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Second Circuit: ERISA Plaintiffs Who Did Not Personally Invest in Allegedly Mismanaged Investment Options Lack Article III and Class Standing

On August 18, 2025, the Second Circuit affirmed the dismissal of a putative ERISA class action alleging that the defendant fiduciaries of an employer-sponsored defined contribution retirement benefit plan had mismanaged the plan. Collins v. Northeast Grocery, Inc., 149 F.4th 163 (2d Cir. 2025) (Walker, J.). The Second Circuit held that plaintiffs “lack both Article III and class standing to assert several of their claims because they did not plead that they suffered any individual harm arising from Defendants’ allegedly imprudent and/or disloyal management of investment options in which they did not personally invest or any plan-wide harm affecting their individual accounts.” Notably, the Second Circuit stated that its decision was prompted by the district court’s observation that the “Second Circuit has not definitively resolved the issue of whether and to what extent participants of a defined contribution plan must demonstrate individual harm in order to bring claims concerning funds that they did not personally invest in.”

Plaintiffs participated in their former employer’s 401(k) Savings Plan, which provided for individual accounts where each account’s value was determined by the market performance of employee and employer contributions, less expenses. The district court dismissed holding that plaintiffs failed to establish that they had Article III standing to bring claims alleging fiduciary breaches arising from defendants’ share class selection, failure to investigate the availability of alternative funds, and revenue sharing finding that plaintiffs had not alleged any constitutionally-cognizable injury in connection with the specific investment options criticized in the complaint in which plaintiffs did not invest.

On appeal, the Second Circuit explained that to establish Article III standing, participants in a defined contribution benefit plan must plausibly plead a constitutionally-cognizable individual injury arising from the breach of the statutorily imposed duty. The Second Circuit stated that plaintiffs lack Article III standing for several of their claims because they did not plead that they suffered any individual harm arising from defendants’ allegedly imprudent and/or disloyal management of investment options in which they did not personally invest or any plan-wide harm affecting their individual accounts. The Second Circuit explained that “precedent demonstrates that defined contribution plan participants seeking to obtain monetary relief for alleged ERISA violations must allege a non-speculative financial loss actually affecting, or imminently threatening to affect, their individual retirement accounts.” The Second Circuit stated that, for some of their claims, plaintiffs “failed to allege that their benefits were or would imminently be affected by the performance of, or by fees associated with, investment options in which they did not personally invest.” The Second Circuit continued that, further, plaintiffs “failed to allege individual harm from the allegedly flawed processes resulting in the retention of the criticized investment options or the retention of Committee members who retained the criticized funds.” The Second Circuit concluded that the district court correctly dismissed on Article III standing grounds the claims for: (i) breach of the duty of prudence based on a failure to investigate the availability of alternative share classes; (ii) breach of the duty of prudence based on the failure to investigate the availability of alternative funds; (iii) breach of the duty of prudence based on the failure to monitor indirect recordkeeper costs; and (iv) breach of the duty of loyalty regarding funds with revenue sharing. The Second Circuit also determined that plaintiffs did not plausibly allege that they had class standing to proceed with the claims for which they lacked Article III standing because a showing of individual injury is also required to establish class standing.

Second Circuit: Rejects Novel Theory of Liability for Short-Swing Profits Under Section 16(b)

On May 23, 2025, the Second Circuit affirmed the dismissal of two lawsuits[1] brought by a shareholder seeking to impose Section 16(b)[2] liability by pairing sales of outstanding shares made by controlling shareholders with share repurchases by corporations they control. Roth v. LAL Family Corp., 138 F.4th 696 (2d Cir. 2025) (Jacobs, J.). The Second Circuit held that plaintiff’s “novel theory of liability” was “invalid” because applicable law transforms the outstanding securities into treasury shares upon repurchase by the issuer such that Section 16(b) does not impose liability for the alleged pairing.

Plaintiff is a shareholder of a Delaware corporation that is controlled by a family through its two business entities. In 2021, pursuant to Section 16(a) it was reported to the SEC that one of the two business entities sold two million shares of the Delaware corporation’s Class A common stock, while the Delaware corporation reported that it had repurchased Class A shares pursuant to a stock buyback program. Under Delaware corporate law, the repurchased shares were instantly and automatically converted into treasury shares, which had the effect of removing them from the pool of outstanding shares and divesting them of any incidents of ownership, such as rights to vote or receive dividends. Plaintiff filed suit against the two business entities on the Delaware corporation’s behalf alleging that 23% of these repurchases should be attributed to the family’s business entities, to match their pecuniary interest in the Delaware corporation. The district court dismissed holding that issuer repurchases cannot be paired with insiders’ sales of outstanding shares to create Section 16(b) liability.

On appeal, the Second Circuit framed the issue as “whether an issuer’s share repurchase is a purchase of ‘any equity security’ that may be paired with an insider’s personal sale of outstanding shares of the issuer, such that any ‘profit realized’ by the insider is subject to disgorgement to the issuer.” The Second Circuit held that “[w]here applicable law transforms outstanding securities into treasury shares upon repurchase by the issuer, we answer this question in the negative and so conclude that Section 16(b) does not impose liability for the alleged pairing.” The Second Circuit explained that “Section 16(b) requires defendants have beneficial ownership over the shares involved in each transaction in order for them to be considered insiders; but SEC regulations preclude attributing to controlling shareholders even indirect beneficial ownership of shares repurchased by issuers.” The Second Circuit determined that defendants “were not insiders to the repurchases because they lacked beneficial ownership over the repurchased equity securities.” The Second Circuit explained that “controlling shareholders do not become indirect beneficial owners of shares acquired by an issuer when that issuer repurchases its own issue, because state law transforms those shares into treasury shares.”

Ninth Circuit: “Snappy” Opioid Slogan Not Deceptive Where Additional Disclosures Clarified Its Context

On August 20, 2025, the Ninth Circuit affirmed the dismissal of a securities fraud class action alleging that a pharmaceutical company and certain of its executives misled investors in violation of Section 10(b) and Rule 10b-5 by marketing a drug with the slogan “Tongue and Done” because administering it was more complex than just placing it under the “Tongue and Done” and therefore its potential market would be more limited. Sneed v. Talphera, Inc., 147 F.4th 1123 (9th Cir. 2025) (Lee, J.). The Ninth Circuit affirmed the district court’s dismissal because plaintiffs failed to adequately plead falsity. The Ninth Circuit held that the slogan was not deceptive because the company provided additional disclosures alongside the slogan in materials intended for investors. The Ninth Circuit explained that a reasonable investor would “not blindly” accept a slogan without considering other information that clarified the slogan’s context.

The company’s new drug could be administered by placing it under the patient’s tongue rather than intravenously. To reduce the risk of misuse, the FDA conditioned the drug’s approval on compliance with an agency safety plan called a Risk Evaluation and Mitigation Strategy (REMS), which required the drug to only be administered in medically-supervised settings and also forbids home use and sales to retail pharmacies. The company adopted the slogan “Tongue and Done” for its various investor marketing materials. Subsequently, shareholders sued alleging violations of Sections 10(b) and Rule 10b–5 and claiming that the following statements at an investor conference were false or misleading: (i) a tabletop display with the slogan; (ii) a banner advertisement with the slogan; and (iii) the CEO’s statement that you “lift up their tongue, you inject it under and you’re done.” The district court dismissed for a failure to adequately plead facts leading to strong inference of scienter but did not rule on falsity, deeming it a “close call.” On appeal, plaintiffs argued that the statements misled investors because they omitted material information, including about dosing, administration, limitations of use, REMS restrictions and the limited size of the drug’s potential market due to the prohibition on home use.

Affirming the district court, the Ninth Circuit found the pleadings deficient as to falsity. The Ninth Circuit explained that an omission can mislead by affirmatively giving a reasonable investor “an impression of a state of affairs that differs in a material way from the one that actually exists” and that under Weston Family Partnership LLLP v. Twitter, Inc., 29 F.4th 611 (9th Cir. 2022), a court should look at the context surrounding the statement to decide whether a misstatement or omission is misleading. The Ninth Circuit concluded that the “Tongue and Done” slogan would not mislead a reasonable investor about the need to administer the drug under a REMS plan or about the scale of its potential market. The Ninth Circuit stated that a reasonable investor would read the slogan in the context of a marketing campaign designed to highlight that patients can receive it orally, but that made no representation about REMS restrictions. The Ninth Circuit stated that the company provided “copious clarifying information” next to the slogan, including, among other things, that the tabletop and banner ads included text that disclosed the REMS plan; the tabletop ad directed investors to the company’s booth for more information; and the banner ad expressly noted that the drug has a REMS and must be “administered sublingually by a healthcare professional.” The Ninth Circuit further pointed out that investors who still wanted more information could turn to the company’s SEC disclosures or its dedicated REMS website. As to the CEO’s speech, the Ninth Circuit concluded that it apprised investors of the limitations imposed by the REMS and limited market because the statements warned that the drug has a limited market because only healthcare professionals can administer it under a restrictive REMS.

Ninth Circuit: Clarifies the Application of the Larson Test in Shareholder Derivative Actions

On March 28, 2025, the Ninth Circuit affirmed a district court’s dismissal of a shareholder derivative action brought by a venture capital firm (the “VC firm”) against a technology manufacturer, on the ground that the VC firm could not fairly or adequately represent the interest of the manufacturer’s stockholders. Bigfoot Ventures Ltd. v. Knighton, 132 F.4th 1138 (9th Cir. 2025) (Gould, J.). In its decision, the Ninth Circuit clarified the application of the eight-factor test established in Larson v. Dumke, 900 F.2d 1363 (9th Cir. 1990), which is used to assess the adequacy of representation by a plaintiff in a shareholder derivative action.[3] The Ninth Circuit held that the district court did not err in considering the ongoing litigation between the VC firm and the manufacturer, pointing out that “[s]uch entanglements may make it likely that the interests of the other stockholders will be disregarded in the management of the suit.”

Before the instant litigation arose, the VC firm made several loans to the manufacturer through promissory notes that were secured by the manufacturer’s patents. The VC firm went on to sue the manufacturer in state court to collect on these notes. After that, there were several lawsuits between the VC firm and the manufacturer and its CEO/founder concerning the VC firm’s investments in the manufacturer and the manufacturer’s patents. In 2019, the VC firm brought the instant shareholder derivative action in federal district court alleging that an agreement transferring the manufacturer’s inventory and revenue to an LLC that was formed by the manufacturer’s CEO was not intended to benefit the manufacturer or its shareholders. The manufacturer moved to dismiss on the ground of plaintiff inadequacy under Federal Rule of Civil Procedure 23.1 (“FRCP 23.1”). The district court ordered supplemental briefing on whether the VC firm satisfied the test in Larson v. Dumke and later dismissed concluding that the VC firm was inadequate to represent the manufacturer’s shareholders.

On appeal, the Ninth Circuit explained that under FRCP 23.1(a), a “derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.” Stating that Larson identified eight factors to consider in determining the adequacy of representation, the Ninth Circuit clarified that “it is not mandatory for a court to assess each and every one of the Larson factors” and that “[c]ourts may consider other factors like outside entanglements[.]” Notably, the Ninth Circuit stated that “[c]ourts can consider whatever other factors help them to assess” plaintiff adequacy “in addition to the Larson factors.” The Ninth Circuit held that the derivative action could not be maintained because the VC firm “does not fairly and adequately represent the interests of [the manufacturer’s] shareholders.” The Ninth Circuit held that the district court did not err in considering the ongoing litigation between the VC firm and the manufacturer under “outside entanglements,” noting the frequent litigation between the VC firm and the manufacturer. The Ninth Circuit concluded that the district court correctly found that four Larson factors weighed against plaintiff adequacy.

Ninth Circuit: Disclaiming Fraud Does Not Waive a Section 12(a)(2) Misstatement Claim

On June 10, 2025, the Ninth Circuit reversed the dismissal of a putative securities fraud class action alleging that defendants,[4] who promoted their real estate investments with social media posts telling would-be investors that they could double their money and earn a 15% annualized return, violated Section 12(a)(2)[5] of the Securities Act by making misstatements in their offering materials. Pino v. Cardone Cap., LLC, 2025 U.S. App. LEXIS 14214 (9th Cir. 2025) (McKeown, J.). Specifically, plaintiff alleged that defendants made misleading opinion statements as to the projected internal rate of return (“IRR”) and disbursements. Disagreeing with the lower court’s interpretation of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015), the Ninth Circuit concluded that the “district court incorrectly held [that plaintiff] waived subjective falsity by disclaiming fraud in her complaint and also erred in finding that she failed to plausibly allege subjective and objective falsity.”

The Ninth Circuit stated that plaintiff’s claim under Section 12(a)(2) based on the IRR and the distribution projections requires both subjective and objective falsity. The Ninth Circuit explained that “[s]ubjective falsity means that the speaker did not hold the belief he professed and objective falsity requires that the belief is objectively untrue.” The Ninth Circuit held that the “district court incorrectly held [that plaintiff] waived subjective falsity by disclaiming fraud in her complaint[.]” The Ninth Circuit noted that the district court, citing Omnicare, concluded that plaintiff could not proceed with her misstatement claim because she disclaimed any and all allegations of fraud. Taking issue with this, the Ninth Circuit stated that “[a] careful reading of Omnicare does not support this analysis.” The Ninth Circuit explained that in Omnicare although the Supreme Court referenced a fraud waiver, the reference merely underscored that plaintiffs did not argue subjective disbelief at all, and instead argued defendant’s sincerely held opinion proved wrong. The Ninth Circuit concluded that the “Court’s decision in Omnicare makes clear that it is the absence of claims of subjective disbelief, rather than the absence of fraud claims specifically, that doomed plaintiffs’ claims.” The Ninth Circuit then stated that “[f]raud is not an element of a § 12(a)(2) claim, and a fair reading of Omnicare is consistent with [plaintiff’s] argument that disclaiming fraud alone does not foreclose an entirely separate § 12(a)(2) misstatement cause of action.” The Ninth Circuit further pointed out that the Omnicare waiver[6] was “far broader” than the waiver in this case, which was limited to “any allegation in the complaint that could be construed as alleging fraud.”

Further disagreeing with the district court’s conclusion that plaintiff failed to allege either that defendants subjectively disbelieved the IRR and distribution projections or that the projections were objectively untrue, the Ninth Circuit concluded that plaintiff’s allegations were sufficient. The Ninth Circuit found that the allegation of defendants’ subjective disbelief was “both strong and reasonable” noting the projection of 15% IRR and relatedly high distributions in the initial offering circular. The Ninth Circuit pointed out that the SEC reviewed the offer and stated in a letter to defendants that the projections lacked backing and should be removed. The Ninth Circuit observed that defendants “pushed back on other criticisms from the SEC, but not this one, suggesting that [defendants] did not truly believe its own projections and lacked evidence to rebut the SEC.” The Ninth Circuit noted that despite this, defendants continued to repeat the IRR and distribution projections to would-be investors on social media. The Ninth Circuit also disagreed with the district court’s conclusion that plaintiff failed to allege objective falsity and could not because the relevant SEC Form 1-K filings purportedly projected performance in line with the 15% IRR projection, concluding that the district court’s “approach elevates [defendants’] self-serving statements over other evidence.”

[1] This discussion will be limited to the facts of the first captioned case because, “[t]he facts in these two cases are parallel, and the legal theory advanced in them, identical.”

[2] Section 16(b) requires corporate insiders to disgorge to any issuer with which they have an insider relationship all profits (the so-called “short swing profits”) that they realize from paired purchases and sales, within a six-month period, of any equity security of that issuer.

[3] The eight Larson factors are: “(1) indications that the plaintiff is not the true party in interest; (2) the plaintiff’s unfamiliarity with the litigation and unwillingness to learn about the suit; (3) the degree of control exercised by the attorneys over the litigation; (4) the degree of support received by the plaintiff from other shareholders; (5) the lack of any personal commitment to the action on the part of the representative plaintiff; (6) the remedy sought by plaintiff in the derivative action; (7) the relative magnitude of plaintiff’s personal interests as compared to his interest in the derivative action itself; and (8) plaintiff’s vindictiveness toward the defendants.”

[4] Defendants include a real estate entrepreneur, the real estate syndicator he founded, and two equity funds managed by the syndicator.

[5] Section 12(a)(2) provides a cause of action for securities offered or sold using prospectuses or oral communications that contain material misstatements or omissions. 15 U.S.C. § 77l(a)(2).

[6] The Omnicare waiver encompassed “any allegation that could be construed as alleging fraud or intentional or reckless misconduct.”