accurate reflection and an appropriate reflection of the company's uh Value They are indirectly relying on all of the information that's out there and all of the statements the company makes.

And without that, it would be impossible to have a class action because how could you show reliance? Individual by individual, some people read the whole sec filing some people don't read a thing some people go on reddit and hear from their friend Buy amc and so they buy amc, but they don't know anything that amc has ever said They might not even know what the company does right and the supreme court did take that up and there were three votes To get rid of the fraud in the market presumptions.

I think that was the closest That the securities litigation came to a true significant move the rest of them I think they they change things and then there are lots of fights and lower courts about how much they change But I don't think we've seen a massive tidal wave type shift in In securities law.

[00:35:51] JOHN QUINN: No, I think you said that um, you don't see a lot of securities cases going to trial Especially the class actions, although like you alluded to a phenomenon that maybe we're seeing more of them before I know you were involved in one of the very few securities class actions That went to trial. Can you tell us about that?

[00:36:12] JESSE BERNSTEIN: Sure. Uh, yeah, I was I was very privileged to be part of the team here that went to trial on the tesla securities class action about elon musk's tweet back in 2018 When he said he was considering taking tesla private And then the two famous words that became the focus of the trial funding secured And and that was a case where we went in with at least one hand tied behind our back because we had Summary judgment granted against us on the issue of falsity and scienter 

[00:36:52] JOHN QUINN: and the judge instructed the jury I'm at the beginning of the trial.

[00:36:55] JESSE BERNSTEIN: The judge told the jury that falsity you you are to assume That the following statements were false when made and you are to assume that they were made recklessly Why from a defense standpoint? That's not a great way to begin the trial. It wasn't a great way to begin the trial i've seen some Uh articles after we won because all the articles before we won said there's no chance these people are gonna win They're crazy for even thinking about taking this to trial Huge uphill battle and uphill such that you're never going to get over that hill Afterwards i've seen some people say, you know, maybe it actually gave the tesla elon musk team an advantage of You know Being able to not fight on whether it's literally true not true and kind of just own the 

[00:37:52] JOHN QUINN: Accuracy or inaccuracy 

[00:37:55] JESSE BERNSTEIN: Accuracy and inaccuracy and focus on other issues And then they also have opine that you know to your point cases generally don't go to trial perhaps Being so disadvantaged by having that summary judgment decision and wanting to be able to appeal that issue Provided us A a more logical Trial route because obviously we can't appeal it unless we go through the trial I don't think those theories are are quite right Maybe the first one about us having an advantage by not needing to fight the battle of literal truth literal falsity Um, but I suspect this case was going to trial no matter what happened at summary judgment 

[00:38:39] JOHN QUINN: Well notwithstanding that instruction to the jury at the outset of the case that the tweet was false and that mr musk was Reckless in in saying what he said We know you the team Won that trial.

Why did you win? Why did the jury come back with a defense verdict? 

[00:38:59] JESSE BERNSTEIN: So I I think the answer It was a general verdict form so we don't know for sure Um, but we know there were only two elements left. So it was one of those two It was either materiality or loss causation or some combination of those two.

I I personally think it was a combination of the two and on materiality The question and we got a great jury instruction which told the jury. It's not just is this important? In a vacuum, which obviously you could make a strong argument that someone Announcing they're going to take a company private is important in a vacuum The question is is the difference between the true state of affairs and what he said Is that delta is that material?

And so in our case we focused on okay. Yeah, he said funding security What if he had said funding won't be an issue? Which the evidence showed funding would not have been an issue Is that materially different? Would the world have looked all that different if he had said funding not an issue? And I I think the real the correct answer is no the stock would have done the exact same thing 

[00:40:18] JOHN QUINN: Exactly.

I gotta think that's right if the richest man in the world Who's the largest shareholder of Tesla tells the world, I want to take Tesla private at 420 a share, the market's going to react market probably doesn't care whether funding secured or not. 

[00:40:36] JESSE BERNSTEIN: I think that's exactly right. And Bill price, uh, are, are one of our leading trial lawyers at our firm got the admission from the lead plaintiff in the case at trial, if Elon Musk says he's going to do something.

He's gonna do it So if ilan must says i'm going to get the funding It's as good as secured because he's going to do it. He's going to get the funding and I think the jury really Latched on to that appropriately. So the other element loss causation which is one of my uh my favorites But maybe is not the most jury friendly issue in in a trial is You The the plaintiff made no attempt and admitted they made no attempt to Disaggregate how much of the stock increase on the day musk tweeted was due to the truthful No one disputes truthful portion that he was considering taking tesla private at 420 And how much was due to the funding secured?

So even if you think the funding secured? Yeah, it was material and yeah the difference between Funding secured and and funding not an issue is also material They made no attempt to show how much of the stock price would have gone up anyway because of he's thinking about taking tesla private at 420 and they also Made no attempt to explain as the stock went down how much of the stock went down Because the market is learning funding is not secured.

Whatever that means Versus some of the other issues that were coming out in the 10 days following Elon musk's tweet including this tearful article That elon musk gave to the new york times where he describes the Difficult year he's had and how he's not getting sleep And he's depressed and he's thinking of you know all of these terrible things that if you're an investor in tesla, you might say well, that's a problem because Tesla and Elon Musk, they're one and the same, right?

If, if, if Elon Musk is no longer around, that's a real drag on Tesla's value and they made no attempt, they admitted, they made no attempt to take out any losses that were due to that, which obviously were not a result of the alleged fraud. 

[00:43:17] JOHN QUINN: Did you get to talk to the jury afterwards?

[00:43:19] JESSE BERNSTEIN: I didn't stay around to talk to the jury.

I see no upside , 

[00:43:23] JOHN QUINN: right. But I mean, these are, these are a relatively arcane, uh, abstract, uh, issues, lost causation, materiality, but clearly the jury got it.

[00:43:35] JESSE BERNSTEIN: So the, the rumor I heard from someone who did stay around to hear from the juries that one of the jurors used the word disaggregation. And that to me was a complete victory.

Yeah. They understood that was an idea that should be in their head. Disaggregation. 

[00:43:52] JOHN QUINN: All right. Let's talk about the future. Of securities litigation. What issues do you see percolating on the horizon in the area? 

[00:44:02] JESSE BERNSTEIN: So there are a couple, um, one comes from the, the McClary case that I mentioned, which is courts have now, the Supreme Court has now said that a pure omission is not actionable.

And the case came up under Uh this sec rule that says you need to disclose all of your known trends any negative trends about your business You need to disclose And they said they didn't disclose it Um, and the supreme court said well if it's just a pure omission It's not actionable as at least a private right of action What's going to come next is a debate over okay, because the supreme court left open Even though it's not actual as a pure omission You If it renders some other statement misleading, if it's a half truth, that is going to be actionable.

So I think the plaintiff's bar is going to be arguing that once you disclose any of your known trends It's inherently misleading to leave out other known trends that are A negative on your business. 

[00:45:12] JOHN QUINN: That's not really an expansion of law of fraud I mean, if you say anything, you need to say the full, make the full statement to make what you said accurate and not misleading.

[00:45:24] JESSE BERNSTEIN: I think that's what the plaintiff's bar is going to say. And I think the defense bar is going to say you're effectively. Just going back to the old rule, which is that's a pure omission. They're going to, I think, argue that unless the specific disclosure is misleading. So if you make a disclosure about headwinds in Europe and you don't disclose a particular issue about the European market that makes the headwind even worse, that's where we'll say, okay, maybe that can be misleading.

But if you disclose headwinds in Europe as a negative trend. But you don't disclose cyber security regulations in the U. S. As a trend, even if it even if it was a negative trend defense bar will say well They have nothing to do with each other. That's not a half truth And I think the plaintiff's bar will say no once you said anything About your your negative trends if you leave any out that are a negative trend.

That's a half truth Yeah, I think we're going to see a lot of fighting over that and that comes from the Mclaury case where the supreme court said we're not saying you can't bring a half truth case And so I think there's gonna be a lot of debate over what is You What is a half truth? 

[00:46:40] JOHN QUINN: All right, give us another one another issue that you see on the horizon.

[00:46:45] JESSE BERNSTEIN: Sure um risk disclosures are typically Inactionable unless the risk has already materialized or is really on the verge of materializing the example uh courts have given the famous example is you can't warn your hiking partner that there may be a hole ahead You If you know that the grand canyon is five feet away So courts have struggled I think a little bit with When is a forward looking risk warning our business may be harmed If we have a data breach When is that statement mislead?

So some courts have said Never some courts have said if the data breach has already happened and it is causing your business arm And recently, the Ninth Circuit said in a case against Facebook related to its Cambridge Analytica data breach that saying, if we have a data breach, our business may be harmed was misleading solely because they already had a data breach, even though they did not know that that data breach.

Was going to cause any harm supreme court said once you Once you can't disclose something as hypothetical the ninth circuit said once you disclose it as hypothetical You can't fail to disclose that it's already happened. Even if it's not causing any harm 

[00:48:22] JOHN QUINN: How about if you if you have reason to think that one might happen you say we'd be harmed if there were a data breach You don't say we actually have reason to know we're vulnerable and the chances of this happening are pretty high You 

[00:48:36] JESSE BERNSTEIN: That would be another situation where courts, um, have sometimes said you can't disclose a risk without disclosing facts that would materially impact an investor's assessment is how likely that risk is to occur.

So an example is a company saying our power plant has a fire. We are at risk and here's what we have done to ensure, you know, we have a a great fire uh, you know prevention System and not disclose the fire prevention system is Inoperative

[00:49:22] JOHN QUINN: right? Well, I mean, it seems like, uh, there's unlimited, uh, issues that can arise and securities litigation.

Uh, uh, I think it's, uh, I think you're going to have plenty to do Jesse. Uh, no, no question.

[00:49:37] JESSE BERNSTEIN: I think we will. We will stay busy in securities litigation. I don't see uh, The supreme court overturning the implied private right of action Anytime soon, even though they have they have said it would never happen today.

It's almost like you're grandfathered in Right on this This private right of action that should have never happened, but we're not going to take it away from you anytime soon All 

[00:50:01] JOHN QUINN: right. Thank you. Jesse We've been talking to jesse bernstein who's co head of the securities litigation practice and my partner at quinn emmanuel This is john quinn, and this has been law disrupted

Thank you for listening to law disrupted with me john quinn If you enjoyed the show, please subscribe and leave a rating and review on your chosen podcast app to stay up to date with the latest episodes. You can sign up for email alerts at our website, law disrupted. Dot F M or follow me on X at JBQ law or at Quinn Emanuel.

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