Broker-Dealer Litigation - Greenberg Traurig LLP

Broker-Dealer Litigation
2011 Annual Survey
Editor
Terry R. Weiss
GREENBERG TRAURIG LLP
Atlanta, Georgia
© March 2012

This Survey identifies significant court decisions and administrative proceedings before
the SEC and FINRA, which involve issues relevant to broker-dealers and investment banking
firms during the year 2011. Although the Survey does not purport to necessarily be
comprehensive, it is intended to include all notable decisions and proceedings during 2011.
This Survey is an annual project of the ABA’s Broker-Dealer Subcommittee, conducted
with the assistance and support of the full Securities Litigation Committee. Again this year, the
Survey has been prepared in conjunction with the annual Compliance and Legal Seminar of the
Securities Industry and Financial Markets Association. In addition to the Subcommittee
members participating in the project listed below, we gratefully acknowledge the special
assistance of Ellen Taylor, Andy Clark and Brenda McDonald of Greenberg Traurig in Atlanta,
Georgia, for their efforts in editing, revising, and organizing the Survey.
Dated: March 1, 2012
Terry R. Weiss
Atlanta, Georgia
Co-Chair, Broker-Dealer Subcommittee,
Litigation Section, American Bar Association
Subcommittee Members Participating in the Project:
Timothy P. Burke
Bingham McCutchen
Boston, MA
Jeff G. Hammel
Latham & Watkins
New York, NY
Christine M. Debevec
Stradley Ronon Stevens & Young LLP
Philadelphia, PA
Jeffrey W. Willis
Rogers & Hardin
Atlanta, GA
Joseph D. Edmondson, Jr.
Foley & Lardner, LLP
Washington, DC
Michele R. Fron
Keesal, Young & Logan
Long Beach, CA
H. Nicholas Berberian
Neal Gerber & Eisenberg LLP
Chicato, IL
Thomas C. Sand
Miller Nash LLP
Portland, OR
Bennett Falk
Bressler, Amery & Ross
Miramar, FL
Peter S. Fruin
Maynard Cooper & Gale PC
Birmingham, AL
Alyson M. Weiss
Loeb & Loeb LLP
New York, NY
Matthew R. Stammel
Vinson & Elkins LLP
Dallas, TX

Rocky Pozza
Miller, Canfield, Paddock and Stone PLC
Detroit, MI
Additional Contributors:
The Subcommittee would also like to acknowledge the efforts of the following
individuals on this year’s Annual Survey:
Matthew C. Applebaum
Brian M. Bohn
Keith Cantrelle
Alexander J. Casnocha
Jonathan Cyprys
Christina N. Davilas
David DeVito
Kirstin L. Ericson
Justin Helsby
Todd A. Holleman
Julie M. Jarvis
Kristin J. Jones
Tyson W. Kovash
Juliette B. McCullough
Thomas J. Mew
Daniel J. Moore
Bryan Reyhani
Adrian Rodriguez
A.J. Rosenthal
Inge Selden
Melissa M. Smith
James M. Walker
Michael R. Weissmann
Adrienne K. Eason Wheatley
Sandra J. White-Hall
Tina L. Winer

TABLE OF CONTENTS
Page
A. Definition of a Security........................................................................................................1
B. Liabilities under the Securities Act of 1933 ........................................................................3
1. Section 11.................................................................................................................3
2. Section 12...............................................................................................................24
3. Section 17...............................................................................................................50
C. Liabilities under the Securities Exchange Act of 1934......................................................57
1. Section 10(b) and Rule 10b-5 ................................................................................57
a. Churning ....................................................................................................57
b. Suitability...................................................................................................58
c. Insider Trading...........................................................................................61
d. Misrepresentations/Omissions ...................................................................61
e. Standing .....................................................................................................79
f. Affirmative Defenses.................................................................................83
g. Other ..........................................................................................................94
2. Section 14...............................................................................................................99
3. Section 15(c) ........................................................................................................109
4. Section 16(b)........................................................................................................113
5. Section 17.............................................................................................................116
6. Section 18.............................................................................................................117
7. Section 19(b)........................................................................................................118
8. Margin Violations ................................................................................................119
D. Liabilities under the Securities Litigation Reform Act of 1995 ......................................121
1. Pleading................................................................................................................121
2. Appointment of Lead Plaintiff/Class Counsel .....................................................176
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3. Safe Harbor/Bespeaks Caution Defense ..............................................................192
E. Liabilities under the Securities Litigation Uniform Standards Act of 1999 ....................207
F. Liabilities under State Statutory and Common Law........................................................221
1. Blue Sky Laws .....................................................................................................221
2. Consumer Protection and Other Statutes .............................................................225
3. Common Law Fraud ............................................................................................225
4. Breach of Fiduciary Duty and Other Common Law Claims ...............................227
G. Liabilities Involving Clearing Brokers ............................................................................230
H. Secondary Liability..........................................................................................................234
1. Respondeat Superior ............................................................................................234
2. Control Person .....................................................................................................238
3. Aiding & Abetting ...............................................................................................267
4. Conspiracy ...........................................................................................................280
5. Failure to Supervise .............................................................................................283
I. Private Rights of Action for Violations of SRO Rules....................................................295
J. RICO................................................................................................................................297
K. Damages and Other Relief in Private Actions .................................................................305
1. Damages as Element of Claim.............................................................................305
2. Measure of Damages............................................................................................306
3. Punitive Damages ................................................................................................310
4. Attorneys’ Fees and Costs ...................................................................................311
L. Contribution, Indemnification..........................................................................................317
M. Statute of Limitations.......................................................................................................319
1. Federal Securities Claims ....................................................................................319
2. State Securities Claims ........................................................................................327
3. RICO....................................................................................................................329
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4. SRO Rules............................................................................................................329
N. Arbitration........................................................................................................................330
1. Scope....................................................................................................................330
2. Eligibility/Limitations..........................................................................................337
3. Jurisdiction/Estoppel............................................................................................339
4. Motions to Vacate or to Enjoin............................................................................346
a. Punitive Damages ....................................................................................346
b. Attorneys’ Fees ........................................................................................346
c. Other ........................................................................................................348
O. Practice and Procedure.....................................................................................................350
1. Rule 9(b) of the Fed. R. Civ. P. ...........................................................................350
2. Rule 11 of the Fed. R. Civ. P. ..............................................................................360
3. Rule 23 of the Fed. R. Civ. P. ..............................................................................362
4. Venue, Pendent Jurisdiction Removal and Other Issues .....................................366
5. Discovery .............................................................................................................375
P. Failure to Supervise .........................................................................................................378
1. SEC Enforcement Actions ...................................................................................378
2. FINRA Enforcement Actions ..............................................................................392
3. NYSE Enforcement Actions................................................................................398
Q. SEC Litigation Affecting Broker-Dealers .......................................................................401
1. Direct SEC Proceedings.......................................................................................401
a. Sales Practice Violations..........................................................................401
b. Unfair/Fraudulent Markups or Commissions ..........................................403
c. Other Fraudulent Practices.......................................................................404
(i)
(ii)
Misappropriation..........................................................................404
Misrepresentation.........................................................................409
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(iii)
Falsification of Documents..........................................................414
(iv) Failure to Maintain Accurate Books and Records .......................414
d. Mutual Fund Trading and Disclosure Violations.....................................414
e. Trading Practice Violations .....................................................................416
(i)
Insider Trading.............................................................................416
(ii) Market Manipulation ...................................................................420
(iii) Securities Offering Violations .....................................................423
(iv) Trading Rules Violations .............................................................426
f. Failure to Supervise .................................................................................429
g. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed...................................435
h. Procedural Issues .....................................................................................435
(i) Jurisdiction and Time Bars ..........................................................435
(ii)
(iii)
Standard of Review......................................................................435
Due Process..................................................................................435
(iv) Prior Disciplinary Histories .........................................................435
(v)
(vi)
Selective Prosecution...................................................................435
Sanctions......................................................................................435
i. Broker/Dealer Registration Violations ....................................................436
j. Miscellaneous / MSSR Municipal Bond Offerings .................................437
k. Regulation S-P .........................................................................................438
2. SEC Review of SRO Proceedings .......................................................................439
a. Sales Practice Violations..........................................................................439
b. Unfair/Fraudulent Markups or Commissions ..........................................440
c. Other Fraudulent Practices.......................................................................440
(i)
Misrepresentation.........................................................................440
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(ii)
Falsification of Documents..........................................................441
(iii) Failure to Maintain Accurate Books and Records .......................441
(iv)
Selling Away................................................................................441
d. Financial Responsibility Violations.........................................................441
(i)
(ii)
Segregation of Customer Funds...................................................441
Regulation T Violations...............................................................441
e. Trading Practice Violations/Market Manipulation ..................................441
f. Failure to Supervise .................................................................................441
g. Registration Violations ............................................................................442
h. Failure to Cooperate with FINRA Investigation/Failure to
Comply with FINRA Requests for Financial Information ......................442
i. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed...................................444
j. Procedural Issues .....................................................................................445
(i)
(ii)
Evidence.......................................................................................445
Due Process..................................................................................445
(iii) Jurisdiction and Time Bars ..........................................................445
(iv) Discovery .....................................................................................445
(v)
Sanctions......................................................................................445
(vi) Right to Counsel ..........................................................................446
k. Statutory Disqualification ........................................................................446
l. Reporting Violations................................................................................446
m. Net Capital Violations..............................................................................448
n. Trading Practice Violations/Market Manipulation ..................................448
R. Broker-Dealer Employment Litigation and Arbitration ..................................................449
v

SECURITIES LITIGATION
A. Definition of a Security
A.
U.S. v. Bowdoin, 770 F. Supp. 2d 142 (D.D.C. 2011).
Defendant challenged his indictment for sale of unregistered securities on ground that the
definition of a security to include an investment contract was unconstitutionally vague. The
court rejected the challenge because the Supreme Court in 1946 had held the term “investment
contract” as used in the Securities Act of 1933 was not vague. Congress had defined securities to
include “investment contracts” based on many years of enforcement of that term by various
States under state laws. The court was bound by precedent and the lineage of the term being
long and well-recognized so it held that the defendant’s challenge was without merit.
Jacquemyns v. Spartan Mullen Et Cie, S.A., 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011).
Defendant argued in support of a motion to dismiss a securities fraud claim under Section
10(b) that the infusion of cash in a fund was a loan and not an investment. The court rejected the
argument because the definition of a security under 15 U.S.C. § 77b(1) included a “note” and the
contributions made were evidenced by a note. In addition, the court held that the investments
were also securities because they were “investment contracts” under the test enunciated by the
Supreme Court in S.E.C. v. Howey, 328 U.S. 293 (1946). The fact that defendants tried to dress
up what is patently a security in the clothing of a loan did not, according to the court, change the
fact that the arrangement they offered to the plaintiffs met every element of the Howey test for a
security.
A.
SEC v. Wyly, 788 F. Supp. 2d 92 (S.D.N.Y. 2011).
A.
The S.E.C. pursued a claim of insider trading against the defendants. The defendants
argued for dismissal of the claim because, when the conduct at issue occurred, a security-based
swap agreement was not included in the 1934 Securities Exchange Act’s definition of a
“security”. The court rejected the argument and held, regardless of whether security-based swap
agreements were included in or are now excluded from the statutory definition of a “security”,
section 10(b) and Rule 10b-5 apply to fraudulent devices undertaken in connection with the
purchase or sale of securities, and the swap transaction at issue touched, coincided with and
induced stock trading. It further held that the swap agreements were fraudulent devices used in
connection with the purchase or sale of securities, and, thus, properly the subject of the S.E.C.’s
claim.
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A.
U.S. v. McDonald, 2011 WL 1812782 (S.D.N.Y. May 10, 2011).
Defendant sought dismissal of an indictment charging him with securities fraud. He
asserted that the preferred stock at issue was not a security as defined by the Securities Exchange
Act. The court denied the defendant’s motion to dismiss because there was no reason to believe
that the preferred shares were not stock within the definition of the Securities Exchange Act.
Among other facts, the shares were designated “stock,” and the investor received stock
certificates.
In re Jamuna Real Estate, L.L.C., 460 B.R. 661 (Bankr. E.D. Pa. 2011)
Defendant to a civil RICO claim asserted that his alleged conduct was not properly the
subject of a RICO claim because the allegations were based on conduct that would be securities
fraud, which is excluded from RICO by 18 U.S.C. § 1964(c). Notwithstanding the broad
definition of a “note” as a security in 15 U.S.C. §§ 77b(1) and 78c(10), the court held that the
notes at issue were not securities because the lender was not an investor, the return on the notes
was limited to interest over the life of the loans, any risk of non-payment was addressed by
collateral and the notes evidencing loans for real estate and equipment for the defendant’s fast
food business were commercial rather than investment in character.
In re Jensen-Ames, No. 10-10684, 2011 WL 1238929 (Bankr. W.D. Wash. March 30, 2011).
Debtor sought to discharge debt owed under a consent order. The court determined that
the debt was nondischargeable because it arose from a violation of state securities law when the
debtor sold unregistered interests in a real estate development project to investors.
Aventa Learning, Inc. v. K12, Inc., 2011 WL 5438960 (W.D. Wash. Nov. 8, 2011).
Plaintiffs asserted claims under the Washington State Securities Act (“WSSA”) in
connection with payments they allege were owed as part of an acquisition by the defendant,
which resulted in a change of control. Defendants asserted that the asset purchase agreement on
which the plaintiffs based their claim was not a “security” under the WSSA. The court agreed
and dismissed the claim because the asset purchase agreement did not meet the definition of a
“security” either as an investment contract or a risk capital investment when the individual
plaintiffs became, post-acquisition, part of the executive team that made the operational and
strategic decisions for the acquiring company.
A.
A.
A.
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Purvis v. Arizona Corp. Comm’n, No. 1 CA-CV 10-0311, 2011 WL 662842 (Ariz. Ct. App, Div.
1 Feb. 24, 2011).
Appellant argued that promissory notes issued in connection with bridge loan
transactions were not “securities” requiring registration under the 1933 Securities Act. The court
held that a note is a “security” under Ariz. Rev. Stat. § 44-1801.26, and the appellant failed to
carry his burden and establish that any statutory exemption applied. Accordingly, it affirmed the
Commission’s decision holding appellant liable for violations of the Arizona Securities Act.
West v. State of Indiana, 942 N.E.2d 862 (Ind. Ct. App. 2011).
Defendant was convicted for using fraud in the offer or sale of a security and for selling
unregistered securities. He argued that his conviction should be overturned because the term
“investment contract” is undefined and, thus, the definition of a security under Indiana Code §
23-2-1-1(k) is unconstitutionally vague. At trial, the State applied the test from American
Fletcher Mort. Co. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7 th Cir. 1980), as adopted by
Indiana courts in Manns v. Skolnik, 666 N.E.2d 1236 (Ind. Ct. App. 1996), to determine whether
the transaction was an investment contract. According to the test, an investment contract arises
whenever a person (1) invests money (2) in a common enterprise (3) premised upon a reasonable
expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others.
The court affirmed the conviction and held that, although a person of ordinary intelligence may
not generally understand whether a particular document falls under the definition of a security,
that lack of comprehension does not render the statute void when the jury was given sufficient
information to determine under the American Fletcher test whether the investment contract was a
security.
A.
A.
B. Liabilities under the Securities Act of 1933
1. Section 11
B.1
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762
(1st Cir. Mass. 2011).
The Court of Appeals for the First Circuit affirmed in part and vacated and remanded in
part the district court’s dismissal of plaintiffs-appellants’ putative class action complaint alleging
violation of, inter alia, Section 11 of the Securities Act of 1933 from plaintiffs-appellants’
purchase of mortgage-backed securities. The Court affirmed the district court’s holding that
plaintiffs-appellants lacked Article III standing to pursue claims based upon trusts from which
they had not purchased securities. Following a de novo review regarding the sufficiency of
alleged misstatements, the Court sustained alleged misstatements concerning lending guidelines,
for which plaintiffs-appellants alleged a wholesale abandonment of underwriting standards. The
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Court rejected as the basis for a Section 11 claim allegations concerning appraisal standards
(which amounted to insufficient and conclusory allegations that banking industry appraisers were
generally subject to undue pressure, which may have distorted loan values) and credit ratings
(which were insufficient to support a claim because they reflected inactionable opinions that
were not alleged to be believed untrue at the time made, nor alleged to be unsupported by models
regarding the quality of the securities being rated).
Amorosa v. AOL Time Warner Inc., 409 Fed. App’x 412 (2d Cir. 2011).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of
plaintiff-appellant’s complaint against an auditor defendant that alleged, inter alia, violation of
Section 11 of the Securities Act of 1933 from allegedly false and misleading statements in an
audit opinion that were incorporated by reference in a Merger Registration Statement.
Reviewing de novo, the Court dismissed the Section 11 claim against the auditor because the
claim was either made more than a year after plaintiff-appellant was on constructive notice, and
therefore time-barred; or, if it was not time-barred, then the absence of loss causation would be
apparent on the face of the complaint given that share prices went up between the time of the
corrective disclosure that would remedy the statute of limitations problem and the date the
complaint was filed.
Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of
plaintiffs-appellants’ amended putative class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933 in connection with allegedly false and misleading
statements concerning goodwill and loan loss reserves. Reviewing de novo, the Court held that
defendants-appellees’ subjective statements regarding the value of goodwill and adequacy of
loan loss reserves were inactionable opinions that were not alleged to have falsely represented
the speakers’ beliefs at the time they were made. The Court also dismissed plaintiffs-appellants’
claims to the extent based upon Sarbanes-Oxley, generally accepted accounting principles, and
generally accepted accounting standards on the ground that they were derivative of the primary
allegations regarding goodwill and loan loss reserves, and thus similarly failed to state a claim.
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of
plaintiffs-appellants’ putative class action complaints alleging violation of, inter alia, Section 11
of the Securities Act of 1933 based upon alleged misstatements and omissions about mortgage
pass-through certificates. Reviewing de novo, the Court held that Rule 9(b) of the Federal Rules
of Civil Procedure was not applicable because plaintiffs-appellants expressly disclaimed any
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B.1
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allegation of fraud. The complaint was premised on the argument that rating agencies can be held
liable as underwriters for alleged violation of the Securities Act, which the Court rejected as
“without merit” because “the text, case law, legislative history, and purpose of the statute” prove
that Congress intended for the Securities Act only to apply to those who participate in statutory
underwriting (including the purchase of securities with a view towards distribution), or in
offering or selling securities in connection with a distribution, not in the structuring or creation of
securities. Securities Act claims therefore cannot be brought against rating agencies, which do
not engage in the underwriting procedures and distributional activities explicitly identified in the
statute, and which more resemble “experts” under the Securities Act, given their role in assessing
creditworthiness, rather than “underwriters”.
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).
The Court of Appeals for the Second Circuit vacated and remanded the district court’s
dismissal of plaintiffs-appellants’ putative class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933 following an IPO in which the health of certain
Blackstone portfolio companies and real estate fund investments was at issue. Reviewing de
novo, the Court held that plaintiffs-appellants had plausibly alleged that downward trends in real
estate were known at the time of the IPO, were reasonably likely to have a material impact on
Blackstone’s financial condition, and were therefore material and subject to a duty to disclose
under Item 303 and Section 11. The Court rejected Blackstone’s argument that its structure as a
private equity firm required a finding of immateriality as a matter of law. Qualitative factors
found to render material a quantitatively small misstatement included the importance of the subperforming
portfolio companies to Blackstone’s overall operations, and that the omissions
masked a reasonably likely change in earnings, and “doubtless” increase in management
compensation. The disclosures regarding Blackstone’s real estate assets also were actionable
(notwithstanding plaintiffs’ inability to establish a clear “link” between the declining residential
real estate market and Blackstone’s investment in commercial real estate) because Blackstone
had at least one residential real estate investment in its portfolio, because residential real estate
allegedly constituted as much as $3 billion and 15% of real estate assets under management, and
because “complex securitizations of residential mortgages” might reasonably be expected to
have adverse effects on commercial real estate investments, as conceded in Blackstone’s
disclosures.
Hutchison v. Deutsche Bank Sec. Inc., 2011 WL 3084969 (2d Cir. July 26, 2011).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of
plaintiff-appellant’s second amended class action complaint against a real estate financing
company alleging violation of, inter alia, Section 11 of the Securities Act of 1933 resulting from
allegedly false statements and omissions about the impairment of two mezzanine loans, which
defendants-appellees allegedly had a duty to disclose under Item 303 of Regulation S-K.
Reviewing de novo, the Court applied quantitative and qualitative analyses, holding that where
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plaintiff-appellant failed to allege why the product at issue (mezzanine loans) were of distinct
interest to investors, any alleged impairment must be analyzed in relations to defendantsappellees’
entire investment portfolio using a quantitative approach, pursuant to which the loans
were not material. The Court held that plaintiff-appellant failed to establish qualitative
materiality because (i) the stock price drop following disclosure of the loans’ impairment was an
insufficient cause-and-affect allegation that was “too blunt an instrument to be depended on in
considering whether a fact is material”; and (ii) the impairment had a quantitatively small impact
on defendants’ business, and the loans were fully collateralized, which also suggests that the
business was not threatened by the loans’ impairment.
Katz v. Gerardi, 655 F.3d 1212 (10th Cir. 2011).
The Court of Appeals for the Tenth Circuit affirmed the district court’s dismissal of
plaintiffs-appellants’ putative class action complaint based upon lack of standing to assert claims
under, inter alia, Section 11 of the Securities Act of 1933 because plaintiffs-appellants were not
bona fide purchasers of securities. Plaintiffs-appellants argued that pursuant to the fundamental
change doctrine – also known as the forced seller doctrine – the merger’s effect on their
securities effectively required them to purchase new securities, thus satisfying standing
requirements under Section 11. The Court rejected this argument because the forced seller
doctrine only applies to claims under the Securities Exchange Act of 1934, and because, even in
a forced sale, one is still a seller, not a purchaser, of securities.
Hill v. State Street Corp., 2011 WL 3420439 (D.Mass. Aug. 3, 2011).
The district court denied defendants’ motions to dismiss plaintiffs’ consolidated amended
class action complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of
1933 in connection with allegedly inconsistent application of foreign exchange rates and alleged
misleading of the market regarding exposure to mortgage-backed securities. Applying American
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the court held that plaintiffs’ claims were
not time-barred because the statute of limitations had been tolled by one of the earlier-filed class
actions that was eventually consolidated into the pending class action. Notwithstanding
plaintiffs’ failure to offer good cause for their untimely service, the court extended the deadline
for service against the underwriting defendants, who would otherwise be dismissed, because the
underwriter defendants were on constructive notice of the claims, because they did not show
even “remote” prejudice by the delay, and because justice would be best served by extension of
the deadline for service.
B.1
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6

Silverstrand Investments v. AMAG Pharm., Inc., 2011 WL 3566990 (D.Mass. Aug. 11, 2011).
The district court granted defendants’ motions to dismiss a putative federal securities
class action alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in
connection with a securities offering for a pharmaceutical drug used to treat anemia. The Section
11 claim was dismissed in its entirety and as to all defendants. The court held that defendants
did not have a disclosure obligation under Item 303 of Regulation S-K because twenty-three
serious adverse events (“SAEs”) from use of the drug was not a “known trend or uncertainty”
requiring disclosure given the “repeated” disclosures in offering documents and other public
filings that SAEs were observed during clinical trials. The 23 SAEs that occurred after launch of
the drug but prior to the offering were therefore consistent with previously and publicly disclosed
information. Although one person allegedly died from the drug, the court held that a single death
does not constitute a “trend”. The court similarly held that defendants did not have a disclosure
obligation under Item 503 of Regulation S-K, which requires discussion of risk factors, because
they had satisfied that obligation. The court rejected plaintiffs’ argument that the offering
documents omitted material information from (i) action letters from the FDA that twice declined
to approve the drug (rejected because the drug was ultimately approved, suggesting that prior
issues had been resolved), and (ii) an FDA warning letter regarding certain “illegal and
misleading marketing practices (because the complaint failed to establish any connection
between the warning letter and the time of the offering).
Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-A Sec., 273 F.R.D. 363 (E.D.N.Y.
2011).
In a class action alleging violation of, inter alia, Section 11 of the Securities Act of 1933
due to allegedly false and misleading disclosures about mortgage-backed securities, the district
court denied a motion to intervene as of right where the proposed intervenor sought to represent
a class of plaintiffs whose claims had been dismissed for lack of standing by the named
plaintiffs. The court denied the intervenor’s motion as time-barred, finding that the equitable
tolling principles of American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), could not
apply where the intervenor had not purchased its securities during the time period identified in
the originally defined class. As a non-class member, the intervenor also failed to satisfy the
intervention requirement of Federal Rule of Civil Procedure 24 that an intervenor have an
“interest relating to the property or transaction” that is the subject of the complaint.
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance
Corp. I, 2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
putative class action complaint which alleged violation of, inter alia, Section 11 of the Securities
B.1
B.1
B.1
7

Act of 1933, arising from the issuance and sale of $36.8 billion in mortgage-pass through
certificates made in thirty-three separate offerings. The twenty-five offerings from which
plaintiffs never purchased mortgage-backed securities were dismissed as the basis of a Section
11 claim for lack of Article III standing. For the eight remaining offerings where plaintiffs had
Article III standing, the court held that plaintiffs had statutory standing to sue only on the
specific tranches from which plaintiffs had made a purchase. The court held that plaintiffs
claims were timely because public news articles were insufficient to provide inquiry notice,
particularly given that none of the articles related to defendants, or established that their offering
documents contained misstatements and omissions. New certificates added to the existing
Section 11 claim were sustained because they related back to the original complaint for statute of
limitations purposes. The court also sustained the Section 11 claim to the extent the certificates
were alleged to have declined in market value; plaintiff was not required to plead specific figures
for cognizable economic loss. Where specific facts were pleaded, the court sustained the Section
11 claim based upon material misstatements and omissions regarding appraisal standards and
loan-to-value ratios and systematic deviations from underwriting guidelines. Where specific
facts were not pleaded, the certificates were dismissed, including for originators’ alleged failure
to follow appraisal and LTV ratios, the alleged insufficiency of credit enhancements supporting
the offerings, the alleged insufficiency of credit ratings and conflicts of interest by rating
agencies, and the deviation from underwriting guidelines. Certificates from originators against
whom no facts were pleaded at all were dismissed on plausibility grounds. The court declined to
enforce cure provisions in the offering documents on the ground that they “undermine the strict
liability” created under Section 11.
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F.Supp.2d 618 (S.D.N.Y. 2011).
The district court granted defendants’ motion for summary judgment in a complaint
alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in connection with
public offerings of mortgage-backed securities. The court granted summary judgment to
defendants on the ground that plaintiffs’ claims were barred by the three-year statute of repose –
an absolute rule that begins when the offering is “bona fide offered to the public”, and which,
under Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), is not
subject to equitable tolling otherwise available under American Pipe & Construction Co. v. Utah,
414 U.S. 538 (1974).
In re IndyMac Mortgage-Backed Sec. Litig., 793 F.Supp.2d 637 (S.D.N.Y. 2011).
In an action that alleged, inter alia, violation of Section 11 of the Securities Act of 1933
arising from offerings for mortgage pass through certificates, the district court granted in part
and denied in part motions to intervene as class representatives and denied a motion by lead
plaintiff and several proposed intervenors to amend the amended consolidated complaint to name
underwriting defendants. The court denied as time-barred the motion to intervene by a proposed
intervenor who was on notice that both the consolidated complaint and the amended consolidated
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complaint lacked named plaintiffs who had purchased certain certificates but who failed to
intervene at that time, subsequently abandoned claims related to the certificate, and raised them
again when action on the certificates was time-barred. The court also denied motions to
intervene with respect to all offerings with expired statutes of repose, on the ground that, by their
terms, statutes of repose do not permit any form of tolling or application of the relation back
doctrine. Claims related to the sole offering that was not barred by the statute of repose were
found to be tolled and subsequently filed within the remaining limitations period, thus rendering
them timely under applicable statutes of limitation. Although the putative intervenors did not
have standing to assert the claims at issue, the court nonetheless permitted the claims to proceed
on the ground that holding otherwise would undermine the policies of efficiency and economy
served by Federal Rule of Civil Procedure 23 and American Pipe & Construction Co. v. Utah,
414 U.S. 538 (1974), which encourages parties like the putative intervenors to remain passive
during early stages of the class action rather than making protective filings to preserve their
claims (particularly where, as here, defendants were on notice of the claims sought to be asserted
by the putative intervenors). Putative intervenors who did not seek intervention within the
limitations period once the tolling period ended were time-barred and were not permitted to
intervene in order to assert those claims. The court denied the motion for leave to amend to add
certain underwriting defendants because the claims sought to be asserted related to time-barred
offerings for which the limitations period had run.
In re Lehman Bros. Sec. & Erisa Litig., 799 F.Supp.2d 258 (S.D.N.Y. 2011).
The district court granted in part and denied in part defendants’ motions to dismiss a third
amended class action complaint alleging violation of, inter alia, Section 11 of the Securities Act
of 1933, arising from a 2006 shelf registration statement pursuant to which over $31 billion in
debt and equity securities were issued. The court held that claims by twenty-four newly named
plaintiffs were timely under the statute of limitations given recent constructions of American
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), pursuant to which the filing of a class
action suspends applicable statutes of limitations even where the putative class plaintiff does not
have standing to assert the claims at issue. Although timely for statute of limitations purposes,
the court held that the claims were time-barred to the extent the applicable statute of repose had
run; the court rejected application of any relation back theory because, by its terms, the statute of
repose has no exceptions. The court rejected valuation of commercial real estate as the basis for
a Section 11 claim given plaintiffs’ failure to allege that Lehman did not believe its valuations to
be true at the time they were issued, and given their failure to substantiate allegations that
Lehman violated Statement of Financial Accounting Standards 157. The court sustained alleged
misstatement and omissions for Section 11 claims to the extent such statements or omissions had
sufficiently stated a claim under the Securities Exchange Act of 1934 (including for allegedly
artificial reductions in net leverage, insufficient risk management practices, and significant
concentration of credit risk). The court also sustained alleged misstatements related to principal
protected notes because, at this stage of litigation, the court was unable to conclude as a matter of
law that repeated and emphasized statements about principal protection were offset sufficiently
by “inconspicuous and scattered warnings” in other SEC filings about Lehman’s solvency. The
Section 11 claim was sustained against an individual defendant who did not sign the registration
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statement at issue only to the extent the claim could be based upon statements made in other SEC
filings that she did sign and that were incorporated by reference into the registration statement at
issue. The court declined to apply the affirmative defenses of due diligence and reliance on an
expert to dismiss the Section 11 claim because applicability of such defenses was not apparent
on the face of the complaint. The court dismissed claims against auditor defendant E&Y because
the only actionable misstatements it allegedly made were in unaudited interim financials, which
fail as the basis of any Securities Act claim.
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig., 774 F.Supp.2d 584
(S.D.N.Y. 2011).
The district court granted defendants’ motions to dismiss a second amended complaint,
alleging violation of, inter alia, Section 11 of the Securities Act of 1933, arising from alleged
misstatements and omissions concerning the impact of mortgage-backed securities in a fixed
income investment fund. The court dismissed the Section 11 claim because defendants satisfied
their burden of pleading facially apparent negative loss causation due to an insufficient
connection between the alleged material misstatement and diminution in the security’s value.
The court also agreed that, because there is no secondary market for shares in a mutual fund,
statements by a fund’s issuer have no ability to “inflate” the price of the fund’s shares or
otherwise affect net asset value, which does not react to misstatements in the fund’s prospectus.
As a result, no connection between the alleged material misrepresentation and a diminution in
the security’s value could be plausibly alleged.
In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326 (S.D.N.Y. 2011).
The district court granted in part and denied in part defendants’ motions to dismiss four
complaints alleging violation of, inter alia, Section 11 of the Securities Act of 1933, in
connection with the “financial disintegration” of Wachovia between 2006 and its 2008 merger
with Wells Fargo. The court dismissed for lack of standing all Securities Act claims arising from
sixteen offerings in which none of the named plaintiffs purchased securities. The court
considered the impact of including three new plaintiffs, holding that their claims were
appropriate because they were not under inquiry notice as defined in Merck & Co. v. Reynolds,
130 S.Ct. 1784 (2010); their claims were not time-barred under American Pipe & Construction
Co. v. Utah, 414 U.S. 538 (1974), and failure to toll their claims would undermine the policies of
efficiency and economy of litigation underlying Federal Rule of Civil Procedure 23; and because
general allegations that plaintiffs’ shares may be traced to the allegedly defective registration
statement would suffice – there was no requirement to trace purchased shares to the specific
supplemental offerings pleaded by the additional plaintiffs. The court applied the pleading
standard of Federal Rule of Civil Procedure 8 because fraud was not specifically pleaded in
connection with preparation of offering materials (notwithstanding that plaintiffs pleaded a
“massive fraud” actionable under Section 10(b) of the Securities Exchange Act of 1934). The
court sustained one complaint’s Section 11 claim based upon a material misrepresentation
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egarding loan-to-value ratios reported in the offering documents. The court also sustained the
Section 11 claim against the auditor defendant, for whom plaintiffs had sufficiently pleaded that
the financial statements were false and misleading, and because the due diligence defense does
not apply on a motion to dismiss. The court dismissed the Section 11 claim raised in another
complaint because it was based upon alleged misstatements regarding corporate optimism, which
was inactionable puffery, and because alleged omissions regarding certain financial accounting
and underwriting standards were conclusory, unsupported, and not plausible.
In re Barclays Bank PLC Sec. Litig., 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).
The district court granted, in its entirety, defendants’ motion to dismiss a consolidated
amended complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,
arising from Barclays’ allegedly material misstatements and omissions related to certain
mortgage-backed securities. The court held that the complaint failed adequately to state a
Section 11 claim because it contained no allegations that Barclays did not believe its subjective
valuations and write downs. Plaintiffs also failed to demonstrate Section 11 liability based upon
Barclays’ failure to itemize its mortgage-related assets into subcategories, which it had no
independent duty to provide, or upon the alleged misleading nature of statements lacking such
itemization. Violation of applicable accounting standards and SEC regulations was insufficient
to state a Section 11 claim in the absence of specific allegations regarding how Barclays’
practices were improper. The court held that Barclays’ risk management disclosures were too
general for a reasonable investor to rely upon, and were not alleged to be false at the time made
or to reflect processes that were not followed. A Section 11 claim could not be stated based
upon the purchase of securities after Barclays’ allegedly corrective disclosures in the absence of
allegations that additional disclosures remained to be made.
Public Emps. Ret. Sys. of Miss. v. Goldman Sachs Grp. 2011 WL 135821 (S.D.N.Y. Jan. 12,
2011).
The district court granted in part and denied in part defendants’ motions to dismiss
plaintiffs’ second amended class action complaint, which alleged violation of, inter alia, Section
11 of the Securities Act of 1933 in connection with three offerings of mortgage-backed pass
through certificates. The court held as a threshold matter that plaintiffs lacked standing for
certificates that they did not purchase (thus dismissing those securities), and that plaintiffs were
not time-barred because publicly available documents and articles did not directly relate to the
issuing trusts contested here (and, therefore, did not put plaintiffs on inquiry notice). The court
sustained the Section 11 claim on the grounds that plaintiffs had sufficiently pleaded both
cognizable loss (based upon the difference between the amount paid for the securities and the
price at which the security was sold before the suit was filed) and material misrepresentations
(by adequately alleging that the offering documents did not put investors on notice of the
underwriting practices that loan originators were using, thus obscuring the risk exposure to
certificate holders. The court rejected the argument that such disclosure was precluded by
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Section 1111 of Regulation AB, which requires underwriting criteria to be described “to the
extent known”, since knowledge is immaterial to Section 11). The court dismissed the Section
11 claim against rating agency defendants on the ground that they are not “underwriters” as
defined in the Securities Act.
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2011 WL 1338195 (S.D.N.Y. Mar. 31,
2011).
The district court dismissed (with and without prejudice and leave to replead) various
aspects of a consolidated second amended securities class action complaint alleging, inter alia,
violation of Section 11 of the Securities Act of 1933, arising from the issuance of $7.75 billion of
mortgage-backed securities issued in six separate offerings. The court held that plaintiff lacked
standing to sue on the five offerings in which it had not purchased securities; claims based upon
those offerings were dismissed with prejudice. For the sole offering where plaintiff had standing
to sue, the court held that market value loss is sufficient to establish damages for a mortgagebacked
securities claim, in part because prevention of such claim “would place severe limits” on
application of the Securities Act to securities such as bonds. The court dismissed plaintiff’s
Section 11 claims against the rating agency defendants, to whom underwriter liability does not
apply. The court also dismissed without prejudice Section 11 claims against defendants who
sponsored, sold, and acted as depositor for the securities because plaintiff’s allegations against
them were conclusory, relied only on news articles and broad investigations into subprime
mortgages, and were non-specific as to the origination practices and underwriting guidelines
relevant to the security for which plaintiff had standing to sue.
Employees’ Ret. Sys. of the Gov’t of the Virgin Islands v. J.P. Morgan Chase & Co., 2011 WL
1796426 (S.D.N.Y. May 10, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
second amended securities fraud class action complaint, which alleged violation of, inter alia,
Section 11 of the Securities Act of 1933 based upon statements made in connection with
mortgage pass-through certificates for pools of residential real estate loans. The court dismissed
Section 11 claims based upon ten of the eleven offerings at issue for lack of standing, given that
plaintiff had failed to purchase securities in each of the challenged offerings. In the single
offering where plaintiff had purchased securities, and therefore had standing to pursue the claim,
allegations concerning credit ratings were insufficient to state a claim against rating agencies
because there were no allegations that the agencies believed their standards to be too lax or
inaccurate, nor any allegation that they knew the data was flawed. The court also dismissed
Section 11 claims against sponsor and parent companies of the underwriters, despite their alleged
participation in drafting offering documents, because such allegations are “statutorily irrelevant”
to the definition of an underwriter. The court sustained the Section 11 claim based upon alleged
deviations from underwriting standards, appraisal standards and LTV ratios (given that the
appraisers allegedly did not believe the appraisals at the time made, and further given the
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appraisers’ alleged acceptance of assignments that were contingent on predetermined results).
The court sustained plaintiff’s arguments on materiality, holding that allegedly widespread
abandonment of underwriting and appraisal guidelines “can hardly be held immaterial as a
matter of law.” The court also found that the alleged decline in investment value was a
sufficiently cognizable injury.
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 WL 2020260 (S.D.N.Y. May 19,
2011).
The district court granted in part and denied in part defendants’ motions to dismiss a
consolidated second amended securities class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933, arising from alleged misrepresentations and omissions
on whether proper guidelines and procedures were observed in the origination of certain
mortgage-backed securities and their subsequent securitization. The court held that plaintiff’s
claims were timely given the recent holding of Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010),
that the limitations period begins when a reasonably diligent plaintiff would have discovered the
facts constituting the violation, which, in this case, was not more than a year before the action
was brought. The court held that increasing loan delinquency rates, the collapse of Bear Sterns,
and the placement of the relevant securities on a “ratings watch” all were insufficient for plaintiff
to have discovered the alleged violation. For similar reasons, the court held that plaintiff did not
have knowledge of the alleged untruth or omission at the time it occurred, and that the Section 11
claim would be sustained as a result. The court also sustained the Section 11 claim to the extent
it was based upon diminution in market value and sale of the securities at a loss, both of which
constituted cognizable losses notwithstanding the fact that plaintiffs-intervenors were warned of
the risks of an illiquid secondary market. The court sustained the Section 11 claim over
defendants’ argument that plaintiff failed to pursue the offering documents’ remedy of
“repurchase, cure or substitute[ion]” of non-conforming loans, holding that such language was in
the nature of contract which is inapposite in the context of Securities Act claims. The court also
rejected defendants’ objections concerning plaintiffs’ failure to plead reliance, which is not
required where, as here, earnings statements are not at issue. The court dismissed the Section 11
claim to the extent it was founded upon securities sold at a profit.
Bensinger v. Denbury Res. Inc., 2011 WL 3648277 (E.D.N.Y. Aug. 17, 2011).
The district court denied defendant’s motion to dismiss an amended complaint alleging
violation of, inter alia, Section 11 of the Securities Act of 1933 based upon allegedly material
misrepresentations during defendant’s acquisition of a company for which plaintiff was a
shareholder. The court sustained the Section 11 claim because the Proxy and Registration
Statements misstated calculation of the merger consideration in several instances. Such
misstatements were material because they directly related to compensation the target company’s
shareholders were entitled to receive, thus having the potential to alter significantly the total mix
of information available to a reasonable investor.
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In re Deutsche Bank AG Sec. Litig., 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
consolidated amended class action complaint alleging violation of, inter alia, Section 11 of the
Securities Act of 1933 arising from Deutsche Bank’s involvement in structuring, trading and
investing in residential mortgage-backed securities and collateralized debt obligations backed by
U.S. residential subprime and nonprime mortgages. The court dismissed as the basis of the
Section 11 claim certain alleged misstatements that were insufficient to show that, at the time of
offering, (i) the subprime and nonprime holdings constituted a group concentration of credit risk,
(ii) the extent of exposure to subprime and nonprime holdings made the offering particularly
speculative or risky, or (iii) that risk management procedures were not applied as stated (it being
insufficient to plead that the procedures were insufficient to prevent losses). The court also
dismissed as the basis of the Section 11 claim alleged misstatements or omissions that were
addressed by documents incorporated into the offering materials, which disclosed expansion into
mortgage-backed securities and that trading losses might result. After finding that the Section 11
claim was timely under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974),
because it related to an offering raised in the initial class action complaint, the court sustained the
Section 11 claims because (i) the court declined to find as a matter of law that defendants had no
duty to disaggregate or quantify the specific types or quality of mortgage-related holdings; (ii)
defendants made “no attempt” to argue that the allegedly omitted information was not material;
and (iii) equities trading losses of $630 million were 700% above the “maximum exposure” and
were therefore material and sufficient to state a claim.
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.
Sept. 15, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
second consolidated amended complaint, alleging violation of, inter alia, Section 11 of the
Securities Act of 1933, arising from the marketing and sale of mortgage-backed security passthrough
certificates. The court acknowledged that plaintiffs’ claims were insufficiently specific
to show timeliness, but granted one additional opportunity for each plaintiff to replead the time
and circumstances of discovery of the alleged misconduct to demonstrate compliance with
applicable statutes of limitation. The court rejected arguments that plaintiffs were on inquiry
notice due to ratings downgrades and negative watches, monthly disclosures of delinquency and
foreclosure rates, and news reports questioning ratings integrity of subprime instruments,
particularly since the underlying loans retained an investment grade rating into the limitations
period. Although the parties agreed that the statute of repose ran prior to filing of the second
amended complaint, the court held that the statute of repose was tolled pursuant to American
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), because the court construed the tolling
principle in American Pipe to be legal (not equitable) in nature given that it derives from Federal
Rule of Civil Procedure 23. As a legal tolling provision, the court concluded that the Supreme
Court’s holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991),
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that statutes of repose are not susceptible to equitable tolling, does not apply here. In furtherance
of the policies of economy and efficiency that underpin American Pipe, its tolling principles
were also deemed to apply here because the original plaintiffs lacked standing. The court also
held that diminution in value of a security was sufficient to plead cognizable injury under the
Securities Act, and that allegations concerning systematic disregard for underwriting and
appraisal standards, or an effort to maximize loan origination without regard to loan quality,
were actionable. The court dismissed the Section 11 claims to the extent they were based upon
alleged misrepresentations concerning the derivation or integrity of the ratings, because plaintiffs
had pleaded no duty to disclose any alleged flaws in the ratings process.
In re Sec. Capital Assur. Ltd. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).
The district court granted defendants’ motions to dismiss in their entirety, dismissed the
first amended consolidated class action complaint with prejudice, and denied as futile plaintiffs’
request for leave to amend the complaint, which alleged violation of, inter alia, Section 11 of the
Securities Act of 1933 arising from exposure to subprime loans. The court dismissed the Section
11 claim because the absence of loss causation was apparent on the face of the complaint, which
did not sufficiently identify corrective disclosures that revealed any allegedly concealed facts.
Because the “essence” of loss causation is that an alleged misstatement or omission concealed
material information from the market that, when disclosed, negatively affected the value of the
security, it is “essential” that plaintiffs allege concealed facts that were subsequently revealed.
Having failed to do so, the absence of loss causation was apparent on the face of the complaint
and therefore subject to dismissal.
City of Roseville Employees’ Ret. Sys. v. EnergySolutions, Inc., 2011 WL 4527328 (S.D.N.Y.
Sept. 30, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
second amended class action complaint, which alleged violation of, inter alia, Section 11 of the
Securities Act of 1933 in connection with an initial public offering and a subsequent offering.
The court sustained the Section 11 claim to the extent it was based upon statements that were
false or that omitted facts necessary to make the disclosures not materially misleading. The court
dismissed the Section 11 claim as not plausible under Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009),
and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), to the extent it was based upon
documents that refuted plaintiffs’ allegations. The court also dismissed the Section 11 claim to
the extent it was based upon an alleged failure to make disclosures under Item 303 of Regulation
S-K, which requires disclosure of known trends or uncertainties, because the information alleged
to be in violation of Item 303 either did not reflect trends or uncertainties, or was sufficiently
disclosed.
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In re Merck & Co. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011).
The district court granted in part and denied in part defendants’ motion to dismiss a
corrected consolidated fifth amended class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933, arising from stock purchased during a period that
Merck sold the arthritis medication Vioxx, whose commercial viability was allegedly overstated.
The court sustained the Section 11 claim, rejecting the “perfunctory” arguments that (i) plaintiffs
could not pursue their securities law claims under the judicial estoppel doctrine (rejected because
the doctrine applies only to “clearly inconsistent” legal positions from which plaintiffs would
derive an unfair advantage, which did not occur here because the core of the complaint has
remained the same); (ii) the market was “well aware” of the drug’s potential risks (rejected
because of Merck’s “repeated reassurances” regarding the drug’s safety); and (iii) the allegedly
misstated or omitted information was not material (rejected given internal analyses that Vioxx
patients experienced a greater incidence of adverse cardiovascular events).
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).
The district court granted in its entirety the auditor defendant’s motion to dismiss, and
granted in part the remaining defendants’ motion to dismiss the amended complaint, which
alleged violation of, inter alia, Section 11 of the Securities Act of 1933, arising from a shelf
registration statement by one of the largest credit card issuers in the United States. The Section
11 claim against the auditor was dismissed as conclusory and insufficient to support a plausible
claim for relief because plaintiffs did not allege that GAAP standards were, in fact, violated;
which GAAP standards were violated, if any; or how the statements in the audit report were false
or misleading at the time made. For the remaining defendants, the court held that plaintiffs did
not establish a material misstatement or omission with respect to: (i) contingency plans to
address reduced liquidity from an early amortization event (because the challenged statements
did not put the adequacy of the company’s contingency plans “in play”, meaning there was no
duty to disclose, and because the statements that were made were not alleged to have been untrue
at the time made); (ii) assessment of capital levels as “strong” (a statement of belief that was not
alleged to have been made without reasonable belief); (iii) the methodology for accessing and
monitoring customer creditworthiness (because plaintiffs failed to explain why the statements
were misleading); and (iv) maintaining and strengthening customer relationships (because those
are inactionable, vague statements of opinion or expectation). The court held that plaintiffs did
establish a material misstatement or omission with respect to calculation and adequacy of loan
loss reserves and compliance with capital adequacy requirements – statements fact, not opinion,
that were plausibly alleged to have been materially misstated.
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Pension Trust Fund for Operating Eng’rs v. Mortgage Asset Securitization Trans., Inc., 2011
WL 4550191 (D.N.J. Sept. 29, 2011).
The district court granted (without prejudice) defendants’ motion to dismiss an amended
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,
arising from alleged misstatements and omissions concerning mortgage-backed securities
(including alleged deviation from loan underwriting guidelines, loan-to-value ratios, debt-toincome
ratios, appraisal standards and procedures, and income, employment and credit history
verification processes). The court dismissed the amended class action complaint because
plaintiffs failed to comply with the particularized pleading requirements of Section 13 of the
Securities Act, which sets out the statutes of limitations and repose applicable to Securities Act
claims. Plaintiffs were directed to replead with particularized facts concerning the timeliness of
their claims, including but not limited to the time and circumstances of discovering the
defendants’ allegedly actionable statements, the reason why discovery was not made earlier, or
the diligent efforts undertaken in making such discovery. The court exercised its discretion to
grant leave to amend because doing so would not be “futile”.
In re Franklin Bank Corp. Sec. Litig., 782 F.Supp.2d 364 (S.D. Tex. 2011).
The district court granted defendants’ motions to dismiss and dismissed with prejudice a
consolidated class action lawsuit alleging violation of, inter alia, Section 11 of the Securities Act
of 1933, arising from Franklin Bank’s management and strategy practices that allegedly resulted
in its closure and liquidation. After applying the pleading standard of Federal Rule of Civil
Procedure 8 (and rejecting defendant’s argument that allegations of recklessness are tantamount
to fraud), the court dismissed with prejudice the Section 11 claim against the underwriter
defendant because it was based on an SEC filing and its attendant public announcement that
were not included in the registration statement at issue, and because the alleged misstatements
and omissions were not alleged to have been known at the time the registration statement was
issued and distributed. The Section 11 claim was also dismissed because an impact of .46% on
total interest income, 1.4% on net interest income, and 1.78% on interest income after credit
losses was insufficient to establish materiality as a matter of law. The court declined to consider
financial impacts that were material for timeframes not relevant to the Section 11 claims. The
court declined to find plaintiffs’ claims time-barred because the alleged “storm warnings”
identified by defendants did not address the time period relevant to the Section 11 claim.
Indiana State Dist. Council of Laborers v. Omnicare, Inc., 2011 WL 2786301 (E.D. Ky. July 14,
2011).
The district court disposed of a claim under Section 11 of the Securities Act of 1933 that
was remanded from the Sixth Circuit (because the district court had improperly dismissed the
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claim on grounds that plaintiffs had not shown loss causation, which is an affirmative defense,
not an element of a Section 11 claim) by granting defendants’ renewed, uncontested motion to
dismiss the Section 11 claim and by granting plaintiffs’ motion to file a second amended
complaint to restate that claim. The district court held that the Section 11 claim was properly
dismissed because the face of the complaint established a failure of loss causation by pleading
about disclosures that did not address the alleged misrepresentations and omissions concerning
GAAP. The court also sustained dismissal of the Section 11 claim because conclusory
allegations of GAAP violations generally do not satisfy the requirements of Rule 9(b) of the
Federal Rules of Civil Procedure. Plaintiffs were granted leave to replead the Section 11 claim
because it was the first time they sought to amend the claim, and because they sought to do so
based on newly available information. The court found the proposed amendment to be
“arguably” viable with respect to loss causation because the proposed amendment did not
suggest that lack of loss causation would be apparent on the face of the proposed amended
complaint.
City of New Orleans Employees’ Ret. Sys. v. PrivateBankcorp, Inc., 2011 WL 5374095 (N.D. Ill.
Nov. 3, 2011).
The district court granted, with prejudice, defendants’ motions to dismiss an amended
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in
connection with documents incorporated into materials supporting public offerings in 2008 and
2009. The court held that the alleged failure to disclose deteriorating credit quality in legacy
loan portfolios was not misleading because, even though disclosure was not made in the 10-K
and 8-K, the disclosures were made in other documents incorporated by reference in the 2008
offering materials. The alleged failure to maintain sufficient loan loss reserves was similarly not
actionable given the failure to allege that defendants did not believe that loan loss reserves were
adequate and the failure to allege that defendants lacked a reasonable basis for their beliefs. The
alleged omission that loan portfolio increases were due to risky lending and an increasing
number of bad loans was also deemed insufficient to state a claim given that companies are
under no obligation to characterize their operations in a negative manner. The suggestion that
quality in lending practices was deliberately sacrificed to increase loan quantities was rejected as
conclusory.
In re STEC Inc. Sec. Litig., 2011 WL 4442822 (C.D. Cal. Jan. 10, 2011).
The district court granted without prejudice defendants’ motion to dismiss plaintiffs’
consolidated amended complaint, which alleged violation of, inter alia, Section 11 of the
Securities Act of 1933, arising from alleged misstatements and omissions about STEC’s
financial performance and condition (which allegedly had the effect of artificially inflating the
stock price, which allegedly collapsed when falsity of the statements was disclosed). The court
applied Federal Rule of Civil Procedure 9(b) because plaintiffs’ Securities Act claims were based
on a unified course of fraudulent conduct alleged in connection with plaintiffs’ claims under the
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Securities Exchange Act of 1934. The court held that the alleged misstatements at issue
(concerning customer supply agreements, and the failure to file same pursuant to Item 601(b)(1)
of Regulation S-K) were not material misstatements or omissions sufficient to state a claim under
Section 11. To the extent statements concerning STEC’s customers did constitute a material
misstatement, the court nonetheless dismissed the Section 11 claim on the ground that plaintiffs
“ha[d] not alleged” loss causation.
Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL 4389689 (C.D. Cal. May 5, 2011).
The district court granted in part and denied in part motions to dismiss a second amended
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,
arising from 427 separate offerings in which disclosures regarding Countrywide’s loan
origination practices were alleged to be materially untrue or misleading. For tranches of
mortgage-backed securities where none of the named plaintiffs had made a purchase, the Section
11 claim was dismissed for lack of standing. Because “each tranche is indisputably a separate
security,” the court held it was not enough to have purchased from a tranche issued pursuant to
the same prospectus supplements; plaintiffs were required to have purchased from each tranche
at issue. Failure to purchase from each tranche also deprived plaintiffs of constitutional standing
under Article III (because they suffered no personal injury, and therefore had no standing to sue
upon, tranche investments that they did not make); the interconnectedness of the tranches was
deemed “largely irrelevant.” The Section 11 claim was otherwise sustained on the grounds that
allegations concerning systematic deviations from and disregard for underwriting guidelines
were sufficient to state a claim, and plaintiffs had sufficiently pleaded materiality and injury in
that the allegations in the complaint did not conclusively demonstrate the absence of loss
causation. The court reserved judgment on whether aftermarket purchasers had sufficiently
pleaded reliance on the registration statement given its decision on standing, which may have
mooted the reliance issue.
In re STEC Inc. Sec. Litig., 2011 WL 2669217 (C.D. Cal. June 17, 2011).
The district court denied the STEC defendants’ motion to dismiss and granted the motion
to dismiss by the underwriter defendants, without prejudice to replead, in connection with a
second consolidated amended complaint alleging violation of, inter alia, Section 11 of the
Securities Act of 1933, arising from alleged misstatements and omissions that inflated the
company’s stock price (which allegedly collapsed upon corrective disclosure of same). The
court held that plaintiffs adequately alleged material misrepresentations in support of their
Section 11 claim on the grounds that disclosures in the prospectus regarding a large customer
sales order constituted misleading “half-truths” because they failed to disclose that the order was
not truly reflective of product demand, was not an ordinary course contract, and could not be
expected to drive ongoing sales at similar levels, all of which was revealed when the company
later described the agreement as a “one-off”. Plaintiffs’ Section 11 claim against the underwriter
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defendants was dismissed due to lack of standing because the securities allegedly causing injury
were not traceable to the secondary offering in which the underwriters were involved.
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp.2d 1125 (C.D. Cal. 2011).
The district court granted defendants’ motions to dismiss plaintiff’s first amended
complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of 1933, in
connection with residential mortgage-backed securities (“RMBS”) purchased by plaintiff in
fifteen different offerings structured and sold by almost two dozen defendants. The court
dismissed without prejudice the Section 11 claim against all defendants on the ground that the
claims were time-barred under the applicable statute of repose, particularly given that neither the
original nor the amended complaint set forth any basis for tolling the repose period. To the
extent plaintiff repleaded the Section 11 claim, the court set forth the required allegations that
must be pleaded, including that named plaintiffs have standing based upon their purchase of the
specific RMBS at issue, and that their claims are timely under applicable statute of repose.
Dean v. China Agritech, Inc., 2011 WL 5148598 (C.D. Cal. Oct. 27, 2011).
The district court disposed of an amended class action complaint by, inter alia,
dismissing the claim brought by one of the class representatives pursuant to Section 11 of the
Securities Act of 1933 and arising from allegedly false financial statements included in a
registration statement and prospectus. The court exercised subject matter jurisdiction on the
Section 11 claim after rejecting defendants’ argument that the class representative lacked Article
III standing for failing to plead an injury specifically traceable to defendants’ conduct. After
determining that pleadings alleging fraudulent conduct to inflate the value of the class
representative’s stock are sufficient to confer standing for an economic injury, the court
nonetheless held that the Section 11 claim failed because it was apparent on the face of the
amended class action complaint that plaintiff could not establish loss causation, having sold the
stock at a loss several months before the first curative disclosure was disseminated in the
marketplace.
Katz v. China Century Dragon Media, Inc., 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).
The district court granted (with leave to amend) defendant’s motion to dismiss a first
amended complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,
arising from allegedly false statements during an IPO about the company’s earnings. Although
plaintiffs disclaimed pleading in fraud, the court applied the heightened pleading standard of
Federal Rule of Civil Procedure 9(b) because allegations in the complaint sounded more in fraud
than in negligence, and because it was “implausible” that mere negligence caused deviations
between numbers on the company’s profit and revenue reports reported to Chinese regulatory
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authorities versus those reported in the prospectus. Plaintiffs satisfied Rule 9(b)’s heightened
pleading standard with respect to identifying the allegedly false statements, who made them, and
their materiality given that the statements concerned profits and revenues. Plaintiffs failed to
meet the heightened pleading standard for the claim that profit and revenue reports reported to
the SEC were false; although the numbers were different from those reported to Chinese
regulatory authorities, Section 11 requires greater specificity to show that the SEC numbers were
actually false, by pleading, for example, that Chinese and American accounting standards are
similar or that the reports were made based on the same data. The court held that plaintiffs need
not plead loss causation given that defendants bear the burden of proving the absence of loss
causation (a burden the court found it unlikely to be met at the pleading stage because it seemed
“evident” that the facts alleged could have caused the company’s delisting and plaintiffs’
resulting injuries).
Plichta v. SunPower Corp., 790 F.Supp.2d 1012 (N.D. Cal. 2011).
The district court granted defendants’ motion to dismiss a putative class action complaint
alleging violation of, inter alia, Section 11 of the Securities Act of 1933, in connection with
accounting entries in financial statements filed with the Securities and Exchange Commission
that allegedly understated the cost of goods sold. The court held that plaintiffs lacked standing to
sue under Section 11 because they concededly did not purchase their stock in the public offering,
and therefore could not allege facts sufficient to show that the stock purchased was traceable to
the offering in dispute. The one named plaintiff who had purchased shares close in time to the
offering had sold the securities in excess of the offering price, and therefore lacked recoverable
damages. The court also dismissed the Section 11 claim based upon shares received by certain
shareholders through a spinoff because those plaintiffs paid nothing for the shares, and therefore
had no recoverable damages. Although the court said it was not clear how the pleading defects
could be cured, plaintiffs were given leave to replead.
Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).
The district court granted in part and denied in part defendants’ motions to dismiss a
putative securities class action complaint alleging violation of, inter alia, Section 11 of the
Securities Act of 1933, in connection with alleged misrepresentations concerning a long bond
strategy fund. The court denied the motion to dismiss the Section 11 claim brought by
defendants responsible for issuing, managing, and distributing shares of the fund because
plaintiffs sufficiently alleged a material misrepresentation (regarding suitability of the fund for
certain investors) and an omission of material fact (regarding alleged failures adequately to
disclose a “mathematical compounding effect” that caused the fund to deviate from its
benchmark). The court granted the motion to dismiss the Section 11 claim brought by
independent trustees to the extent plaintiffs lacked standing to sue on securities that they did not
purchase. The trustees’ motion to dismiss the Section 11 claim was otherwise denied. The court
held that plaintiffs claims were timely (because annual reports and “well-publicized” news
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articles were insufficient to provide inquiry notice), and that they suffered “compensable
damages” (thus rejecting the trustees’ argument that only the fund’s investments affect its price,
not its disclosures, which, if true, would foreclose all Securities Act claims against such funds,
even if they intentionally misrepresented material facts). The court also held that plaintiffs had
plausibly alleged loss causation in that their loss was allegedly caused, or worsened by,
realization of the undisclosed risk.
In re Century Aluminum Co. Sec. Lit., 2011 WL 830174 (N.D. Cal. Mar. 3, 2011).
The district court granted with prejudice defendants’ motions to dismiss plaintiff’s third
amended complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of
1933, arising from alleged false and misleading financial statements in connection with a
secondary offering of common stock. The dismissal was based upon plaintiffs’ failure to plead
facts sufficient to show how their purchases were traceable to the secondary offering. The court
held that plaintiffs could not meet their pleading burden by stating that they had purchased shares
solely in the aftermarket or through brokers and brokers’ third-parties, as opposed to purchasing
shares from underwriters. The fact that the market already contained 49 million shares when
11.3 million shares were made available to the public was also deemed insufficient to show how
plaintiffs’ specific shares were specifically traceable to the secondary offering.
In re Washington Mut. Mortgage-Backed Sec. Litig., 2011 WL 5027725 (W.D. Wash. Oct. 21,
2011).
The district court granted defendants’ motion for judgment on the pleadings and granted
in part plaintiffs’ motion for class certification in a putative class action alleging, inter alia,
violation of Section 11 of the Securities Act of 1933 arising from mortgage-backed securities
(“MBS”) that were allegedly backed by “fundamentally impaired” residential mortgage loans,
and for which plaintiffs had allegedly been misled about the quality of underwriting standards.
The MBS at issue were sold through six offerings, including 110 tranches, with each tranche
representing an individual security. Because the named plaintiffs had purchased securities from
only thirteen tranches, defendants moved for judgment on the pleadings to dismiss plaintiffs’
Section 11 claim for lack of standing to sue on the tranches from which plaintiffs had not
purchased securities, and, therefore, suffered no personal injury. The court granted defendants’
motion, notwithstanding the fact that the dismissed tranches were sold in the same offering as,
and were therefore related to, tranches in the same offering from which plaintiffs did purchase
MBS.
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In re Oppenheimer Rochester Funds Grp. Sec. Litig., 2011 WL 5042066 (D.Colo. Oct. 24,
2011).
The district court denied one defendant’s motion to dismiss and granted in part and
denied in part defendants’ joint motion to dismiss consolidated class action complaints alleging
violation of, inter alia, Section 11 of the Securities Act of 1933 in connection with funds that
were allegedly marketed as stable, income-seeking, capital-preserving investments when, in fact,
they allegedly used risky investment strategies fundamentally incompatible with stated
objectives. The court held that defendants’ disclosure duties were not satisfied given their failure
to disclose sufficient information to render not misleading statements on investment objectives,
highly-leveraged derivative instruments, and the volatility, liquidity, risk, and valuation of the
securities at issue. As such, those statements were sufficient to state a claim under Section 11.
The court held that plaintiffs’ losses were adequately linked to the allegedly misleading
statements and omissions, thus rejecting defendants’ loss causation arguments. The court also
rejected defendants’ argument that plaintiffs’ claims were time-barred, holding that news articles
and other press reports were insufficient to trigger inquiry notice.
In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).
The district court granted in part and denied in part plaintiff’s omnibus motion for leave
to amend the consolidated class action complaint and for reconsideration of the court’s
memorandum opinion and orders granting in part and denying in part defendant’s motion to
dismiss the consolidated amended complaint, which had alleged violation of, inter alia, Section
11 of the Securities Act of 1933 in connection with alleged failure to disclose certain business
and financial conditions. The court agreed to reconsider whether Regulation S-K and Item 303
imposed on defendants a duty to disclose adverse liquidity trends during the offering period. The
court affirmed its prior decision to dismiss the underwriter defendants, holding that (i) the
abstain-or-disclose rule applicable in the insider trading context does not apply to Section 11
claims (because it would require disclosure of more information than required by the Securities
Act, and would “render nugatory” laws that specify information issuers must disclose); and (ii)
plaintiffs had not established violation of disclosure duties under Item 303 (because certain facts
in support of the duty were not pleaded in the complaint; events occurring in a three-week period
were insufficient as a matter of law to establish a trend; and allegations in support of a trend did
not differentiate between defendants and were therefore implausible). The court also
reconsidered, and rejected, (i) whether Item 303 requires disclosure of contractual provisions in
offering materials (held not to be a material omission absent allegations that the provision was
unique); (ii) the requirement of Regulation S-X that significant concentrations of credit risk be
disclosed (rejected because the issuer made such disclosures); (iii) arguments that the issuer’s
2007 10-K was actionable and that certain statements constituted inactionable puffery (because
there was no basis given for reconsideration); and (iv) arguments that the issuer’s 2008 offering
was actionable (because no named plaintiff purchased shares during that offering, thus depriving
them of statutory standing to sue).
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Haarbauer v. Morgan Keegan & Co., 2011 WL 457971 (FINRA Feb. 1, 2011) (Gomez, Barrett,
Dorsey, Arbs.).
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted
violation of, inter alia, Section 11 of the Securities Act of 1933, arising from respondent’s
alleged failure to disclose the nature and extent of risk from investing in certain bond funds.
After one pre-hearing session with a single arbitrator, four pre-hearing sessions with the panel,
and ten hearing sessions, respondent was found liable for an award one $210,000 in
compensatory damages and $375 in filing fees to one of the claimants. Issues raised by the
remaining claimant, who had not settled with respondents, were dismissed in their entirety and
with prejudice. All other relief not specifically addressed was denied, including requests for
punitive/treble damages and attorneys’ fees.
Clifford v. Morgan Keegan & Co., Inc., 2011 WL 5025045 (FINRA Oct. 11, 2011) (Pieroni,
Arb.).
In an arbitration before the Financial Industry Regulatory Authority, claimant asserted
violation of, inter alia, Section 11 of the Securities Act of 1933, arising from claimant’s purchase
of certain bond funds. After three pre-hearings and a recorded hearing with oral arguments
before a single arbitrator, respondent’s motion to dismiss was granted, with the arbitrator
dismissing all claims in their entirety and denying relief not specifically addressed therein,
because (i) the funds were purchased by an experienced investor who made his own
determinations and executed those decisions through brokerage firms; (ii) the funds were
purchased through a secondary market instead of through an initial public offering; and (iii) there
was no evidence that the claimant purchased the funds from respondent or relied on the
respondent for advice and/or recommendations.
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Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762
(1st Cir. 2011).
The court of appeals affirmed in part and vacated in part the district court’s dismissal of
the plaintiffs’ putative class action claims under Section 12(a)(2) of the Securities Act of 1933.
Plaintiffs argued that three sets of allegations concerning material misrepresentations were
adequately pled to survive 12(b)(6) dismissal: (1) that the defendants misrepresented their use of
lending standards despite alleged practices of not verifying borrowers’ employment and ability to
repay loans; (2) that the defendants did not comply with uniform appraisal standards in
determining property values despite representing their compliance in a prospectus; and (3) that
credit ratings were misleading because they were based on outdated models, lowered ratings, and
inaccurate loan information. The court affirmed the district court’s judgment that the plaintiffs’
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claims as to the appraisal standards and the credit ratings were not sufficient to survive a motion
to dismiss. The court vacated the district court’s judgment on the issue of the lending standards
holding that the plaintiffs had sufficiently alleged that the defendants misrepresented the lending
standards used in its prospectus because the allegations were specific as to particular lenders and
the practices used were widely understood to have been used in the industry. The court also held
that the district court erred in dismissing the plaintiffs’ claims for failure to allege that defendants
sold the certificates to or solicited the sales from plaintiffs.
Fait v. Regions Fin. Corp., 655 F.3d 105 (2d. Cir. 2011).
The court of appeals affirmed the district court’s 12(b)(6) dismissal of plaintiffs’ claims
under Section 12(a)(2) of the Securities Act of 1933 because defendant’s statements concerning
goodwill and loan loss reserves in a prospectus for a securities offering were statements of
subjective opinion rather than statements of objective fact. Plaintiffs also failed to allege that
defendants did not believe the statements when they were made. Plaintiffs, purchasers of
securities offered by defendants, filed a putative class action lawsuit under Section 12, alleging
that defendants failed to write down goodwill and increase loan loss reserves to account for
deterioration of the mortgage and housing markets in its prospectus for a securities offering in
2008. The court of appeals affirmed the district court’s holding that statements concerning
goodwill and loan loss reserves were statements of subjective opinion rather than statements of
objective fact. The court also affirmed the district court’s dismissal of the plaintiffs’ complaint
because the plaintiffs did not allege that the defendants knew the statements were untrue at the
time they made them. Plaintiffs argued that the court was imposing a scienter requirement for
Section 12 claims, but the court rejected this argument distinguishing a misstatement of a truly
held belief from a misstatement made with fraudulent intent.
Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479 (2d Cir. 2011).
The court of appeals affirmed the district court’s dismissal of the plaintiffs’ claims under
Section 12 of the Securities Act of 1933, but on different grounds than the district court. The
plaintiffs alleged that the defendants made false statements and omissions of material facts in a
registration statement and prospectus for its initial public offering concerning the impairment of
two mezzanine loans. Plaintiffs appealed the court’s dismissal of their complaint alleging that
defendants failed to disclose that two loans in its portfolio of loans were impaired and that
defendants knew that the loans were impaired at the time that they issued the registration
statement and incorporated prospectus. The district court dismissed the plaintiffs’ second
amended complaint on the ground that the alleged misstatements and omissions in the prospectus
were not material because the subordinated loans were adequately collateralized at the time of
the defendants’ IPO. The court of appeals ultimately rejected this ground as the sole basis for
dismissal given the diminished role of collateralization in the registration statement. Instead, it
affirmed the dismissal on the ground that the omission was not quantitatively material since the
loans were a small part of the defendants’ full portfolio of investments and because the plaintiffs
failed to allege that the two loans were of distinct interest to investors other than as another
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component of defendants’ full portfolio of investments. The court also found that the omissions
were not qualitatively material because although the price of the defendants’ stock dropped
significantly after its announcement of the impairment of the loans, other unfavorable
announcements were included in that press release and could have caused the price to fall.
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).
The court of appeals vacated the district court’s dismissal of the plaintiffs’ putative
securities class action complaint, alleging that defendants violated Section 12(a)(2) of the
Securities Act of 1933 and remanded it for further proceedings. Plaintiffs alleged claims against
an asset management company and its officers that they knew of problems in their real estate
investments and in two of their portfolio companies yet failed to disclose these problems and the
known possibility of a clawback and reduced performance fees in their registration and
prospectus statements filed for their IPO. Defendants argued on appeal that plaintiffs did not
adequately plead that the defendants should have disclosed a presently existing trend, event, or
uncertainty, and that the omission was not material. The court disagreed. The court held: that
the district court erred in evaluating materiality in the aggregate noting that the defendants were
not permitted to omit disclosure of negative information if poor performance would be offset by
positive performance elsewhere in the portfolio; that the structure of defendants’ organization
was still subject to the same disclosure requirements when going public as those companies that
are already public; that the district court erred in finding that the alleged loss of an exclusive
contract by a company in which defendants invested significantly was immaterial; and that the
district court erred in failing to consider that the defendants’ omissions masked a reasonably
likely change in earnings.
Gerstner v. Sebig, LLC, 426 Fed. App’x. 470 (8th Cir. 2011).
The court of appeals affirmed the district court’s dismissal of plaintiffs’ unregisteredsecurities
claims under Section 12 of the Securities Act of 1933 as untimely and not entitled to
equitable tolling.
Katz v. Gerardi, 655 F.3d 1212 (10th Cir. 2011).
The court of appeals affirmed the district court’s dismissal of plaintiffs’ class action
securities claims under Section 12(a)(2) the Securities Act of 1933 where plaintiffs lacked
standing to sue. The court of appeals also affirmed the district court’s dismissal of claims by
class members who exchanged stock for new units for improper claim-splitting. Plaintiffs who
cashed out their stock in a merger argued that they were purchasers under Section 12 because the
merger fundamentally changed their investment units in a real estate investment trust and that
they were forced to purchase new, altered investment units. The court rejected this argument,
noting that the plaintiffs merely had to sell or exchange the units during the merger. It held that
an investor who was forced to sell his shares as a result of a merger does not have standing to sue
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under Section 12 and declined to extend the fundamental change doctrine (or forced seller
doctrine) to claims brought under the 1933 Act.
Hudes v. Aetna Life Ins. Co., 2011 WL 3805679 (D.D.C. Aug. 30, 2011).
The court dismissed plaintiff’s Sarbanes-Oxley claims because the alleged violating
entity had no securities registered under Section 12 of the Securities Exchange Act of 1933. The
court held securities issued by the World Bank are explicitly “deemed to be exempted securities”
under Section 12.
In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 275 F.R.D. 382 (D. Mass. 2011)
The court granted plaintiffs’ motion to certify a class for its claims arising under Section
12(a) of the Securities Act of 1933 against a mutual fund and persons and entities associated with
the fund. Plaintiffs alleged that defendants violated Section 12 by making false and misleading
statements in offering documents for a fund comprised of high-risk securities. Plaintiffs moved
for certification of a class comprising all persons who purchased shares of the defendant fund
during the proposed class period and who were damaged as a result. The court rejected
defendants’ arguments against certification, holding that it was immaterial that none of the lead
plaintiffs purchased the securities during the first fifteen months of the proposed class period,
that the potential conflicts between the lead plaintiffs and absent putative class members who
benefited from the misinformation did not render the lead plaintiffs inadequate representatives,
and that the lead plaintiffs’ acquisition of interests in the defendant fund through a merger with
the defendant fund and another fund did not render their claims atypical.
Hill v. State Street Corp., No. 09cv12146–NG, 2011 WL 3420439 (D. Mass. Aug 3, 2011).
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)
of the Securities Act of 1933 because plaintiffs had stated a valid prima facie claim. Plaintiffs
alleged that the defendant violated Section 12(a)(2) by conducting an offering pursuant to a
registration statement and prospectus that contained untrue and misleading statements of material
fact. Defendant moved to dismiss, claiming that the complaint did not allege sufficient facts to
show that plaintiffs had standing to bring a Section 12 claim. The court denied the motion. It
held that plaintiffs’ assertion that “during the class period, plaintiffs purchased stock in the
defendant pursuant and/or traceable to the offering and suffered substantial damages as a result
of the violations of the securities laws alleged herein.” combined with the lead plaintiff’s
inclusion of a certification showing all of its purchases with a particular defendant satisfied the
Section 12 pleading requirement—even though plaintiffs had not completely identified the
circumstances and sellers in all of the transactions.
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Silverstrand Investments v. AMAG Pharm., Inc., 2011 WL 3566990 (D. Mass. Aug. 11, 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a) of the Securities Act of 1933. Plaintiffs alleged that defendant drug manufacturer omitted
material information in its offering documents. The omissions included twenty-three serious
adverse events in patients taking the drug, two declinations by the FDA to approve the drug, and
a warning letter from the FDA issued after the offering regarding the manufacturer’s practices in
marketing the drug to consumers. The defendants moved to dismiss the Section 12 claims,
arguing that the omissions were not material and that there was no duty to disclose this
information. The court held that the defendants were under no duty to disclose the FDA’s
previous disapprovals of the drug because the agency subsequently approved it, and that the
FDA warning letter was irrelevant because it was sent after the offering period. The court also
concluded that the defendants were under no duty to disclose the serious adverse events because
the frequency of such events was not materially different than a warning in the offering
documents that noted such risks and the documents disclosed similar serious adverse events
observed in clinical trials.
Ambert v. Caribe Equity Group, Inc., 2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011).
The court denied the individual defendant’s motion to dismiss plaintiffs’ claims under
Section 12(a) of the Securities Act of 1933 for sale of an unregistered security and for failure to
provide a prospectus. Plaintiffs were investors who alleged that they were defrauded by
defendants in seeking to create a new HMO. Defendants instead took their investments and
purchased an existing HMO in financial distress. Upon learning of the fraud, plaintiffs filed suit
alleging, inter alia, various federal securities violations. The court found the plaintiffs’ amended
petition adequately explained the alleged claims for sale of unregistered securities and sale of
securities without a prospectus.
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance
Corp. I, 2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011).
The court granted in part and denied in part defendants’ motion to dismiss the plaintiffs’
securities class action complaint alleging, among other things, a violation of Section 12(a)(2) of
the Securities Act of 1933. The court dismissed the lead plaintiff’s claims for lack of Article III
and Section 12(a)(2) statutory standing because it did not allege that it held the certificates at
issue and thus could not have been injured and because it failed to allege that the certificates
were purchased in the initial public offering; however, the court granted leave to replead. The
court held that an allegation of decline in value in the certificates due to the decline in value of
the underlying mortgages was a sufficient pleading of Section 12(a)(2) economic loss but
dismissed the allegations concerning certificates that were allegedly sold by plaintiff for a profit
or no loss. Defendants moved to dismiss plaintiffs’ Section 12(a)(2) claims as time-barred,
arguing that plaintiffs had constructive notice of the decline in value through many news stories;
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however, the court found that the stories did not tie back to defendants and thus the claims were
not time-barred. Finally, the defendants moved to dismiss plaintiffs’ claims for failure to allege
a material misrepresentation concerning lending standards, appraisal standards, statement of risk,
and credit ratings; the court found: that the plaintiffs adequately pled a material
misrepresentation or omission with regard to appraisal standards against some of the originators
listed and dismissed the allegations against those inadequately pled; that plaintiffs failed to allege
that defendants knew the credit enhancement statement was false when it was made; that
plaintiffs failed to allege that credit rating agencies knew the ratings were false when given; and
that plaintiffs adequately pled a misrepresentation or omission concerning underwriting
guidelines as they pertain to certain listed originators but dismissed the allegations as to any
other.
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F. Supp. 2d 618 (S.D.N.Y. 2011).
The court granted defendants’ motion for summary judgment on plaintiffs’ claim under
Section 12 of the Securities Act of 1933. The court found that plaintiffs’ claims were barred by
the Securities Act’s statute of repose. The statute of repose provides that no action shall “be
brought to enforce a liability created . . . under [Section 12(a)(2)] more than three years after the
sale” of the security at issue. Plaintiffs had brought a Section 12(a)(2) claim based on sales that
occurred in 2006 and argued that class actions filed on these issues in 2007 and 2008 tolled this
limitations period. The court rejected this argument because of the language of the statute
indicating that an action may be commenced after the limitations period “in no event” and
because it is settled that a federal statute of repose is not subject to equitable tolling.
In re IndyMac Mortg.-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011).
The court granted in part three motions to intervene and denied plaintiff’s motion for
leave amend its complaint for claims including alleged violations of Section 12(a)(2) of the
Securities Act of 1933. Investors in mortgage pass-through certificates filed putative class action
against issuer, former officers and directors for allegedly making misrepresentations and
omissions in connection with the sale of the issuer’s mortgage pass-through securities. In
previous litigation (“IndyMac I”), the court consolidated two cases involving the same violations
of the 1933 Act by the defendant issuer. Without opposition, the court named a single plaintiff
to represent the class. In IndyMac I, the court then dismissed all claims arising out of securities
that the named plaintiff had not purchased. Three other parties then made separate motions to
intervene since they purchased additional securities that the named plaintiff had not. The court
dismissed one party’s motion to intervene and assert certain claims because, although the party
had originally filed suit within the statute of repose, the party had allowed the court to
consolidate its case and name a single plaintiff to represent the class. The court, therefore,
considered the party’s motion to intervene and assert claims for misstatements occurring more
than three years prior barred by the three-year statute of repose. The two other parties were
likewise able to intervene only as to Section 12(a)(2) claims occurring within the three-year
statute of repose. The court did find, however, that the one-year statute of limitations had been
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tolled by the filing of IndyMac I until the date that the court ruled that the plaintiff named in
IndyMac I lacked standing to assert claims for securities that the plaintiff had not directly
purchased. The court then denied plaintiff’s motion for leave to amend to add two additional
defendants since all claims against the prospective defendants would be barred by the three-year
statute of repose.
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011).
The court granted in part defendants’ motion to dismiss plaintiffs’ claim arising under
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs brought a putative securities fraud class
action against a financial services corporation and its former officers, directors, auditors, and
underwriters, alleging that defendants made materially false and misleading statements and
omissions regarding the corporation’s liquidity risk and value of its real estate holdings.
Additional plaintiffs were added over one year from the filing of the initial complaint. The court
granted dismissal of some Section 12(a)(2) claims because none of the named plaintiffs in the
class action had purchased the securities at issue and, therefore, did not have standing. The court
also dismissed certain Section 12 claims as time-barred by the applicable statute of repose,
finding American Pipe tolling does not apply to a statute of repose where, as here, the offering of
the securities occurred more than three years prior to the added plaintiffs’ claims. The court did
rule, however, that certain Section 12 claims were not time-barred because a class action suit had
been filed within the statute of limitations. The court applied American Pipe tolling even though
the plaintiffs who brought the original class action lacked standing.
In re Royal Bank of Scotland Group PLC Sec. Litig., 765 F. Supp. 2d 327 (S.D.N.Y. 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a) of
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit claiming defendants
violated Section 12 by making misleading statements in offering materials concerning the
volume of the defendants’ subprime exposure. Defendants moved to dismiss, arguing, among
other things, that the Section 12 claims must be dismissed under the Supreme Court’s decision in
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), for the proposition that the
Securities Act does not have extraterritorial reach. The court held that because plaintiff did not
allege that the purchases took place in the United States and it was clear that the shares were
listed on a foreign rather than domestic exchange, the claim should be dismissed under Morrison.
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig., 774 F. Supp. 2d 584
(S.D.N.Y. 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the
Securities Act of 1933. Plaintiffs alleged that defendants had misrepresented the investments,
objectives, and risk exposure of a mutual fund. Defendants moved to dismiss the Section 12
claim, arguing the affirmative defense of failure to state a claim for loss causation. They argued
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that a mutual fund’s share price is determined by a statutorily defined formula that would not be
affected by the alleged misrepresentations. The loss suffered by plaintiffs was, therefore, not at
all due to a correction for the alleged misrepresentations, but solely due to a decline in the
economy at large. The court agreed and dismissed plaintiffs’ claim for failure to show loss
causation.
In re Wachovia Equity Sec. Litig., 753 F. Supp.2d 326 (S.D.N.Y. 2011).
The court denied defendants’ motion to dismiss under Section 12 of the Securities Act of
1933. Defendants argued that plaintiffs had failed to allege an actionable misstatement or
omission of fact under Section 12. Plaintiffs alleged that defendants had misrepresented loan-tovalue
ratios for a residential mortgage portfolio reported by defendants in offering documents.
According to plaintiffs, appraisers used by defendants reported inflated appraisal values that
resulted in the misrepresentations. The court acknowledged that appraisals are arguably
subjective opinions rather than facts. But because the appraisals affected the loan-to-value ratios
that were featured in the offering documents as facts, the court held that plaintiffs sufficiently
alleged a material misrepresentation of fact, declining to dismiss the claims under a “blanket
subjective opinion rule.”
N.J. Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011).
The court denied plaintiffs’ motions for class certification for purchasers of mortgagebacked
securities. Plaintiffs claimed violations of Section 12(a)(2) of the Securities Exchange
Act of 1933, among other claims, alleging that the offering documents were misleading as to
whether the residential mortgages comprising the securities were built in conformity with proper
underwriting guidelines. In finding the Rule 23(a) requirements met for class certification, the
court rejected the defendants’ argument that there could be no typicality for class members who
purchased different tranches of certificates. The court held that the “heart” of plaintiffs’ Section
12 claims was the alleged disregard of the loan underwriting guidelines, which impacted all
proposed class members in the same manner, irrespective of which tranche they purchased. The
court also held that even though some class members had only Section 11 claims and not Section
12(a) claims because the purchases had not been made from an initial public offering, the class
could still be certified to represent all members. Nevertheless, the court denied class certification
on the grounds that plaintiffs did not meet the Rule 23(b)(3) predominance requirement because
class members had different levels of knowledge with regard to whether loan originators were
“loosening and lowering” underwriting guidelines depending on the class members’
sophistication and when they purchased the certificates.
In re Kummerfeld, 44 B.R. 28 (Bankr. S.D.N.Y. 2011)
The bankruptcy court issued an order on the parties’ cross motions for summary
judgment, finding that the debtor’s primary violation of the securities laws, including a violation
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of Section 12(a) of the Securities Act of 1933, and his status as a control person were not in
dispute. The debtor had a prior securities judgment entered against him after a jury trial found
that the corporate veil should be pierced, and he subsequently filed for bankruptcy. The creditor
challenged the bankruptcy on the grounds that the debt was not dischargeable under Section
523(a) of the Bankruptcy Code, which prohibits discharging obligations arising out of fraud.
The court held that the debtor failed to meet his burden to show that other purchasers were not
solicited for the offering and that the investor had access to the information the registration
would have disclosed. The court also held that where a determination is made that a corporation
was a primary violator of the securities laws, a person who is deemed a control person of that
corporation may not discharge the debt from the judgment in bankruptcy unless he can establish
an affirmative defense to control-person liability. The court did, however, note that issues of fact
existed as to whether the debtor could avail himself of the affirmative defenses to control-person
liability.
In re Barclays Bank PLC Sec. Litig., No. 09-cv-1989, 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)
of the Securities Exchange Act of 1933. Plaintiffs filed suit claiming defendants violated Section
12 by making misleading statements in offering materials and making misleading and inadequate
disclosures concerning the defendants’ exposure to subprime mortgage and credit markets. The
court dismissed plaintiffs’ claims on three separate grounds. First, that plaintiffs lacked standing
to bring their Section 12(a)(2) claims because they failed to allege that they purchased the
relevant shares directly from defendants. Second, the claims were time barred by the one year
limitations period because plaintiffs were on inquiry notice after defendants had issued a trading
update in 2007. And third, plaintiffs failed to adequately state Section 12(a)(2) claims on the
basis of failing to disclose credit market exposures during the offering period because plaintiffs
failed to allege that the defendants did not truly believe their subjective valuations.
Public Emps. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 2011 WL 135821 (S.D.N.Y. Jan.
12, 2011).
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a)(2)
of the Securities Exchange Act of 1933. Defendants argued that the Section 12(a)(2) claims
must be dismissed as to the mortgage backed pass-through certificates that plaintiffs purchased
because plaintiffs failed to plead that the purchases were made directly from defendants or in a
public offering as required by Section 12(a)(2). The court denied defendants’ motion because
plaintiffs provided sufficient information by alleging that “Plaintiff and other Class members
purchased their Certificates directly from” defendants. Defendants also argued that plaintiffs’
claims should be dismissed under the statute of limitations because plaintiffs were on inquiry
notice more than a year prior to the filing of the lawsuit. The court rejected this argument,
finding that a downgrading of the certificates and publicly-available information about the
deterioration of the mortgage market did not relate directly to the alleged misrepresentations and
omissions in plaintiffs’ complaint. The defendants also argued that plaintiffs did not adequately
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allege a material misrepresentation or omission because the offering documents put plaintiffs on
notice that the originators would deviate from underwriting standards. The court held that the
allegations were sufficient because the offering documents did not put investors on notice as to
the actual level of risk faced by investors and whether originators applied underwriting standards
to account for borrowers’ ability to pay.
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2011 WL 1338195 (S.D.N.Y. Mar. 31,
2011).
The court granted defendants’ motion to dismiss a class-action plaintiff’s claims under
Section 12(a) of the Securities Exchange Act of 1933. The plaintiff lacked standing to sue on
five of the six offerings pled in its complaint because, as the only named plaintiff in the suit,
plaintiff failed to allege that it purchased securities traceable to any of those offerings. As to the
sole offering in which plaintiff did purchase securities, the court nevertheless found dismissal
was warranted since plaintiff’s allegations were wholly conclusory in nature. Instead of pointing
to specific factual statements to support its allegations, the plaintiff instead pointed to
voluminous news articles and broad investigations concerning the subprime mortgage crisis,
which standing on its own, was not enough.
Employees’ Retirement Sys. of the Government of the Virgin Islands v. J.P. Morgan Chase &
Co., No. 09 Civ. 3701(JGK), 2011 WL 1796426 (S.D.N.Y. May 10, 2011).
The court granted the defendants’ motion to dismiss plaintiff’s claims under Section
12(a) of the Securities Exchange Act of 1933, finding that the plaintiff lacked standing as to
certain claims and failed to sufficiently plead others. With respect to ten sets of Certificates the
plaintiff did not purchase, the court dismissed for lack of standing, stating that a Section 12
plaintiff cannot sue over a broad course of conduct, rather their suit is limited to only “the
specific registration statement and prospectus that cover the specific security that it purchased.”
With respect to the one set of Certificates the plaintiff did have standing to sue upon, the court
found that plaintiff nevertheless had failed to state a plausible claim, as plaintiff did not purchase
the Certificates in the initial public offering, in fact making the purchase nearly a full year after
the first offering. The court concluded that even if a party could base its Section 12 claim on “an
aftermarket sale,” plaintiff had failed to include any factual allegations to support its legal
contention that the defendants “promoted and sold” the Certificates and “solicited sales” for
financial gain.
Huelbig v. Aurora Loan Servs., LLC, 2011 WL 4348281 (S.D.N.Y. May 18, 2011).
The magistrate judge recommended that the court grant defendants’ motions to dismiss
plaintiff’s claims under Section 12(a) of the Securities Exchange Act of 1933, finding that
plaintiff had failed to plausibly allege that he purchased a security from any defendant in the
case. The plaintiff failed to “explain what securities were allegedly purchased, in what amount,
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or at what price, and from whom.” The court found the plaintiff’s claims further implausible
because none of the alleged defendants were licensed securities broker/dealers.
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 WL 2020260 (S.D.N.Y. May 19,
2011).
The court granted defendants’ motion to dismiss the intervenor–plaintiffs’ claims under
Section 12(a) of the Securities Exchange Act of 1933, finding that plaintiffs had failed to
adequately allege a direct purchase from any defendant. The fact that plaintiffs’ complaint
contained the exact security purchased and the date of the purchase was not enough. Nor was the
fact that certain defendants “underwrote” unspecified offerings. While the court intimated that
its holding might be different if the purchase dates corresponded with the offering dates, the
purchase dates provided in the complaint occurred months or even years after the offering.
In re Deutsche Bank AG Sec. Litig., 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under
Section 12(a) of the Securities Exchange Act of 1933. The court rejected defendants’ contention
that some of the defendants could not be considered “statutory sellers” as defined by Section
12(a)(2). The court held that plaintiffs’ pleadings alleging one defendant conducted offerings of
the securities at issue and raised billions in capital from the sale of the securities were sufficient
to make that defendant a “seller” for purposes of Section 12. The court then dismissed claims
against the underwriter defendants because plaintiffs merely pled purchases occurred “pursuant
or traceable to” defendants’ offering documents. Such language failed to allege facts sufficient
to demonstrate that the securities were purchased in the public offerings at issue. The court then
granted plaintiffs leave to amend claims related to certain offerings.
Pub. Emps. Ret. Sys. of Miss. v. Merrill Lynch & Co., 2011 WL 3652477 (S.D.N.Y. Aug. 22,
2011).
The court granted plaintiffs’ motion to certify a class for plaintiffs’ claims arising under
Section 12(a) of the Securities Act of 1933. The plaintiffs alleged that the defendants violated
Section 12 by selling mortgage pass-through certificates using documents containing untrue
statements and material omissions. Plaintiffs moved for certification of a class comprising all
those who purchased or otherwise acquired the certificates from the defendants in thirteen
offerings during a specified period. The court rejected the defendants’ arguments against
certification, holding that the sophistication of plaintiffs did not preclude them from satisfying
the numerosity requirement, that there were common questions of law and fact susceptible to
common answers, the lead plaintiffs were adequate representatives and that their claims were
typical of the class, even though putative class members purchased certificates in different
offerings, because the alleged misrepresentations were the same in each offering and part of the
same course of events. Defendants further argued that individualized inquiries predominated
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over common questions, given the number of separate offerings and the need to determine
whether the actionable misstatements were material and the extent to which each putative class
member relied on those statements. The court concluded that common questions predominated
because of the similarity between the offerings and alleged misrepresentations present in each.
Finally, the court rejected the defendants’ arguments that there were individual questions arising
from the statute of limitations, which had allegedly tolled for many plaintiffs based on their
possible suspicion of misrepresentations at an earlier time. The court held mere suspicion of
legal violations did not constitute actual knowledge for tolling purposes and defendants had not
alleged that any putative class members participated in the illegal acts at issue.
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.
Sept. 15, 2011).
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under
Section 12(a) of the Securities Exchange Act of 1933. The court held that plaintiffs’ complaint
alleging that “[defendants] promoted and sold the Certificates to plaintiffs and other class
members” was sufficient to satisfy statutory standing requirements under Section 12(a)(2).
Further, the court also found that diminution of a security is a cognizable loss under Section
12(a)(2). The court determined that plaintiffs’ 12(a)(2) claims that mortgage loans were made
without any regard to borrower qualifications, that borrowers were coached by defendants, and
that defendants employed atypical real estate valuation practices could not be dismissed because
of disclosures made in defendants’ offering documents that “borrower information was not
always obtained or verified, and that appraisals might not be independent.” The court then
dismissed plaintiffs’ claims that defendants, by stating that underlying securities held a certain
investment claim, made an actionable misrepresentation without disclosing underlying flaws in
the ratings process. The court held these “ratings-related” claims failed to state a factual
misstatement but granted plaintiffs leave to amend.
City of Roseville Employees’ Retirement Sys. v. Energysolutions, Inc., No. 09 Civ. 8633 (JGK),
2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011).
The court granted defendants’ motion to dismiss in part and denied it in part. Plaintiffs
were a proposed class of investors in common stock of engineering, spent fuel management, and
decontamination and decommissioning company that serviced nuclear reactors. About a year
after its IPO, defendants announced that that they would not be able to move forward with an
announced major project due to significant decline in the trust fund for that decommissioning
project. Further, new regulatory policies the company had expected to pass had been denied.
For these reasons, defendants’ revenue and earnings estimates would need to be significantly
reduced, causing the company’s stock to drop more than 60% over the next month. Plaintiffs
alleged that Registration Statements filed by defendants prior to this announcement contained
false and misleading statements under Section 12(a)(2) of the Securities Act of 1933. These
alleged misstatements and omissions included 1) representations regarding impact of certain
contracts defendant entered prior to its IPO on waste disposal opportunities, 2) available
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opportunities present in the market, 3) the viability of targeted disposal project, 4) the likelihood
of regulatory action allowing use of decommissioning funds for disposal of components of
operational reactors, and 5) the potential adverse effects of macro-economic conditions. The
court denied defendants’ motion as to points 1, 2, and 4 noted above. Plaintiffs’ complaint
established that defendant had overstated the amounts of certain types of waste of which they
were contracted to dispose. Further, plaintiffs alleged that defendants overstated opportunities
available in the market by including projects in forecasts when defendants had good reason to
believe it would not obtain these projects or the projects would not be available for some time.
Additionally, plaintiffs pled with specificity that defendants had information that the regulatory
changes they referred to as imminent were in fact highly unlikely to be passed. The court
dismissed those claims involving the viability of a targeted disposal project because the
document upon which plaintiffs’ allegations were based in fact contradicted that assertion.
Finally, the court noted that plaintiffs failed to allege any material misstatements or omissions
regarding macroeconomic conditions because the allegations focused on the period after the IPO
was complete.
Cobalt Multifamily Investors I, LLC v. Arden, 2011 WL 4542734 (S.D.N.Y Sept. 30, 2011).
The court adopted the magistrate judge’s report and recommendation that the receiver’s
motion for summary judgment for violations of Section 12(a)(1) of the Securities Act of 1933 be
granted against individual defendants but be denied against corporate defendant. Individual
defendants were sales employees who solicited investments by means of alleged
misrepresentations. The individual defendants all had judgments entered against them for
criminal securities violations. The plaintiff receiver alleged that all defendants violated Section
12(a)(1) based on their breaches of Section 5 of the Securities Act which prohibits the use of the
mails or means of interstate commerce to offer or sell a security without an exemption. The
magistrate judge found that the receiver made a prima facie claim for violation of Section 5 by
establishing that the individual defendants had solicited purchases of unregistered securities over
the phone. As to the sole corporate defendant, however, the receiver did not establish that its
representative had made calls or used other means of interstate commerce to solicit investors.
For this reason the magistrate judge recommended that the Receiver’s motion be denied as to
that claim.
Int’l Fund Mgmt. S.A., v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,
2011).
The court granted defendants’ motion to dismiss as to two of plaintiffs’ allegations
regarding Section 12(a)(2) of the Securities Act of 1933. Plaintiffs were foreign investors and
members of putative classes against defendant, several of its officers and directors, and its
subsidiary in connection with its underwriting of various debt offerings. Plaintiffs alleged that
they suffered losses relating to misrepresentations and omissions concerning the defendants’
exposure to collateralized debt obligations, structured investment vehicles, alternative A class
residential mortgage backed securities, and auction rate securities; the company’s mortgage
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lending practices; and its solvencies. Because the allegations did not sound in fraud, plaintiffs’
complaint was analyzed under the pleading standards of Fed. R. Civ. P. 8. Under this standard,
defendants sought only dismissal of the structured investment vehicles (“SIVs”) and the auction
rate securities (“ARSs”). As to the structured investment vehicles, plaintiffs alleged that
defendants had implicitly guaranteed to assume the SIVs’ debts to prevent the SIVs from
defaulting. Further, the plaintiffs allege that the rating agencies relied on defendants’ reputation
when rating the securities, and that defendant played multiple managerial roles for the SIVs.
However, the court ruled that none of these facts plausibly supported the inference that defendant
had guaranteed anything. As to the ARSs, plaintiffs alleged the defendants had violated the
Securities Act by failing to disclose its ARS holdings and liquidity problems in two separate
SEC filings. The court ruled that defendants had no duty under Item 303 because no known
trend in the collapse of defendants’ ARS business was apparent before the filing dates of the
disputed disclosures. Finally, the court ruled that plaintiffs’ claims were not barred by either the
statute of limitations or statute of repose because the time for filing was tolled as plaintiffs were
members of a class which had asserted the same claims within the applicable period.
Brecher v. Citigroup Inc., 2011 WL 5525353 (S.D.N.Y. Nov. 14, 2011).
The court denied plaintiffs’ rule 59(e) motion to amend the court’s dismissal of plaintiffs’
claims alleging a violation of Section 12(a)(2) of the Securities Act of 1933 and also denied
plaintiffs’ motion for leave to amend their complaint under rule 15(a) as futile. Plaintiffs argued
that their Section 12 claim against the corporate entity defendants should not have been
dismissed as untimely because new alleged facts would show that plaintiffs could not have
discovered the claims prior to one-year limitations period. The court found that the proposed
amended complaint and referenced documents did not support this assertion and upheld its
original dismissal of the claim. As to individual defendants and the board of director’s personnel
and compensation committee defendants, plaintiffs argued that the proposed amended complaint
alleged that they were control persons and that should suffice to meet the pleading requirement
that defendants be statutory sellers. The court held that liability as a control person under
Section 15 is distinguishable as a separate cause of action than the Section 12 statutory seller
requirement and that allowing leave to amend as to individual defendants and the board of
director’s personnel and compensation committee would be futile because plaintiffs failed to
allege that they were statutory sellers.
In re Merck & Co., Inc. Sec., Derivative, & ERISA Litig., 2011WL 3444199 (D.N.J. Aug. 8,
2011).
The court denied defendant’s motion to dismiss plaintiff’s claims arising under Section
12(a) of the Securities Act of 1933 because plaintiffs had validly plead a prima facie claim.
Plaintiffs brought a claim pursuant to Section 12(a) maintaining that defendant overstated the
commercial viability of its drug by deliberately downplaying the possible link between the drug
and an increased risk of heart attack or other cardiovascular events. Plaintiffs also contended
that defendant’s misstatements of fact and belief regarding the drug artificially inflated the stock
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price, which fell sharply when the truth began to emerge. The court held plaintiffs stated a prima
facie claim under Section 12 because plaintiffs alleged that they purchased the security pursuant
to a prospectus and plaintiffs alleged facts showing material misstatements or omissions.
Pension Trust Fund for Operating Eng’rs. v. Morgtgage Asset Securitization Trans., Inc., 2011
WL 4550191 (D.N.J. Sept. 29, 2011).
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section
12(a)(2) of the Securities Exchange Act of 1933 because plaintiff failed to allege facts setting
forth the time and circumstances of the discovery of the defendants’ allegedly actionable
statements as required by Section 13 of the 1933 Act. The court granted plaintiff leave to amend
since plaintiff’s claims were “sufficiently particularized to convince [the] [c]ourt that granting
leave to amend would not be ‘futile.’”
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’
claims arising under Section 12(a)(2) of the Securities Exchange Act of 1933. The court held
that defendants did not make material misrepresentations by including statements in offering
documents that the occurrence of a specific event was avoidable and unexpected even though
defendants lacked sufficient contingency plans once the specific event actually occurred.
Additionally, the court dismissed three of plaintiffs’ claims because plaintiffs failed to allege
defendants’ subjective beliefs as to the truth of opinion statements or that defendants had no
reasonable basis for the opinions. Several of the issuer’s statements regarding its intent to
develop strong business relationships and sound strategy constituted “mere puffery” and could
not be the basis for securities liability. Plaintiffs’ claim concerning statements that the issuer
regularly validated and updated its proprietary credit-risk analysis was dismissed because
plaintiffs failed to plead facts to show a misstatement. The court then denied defendants’ motion
to dismiss two Section 12 claims, holding that not all statements regarding loan loss reserves are
opinion statements, allegations that defendants failed to follow stated loan loss policy
methodology were sufficient to state a claim, and the “bespeaks doctrine” could not be applied to
these factual statements. Further, the court held that statements regarding whether the issuer
complied with capital adequacy requirements were also factually based and not “forwardlooking.”
The court granted plaintiffs leave to amend the dismissed claims.
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(1)
of the Securities Exchange Act of 1933, and granted in part and denied in part defendantmovants’
motion to dismiss the plaintiffs’ claims under Section 12(a)(2). The plaintiffs brought
the Section 12 claims, among others, alleging that defendants operated a Ponzi-like scheme in
selling partnership interests to plaintiffs. Three defendants who served as managers to the
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partnership and worked to obtain investors moved to dismiss the suit. In arguing for dismissal of
the Section 12(a)(1) claim, the movants claimed plaintiffs had not plead with particularity that
movants were “sellers” of the securities because movants had sold their interest in the
partnership. The court found plaintiffs had alleged sufficient facts to find that movants’ actions
may have served their own financial interests. The court granted the motion to dismiss as to two
of the movants on the Section 12(a)(2) claims. The court noted because the claim sounds in
fraud, plaintiffs’ allegations must meet Rule 9 pleading requirements. The court held that
plaintiffs had failed to plead particularized facts showing that two of the movants made
fraudulent misrepresentations to investors, or that movants had the requisite scienter. In
rejecting defendants’ motion to dismiss the Section 12(a)(2) claim as to the third movant, the
court held that plaintiffs had met the misrepresentation and scienter requirements of Rule 9 by
pleading that the movant had misled plaintiffs by implying that the partnership was registered
when it was not.
Billitteri v. Sec. Am, Inc., 2011 WL 3586217 (N.D. Tex. Aug 4, 2011).
The court approved a settlement agreement for claims including violations of Section
12(a) of the Securities Act of 1933 because the settlement provided a fair and reasonable
recovery for class members and met all Rule 23 requirements. After investing in two Ponzi
schemes, the plaintiffs in two class actions brought suit against several defendants alleging
several violations of federal and state securities laws, including violation of Section 12(a). After
arbitration and mediation, the parties proposed a settlement agreement that disposed of the
Section 12 claims against all the defendants, which the court found fair and reasonable for all
class members.
Nexbank, SSB v. BAC Home Loan Servicing, LP, 2011 WL 5182118 (N.D. Tex. Oct. 28, 2011).
The court granted plaintiff’s second motion to remand the suit to state court. Plaintiff
asserted various common law and statutory state law claims, as well as federal securities claims
under Section 12(a)(2) of the Securities Act of 1933 based on alleged misconduct by the
defendants related to three mortgage-backed securities. Defendants removed the suit to federal
court. The court remanded the case, rejecting defendants’ argument that the Section 12 claim
was baseless and holding that the claims were not removable. In the state court, defendants filed
a motion for summary judgment in which they raised for the first time the argument that
plaintiff’s Section 12 claim failed because the securities at issue were acquired after the ninetyday
maximum window closed for delivery of a prospectus, and the certificates purchased by
plaintiff did not require delivery of a prospectus. This state court granted the motion, and the
defendants again removed the case to federal court. Because defendants could have but did not
raise the “new” improper or fraudulent pleading ground when they removed the first time, the
court held that it could not serve as a basis for the defendants’ second removal. Further, the state
court’s dismissal of the Section 12 claim did not constitute a finding that the claim was
improperly or fraudulently pleaded, as there was no such conclusion in the order.
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In re Enron Corp. Sec., Derivative & ERISA Litig., 761 F. Supp. 2d 504 (S.D. Tex. 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12(a)(2)
of the Securities Exchange Act of 1933. Plaintiffs filed suit claiming defendants violated Section
12 by making misleading claims in face-to-face sales meetings and information pamphlets for
potential investors. The court granted defendants’ motion to dismiss holding that Section
12(a)(2) liability expressly reaches the sale of a security “by means of a prospectus” that contains
a misstatement or omission of material fact. Here, plaintiffs’ claim failed because there was no
prospectus applicable to plaintiffs’ certificate purchases. Further, because plaintiffs’ purchase
occurred by purely private sale, the court held there could be no Section 12 liability.
In re Enron Corp. Sec. Derivative & ERISA Litig., Nos. H–01–3624, H–03–0815, 2011 WL
3489524 (S.D. Tex. Aug. 9, 2011).
The court granted plaintiffs’ motion for leave to amend their complaint to include a claim
arising under Section 12(a) of the Securities Act of 1933. The defendants opposed the motion
arguing that allowing the plaintiffs to amend would unfairly prejudice the defense and
dramatically expand the factual allegations against the defendants. The court allowed the
amendment reasoning that the plaintiffs asserted the basic factual underpinnings of the Section
12 claim in their previous pleadings and, therefore, defendants had fair warning of the nature of
the Section 12 claims and none of the defendants filed an answer or motion to dismiss in
response to the prior pleadings.
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D.Mich. Feb. 28, 2011)
The court granted a defendant’s motion to dismiss plaintiffs’ claim under Section 12 of
the Securities Act of 1933. Plaintiffs alleged that they invested in unregistered securities at the
behest of an employee of the defendant. Plaintiffs sought to hold defendant liable for these acts
under Section 15’s vicarious Section 12 liability for “controlling persons.” Because plaintiffs’
allegations under Section 12 were rooted entirely in fraud, the court found that the heightened
pleading standards of Federal Rule of Civil Procedure 9(b) applied. Although the employee’s
misrepresentations were clearly identified, plaintiffs failed to plausibly allege any misstatement
during a time and place that he was under defendant’s control. Therefore the court dismissed
plaintiff’s Section 12 cause of action against the defendant.
Smith v. Mpire Holdings, LLC, 2011 WL 3841676 (M.D. Tenn. Aug. 30, 2011).
The court entered judgment for plaintiffs on their claims under Section 12(a) of the
Securities Exchange Act of 1933. Defendants ultimately failed to appear or defend against
plaintiffs’ claims. The court entered a default judgment against the defendants and found
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Section 12(a)(2) required the court to award damages based on the statutory interest rate and not
the higher interest rate originally promised to plaintiffs by defendants in the underlying offering.
City of New Orleans Employee’s Retirement Sys. v. PrivateBancCorp, Inc., No. 10c 6826, 2011
WL 5374095 (N.D. Ill. Nov. 3, 2011).
The court granted bank defendants’ motion to dismiss for failure to state a claim under
Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15
U.S.C. § 78u-4(b)(3)(A). The dispute arose over defendants’ writing off of certain risky loans
after putative class action plaintiffs had bought stock in defendants and asserted that the banks
defrauded them by delaying to make the write-off until after they invested. Plaintiffs alleged that
Defendants had made false or misleading statements in registration statements and prospectus
supplements by failing to disclose the deteriorating credit quality problems in certain loan
portfolios in violation of Section 12(a)(2) of the Securities Exchange Act of 1933. Additionally,
Plaintiffs alleged that the documents defendants filed with the SEC were misleading because
they failed to maintain an allowance for loan losses that were sufficient to absorb the credit
losses inherent in the loan portfolio. However, the court ruled the defendants did make
disclosures in quarterly reports showing increases in non-performing loans and growth in
outstanding loans. Further, the plaintiffs failed to allege that the defendants did not actually
believe that loan loss allowances were adequate. Plaintiffs’ conclusory allegations that
incorporated documents were “false” by failing to disclose the high-risk loans originating under
defendant’s growth plan were insufficient.
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D.Cal. 2011).
The court denied defendants’ motion for summary judgment of plaintiffs’ claim under
Section 12 of the Securities Act of 1933. Defendants failed to introduce facts precluding the
conclusion that plaintiffs expected profits on the investment solely from the efforts of third
parties. Thus, the court held summary judgment was improper on the issue of whether the
interest in real estate was a statutory “security.” Next, defendants alleged that they were not
statutory “sellers.” The court rejected this argument as to each defendant. As to the investmentadviser-defendant,
the court noted that he was paid for his role in the transaction, and plaintiffs
presented facts that indicated he was intricately involved in the investment. The court thus
rejected his argument that he merely referred a client to the true sellers. As to the real estate
company-defendants, there was a fact issue as to whether the investment adviser acted with its
apparent authority. Finally, the court rejected defendants’ arguments that the investment was
exempt from the Securities Act’s registration requirements because defendants failed to produce
any evidence of the number of offerees.
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Drescher v. Baby It’s You, LLC, 2011 WL 63615 (C.D. Cal. 2011).
The court granted defendants’ motion to dismiss plaintiff’s claim under Section 12(a)(2)
of the Securities Exchange Act of 1933. Plaintiff filed suit claiming defendants violated Section
12 by making misleading statements in acquiring plaintiff’s investment in the defendants’ theater
company. Defendants moved to dismiss, arguing that plaintiff did not allege an agreement to
purchase securities, and thus plaintiff was not a purchaser within the meaning of the statute. The
court dismissed the claim but granted plaintiff leave to amend, agreeing with defendants that
plaintiff did not allege that he purchased any securities from defendants.
Me. State Retirement Sys. v. Countrywide Fin. Corp., No. 2:10–CV–0302 MRP (MANx), 2011
WL 4389689 (C.D. Cal. May 5, 2011).
The court granted in part and denied in part defendants’ motion to dismiss the claims
under Section 12(a) of the Securities Exchange Act of 1933 in a putative class action, finding
that the class lacked standing to bring certain of its claims, had failed to sufficiently plead other
claims, and had properly pled the remaining claims. With respect to standing, the court found
that the class lacked standing to pursue any Section 12 claim involving certificates that at least
one named plaintiff did not purchase, reasoning that different certificates purchased under the
same prospectus are nevertheless separate securities under Section 12. As to four issuerdefendants,
the court found that the class had failed to state a plausible claim because the
securities were sold through a “firm commitment underwriting,” where title passed to the
underwriter-defendants from the issuer-defendants prior to the ultimate purchasers. Thus, the
issuer-defendants were not “immediate sellers” as required by Section 12. With respect to the
underwriter-defendants, the court found that the complaint’s assertion that plaintiffs had
purchased the securities either “directly from the Section 12 underwriter defendants in the
Offerings” or “pursuant to the Offering Documents” sufficiently alleged that the securities were
purchased as part of the initial public offering and not in the secondary market. While the court
admonished that any securities purchased after the expiration of the forty-day prospectus
delivery period could not form the basis of a valid claim, the court was unable to determine on
the pleadings alone which securities were purchased within the initial public offering and which
were not.
In re STEC Inc. Sec. Litig., Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx),
SACV 09–1320–JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011
WL 4442822 (C.D. Cal. June 17, 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a)(2) of the Securities Act of 1933 because plaintiffs failed to plead facts sufficient to show
an actionable misstatement or omission. Plaintiffs brought a putative class action alleging that
defendants violated various securities laws, including Section 12(a)(2), through materially untrue
statements and omissions as to the issuing defendant’s financial performance and condition that
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initially inflated the company’s stock price and ultimately caused the stock to drastically decline
in value. Defendants moved to dismiss the complaint. The court dismissed the Section 12
claims because plaintiffs based their claims on statements concerning the relationship between
the issuer and another products manufacturer as well as statements concerning sales strategy and
relationships that could not constitute untrue statements of material fact. The court granted
plaintiffs leave to amend.
In re STEC Inc. Sec. Litig., Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx),
SACV 09–1320–JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011
WL 2669217 (C.D. Cal. June 17, 2011).
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs brought a putative class action alleging
that defendants violated federal securities laws, including Section 12(a)(2) of the Securities Act,
when they issued or caused to be issued materially untrue statements and made omissions that
created an inflated impression of issuing defendant’s revenue growth and dramatically inflated
the company’s stock price. The issuer defendants moved to dismiss pursuant to Federal Rules of
Civil Procedure 12(b)(1), (b)(6), 8(a), and 9(b) and the Private Securities Litigation Reform Act
of 1995 arguing that plaintiffs did not adequately allege material misrepresentation. The court
denied defendant’s motion and cited several instances where plaintiffs alleged factual
misrepresentations. The court noted that plaintiffs did not oppose dismissal of the Section
12(a)(2) claims against the underwriter defendants and thereby granted dismissal without
discussion.
Healthy Habits, Inc. v. Fusion Excel Corp., No. CV11–675–CAS (PLAx), 2011 WL 2448256
(C.D. Cal. June 17, 2011).
The court denied defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a)(2) of the Securities Act of 1933 because plaintiffs validly asserted a prima facie Section 12
claim. Investors brought suit alleging violation of Section 12(a)(2) based on the sale of
unregistered securities and fraudulent misrepresentations associated with those sales.
Defendants moved to dismiss the Section 12 claims pursuant to Federal Rules of Civil Procedure
12(b)(1) and (b)(6) arguing that the court lacked subject matter jurisdiction because plaintiffs
failed to show the sale of a “security.” The court denied the motions because plaintiffs had plead
a sufficient factual basis to establish a Section 12 claim. The court held that defendants’
submissions regarding the true nature of the disputed security inappropriately required the court
to make findings of fact. The court deemed such factual determinations more suitable for a
summary judgment motion.
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Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp.2d 1125 (C.D. Cal. 2011).
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section
12(a) of the Securities Act of 1933 because plaintiff’s claims were barred by the three-year
statute of repose. The investor in residential mortgage-backed securities brought suit in
California state court alleging various federal and state law claims. Defendants removed the case
to federal district court and then moved to dismiss. The court dismissed the Section 12 claims
ruling that the claims were barred by the applicable three-year statute of repose since all of the
securities in the complaint were purchased more than three years prior to the filing of the
complaint. The court held plaintiff failed to plead tolling by merely asserting that the securities
in question were tolled by a prior class-action suit without showing that plaintiffs in the prior
class action suit actually purchased the same securities that formed the basis of the current
litigation. The court granted plaintiff leave to amend the complaint but required plaintiff to show
tolling with particularity.
Katz v. China Century Dragon Media, Inc., 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).
The district court granted defendants’ 12(b)(6) motion to dismiss plaintiff’s securities
claims brought under Section 12(a)(2) of the Securities Act of 1933 for failure to plead fraud
with adequate specificity and granted plaintiff leave to amend its complaint. Plaintiff filed a
lawsuit against defendant alleging a violation of Section 12 for falsely stating earnings in its
registration statement and prospectus because the numbers filed with the SEC were different
from the numbers filed with the Chinese regulatory agency. Defendants moved to dismiss. The
court held that plaintiff alleged fraud and that the complaint lacked the specificity required for
fraud pleadings and that the rules require more than merely alleging that the numbers were not
the same in the two filings.
Bowler v. Green Tree Servicing, LLC, 2011 WL 320398 (E.D. Cal. Jan. 28, 2011).
The magistrate judge recommended that the district court grant defendants’ motion to
dismiss plaintiffs’ claim under Section 12(a) of the Securities Exchange Act of 1933. The pro se
plaintiffs alleged that defendants, mortgage brokers, were securities brokers who had breached a
duty of care when they “manipulated the plaintiffs’ account,” among other claims. The
magistrate judge recommended granting defendants’ motion to dismiss for failure to state a claim
because plaintiffs’ amended complaint did not identify any public offerings, and therefore, there
could be no Section 12 liability.\
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B.2
Self v. Chase Bank, N.A., 2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a) of the Securities Exchange Act of 1933. The plaintiffs alleged that defendants sold them
unregistered securities in violation of Section 12(a). The court took judicial notice of SEC
filings regarding the securities at issue and found that the securities were, in fact, registered at the
time of sale. The complaints were dismissed with prejudice.
Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).
The court granted in part and denied in part the defendants’ motions to dismiss the
plaintiffs’ claims under Section 12(a) of the Securities Exchange Act of 1933. Plaintiffs, a
putative class who had invested in a certain mutual fund, sued two sets of defendants, both of
whom filed motions to dismiss. As to the first group (the entities responsible for issuing,
managing, and distributing shares of the fund) the court denied defendants’ motion, finding that
plaintiffs had adequately stated a claim under Section 12 in alleging that the defendants were
misleading in their disclosures regarding (1) an appropriate investor for the fund and (2) the
inherent risk of the mathematical compounding system used for tracking the fund. These
defendants failed to satisfy the “stringent showing” necessary to establish that the disclosures
and cautionary language were insufficient as a matter of law. As to the second group of
defendants (the independent trustees) the court found that the plaintiffs had adequately pled the
overwhelming majority of their claims. The court found that plaintiffs’ claims were not timebarred,
as defendants failed to overcome the “especially high hurdle” of establishing inquiry
notice—the contents of the prospectuses themselves did not, as defendants contended, clearly
give plaintiffs notice of the misrepresentations contained therein. The court also rejected
defendants’ argument that the plaintiffs had not suffered “compensable damages” (and thus
could not overcome defendants’ affirmative defense of loss causation), because plaintiffs had
alleged that their loss in the case was caused, or at least exacerbated by, the “materialization” of
undisclosed risks. Finally, the court found that plaintiffs did not have standing to sue for
representations made in a registration statement issued after their shares had already been
purchased. On the other hand, plaintiffs did have standing to sue for representations made as to
classes of shares they did not purchase, in which the representations were contained in the same
registration statements.
Charles Schwab Corp. v. J.P. Morgan Sec. Inc., 2011 WL 1642459 (N.D. Cal. May 2, 2011).
The court granted the plaintiff’s motion to remand its state and federal claims (including
its claim under Section 12 of the Securities Exchange Act of 1933) to state court. In determining
that equitable remand to state court was proper, the court stated that “claims under the Securities
Act first filed in state court are normally not removable.”\
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B.2
Rafton v. Rydex Series Funds, No. C 10–04523 JSW, 2011 WL 1642588 (N.D. Cal. May 2,
2011).
The court denied defendants’ request for leave to file a motion for reconsideration of the
court’s prior order refusing to dismiss plaintiff’s claims under Section 12 of the Securities
Exchange Act of 1933. Defendants sought reconsideration based on In re State Street Bank &
Trust Co. Fixed Income Funds Invs. Litig., 2011 U.S. Dist. LEXIS 35857 (S.D.N.Y. Mar. 31,
2011), where the court dismissed the defendants’ Section 12 claims due to the plaintiffs’ failure
to establish loss causation. In denying the motion for leave, the court stated that loss causation is
an affirmative defense in the Ninth Circuit, not an affirmative element of a Section 12 claim.
Thus, the New York decision was not a change in law necessitating reconsideration of the court’s
prior decision.
Salameh v. Tarsadia Hotels, 2011 WL 1044129 (S.D. Cal. Mar. 22, 2011).
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the
Securities Act of 1933. Plaintiffs purchased condominiums at the Hard Rock Hotel San Diego
and entered into a “Rental Management Agreement” with defendants to rent out their units. The
court noted that the alleged “security” consisted of two contracts, the original purchase contract
and Rental Management Agreements entered into months after the original purchase contracts.
Not all purchasers elected to enter into the Rental Management Agreement. The court concluded
that since plaintiffs could not sufficiently allege that the purchase contracts and the Rental
Management Agreements formed a single economic reality, they could not plausibly show a
“security” consisting of an investment of money with an expectation of profits produced by the
efforts of others. Therefore, the transaction was not subject to the protection of Section 12, and
the court granted defendants’ motion to dismiss.
Taddeo v. Am. Invsco Corp., 2011 WL 4346380 (D. Nev. Sept. 15, 2011).
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section
12(a)(1) of the Securities Exchange Act of 1933. The court held that plaintiff’s claims were time
barred under Section 13.
KeyBank, N.A. v. Bingo, Coast Guard Official No. 1121913, No. C09-849RSM, 2011 WL
1559829 (W.D. Wash. Apr. 22, 2011).
The court granted plaintiff’s motion to dismiss defendants’ counterclaims brought under
Section 12(a) of the Securities Exchange Act of 1933, finding that defendants failed to
adequately allege that plaintiff was the one who solicited, offered, or sold the unregistered
securities at issue in the suit. Defendants failed to allege that the plaintiff was “affiliated with,”
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“associated with,” or “acted as the agent for” the entity that offered and sold the shares. Instead,
the counterclaims merely alleged that plaintiff “aided and abetted” and “promoted and assisted”
in the activities. The court found that this alone was not sufficient to convert plaintiff into a
“seller” under Section 12.
In re Oppenheimer Rochester Funds Group Sec. Litig., 2011 WL 5042066 (D. Colo. Oct. 24,
2011).
The court denied defendants’ motions to dismiss various alleged securities violations.
Plaintiffs were shareholders in various municipal bond funds alleging that defendant funds,
managers, and trustees had violated Sections 12 of the 1933 Act based on alleged
misrepresentations and omissions made in marketing the funds. According to plaintiffs, the
funds’ prospectuses were materially misleading because their stated investment objectives and
disclosures misrepresented the nature of a high-risk, high-return investment strategy employed
by the fund. Plaintiffs claimed that the fund represented that it was for the purpose of
“preservation of capital,” with various statements supporting this goal, when in fact it had a very
aggressive “high-risk, high-return” objective that employed highly leveraged financial
instruments causing significant potentials for loss in certain market environments. The court
ruled that, taken together and in context, the alleged misstatements did not constitute mere
puffery. Further, the court ruled that plaintiffs had alleged facts tending to demonstrate that
defendants’ stated investment strategies were materially different from the strategies they
actually pursued, and that the stated risks of the investment strategies were materially
misleading. The court acknowledged that the plaintiffs faced significant issues in showing loss
causation, but noted that the factual issues this presented need not be addressed on a motion to
dismiss. The court noted that plaintiffs need not assert in detail factual allegations beyond basic
statements noting that defendants “actively solicited the funds’ shares through the Prospectus . . .
to serve its own financial interests” in order to establish the certain defendants were sellers for
purposes of Section12(a)(2).
In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).
The court denied plaintiffs’ motion to reconsider the court’s previous dismissal of claims
arising under Section 12(a)(2) of the Securities Act of 1933. Investors brought putative class
action against a mortgage corporation, underwriters, and officers alleging various violations of
federal security laws. Plaintiffs moved for reconsideration of orders granting in part and denying
in part defendants’ previous motions to dismiss as to alleged Section 12(a)(2) violations. The
plaintiffs argued that defendants made a misstatement of material fact when they failed to
disclose that an accounting firm had, prior to writing an opinion agreeing with certain financial
statements made by the issuer, found problems with the financial statements. The court
reconsidered the motions but upheld dismissal of the Section 12 claims and found the Form 10-K
was not actionable merely because the accounting firm had, prior to the time it accepted the
financial statements as true, stated certain reservations that were never disclosed in offerings
documents.
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Genesee County Employees’ Retirement Sys. v. Thornburg Mortg. Sec. Trust 2006-3, 2011 WL
5840482 (D.N.M. Nov. 12, 2011).
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’
securities class action complaint alleging violations of, among other things, Section 12(a)(2) of
the Securities Act of 1933. Plaintiffs alleged that defendants made misrepresentations as to the
true risk of several investment offerings of mortgage-backed securities in violation of Section 12.
Defendants moved to dismiss plaintiffs’ securities class action complaint on multiple grounds.
Defendants argued that plaintiffs did not adequately plead economic loss where the offering
documents stated there would be no secondary market; plaintiffs countered that they alleged a
decline in value in the mortgage-backed certificates, and the court agreed that plaintiffs
sufficiently alleged economic loss. Defendants argued that early disclosures advising plaintiffs
of occasional deviation from underwriting policies undercut plaintiffs’ argument that
misrepresentations were material; the court rejected defendants’ argument because while the
disclosures provided notice of some deviations, they did not warn investors of the systematic
abandonment of underwriting policies. The court addressed and rejected similar arguments as to
early disclosures concerning appraisals and credit ratings. The court found that plaintiffs
sufficiently alleged material misrepresentations or omissions regarding defendants’ abandonment
of underwriting guidelines. The court also found sufficient plaintiffs’ allegations concerning
defendants’ use of improper appraisal practices, inflated LTV values, and inaccurate credit
ratings in the offering documents for some, but not all, of the offerings but granted leave to
amend the deficient allegations. The court also held the following: that plaintiffs have no
obligation to plead that a material number of non-complying loans exist to establish materiality;
that plaintiffs have no obligation to plead that defendants failed to cure non-complying loans;
and that in the context of a securities class action, the issue of statutory standing is better
addressed at the class-certification or summary-judgment stage rather than on a motion to
dismiss.
Campbell v. Castle Stone Homes, Inc., No. 2:09–CV–250 TS, 2011 WL 902637 (D. Utah Mar.
15, 2011).
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the
Securities Act of 1933. Plaintiffs alleged defendants sold them unregistered securities in
violation of Section 12. The investment involved using plaintiffs’ good credit to fund
defendants’ construction of new homes and splitting the profit when the homes were sold.
Defendants argued that this was not a “security” under Section 12. The court disagreed, noting
that the definition of security was “flexible.” The key is “whether or not the investment was for
profit.” Since the contracts spoke of “Guaranteed Client Profit,” the court found that plaintiffs
had plausibly alleged the existence of a “security.” The court then rejected defendants’ argument
for summary judgment on loss causation and statute of limitations grounds without substantial
discussion and denied the motion.
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Gibbons v. Nat’l Real Estate Investors, LC, No. 2:07–cv–0990–CW, 2011 WL 1086364 (D. Utah
Mar. 23, 2011).
The court granted plaintiffs’ motion for summary judgment on its claim under Section 12
of the Securities Exchange Act of 1933 for selling an unregistered security. Plaintiffs alleged
that defendant sold them an unregistered security in violation Section 5, which is made part of
Section 12 in subsection (a)(1). Defendant had sold plaintiffs membership interests in a limited
liability company. Defendant argued that these interests did not qualify as “securities” under the
Securities Act based on the definition of that term given by a Utah statute. Rejecting this
argument, the court found Utah’s code wholly inapposite to Section 12. No registration of the
security was ever filed and the use of interstate commerce was not seriously contested.
Therefore, there was no genuine issue as to any material fact, and the court granted plaintiffs’
motion for summary judgment.
Morgan Keegan & Co. v. Shadburn, 2011 WL 5244696 (M.D. Ala. Nov. 3, 2011).
The court granted plaintiff’s motion for preliminary injunction seeking to enjoin FINRA
arbitration initiated by defendant. Plaintiff was an underwriter of an investment fund, and
defendant was an investor who purchased shares of the fund through a third party broker (where
he maintained an account). In the arbitration proceeding, defendant alleged violations of Section
12(a)(2) of the Securities Exchange Act of 1933. The claims under Section 12(a)(2) were for
material misstatements or misleading omissions in marketing materials that the underwriter had
put in a description of the fund on its website. Defendant reviewed these materials in deciding
whether to invest in the fund via the third party broker. In order to properly seek arbitration on
these claims under the FINRA rules, the court noted that defendant must be a customer of
plaintiff. In granting plaintiff’s motion for preliminary injunction, the court ruled that plaintiff
showed a substantial likelihood of success on the merits because defendant had no relationship
with plaintiff, but rather with the third party brokerage firm. His contact with plaintiff was thus
insufficient to create a “customer” relationship under the FINRA arbitration rules. Finding that
plaintiff met the other requirements for preliminary injunction, the court granted the motion.
Costa v. Carambola Partners, LLC, 2011 WL 397949 (M.D. Fla. Feb. 4, 2011).
The court denied plaintiffs’ motion to enter a proposed default judgment filed after the
court granted default judgment against defendants. The court stated that an interest rate of .28%
on plaintiffs’ damages from the date of service of the summons and complaint through the
anticipated date of entry of judgment was not unreasonable. The court stated that Section 12(a)
of the Securities Exchange Act of 1933 allows a successful plaintiff to recover the consideration
paid for the security at issue “with interest thereon,” but does not prescribe a specific rate.
However, the court denied the proposed default judgment because plaintiff failed to show
entitlement to the amount of costs claimed.
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3. Section 17
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SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).
After the district court granted in part the defendants’ motion to dismiss and granted the
SEC’s motion to voluntarily dismiss the remaining claims, both parties appealed. On appeal, the
Second Circuit held that the SEC’s allegation that the mutual fund’s chief operating officer made
statements of “half-truth” was sufficient to state a claim for securities fraud. The basis for the
SEC’s securities fraud claims against the former COO was a statement regarding the elimination
of market timing that specifically provided that “for more than two years, scalpers have been
identified and restricted or banned from making further trades.” The district court dismissed the
SEC’s claims because this statement was, in fact, true. However, the Second Circuit noted that
the law is well-settled that so-called “half-truths,” that is, literally true statements that create a
materially misleading impression, can support claims of securities fraud. In this case, because a
reasonable investor could plausibly conclude after reading the statement at issue that the adviser
had attempted to eliminate all market timing, when in fact, the adviser had entered into an
agreement with a specific investor allowing that investor to engage in a very large amount of
market timing in return for an investment in another hedge fund run by the defendant, the Second
Circuit concluded that the district court erred in dismissing the Section 17(a) claims.
SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011).
The district court granted the defendant’s motion for judgment as a matter of law upon
conclusion of the SEC’s presentation of its case-in-chief in this action alleging that an outside
director committed securities fraud by participating in the grant of backdated stock options. The
district court concluded that the SEC had failed to prove the requisite elements of scienter and
negligence. The SEC appealed and the Eighth Circuit Court of Appeals affirmed the district
court’s decision.
In the district court, the defendant testified that as an outside director, he relied upon the
company’s finance and accounting departments, outside and general counsel, and the company’s
independent auditors to ensure that the stock option plans were properly administered and
reported. It was undisputed in the district court that none of these professionals ever raised a
concern regarding the option dating and pricing or the company’s disclosures regarding the
option grants. The Eighth Circuit noted that, depending on others to ensure the accuracy of
disclosures, even if inexcusably negligent, is not the severely reckless conduct that is the
functional equivalent of intentional securities fraud. On appeal, the SEC argued that the danger
of misleading investors “must have been obvious” to the outside director because the disclosures
stated that the company was issuing at-the-money options. The Eighth Circuit rejected this
argument, concluding that the SEC failed to meet the heavy burden of proving the severe
recklessness that is the functional equivalent of intentional fraud because the disclosure was
ambiguous and it was primarily the responsibility of the accounting and finance professionals to
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avoid ambiguous, potentially misleading disclosures on this complex subject, not the role of an
outside director.
The Eighth Circuit also affirmed the district court’s conclusion that the SEC failed to
present sufficient evidence of negligence with respect to its claims brought pursuant to Section
17(a)(2) and (3) because the SEC failed to offer any evidence regarding the duties of members of
a board of directors or any testimony, lay or expert, regarding the degree of care that an ordinary
person would exercise under the circumstances and failed to prove that the disclosures about
options dating were unambiguous. In short, because it was undisputed that the defendant was an
outside director, had no personal expertise in these complex matters, that the company complied
with accounting principles at the time, no one alerted the outside director to any potential
concern and there was no evidence that the defendant violated the appropriate standard of care,
the SEC failed to state a claim for violations of Sections 17(a)(2) and (3).
SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).
The SEC and defendant Milling, a former officer of Tecumseh, filed cross motions for
summary judgment in this action alleging violations of the antifraud provisions of the Securities
Exchange Act and Section 17(a) of the Securities Act. The SEC alleged that Tecumseh’s
offering documents as well a letter to shareholders were false and misleading because of their
description of the quarterly distributions. The SEC argued that the offering documents and
shareholder letter did not disclose to investors that the companies had been losing money and
that any profit-derived dividends were highly unlikely and instead implied that the companies
were a profitable enterprise.
In response, Milling relied upon certain cautionary language included in the offering
documents, specifically language providing that there was no assurance that Tecumseh would
pay dividends. The court stated that these cautionary statements were insufficient to advise
investors that the “dividend” payments were not actually dividends but rather, returns of investor
capital. The court concluded that even the cautionary language implied that at least part of the
distributions would be profit-derived, and that informing investors that their quarterly
“distributions”—which were also intermittently referred to as dividends or “ROIs”—might be
paid from a “general fund,” (rather than from profits), fell far short of disclosing a piece of
information that is obviously important to a reasonable investor—that the distributions could not
have been paid from earnings, because the earnings were non-existent.
SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011).
In approving the SEC and Vitesse’s proposed consent judgment, Judge Rakoff again
criticized the SEC over the boiler-plate language included in nearly every securities regulatory
settlement—that the defendant neither “admits nor denies” any wrongdoing. Judge Rakoff
approved a $3 million agreement between the SEC and Vitesse Semiconductor and three former
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executives over the improper accounting of revenue and the backdating of stock options, and
spent the majority of the opinion criticizing the Commission’s long-standing settlement practice
and again stated that the SEC was treating the court as a “rubber stamp” when seeking approval
of consent judgments. In this enforcement action, Judge Rakoff found the terms of the
settlement to be fair, reasonable and in the public interest, even while noting that “the proposal
raises difficult questions of whether the SEC’s practice of accepting settlements in which the
defendants neither admit nor deny the SEC’s allegations meets the standards necessary for
approval by a district court.”
SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147 (S.D.N.Y. 2011).
On a motion to dismiss brought by former Goldman Vice President, Fabrice Tourree, the
court applied the Supreme Court’s Morrison decision to fraud claims brought by the SEC under
both the Securities Exchange Act of 1934 and the Securities Act of 1933. Goldman had
previously settled the claims against it for $550 million. The court’s decision is the first to apply
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), which held that section 10(b)
of the Exchange Act does not apply extraterritorially, to Section 17(a) of the Securities Act.
The court analyzed the sufficiency of the SEC’s claim under section 17(a) of the
Securities Act, and whether Morrison applied to that statutory section. The court observed that
Morrison did not involve or consider section 17(a), none of the parties had cited any cases
applying Morrison to section 17(a), and the court was not aware of any such case. Noting that In
re Royal Bank of Scotland Grp. PLC. Litig. applied Morrison to sections 11, 12 and 15 of the
Securities Act, but did not address section 17(a), the court nevertheless agreed with Tourre that
Morrison applies to section 17(a), stating that “Morrison itself expressly states that the Exchange
Act and the Securities Act share ‘[t]he same focus on domestic transactions.’” Because
Morrison focused on whether sales of securities were domestic or foreign, the court concluded
that, to the extent section 17(a) applied to sales, it does not apply to sales that occur outside the
United States. The court therefore dismissed the section 17(a) claim, but only to the extent that it
was based on sales to foreign entities. The court continued its analysis, however, observing that
section 17(a), unlike section 10(b), applies not only to sales of securities, but also to offers to sell
securities. The court examined the definition of the term “offer” in the Securities Act, which
states that an offer includes “every attempt to offer or dispose of, or solicitation of an offer to
buy, a security or interest in a security, for value.” The court stated that this definition left no
doubt that the focus of “offer,” under the Securities Act, was on the person or entity attempting,
or offering, to dispose of, or soliciting an offer to buy, securities. Applying this definition to the
allegations of the complaint, the court noted that the SEC alleged Tourre, acting from New York
City, offered the notes at issue to IKB, a foreign entity, and solicited ABN’s (another foreign
entity) participation in the credit default swaps at issue. The court observed that Tourre allegedly
engaged in numerous communications from New York City that constituted domestic offers of
securities or swaps, and thus, the court permitted the section 17(a) claim to survive to the extent
that it was based on such “offers.”
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B.3
SEC v. Kelly, 2011 WL 44331161 (S.D.N.Y. Sept. 22, 2011).
The SEC brought securities fraud charges against defendants alleging that they
engineered transactions that allowed the corporation to improperly report over $1 billion in
revenue from online advertising. After the Supreme Court issued its decision in Janus Capital
Group, Inc. v. First Derivative Traders, --- U.S. ---, 131 S. Ct. 2296 (2011), certain defendants
moved for judgment on the pleadings on the SEC’s claims brought pursuant to Section 10(b) of
the Exchange Act and Section 17(a) of the Securities Act. The SEC conceded that Janus
foreclosed a misstatement claim against certain defendants under subsection (b) of Rule 10b-5
because neither defendant “made” a misleading statement. The same defendants also moved for
judgment on the pleadings on the SEC’s claim brought pursuant to Section 17(a) of the
Securities Act. The defendants argued that because a claim for misstatement liability under
Section 17(a) is treated identically to a claim under Section 10(b), the SEC’s Section 17(a) claim
must also be dismissed on the basis of Janus. The court concluded that although the language of
subsection (2) of Section 17(a), which applies to misstatement liability, is not identical to that of
subsection (b) of Rule 10b-5, because both provisions have “the same functional meaning” with
respect to creating primary liability, Janus applies to Section 17(a)(2) claims as well as Section
10(b) claims. The court stated that it would be inconsistent for Janus to require that a defendant
have actually “made” the misleading statement to be liable under subsection (b) of Rule 10b-5
but not under subsection (2) of Section 17(a).
SEC v. Citigroup Global Markets Inc., 2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011).
The SEC filed a complaint against Citigroup alleging violations of Sections 17(a)(2) and
(3) of the Securities Act over a collapsed $1 billion mortgage-bond fund. According to the
complaint, during early 2007, Citigroup created a billion-dollar fund that sought to “dump” some
toxic mortgage-backed securities on “misinformed investors.” Citigroup allegedly pitched the
Fund’s assets to prospective investors as attractive investments rigorously selected by an
independent investment adviser; however, in reality, Citigroup purposely selected a substantial
amount of negatively performing assets for inclusion in the Fund and then took a short position
in those assets, betting that their value would decline over time. Investors in the Fund lost more
than $700 million, while Citigroup reaped net profits of approximately $160 million.
The same day the complaint was filed, the SEC and Citigroup filed a proposed consent
judgment. Both the SEC and Citigroup asserted that the proposed settlement was “fair,
reasonable, and in the public interest,” and asked the court to approve the proposed settlement.
In response, Judge Rakoff asked both parties to answer several questions concerning the
proposed consent judgment. After receiving responses to the court’s questions and hearing
argument, Judge Rakoff rejected the proposed $285 million settlement between the SEC and
Citigroup and concluded that because the SEC’s standard, boilerplate “neither admit nor deny”
settlement language failed to satisfy the required standard in evaluating such settlements, the
proposed settlement would not be approved. Judge Rakoff concluded that the district court could
B.3
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not approve the proposed settlement “because the court has not been provided with any proven
or admitted facts upon which to exercise even a modest degree of independent judgment.”
SEC v. Daifotis, 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011).
In this enforcement action alleging violations of the securities laws based upon
defendants management of the Schwab YieldPlus Fund, defendants moved for reconsideration of
their motions to dismiss and strike the complaint against them in light of the Supreme Court’s
decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011). In
Janus, the Supreme Court held that for purposes of Rule 10b-5’s prohibition making it “unlawful
for any person, directly or indirectly, . . . [t]o make any untrue statement of a material fact” in
connection with the purchase or sale of securities, the “maker” of a statement “is the person or
entity with ultimate authority over the statement, including its content and whether and how to
communicate it.” 2011 WL 3295139 at *1 (quoting Janus, 131 S. Ct. at 2302).
Defendant Daifotis argued that Janus should also apply to claims brought under Section
17(a). The court rejected this argument, noting that because the specific language of Rule 10b-5
the Supreme Court was interpreting—specifically, the word “make”—is absent from the
language of Section 17(a), Janus’ holding does not apply to the SEC’s Section 17(a) claim. The
court also noted that because Janus’ interpretation of the word “make” followed the Supreme
court’s prior decisions limiting the scope of the implied private right of action and Section 17(a)
does not contain an implied private right of action, Janus’ rationale should not apply to a Section
17(a) claim.
SEC v. Mercury Interactive, LLC, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011).
The court had previously denied defendant Susan Skaer’s motion to dismiss the SEC’s
claims that she violated Sections 10(b) and 14(a) of the Securities Exchange Act and Section
17(a) of the Securities Act. Skaer moved for reconsideration of that decision based upon the
Supreme Court’s decision in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct.
2296, 180 L.Ed.2d 166 (2011). Skaer argued that Janus should be extended to claims brought
pursuant to Section 17(a) of the Securities Act even though the Janus decision did not address a
claim under Section 17(a) of the Securities Act. Rather, Janus addressed what it means to
“make” a statement for purposes of Rule 10b-5(b), which provides that it is unlawful to “make
any untrue statement of a material fact . . . in connection with the purchase or sale of any
security.” The court stated that Section 17(a) does not require that the defendant “make” a
statement to be liable, and thus, the court agreed with those decisions that have concluded that
Janus does not extend to claims brought pursuant to Section 17(a) because Section 17(a) does
not contain the very language that Janus construed.
B.3
B.3
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B.3
SEC v. Woodruff, 778 F. Supp. 2d 1073 (D. Colo. March 31, 2011).
In this action against former employees of Qwest Communications International, the SEC
alleged that the defendants engaged in various schemes to conceal the “true nature and source”
of Qwest’s revenue between 1999 and 2002. The court granted in part and denied in part the
defendants’ summary judgment motions. The issues on which the court granted the defendants’
summary judgment motions centered on whether certain defendants, members of Qwest’s
financial reporting department, “caused” the company to make misleading statements. The court
concluded that where the defendant did not himself sign or otherwise issue any of Qwest’s public
statements and the defendant was simply “familiar with the contents” of the public statements,
this evidence was insufficient to demonstrate that the defendant either “caused” Qwest to issue
misleading statements or that he aided and abetted another person in issuing such statements.
Additionally, the court concluded that because the SEC did not provide any specific
evidence regarding the defendants’ involvement in the “review” of the earnings releases or
preparation of materials for investor conference calls, the defendants did not “cause” or provide
“substantial assistance” to another’s issuance of misleading statements. The court stated that the
mere fact that certain defendants commented, in unknown ways, about conference call scripts
and press releases reveals nothing about whether the defendants’ comments concerned Qwest’s
alleged failure to disclose material facts about its revenues. The court also concluded that where
defendants were involved in drafting a 10-K statement that did not contain an allegedly
misleading statement or omission, but were subsequently directed by a superior to make edits to
the statement that allegedly rendered the statement materially misleading (and it is undisputed
that the defendants lacked the authority to disregard those directives), the defendant did not
“cause” the allegedly misleading statement to be made. Rather, the court concluded that the
defendants discharged their duties by supplying the CFO with a draft 10-K that was not
materially misleading and made appropriate disclosures and that their subsequent, ministerial
involvement in the CFO’s decision to remove certain disclosure language was not a meaningful
“cause” of Qwest ultimately making an allegedly misleading statement.
SEC v. Monterosso, 768 F. Supp. 2d 1244 (S.D. Fla. 2011).
In this action alleging that former executives of wholesale telecommunications
companies violated Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act,
among other violations, both parties moved for summary judgment. The court concluded that the
overstatements of revenue were so obviously important to an investor that there were no genuine
issues of fact concerning the issue of materiality, especially in light of the staggering magnitude
of the overstatement and the subsequent restatements. The court also noted that the movement
(or lack thereof) of a company’s stock price is not dispositive of whether a given statement is
material, but rather, is simply a factor that might be relevant to materiality. The court further
concluded that the defendants were primarily liable for violations of Section 10(b) of the
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Exchange Act and Section 17(a) of the Securities Act because there was an abundance of
evidence that the defendants intentionally made deceptive contributions to the fraudulent
scheme, despite the fact that the defendants did not actually prepare the financial statements or
help to prepare the SEC filings. Alternatively, the court concluded that the defendants would be
liable under an aiding and abetting theory of liability because their role in providing fake
invoices in support of overstated revenue was integral to the fraudulent scheme.
SEC v. Betta, Jr., 2011 WL 4369012 (S.D. Fla. Sept. 19, 2011).
The SEC moved for summary judgment against defendant Gagliardi on its claims that he
violated Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act. Gagliardi
was a registered representative with Brookstreet Securities Corp. (“Brookstreet”), a broker-dealer
and investment adviser that collapsed in June of 2007. The SEC alleged that Gagliardi
recommended and sold collateralized mortgage obligations (“CMOs”) to customers even though
he knew, or should have known, that the highly risky CMOs were unsuitable for these customers
and he failed to disclose these risks. The court concluded that viewing the undisputed facts in a
light most favorable to Gagliardi, there were genuine issues of material fact regarding whether
Gagliardi acted with scienter and therefore, summary judgment was not appropriate.
The SEC argued that Gagliardi’s failure to understand and adequately investigate the
Program CMOs was an extreme departure from the standards of ordinary care to which brokers
are held and that Gagliardi’s deviation from these standards of care presented such a clear danger
of misleading his customers that he must have been aware of it. Gagliardi told his customers that
CMOs were appropriate for retirees and that they were well-suited for the conservative segment
of their investment portfolio because they were so safe. According to Gagliardi, he believed all
of these representations because it was his understanding that the SEC and FINRA had “vetted
and reviewed” Brookstreet’s CMO Program in the past and took no action. The court concluded
that there were plausible opposing inferences that could be made from the evidence that did not
lead to the conclusion, as a matter of law, that Gagliardi either knew or it was so obvious that he
must have known that the Program CMOs were too risky and complex for certain investors. In
light of the evidence presented regarding Brookstreet’s forms, training and approach to selling
Program CMOs, the court concluded that as a matter of law, that it was not an extreme departure
from the standard of ordinary care for Gagliardi to recommend CMOs as he had been trained.
Additionally, Gagliardi submitted evidence that suggests that the risks associated with CMOs at
the time was not so clearly established. Thus, the court denied the SEC’s motion for summary
judgment on their Section 10(b) and Section 17(a)(1) claims.
B.3
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C. Liabilities under the Securities Exchange Act of 1934
1. Section 10(b) and Rule 10b-5
a. Churning
C.1.a
Goldenson v. Steffens, 802 F. Supp. 2d 240 (D. Me. Aug. 4, 2011).
The court denied defendants’ motion to dismiss except for count ten. Plaintiffs’ alleged
that defendants never revealed that plaintiffs’ investments in two hedge funds had been funneled
through a “feeder fund” for Madoff Securities instead being told that the funds employed a
unique proprietary investment strategy. Plaintiffs further alleged that defendants did not reveal
that the loses that occurred in the hedge funds went beyond the funds direct investments and
included loses sustained by other funds. The court held that the plaintiffs properly pleaded the
elements of a Section 10(b) and Rule 10b-5 claim to withstand a motion to dismiss. The court
found that plaintiffs’ common and derivative law claims also were properly pleaded to survive a
motion to dismiss.
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).
C.1.a
The court granted defendants’ motion to dismiss. Plaintiff alleged that his investment
advisor, Alfred Allos (“Mr. Allos”), made hundreds of unauthorized trades in his account that
resulted in Mr. Allos receiving thousands of dollars in commissions and losses to the plaintiff.
Plaintiff further alleged that Mr. Allos changed his stated investment objectives to “trading
profits” and “speculation” despite informing defendants that his investment objectives were
“conservative capital preservation” and not “high risk or speculation.” The court held that the
plaintiff’s claim was barred under Section 10(b) of the Securities Exchange Act of 1934 by the
relevant two year statute of limitations argument. The court found that plaintiff failed to
properly state a Section 20(a) control liability claim and declined to exercise supplemental
jurisdiction over the Plaintiff’s state law claims.
Pipino v. Onuska, 2011 WL 1630134 (N.D. Ohio Apr. 29, 2011).
C.1.a
The court granted plaintiffs’ motion to remand their complaint to state court. First, the
defendants removed the action to federal court theorizing that the defendants had indirectly
invoked the protections of the federal securities laws to support their churning claim (as well as
their unsuitability claim). The plaintiffs alleged that despite their conservative risk tolerance,
defendants recommended unsuitable, risky investments and charged them excessive and
unreasonable fees. The court held that the plaintiffs’ complaint should be remanded to state
court because it did not contain a federal claim or give any other basis for federal jurisdiction.
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The court also found that if Ohio state law recognized churning and unsuitability as common-law
claims, then the state court has jurisdiction to either dismiss or hear the action.
Self v. Chase Bank, N.A., 2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).
C.1.a
The court granted defendant’s motion to dismiss. Plaintiffs alleged that defendants
committed fraud by excessively trading their accounts by entering sell and buy orders in a
“manner disproportionate to the size, character, and objectives of the instructions of Plaintiff[s],
bought and sold securities from one to another without any investment justification other than to
generate brokerage commissions…” Plaintiffs’ claimed that the purchases made in their
accounts were not suitable for their investment objectives, financial situation and needs.
Plaintiffs’ complaint, however, did not specify what their objectives and needs were. The court
held that plaintiffs could not sustain a private right of action under 10(b) because the lines of
credit that plaintiffs obtained from defendants did not constitute a security. The court noted
plaintiffs’ complaints were factually and legally frivolous and warranted sanctions, however,
defendant failed to submit declarations calculating reasonable attorney’s fees and costs.
b. Suitability
In re Bear Stearns Companies, Inc. Sec., Derivative, and ERISA Lit., 763 F. Supp. 2d. 423
(S.D.N.Y. 2011).
C.1.b
The court denied defendants’ motion to dismiss plaintiffs’ securities complaint, but
granted defendants’ motion to dismiss the derivative and ERISA complaints. Plaintiffs’ ERISA
complaint alleged that Bear Stearns and the ESOP Committee failed to take substantial
precautions to protect the plan participants from sustaining losses in their retirement savings plan
by failing to divest the plan of Bear Stearns stock when they knew or should have known that it
was not a suitable and appropriate investment plan. The court held that Bear Stearns was not a
fiduciary of the plan, solely based on their ability to make contributions to the plan. The court
reasoned that the plan agreement did not give any authority to Bear Stearns or the ESOP
Committee members to diversify or divest plan assets.
Owens v. Gaffken & Barringer Fund, LLC, 2011 WL 1795310 (S.D.N.Y. May 5, 2011).
C.1.b
The court granted defendants’ motion for summary judgment as to plaintiff’s claims
against Bridgeville Mangement, G & B and Barringer Capital and denied the motion pertaining
to the remainder of the defendants. Plaintiff alleged that he relied entirely on defendants’ oral
representations pertaining to an investment fund. Plaintiff alleged that defendants’
misrepresented the risks involved with his investment and never provided him with offering
materials that contained the appropriate risk disclosures of that fund. The court held that a
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easonable juror could conclude that plaintiff reasonably relied on defendants’ oral
representations that the fund was a “conservative investment vehicle that functioned like a
money market fund.”
Pipino v. Onuska, 2011 WL 1630134 (N.D. Ohio Apr. 29, 2011).
C.1.b
The court granted plaintiffs’ motion to remand their complaint to state court. First, the
defendants removed the action to federal court on the grounds that the defendants had indirectly
invoked the protections of the federal securities laws to support their churning claim (as well as
their unsuitability claim). The plaintiffs alleged that despite their conservative risk tolerance,
defendants recommended unsuitable, risky investments and charged them excessive and
unreasonable fees. The court held that the plaintiffs’ complaint should be remanded to state
court because it did not contain a federal claim or give any other basis for federal jurisdiction.
The court also found that if Ohio state law recognized churning and unsuitability as common-law
claims, then the state court has jurisdiction to either dismiss or hear the action.
La. Pac. Corp. v. Money Mkt. 1 Inst. Inv. Dealer, 2011 WL 1152568 (N.D. Cal. Mar. 28, 2011).
C.1.b
The court denied defendant, Money Market 1 Institutional’s (“MM1”) motion to dismiss,
stating that plaintiffs properly set forth a suitability claim under 10(b). The plaintiffs alleged the
Auction Rate Securities (“ARS”) that they purchased pursuant to MM1’s recommendation were
unsuitable. The plaintiff’s further accused MM1 of failing to disclose that the complicated
structured investments fell outside the scope of investment guidelines. The court found that
MM1 failed to sustain its burden to demonstrate that the complaint failed to state a claim upon
which relief could be granted under Federal Rule of Civil Procedure 12(b)(6). The court also
held that to the extent which the plaintiff was a sophisticated institutional investor and
responsible for understanding the risks associated with the ARS investment, were questions of
fact and not appropriate for resolution at the procedural stage.
C.1.b
Keybank N.A. v. Bingo, Coast Guard Official No. 1121913, No. C09-849RSM, 2011 WL
1559829 (W.D. Wash. Apr. 22, 2010).
The court granted plaintiffs’ motion to dismiss defendants’ counterclaims with leave to
amend regarding the suitability, breach of fiduciary duty, breach of contract and securities law
violation claims. Defendants’ counterclaim alleged that KeyBank failed to comply with the
suitability rule set forth in RCW 21.20.702, by failing to recommend conservative investments.
The court held that defendants could not sustain a suitability claim under Washington law as
defendants’ failed to prove that KeyBank acted as a broker within the meaning of Ives v.
Ramsden, 142 Wash.App. 391 (Wash.App.2008). The court found that the suitability portion of
Defendants’ counterclaim failed as a common law duty of care claim.
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C.1.b
SEC v. Betta, 2011 WL 4369012 (S.D. Fla. Sep. 19, 2011).
The court denied plaintiff’s motion for summary judgment. Plaintiff alleged that
Gagliardi and nine other defendant representatives materially misrepresented the risks and
characteristics involved with collateralized mortgage debt obligations (“CMOs”). Plaintiff filed
a motion for summary judgment and claimed there was no genuine issue of material fact as to
whether Gagliardi either knew, or should have known, that CMOs were inappropriately risky and
complex for investors who had preservation of capital as their main objective. The court held
that, as a matter of law, the SEC offered insufficient evidence to meet the summary judgment
standard. The court found that Gagliardi presented evidence (from the NASD) that suggested the
risks associated with CMOs were not clearly established.
Guenther v. B.C. Ziegler and Company, FINRA Case No. 10-00558, Jan. 13, 2011.
C.1.b
Claimants asserted lack of suitability and violation of Rule 10b-5. Claimants requested
compensatory damages in the amount of $250,000 and $20,000 in other costs. The panel denied
and dismissed with prejudice all of claimants’ claims. The panel ruled that claimants’ financial
advisor did not make unsuitable recommendations of securities transactions to claimant. The
panel also found that claimant failed to prove any monetary damages that occurred as a result of
claimant’s financial advisor’s conduct.
Wynns v. Citigroup Global Markets, Inc., FINRA Case No. 10-00278 Sep. 14, 2011.
C.1.b
Claimants brought an action against respondents alleging, amongst other allegations,
violations of Rule 10b-5 and unsuitability. Claimants requested relief in the form of $241,000
worth of compensatory damages and $125,000 worth of punitive damages. The panel found
respondents jointly and severally liable to claimants for the sum of $92,400 in compensatory
damages, $45,045 in interest and $35,000 in attorneys’ fees. Despite this ruling, the panel
reasoned that any allegations or proofs regarding the failure of respondents to monitor the
investment options in the Universal Variable Life Insurance Policy were clearly erroneous. The
panel further ruled that the claimants’ FA was not involved in the alleged investment-related
sales practice violation, forgery, theft, misappropriation, or conversion of funds.
C.1.b
Prud’homme v. Merrill Lynch, Pierce, Fenner, & Smith Inc., FINRA Case No. 09-05271 Sep.
19, 2011.
Claimants asserted the following causes of action, amongst others; violation of 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 and violation of FINRA Rule 2310.
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Claimants requested compensatory damages in the amount of $58,000 at the close of the hearing
and that the present value of the hedge fund be returned to them. The panel found respondent
not liable and denied claimants’ claim in its entirety. The panel also held that claimants’
allegation that their financial advisor intentionally withheld information about the fund was
clearly erroneous. The panel reasoned that there was no evidence presented to support
claimants’ allegation that their financial advisor withheld information about the fund. Lastly, the
panel found that there was no evidence presented to show that claimants’ financial advisor had
access to information that was different than what was communicated to claimants.
c. Insider Trading
C.1.c
Matrixx Initiative, Inc. v. Siracusano, 131 S.Ct. 1309 (2011).
Respondent shareholders brought a securities fraud class action against Petitioner
pharmaceutical company and three of its executives alleging that Petitioners failed to disclose
reports of a possible link between its cold remedy product and loss of smell, rendering
petitioners’ public statements to the contrary misleading in an effort to maintain high prices for
its securities. The district court granted the motion to dismiss for failure to properly allege
materiality or scienter. The Court of Appeals reversed, holding that the omitted information
would have been significant to a reasonable investor and that omission of reports of loss of smell
gave rise to a strong inference of scienter. The Supreme Court affirmed, holding that
(1) respondents adequately pleaded materiality because reports of loss of smell, although not in
statistically significant numbers, would have been viewed as material by a reasonable investor in
light of petitioner’s statements that its revenues were going to increase and that third party
reports of loss of smell were “completely unfounded and misleading;” and (2) respondents
adequately pleaded scienter because petitioner’s denial of third party reports of loss of smell and
false claims that it had conducted its own studies gave rise to an inference that petitioner did not
disclose the reports of loss of smell because of their likely effect on the market.
d. Misrepresentations/Omissions
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (U.S. 2011).
C.1.d
The sole issue before the Court was whether investors need to show loss causation for
class certification. The Court held they did not. Courts below had required a showing of loss
causation in order to satisfy the requirement that class members “establish that reliance was
capable of resolution on a common, class-wide basis.” The Supreme Court rejected this
requirement as misplaced. Loss causation requires a showing that “a misrepresentation that
affected the integrity of the market also caused a subsequent economic loss.” In sum, “loss
causation has no logical connection to the facts necessary to establish the efficient market
predicate to the fraud-on-market theory.”
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C.1.d
Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309 (U.S. 2011).
Class action against pharmaceutical company and executives, alleging violation of
federal securities laws by failing to disclose material information including adverse event report
and research studies regarding one of the company’s cold remedy products. The Supreme Court
held that lack of statistical significance of adverse event reports did not necessarily preclude
those reports from being material to reasonable investors, investors sufficiently alleged
materiality and scienter under § 10(b) and Rule 10b-5(b). Scienter was adequately pled under
the Private Securities Litigation Reform Act of 1995 (PSLRA). Securities Exchange Act of 1934
§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5(b).
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011).
C.1.d
Shareholders of asset management firm that launched mutual funds filed putative class
action alleging that firm and its wholly-owned investment advisor subsidiary separately
negotiated market timing arrangements with certain traders to permit timing in specific funds.
The U.S. District Court dismissed the action and plaintiffs appealed. The U.S. Court of Appeals
reversed and remanded and certiorari was granted to determine whether liable in a private action
under Rule 10b-5 for false statements included plaintiffs’ prospectuses. In reversing the U.S.
Court of Appeals’ decision, the U.S. Supreme Court held that because false statements included
in mutual fund prospectuses were ‘made’ by investment fund, investment advisor and parent
capital group could not be liable in private action under Securities and Exchange Commission
rule prohibiting employment of manipulative and deceptive devices in connection with purchase
or sale of securities.
Hill and NECA-IBEW Pension Fund, v. Gozani, 638 F.3d 40 (1st Cir. 2011).
C.1.d
Shareholder brought securities fraud action against medical device manufacturer and
officers. The Court of Appeals, held that omission from manufacturer’s press release of opinion
regarding manufacturer’s promotion of use of incorrect and possibly fraudulent insurance billing
code for its device did not make statements in press release misleading. Statements in quarterly
report were not made misleading by omission of facts pertaining to use of inappropriate billing
codes for device. Allegations did not establish “pervasive” insurance reimbursement problems
that manufacturer was required to disclose. Statements in quarterly report were not made
misleading due to omissions. Annual report containing extensive risk disclosures was not
materially misleading. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17
C.F.R. § 240.10b-5.
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C.1.d
Ashland Inc. v. Morgan Stanley & Co., Inc., 652 F.3d 333 (2d Cir. 2011).
Investors in auction rate securities (ARS) sued broker, asserting claims alleging securities
fraud. The Court of Appeals held that investors in auction rate securities backed by guaranteed
student loan obligations could not have reasonably relied upon broker’s alleged
misrepresentations regarding safety and liquidity of investment, including broker’s practice of
stepping in to place sufficient proprietary bids to prevent auction failure, as required to establish
§ 10(b) claim, despite their longstanding relationship with financial advisor employed by broker,
their repeated inquiries regarding investment’s liquidity, and fact that auction information was
not publicly available, where broker’s publicly-filed statement mandated by Securities and
Exchange Commission (SEC) explicitly disclosed very liquidity risks about which investors,
who admittedly were sophisticated investors, claimed to have been misled. Securities Exchange
Act of 1934 § 10(b), 15 U.S.C.A § 78j(b).
Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011).
C.1.d
Shareholders brought putative class action against bank holding company and its
subsidiaries alleging claims of violations of the Securities Act in connection with hybrid
securities offering as a result of allegedly negligently false and misleading statements concerning
goodwill and loan loss reserves. The court found that plaintiff failed to sufficiently plead an
actionable securities fraud claim with respect to statements about goodwill and loan reserves.
The court determined that such statements are inherently subjective and will vary depending on a
variety of predictable and unpredictable circumstances. For plaintiff to have proven actionable
fraud, he must allege that defendant’s opinions were both false and not honestly believed when
made. Since the complaint did not plausibly allege subjective falsity, the complaint fails to state
a valid claim.
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).
C.1.d
Investors brought putative class action against an asset management company and
officers alleging violations of the Securities Act relating to a registration statement and
prospectus in connection with an initial public offering. The United States District Court for the
Southern District of New York dismissed the case. The Court of Appeals vacated the dismissal
and remanded the case. Plaintiffs were seeking remedies under §11, 12(a)(2) and 15 of the
Securities Act of 1933 for alleged material omissions from and misstatements in Blackstone’s
Registration and Prospectus. They found the district court erred in dismissing the case because
plaintiffs plausibly alleged that Blackstone omitted from its Registration Statement and
prospectus material information related to its investments in FGIC and Freescale that Blackstone
was required to disclose under item 303 of Regulation S-K. Moreover, plaintiffs plausibly
alleged that Blackstone both omitted material information that it was required to disclose under
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Item 303 and made material misstatements in its offering documents related to its real estate
investments.
In re DVI, Inc. Securities Litigation, 639 F.3d 623 (3d Cir. 2011).
C.1.d
Investors’ class action certification was appealed. Court of appeals affirmed investors’
reliance on fraud on the market theory, except as to defendant law firm whose conduct was not
publicly disclosed and it owed no duty of disclosure to the investors. The court rejected
argument of defendant accounting firm that investor must show loss causation at class
certification stage.
Katyle v. Penn National Gaming, Inc., 637 F.3d 462 (4th Cir. 2011).
C.1.d
Shareholders brought a securities fraud class action. The Court of Appeals held that
purportedly corrective disclosures of delays in states’ regulatory approval process for proposed
buy-out/merger agreement and purportedly corrective disclosures in analysts’ reports were
insufficient to show loss causation. The corporation’s failure to issue press release announcing
state regulatory approval of proposed buy-out/merger did not constitute corrective disclosures
sufficient to show loss causation. Allegations of purportedly corrective disclosures of delays in
states’ regulatory approval process for proposed buyout/merger agreement were insufficient to
show loss causation with sufficient specificity required by Private Securities Litigation Reform
Act (PSLRA). Securities Exchange Act of 1934, § 10(b), 21D(b)(1,2), 15 U.S.C.A. § 78j(b),
78u-4(b)(1,2); 17 C.F.R. § 240.10B-5; Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.
Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461 (6th Cir. 2011).
C.1.d
Action alleging securities fraud claims against broker of auction rate securities (ARS).
The Court of Appeals held that Investor’s allegations failed to give rise to strong inference that
broker acted with scienter when recommending that investor buy ARS, as required to state
§ 10(b) securities fraud claim in connection with meltdown of ARS market. Investor failed to
allege common-law fraud claim with sufficient particularity. Broker’s alleged misstatement to
investor that auction rate securities (ARS) were safe and secure was too vague to qualify as
material misrepresentation. Broker’s description of ARS as safe and secure was a soft
description that escaped objective verification. Securities Exchange Act of 1934 § 10(b), 15
U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.
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C.1.d
AnchorBank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).
Plaintiffs sued Hofer, an employee of AnchorBank, for engaging in a collusive trading
scheme in violation of sections 9(b) and 10(b) of the Securities Exchange Act of 1934. Hofer
moved to dismiss under Fed. R. Civ. P. 8(a), 9(b), and 12(b)(6), and the Private Securities
Litigation Reform Act (“PSLRA”). The district court granted Hofer’s motion and plaintiffs
appealed. The Seventh Circuit reversed the district court and held that plaintiffs stated a claim
under sections 9(a) and 10(b) of the Exchange Act. To show a violation of section 9(a) of the
Exchange Act, plaintiffs had to plead and prove (1) a series of transactions in a security created
actual or apparent trading in that security or raised or depressed the market price of that security;
(2) the transactions were carried out with scienter; (3) the purpose of the transactions was to
induce the security’s sale or purchase by others; (4) the plaintiffs relied on the transactions; and
(5) the transactions affected the plaintiff’s purchase or selling price. Plaintiffs’ second amended
complaint alleged that Hofer and two other employees coordinated purchases and sales of units
of the AnchorBank Unitized Fund (“the Fund”) in order to artificially inflate or deflate the unit
price. As an AnchorBank employee, Hofer was permitted to invest in the Fund. He also knew
that the Fund was required to maintain a specific ratio of cash to equities and was required to buy
and sell AnchorBank stock on the open market at specific times and in specific amounts to
maintain the required ratio. Hofer’s coordinated trading activity allowed him to impact the price
of fund units to his benefit and the Fund’s detriment. The court found that the inference of
scienter was strong in comparison to Hofer’s contention that he was simply buying low and
selling high. The court also rejected Hofer’s argument that plaintiffs did not plead loss
causation, finding that Hofer’s activities caused the Fund’s unit price to decline, even though
some of the decline might eventually be attributed to the general economic downturn.
McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011).
C.1.d
Spouse of stock owner filed action against corporation alleging misrepresentations in
connection with her receipt and sale of stock. The district court dismissed the action on the
ground that it was time-barred. Plaintiff appealed alleging that the period in which a private suit
for a federal securities violation begins is on the date of injury, rather than the date the fraud first
occurs. The Supreme Court has thus far declined to answer the question. The Court of Appeals,
in affirming the dismissal, held that: 1) wife’s surrender of demand for other concessions in
divorce decree, such as longer period of alimony, which enabled her to “hold” stock until
husband, as owner of that stock, decided to sell, constituted purchase of stock; and 2) five year
deadline for action involving securities claim of “fraud, deceit, manipulation, or contrivance”
was statute of repose, than statute of limitation, that ran from date of fraud rather than date of the
injury.
65

Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011).
C.1.d
Investors brought putative class action against a biotechnology company and its
individual officers and directors alleging securities fraud. The district court certified the class
and defendants appealed. The district court based certification on the “fraud on the market
presumption” which requires a showing that the market was efficient and whether the purported
falsehoods were public. Defendants’ claim that alleged misrepresentations were immaterial, did
not sway court as it determined that materiality is a trial issue, not one for certification.
Furthermore, defendants would have to assert a defense to the fraud on the market presumption
at trial. The court, in upholding certification, held that proof of materiality is not necessary to
ensure that the question of reliance is common among all prospective class members’ securities
fraud claims. Plaintiffs need only allege materiality with sufficient plausibility to withstand a
12(b)(6) motion.
Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681 (9th Cir. 2011).
C.1.d
Shareholder brought punitive class action for securities fraud against oil company and
related defendants. The Court of Appeals held that royalty trust’s periodic filing with Securities
and Exchange Commission (SEC) of its contract with oil company, in compliance with its legal
obligations, would not be viewed by reasonable investor as certifying company’s ongoing
compliance with agreement’s “prudent operator standard” provision, and therefore company’s
alleged subsequent breach of prudent operator standard did not provide actionable
misrepresentation supporting private securities fraud claim. Securities Exchange Act of 1934 §
10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).
C.1.d
Plaintiff invested in defendant alternative fuels start-up company. Plaintiff sued, seeking,
inter alia, rescission of the transaction. The Court of Appeals held that true rescission was not
available but that the district court had discretion to consider a rescissionary measure of
damages, i.e., “any rescissionary damage award should be offset by the value of the stock as well
as any other benefits incurred after the transaction.” Nevertheless, the rescissionary approach
still requires plaintiff to show loss causation, that the alleged conduct caused the loss.
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011).
C.1.d
Defendant executives solicited plaintiff to invest in company at a time while the company
founders engaged in undisclosed sale of personally owned shares in the company which was
66

experiencing large operating losses. Plaintiff had an agreement with defendants that the
company would disclose such founder sales to it. Defendants argued that this right to disclosure
could be waived by a vote of 60% of company shareholders and notice of this vote could in turn
be waived. Thus, plaintiff had no notice of the “fact that the right to notice itself was cancelled.”
Plaintiff argued that the parties’ agreement required that any waiver required a vote of investors
“voting together.” The court of appeals held this to be the “far more natural interpretation,” but
that in any event it was a fact question not subject to a motion to dismiss. As to the securities
claims, defendants argued that theirs was a plausible reading of the agreement and thus they did
not have the requisite scienter under the federal securities laws. The court of appeals rejected
defendants’ argument because the more plausible reading was that waiver could occur only after
all investors have had an opportunity to vote.
Findwhat Investor Group v. Findwhat.com, 658 F.3d 1282 (11th Cir. 2011).
C.1.d
Investors appealed district court dismissal of securities class action. Investors alleged
that defendant engaged in “click fraud”, i.e., the “practice of clicking on an Internet
advertisement for the sole purpose of forcing the advertiser to pay for the click.” This would
increase the defendant’s short term revenue but the practice was coming under increased
regulatory scrutiny. The company announced that, inter alia, it was taking measures to minimize
the effects of fraudulent clicks. Subsequent company announcements disclosed that click fraud
had been responsible for some of the company’s revenues and the company’s stock price
dropped 21% in a day. The cautionary language in the company’s prior disclosures was
actionable because it contained only general warnings about risks and nothing specific about
click fraud that had occurred.
Ledford v. Peeples, 657 F.3d 1222 (11th Cir. 2011).
C.1.d
Member of a limited liability company and its owners brought action against party which
financed the buyout of member’s interest in LLC alleging violations of federal securities laws.
The district court granted defendant’s motion for summary judgment. The Court of Appeals, en
banc, affirmed holding that the misrepresentation by an individual that had financed active
member buyout of another member’s one-half interest in a limited liability company, when he
falsely stated that he had no role in other member’s decision to buyout, played no causative role
in the other member’s decision to accept the buyout of its interest, and thus did not rise to level
of a fraud actionable under Rule 10b-5. Plaintiffs did not rely on the misrepresentations in
making their decision to accept buyout so they were unable to prove but for causation.
67

C.1.d
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial Corp., 793 F. Supp.
2d 1138 (C.D. Cal. 2011).
Defendants moved to dismiss securities fraud complaint. The district court held that
arguments regarding economic loss, loss causation and reliance were not appropriate at the
dismissal stage. The court nevertheless made the following observations regarding the viability
of investors’ claims. As to economic loss, it is appropriate to net gains and losses and find that
certain investors were not injured. As to loss causation, there will need to be a showing that
defendants’ corrective disclosures caused the drop in value, not macroeconomic events
generally. And as to reliance, it will be necessary for investors to show that they relied on the
alleged misstatements, and not, e.g., on an individual trading strategy.
Hodges v. Akeena Solar, Inc., 274 F.R.D. 259 (N.D. Cal. 2011).
C.1.d
Court certified class action brought under federal securities laws. Numerosity was met
by proof of volume of trading of 14 million shares per week on NASDAQ. The following issues
showed commonality: (1) whether defendants violated federal securities laws (2) whether
defendants omitted or misrepresented material facts during class period (3) whether defendants
acted with requisite state of mind (4) whether market price was inflated and (5) whether market
price fell when misconduct became known to market. Typicality was met by similar losses by
named plaintiffs from similar conduct by defendants. Class representatives were adequate
because of the level of their understanding of the facts and claims and their acceptance of their
responsibilities in prosecuting the class claims. Counsel were found to have sufficient
experience to adequately and vigorously prosecute the case. Plaintiffs also made a prima facie
case of fraud on the market.
Plichta v. Sunpower Corporation, 790 F. Supp. 2d 1012 (N.D. Cal. 2011).
C.1.d
Shareholders filed putative class action against company and its executives alleging that
unsubstantiated accounting entries rendered company’s filings with Security and Exchange
Commission (“SEC”) false and misleading. Defendants moved to dismiss on the grounds that
plaintiff’s claims are inadequate and fail to plead facts giving rise to the requisite strong
inference of scienter. In granting defendants’ motion, the court held that: 1) shareholders failed
to plead scienter; 2) shareholders failed to plead reliance; and 3) shareholders lacked standing to
bring claims under Securities Act.
68

C.1.d
Resnik v. Woertz, 744 F. Supp. 2d 614 (D. Del. 2011).
Shareholder alleged that misrepresentations in a company’s proxy statement deprived
him of his right to a fully informed stockholder vote. The court rejected his claim for injunctive
relief under Section 14(a) of the Securities Exchange Act. The court held that corrective
disclosure and holding another stockholder vote was an injury “insufficient to meet the loss
causation requirement.” Shareholder was successful, however, in avoiding dismissal of his
claims for unjust enrichment and corporate waste based on the high executive salaries received
from the company as a result of the proxy vote.
Vandevelde v. China Natural Gas, Inc., 277 F.R.D. 126 (D. Del. 2011).
C.1.d
Investor filed class action lawsuit alleging securities fraud by Chinese natural gas
corporation and corporate officers in violation of §§10(b) and 20(a) of Securities Exchange Act
and Rule 10b-5. More specifically, plaintiffs alleged that defendant failed to disclose material
facts regarding its financial well-being which, in turn led plaintiffs to purchase its common stock
to their detriment. A notice of the class action was published and two investors filed competing
motions seeking appointment as lead plaintiff and seeking approval of each of their selections for
lead counsel. The court in denying one motion and granting another, held: 1) investor who
suffered largest financial loss was presumptive lead plaintiff; 2) investor satisfied typicality
requirement; 3) investor satisfied adequacy requirement; 4) investor’s communications with
corporation did not create unique defense to his lead plaintiff status; and 5) investor’s electronic
message board postings did not render him inadequate to represent the class.
SEC v. Monterosso, 768 F. Supp.2d 1244 (S.D. Fla. 2011).
C.1.d
Security and Exchange Commission (“SEC”) instituted fraud proceedings against
executives of wholesale telecommunications companies for generating fictitious revenue. Both
parties moved for summary judgment. Plaintiff alleged that: 1) Defendants were liable for
violations of the anti-fraud provisions based on their conduct of making false statements and
participation in a fraudulent scheme; 2) defendants acted with knowledge or at least recklessly in
manufacturing and submitting invoices for business that never occurred; 3) overstatements of
revenue were material; 4) defendants aided GlobeTel’s reporting and book violations; and 5)
defendants falsified records and misled GlobeTel’s auditors in violation of Rules 13b2-1 and
13b2-2. Defendants moved for summary judgment on the SEC’s claims on the basis that any
misstatements of revenue were immaterial. The court, in denying defendants’ motion and
granting plaintiff’s motion, held that: 1) company’s misstatements were made in connection
with purchase or sale of securities within meaning of antifraud provisions of federal securities
laws; 2) overstatements of $108 million of revenue in annual reports, registration statements, and
press releases were material; 3) overstatements of revenue were made with scienter; 4) court was
69

permitted to draw adverse inference against owner of company, for purposes of establishing
scienter, based on his invocation of Fifth Amendment privilege at deposition; 5) Chief Operating
Officer (“COO”) was liable as a primary violator since he had caused the misstatements to be
made and knew the statements were calculated to reach investors; and 6) COO was liable for
aiding and abetting company with filing of false reports to SEC.
Patel v. Patel, 761 F. Supp. 2d 1375 (N.D. Ga. 2011).
C.1.d
Investors brought action alleging that bank’s officers and directors concealed bank’s true
financial condition and business operations, in violation of the Securities Exchange Act.
Defendants moved to dismiss for failure to sufficiently allege scienter, loss causation, and
materiality. The court granted defendants’ motion to dismiss, holding that the defendants alleged
motive to maintain a dividend stream is insufficient to show scienter as it is analogous to the
desire to sustain a company’s stock price, and that alleged “excessively risky” lending practices
were also insufficient to show scienter. The court also held the investors failed to allege loss
causation because the allegation that the FDIC was taking over the defendant bank, resulting in
loss in value of stock, did not necessarily establish the alleged misrepresentations and omissions
caused the investors’ loss.
SEC v. Morgan Keegan & Co., Inc., 806 F. Supp. 2d 1253 (N.D. Ga. 2011).
C.1.d
The Securities and Exchange Commission brought an enforcement action alleging that
the defendant investment firm misled investors concerning risks associated with auction rate
securities (ARS) in violation of § 10(b) of Rule 10b-5. Investment firm moved for summary
judgment, asserting that it prepared several written disclosures for its customers warning of the
risks associated with auction rates securities. The SEC contended the written disclosures were
rendered ineffective and inadequate because brokers did not adequately direct its customers to
them and that its brokers made oral misrepresentations. The court granted the investment firm’s
motion for summary judgment, holding that four alleged statements made to investors by the
investment’ firms brokers were insufficient, by themselves, to alter the total mix of information
made available to the public and customers regarding the liquidity risks of auction rate securities
products.
SEC v Mannion, 789 F. Supp. 2d 1321 (N.D. Ga. 2011).
C.1.d
SEC brought civil enforcement action against principals of master and feeder hedge funds
and advisors alleging misrepresentations of net asset values, misuse of fund assets and fraud on
private equity. Under the SEA, to plead securities fraud, a party must allege 1) material
representations or material misleading omissions, 2) in connection with the purchase or sale of a
security, and 3) made with scienter. Materiality is sufficiently plead when shown that the
70

substantial likelihood that disclosure of omitted fact would have been viewed by a reasonable
investor as having significantly altered total mix of information available. Here, the crux of the
complaint arose from defendant’s representations about the value of the Fund’s World Health
investments in the aftermath of the revelations of misconduct and fraud by top executives of
World Health. The Fund loaned millions of dollars to World Health and the principals inflated
the value of World Health to investors and potential new investors. The court found that the
SEC satisfied the “in connection with” requirement for securities fraud and that the
misrepresentations to the new investor constituted sufficient allegations. The SEC sufficiently
pled fraud and scienter with respect to the allegations against the investors but not against the
Fund itself.
SEC v. Morgan Keegan & Company, Inc., 806 F. Supp. 2d 1253 (N.D. Ga. 2011).
C.1.d
Securities and Exchange Commission (SEC) brought enforcement action against
investment firm, alleging that firm misled investors concerning risks associated with auction rate
securities (ARS). The court held that firm adequately distributed its written disclosures
concerning risks associated with ARS, and alleged misrepresentations made by four of firm’s
brokers were insufficient to establish that firm, as a whole, misrepresented risks of ARS.
Investment firm adequately distributed to its customers its written disclosures concerning risks
associated with ARS. Firm prepared ARS manual that tracked best practices for securities
industry as a whole and distributed manual to each of its ARS customers and posted it on its
website, and after each ARS purchase, firm sent trade confirmations to purchasers directing them
to its website for information regarding ARS procedures. Securities Exchange Act of 1934 §
10(b), 15 U.S.C.A § 78j(b).
C.1.d
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys
Healthcare, 778 F. Supp. 2d 858 (N.D. Ill. 2011).
Investors brought a putative class action case against the corporation, its chief financial
officer and its chief executive officer alleging violations of the Securities Exchange Act
involving statements made by the individuals regarding the implementation and success of a new
computer software version for healthcare organizations. In determining whether the statements
made were actionable, the court reviewed the statements to determine their context and whether
or not they were materially relied upon. The court found that the CEO’s statements about the
corporation’s ability to deliver solid results were not material and thus not actionable. Likewise,
the court determined that the corporation revenue projections were protected under the Private
Securities Litigation Reform Act’s safe harbor provision as forward looking statements. The
court further held that the corporation made sufficient, meaningful cautionary statements to point
to the principal contingencies that could cause actual results to depart from projections. The
cautionary language must be substantive and tailored to the specific predictions made in the
allegedly misleading statement. Lastly, the court found the CEO’s statements concerning the
corporations work on implementation to be misleading and actionable.
71

C.1.d
Akamai Tech., Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).
Plaintiff sued defendant as a control person under section 20(a) of the Securities
Exchange Act of 1934, based on the alleged fraudulent conduct of defendant’s wholly owned
subsidiary, Deutsch Bank Securities (“DBS”), which was Plaintiff’s securities broker and
investment advisor. Plaintiff alleged that it had a discretionary account with DBS and instructed
DBS to purchase only safe, liquid securities. DBS, however, purchased auction rate securities
(“ARS”), which it represented to plaintiff were highly liquid and safe investments. DBS
allegedly failed to inform plaintiff that demand for ARS had been declining, that auctions were
being supported by financial institutions, and that DBS was reducing its own exposure to ARS at
the same time it continued to increase plaintiff’s ARS holdings. Plaintiff filed suit after the ARS
market collapsed in February 2008 and defendant moved to dismiss under Fed. R. Civ. P.
12(b)(6) and section 9(a) of the Private Securities Litigation Reform Act (“PSLRA’). The
district court held that plaintiff’s stated a claim for control-person liability. To state a claim for
control-person liability under section 20(a), plaintiff had to plead (1) an underlying violation of
the securities laws, and (2) that the defendant controlled the primary violator with culpable
participation. The district court found that plaintiff adequately pleaded material omissions by
DBS in failing to disclose facts about the ARS market despite owing plaintiff a fiduciary duty
based on plaintiff’s discretionary account and DBS’s status as an investment advisor. The court
also found that plaintiff merely needed to meet the pleading standard of Fed. R. Civ. P. 9(b), and
did not have to satisfy the PSLRA’s standard for pleading scienter, because PSLRA’s standard
only applied where the plaintiff’s recovery depended on the defendant acting with a particular
state of mind. Plaintiff further pleaded reliance in that it relied on DBS to purchase securities
consistent with its instruction to purchase only safe and liquid securities. Finally, plaintiff
pleaded loss causation because it would not have owned ARS but for DBS’s misconduct. The
court concluded that defendant’s control over DBS presented a question of fact that could not be
decided at the pleading stage, and denied defendant’s motion to dismiss.
C.1.d
Special Situations Fund III, L.P. v. American Dental Partners, Inc., 775 F. Supp. 2d 227 (D.
Mass. 2011).
Defendant was a company which provided administrative services to dental practices.
Plaintiff claimed the defendant misrepresented its economic performance by failing to disclose
that it was based on wrongful conduct that violated defendant’s agreements with dental practices.
Defendant had stated, inter alia, that there had been no change in how it had conducted its
business with respect to its largest dental client. The court did not find this plausible in light
especially of the pending lawsuit against defendant brought by its largest client. Defendant’s
statement was also held to be at least reckless as to the likelihood of misleading investors.
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C.1.d
In re Evergreen Ultra Short Opportunities Fund Securities Litigation, 275 F.R.D. 382 (D. Mass.
2011).
In a federal securities class action, the court certified a class action holding that (1)
plaintiffs have standing to sue notwithstanding different purchase dates (2) numerosity is
satisfied because the millions of shares traded allowed the court to infer sufficient numbers of
plaintiffs (3) common issues included allegation of the misleading character of the offering
materials and the damages allegedly suffered by plaintiffs (4) the claims are typical of the
alleged same course of conduct and applicable legal theory (5) adequacy of the class
representatives despite different purchase dates and (6) substantial experience of counsel with
similar cases.
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Me. 2011).
C.1.d
Investors brought action against investment firms and investment managers for breach of
fiduciary duty, fraudulent misrepresentation, aiding and abetting tortious conduct, intentional
infliction of emotional distress, civil conspiracy, securities fraud, joint and several liability for
securities fraud, punitive damages, and unjust enrichment. Defendants moved to dismiss on the
grounds that plaintiffs’ claims are legally insufficient. The court held that: 1) investors stated
claim for securities fraud; 2) investors stated claim for joint and several liability under Securities
Exchange Act; 3) investors stated claim for breach of fiduciary duty; 4) investors stated claim for
intentional infliction of emotional distress; 5) investors stated claim for aiding and abetting
tortious conduct; and 6) investors stated claim for constructive trust to be imposed upon
defendants.
Szymborski v. Ormat Technologies, Inc., 776 F. Supp. 2d 1191 (D.C. Nev. 2011).
C.1.d
Shareholders brought securities fraud class action against corporation engaged in the
geothermal and recovered energy power business and against corporation’s officers and directors
alleging that defendants made misleading disclosures about corporation’s accounting methods
and about completion and capacity of their geothermal power plant. The court determined that
the complaint sufficiently included the requisite facts and circumstances to show a prima facie
case of securities fraud including a sufficient showing of scienter. However, the court found that
defendants’ misstatements regarding the completion date and capacity of the power plant were
shielded from securities litigation under the Private Securities Litigation Reform Act safe harbor
for forward looking statements and that there was no scienter alleged. The court granted
defendants’ motion in part and denied it in part.
73

C.1.d
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).
Hedge fund filed suit against international corporations, their executives, and their
subsidiaries, alleging market manipulation scheme to artificially inflate price of stock in
violation of federal and Washington state security laws, and state law claims of common law
fraud, breach of contract, veil piercing, and conspiracy. Defendants moved to dismiss on the
grounds of jurisdictional and substantive objections. In granting defendants’ motions, the court
held: (1) it did not have general jurisdiction over Swiss broker; but 2) Swiss broker had sufficient
minimum contacts with United States for exercise of personal jurisdiction; 3) court did not have
personal jurisdiction over German broker; 4) court did not have personal jurisdiction over
nonresident corporation’s principal shareholder; 5) court had personal jurisdiction over
nonresident corporation’s managing director; 6) hedge fund failed to state claim for market
manipulation since its damages were not caused by reliance on an assumption of an efficient
market; 7) complaint failed to allege facts sufficient to give rise to strong inference of scienter on
part of Swiss corporation or its United States agent; 8) allegations that corporation and its
managing director knew that trading would have impact upon market price were insufficient to
allege scienter; 9) allegations of undercapitalization were insufficient to meet scienter
requirement; 10) complaint sufficiently alleged corporation’s managing director’s manipulative
acts with particularity; 11) sua sponte dismissal of claims against non-appearing defendant was
appropriate; and 12) amendment of complaint would be futile, so dismissal without leave to
amend was appropriate.
C.1.d
In re Bear Stearns Companies, Inc., Securities, Derivative and ERISA Litigation, 763 F. Supp.
2d 423 (S.D.N.Y. 2011).
Investors in bank stocks and former employees who held stock in an ESOP brought class
action against bank, its officers and directors and accounting firm that performed audits to
recover for violations of federal securities laws and ERISA violations. Defendants moved to
dismiss for failure to state a claim. Under the Private Securities Litigation Reform Act, a
securities fraud plaintiff asserting a claim for money damages must 1) specify the statements that
he believes are fraudulent, 2) identify the speaker, 3) state where and when statements were
made, and 4) explain why statements were fraudulent. Securities Exchange Act §10(b) The
district court held that plaintiffs had sufficiently pled allegations of securities fraud with respect
to the bank’s continued use of outdated models to value mortgage backed securities. Plaintiffs
also sufficiently alleged insider trading and control liability against officers and directors of the
bank as well as violations of securities laws against the accounting firm for using improper
auditing standards. The court found that the allegations of securities fraud were material and
were made with the requisite scienter to establish the violations. Plaintiff’s derivative claims and
the ERISA claims were dismissed.
74

In re Merrill Lynch Auction Rate Securities Litigation, 765 F. Supp. 2d 375 (S.D.N.Y. 2011).
C.1.d
Purchasers of auction rate securities (ARS) brought securities fraud class action against
auction dealer. The court held that purchasers failed to state misrepresentation or market
manipulation claim, failed to reasonably rely on dealer’s internal research reports and conclusory
allegations of “fraudulent” or “intentional” misrepresentations and omissions failed to give rise
to “strong” inference of scienter. Auction rate securities (ARS) dealer disclosed its bidding
practices, including its ability to submit support bids or affect the clearing rate for securities to
ensure auction is successful, and that its choice to support auctions was made entirely in its
discretion. Auction rate securities (ARS) dealer disclosed liquidity risks in market to purchasers
of ARS. Securities Exchange Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.
In re Sanofi-Aventis Securities Litigation, 774 F. Supp. 2d 549 (S.D.N.Y. 2011).
C.1.d
Investors brought putative class action against foreign pharmaceutical company over
alleged failure to disclose, inter alia, safety and other data about one of the company’s drugs.
The court held that even if the company arguably had no independent duty to disclose, once the
company chose to speak, it had a duty to do so truthfully and accurately. However, the statement
by a company executive that “You know everything concerning [the drug]” was mere puffery.
Furthermore, the investors cannot base a fraud claim on a disagreement over how to interpret
drug testing results.
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 52 (S.D.N.Y. 2011).
C.1.d
Domestic and foreign shareholders filed class action asserting derivative claims against
foreign global media corporation and officers for securities fraud in violation of § 10(b) and Rule
10b-5 as well as control person liability, under Securities Exchange Act, for selling ordinary
shares, or American depository receipts (ADRs) representing those shares, by allegedly material
misrepresentations and omissions that artificially inflated stock price. The court held that foreign
media corporation’s ordinary shares purchased by foreign shareholders and underlying
corporation’s American depository receipt (ADR) offering with foreign bank, registered with the
Securities and Exchange Commission (SEC), and also listed on the New York Stock Exchange
(NYSE), but not for trading, were not “listed on domestic exchange,” within meaning of
transaction rule providing § 10(b) securities fraud claims reached only transactions in securities
listed on domestic exchanges, and domestic transactions in other securities. Securities Exchange
Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § § 240.10b-5, 240.12d1-1(a).
75

C.1.d
Russo v. Bruce, 777 F. Supp. 2d 505 (S.D.N.Y. 2011).
Shareholder filed putative securities fraud action against gold mining company and its
officers alleging that the company made fraudulent misrepresentations regarding status of, and
the likelihood that it would obtain environmental permit necessary to mine gold in Venezuela.
The defendants moved to dismiss and the court granted the motion. Plaintiffs alleged violations
of §10(b) of the Securities Exchange Act in that defendants, with knowledge of or reckless
disregard for the truth, disseminated or approved during the class period false and misleading
statements. Plaintiffs also contend that defendants violated Section 20 of the Securities
Exchange Act by trading securities while in possession of material, non public information.
Lastly, plaintiffs alleged that the defendants were liable as control persons over the wrongful
conduct of Crystallex. Defendants argued that plaintiffs failed to adequately and specifically
allege falsity and scienter in the complaint. Further, they contended that all of the supposed
misstatements were forward looking and immune from liability under the safe harbor of the
PSLRA, 15 USC 78u-5(c). Additionally, defendants argued there was no causation between the
statements and any damages sustained by plaintiffs. The court held that plaintiffs’ complaint
was devoid of particularized facts and circumstances to adequately and sufficiently plead a fraud
case actionable under the Securities Act. Further, the court found that plaintiffs failed to plead
the requisite scienter and that the reasonable inferences for scienter were not as compelling as
those opposing inferences of executive’s non-fraudulent intent. The court allowed plaintiffs to
file an amended complaint but only if they have a good faith basis to do so.
Sawabeh Information Services, Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).
C.1.d
Sawabeh Information Services Company and its wholly owned subsidiary Edcomm, Inc.
brought an action against former Edcomm officers and shareholders, arising from the sale of all
outstanding shares of Edcomm from defendants to plaintiffs. Plaintiffs allege defendants
committed federal securities fraud as well as common law fraud. Defendants moved to dismiss
on the following grounds: 1) the fraud counts - because defendants made no false
representations; plaintiffs have failed to plead facts giving rise to a strong inference that
defendants acted with scienter; plaintiffs could not have reasonably relied on the alleged
misrepresentations; the alleged misrepresentations caused no losses; and the alleged
misrepresentations occurred after the execution of the Term Sheet; 2) the state securities law
claims – because they are preempted by the Martin Act; 3) the contract claims - because the
Term Sheet was not a binding contract; 4) the fraud counts - to the extent that they arise out of
the same facts as plaintiffs’ breach of contract claims; 5) the breach of fiduciary duty - because
plaintiffs fail to allege any damages caused by the alleged breach of fiduciary duty; and 6) the
remaining counts - because the court should decline to exercise supplemental jurisdiction over
these state law claims after dismissing the federal securities claims. In denying in part and
granting in part defendants’ motion, the court held plaintiff’s: 1) alleged material
misrepresentations; 2) properly alleged scienter under Tellabs; 3) properly pled reasonable
reliance; 4) do not need to allege damages with specificity; 5) adequately alleged causation; 6)
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fiduciary duty and negligent misrepresentation counts are not preempted by the Martin Act; 7)
the Term Sheet was a binding preliminary agreement; 8) properly pled defendants’ breach of the
Term Sheet; 9) allegations concerning the covenant of good faith are duplicative of the breach of
contract claims; 10) fraud counts are not identical to their breach of contract claims; 11) alleged
sufficient damages; and 12) state law claims are not subject to dismissal.
SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147 (S.D.N.Y. 2011).
C.1.d
Defendant failed to disclose to investors that it had permitted a short investor to help
select the reference portfolio of a collateralized debt obligation (“CDO”). Instead of making this
disclosure, defendant engaged a “portfolio selection agent,” which was not informed of the short
investor’s short position, and whose role in the transaction was alleged to reassure other
investors in the CDO. Defendant settled with the SEC. Defendant’s employee, Fabrice Tourre,
filed motions to dismiss the counts against him. Tourre argued, inter alia, that there was no
extraterritorial application of the federal securities laws but the court held that he had
participated in phone calls and sent emails from New York City and that section 17(a) of the
Securities Act applies to both sales and offers to sell, making a complete transaction unnecessary
to impose liability.
C.1.d
City of Roseville Employees’ Ret. Sys. v. EnergySolutions, Inc., No. 09-8633, 2011 WL 4527328
(S.D.N.Y. Sept. 30, 2011).
Plaintiffs sued EnergySolutions (“ES”), its officers and directors, and its former owner,
ENV Holdings, Inc. (“ENV”), under sections 10(b) and 20(a) of the Securities Exchange Act of
1934, based on alleged misstatements and omissions in a registration statement as part of an IPO
and subsequent sale of stock. The court held that ENV was responsible for statements made in
ES’s registration statements, distinguishing the Supreme Court’s holding in Janus Capital
Group, Inc. v. First Derivative Traders. At the time of the IPO, ENV was the sole shareholder
of ES, and was a majority shareholder at the time of the later sale. Despite the fact that the
prospectuses and registration statements were issued by ES, the court concluded that ENV
“made” the allegedly misleading statements because it had ultimate authority over the
statements, including their content and whether and how to communicate it. The court
distinguished this case from Janus because, unlike Janus, the registration statements made it
plain that (1) ENV was a majority shareholder and seller in both transactions; (2) ENV’s owners
controlled ES through ENV; and (3) ES agreed to indemnify ENV for any material
misstatements or omissions in the registration statements. Based on these facts, the court found
that ENV’s position enabled it to control all of ES’s corporate actions. Furthermore, the court
rejected ENV’s argument that the registration statements were attributed to ES, reasoning that
attribution to ES did not preclude attribution to ENV also, particularly in light of the indicia of
control in the registration statements. Therefore, plaintiffs were able to state a claim against
ENV.
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C.1.d
International Fund Management S.A. v. Citigroup, Inc., 2011 WL 4529640 (S.D.N.Y. Sept. 30,
2011).
Foreign investors brought actions against corporation and others alleging violations of
federal securities laws relating to collateralized debt obligations. The court held that although
investors failed to raise strong inference of scienter required to state § 10(b) securities fraud
claim in connection with write-downs of corporation’s collateralized debt obligations (CDOs).
Investors allegations were sufficient to raise strong inference of recklessness . . . with respect to
corporate officer’s CDO-related statements, investors insufficiently alleged actual reliance, . . .
based on corporation’s alleged misstatements in its filings with Securities and Exchange
Commission (SEC). Investors’ allegations failed to raise strong inference that corporation
recklessly ignored relevant data or otherwise acted with scienter, as required in connection with
its write-downs of collateralized debt obligations (CDO’s), which were allegedly insufficient in
that corporation wrote-down its CDO portfolio by just under half, when relevant indices had lost
nearly all their value. Investors’ allegations, that officer who headed corporation’s investor
relations department received specific information indicating that corporation had billions of
dollars in undisclosed subprime collateralized debt obligation (CDO) exposure, were sufficient to
raise strong inference of recklessness. Securities Exchange Act of 1934 § 10(b), 15 U.S.C.A §
78j(b); 17 C.F.R. § 240.10b-5; Private Securities Litigation Reform Act of 1955, § 101 (b), 15
U.S.C.A. § 78u-4(b)(1).
C.1.d
Louisiana Municipal Police Employees Retirement System, v. KPMG LLP,, 2011 WL 4629299
(N.D. Ohio Sept. 30, 2011).
Private securities fraud class action alleging that company, officers and outside auditor
participated in fraudulent scheme that caused company to falsify its financial records by
improperly recognizing revenue and manipulating its recording of expenses. The court held that
the Complaint adequately pled scienter against corporate officers. Investor adequately pled
scienter against outside auditor. Investor adequately pled loss causation under Private Securities
Litigation Reform Act (PSLRA). Private Securities Litigation Reform Act of 1995, § 101(b), 15
U.S.C.A. § 78u-4(b)(1,2). 17 C.F.R. § 240.10b-5(b).
C.1.d
City of Ann Arbor Employees’ Retirement System v. Sunoco Products Co., 2011 WL 5041367
(D.S.C. Oct. 19, 2011).
Investors brought action against corporation and two of its officers, alleging violations of
Securities Exchange Act. The court held that investors’ proposed expert testimony on loss
causation was sufficiently reliable to be admissible; fact issue concerning safe harbor provision
precluded summary judgment; and fact issue regarding scienter precluded summary judgment.
Genuine issue of material fact existed as to whether cautionary language accompanying
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corporation’s earnings forecasts was meaningful, precluding summary judgment for corporation
on issue of whether its forecasts were protected by safe harbor provision for forward-looking
statements in investors’ action alleging violations of § 10(b) and Rule 10b-5. Securities
Exchange Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); Private Securities Litigation Reform Act of
1995, § 102(b), 15 U.S.C.A. § 78u-5(i)(1)(A); 17 C.F.R. § 240.10b-5.
In Re Franklin Bank Corp. Securities Litigation, 782 F. Supp. 2d 364 (S.D. Tex.
2011).
C.1.d
Purchasers of common and preferred stock in the failed Franklin Bank Corp. filed
securities fraud class action against bank’s officers and directors, its outside auditor, and
underwriter for preferred stock offer. Defendants moved to dismiss for failure to satisfy the
Private Securities Litigation Reform Act (PSLRA) heightened pleading requirements for
securities fraud cases under Rule 9(B). The court granted defendants’ motion, holding that the
Bank’s acts, and its officers,’ directors,’ and auditors’ acts did not give rise to cognizable claims
because for failure to allege an omission to be sufficiently “material” and failure to allege
scienter sufficient to support a securities fraud claim.
Puskala v. Koss Corp., 799 F. Supp.2d 941 (E.D. Wis. 2011).
C.1.d
Investors brought putative class action against corporation and certain of its officers for
securities fraud and control-person liability involving a $50 million embezzlement scheme by the
vice president of finance. The investors also sued the company’s outside auditors. Plaintiffs
alleged that the defendants had recklessly certified the accuracy of the company’s financial
statements and recklessly represented that the financial statements fairly represented the
company’s financial position. The court rejected the company’s motion to dismiss in part
holding that the company could be liable under the doctrine of apparent authority for the V-P
finance’s “statements to the market while acting with apparent authority, and therefore the
company is liable for her fraud even though she was not trying to further the company’s goals.”
The claim against the auditor was dismissed because its conduct was merely negligent and not
reckless.
e. Standing
C.1.e
Amorosa v. AOL Time Warner Inc., 2011 WL 310316 (2nd Cir. 2011).
Plaintiff brought suit against defendants alleging a violation of Section 10(b) of the
Securities Exchange Act of 1934 based on misleading statements contained in an audit of AOL’s
financial statements. The district court granted defendants’ motion to dismiss. On affirming the
district court, the Second Circuit addressed, inter alia, defendant’s “holder” Rule 10b-5 claim.
Essentially, plaintiff attempted to argue that it had standing to sue based on the Exchange Act as
79

a holder of securities, even though it did not purchase or sell the securities. The court rejected
this argument because the Supreme Court has specifically announced that there is no holder
claim under the federal securities laws.
In re Smith Barney Transfer Agent Litigation, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).
C.1.e
Investors in mutual funds brought class action against funds’ investment advisors and
their affiliates, alleging securities fraud in violation of the Securities Exchange Act of 1934.
Defendants moved to dismiss plaintiffs’ claims under Section 10(b) of the Exchange Act for lack
of standing on three separate grounds: (1) the claims must be pled as derivative rather than direct
claims; (2) plaintiffs purchased shares in only three of the 105 funds at issue; and (3) claims by
mere holders of the fund are barred because they neither purchased nor sold shares during the
class period. As to the first issue, the court noted the lack of case law on pleading a Section
10(b) claim derivatively. Nonetheless, the court found that the plaintiffs suffered individual
injuries distinct from the injury to the corporation. Accordingly, direct claim was sufficient and
not required to be plead derivatively. Next, the court held that plaintiffs lacked standing to the
extent that they did not purchase the funds at issue. The court reasoned that although a lead
plaintiff need not satisfy all the elements of standing, at least one named plaintiff must.
Accordingly, plaintiffs’ claims as to each fund not held by a named plaintiff were dismissed.
Finally, the court dismissed any “holder” claims, claims in which plaintiffs merely held the stock
rather than purchase or sell it, brought by plaintiffs because the courts do not recognize holder
claims under the Exchange Act.
Scottrade, Inc. v. Broco Investments, 774 F. Supp. 2d 573 (S.D.N.Y. 2011).
C.1.e
Online securities broker brought action against investment broker and alleged hackers,
seeking to recover funds it paid to its customers to reimburse them for money customers lost in
securities fraud scheme. Defendant moved to dismiss. The court found that this action presented
a question of first impression. Ultimately, the court concluded that plaintiff lacked standing to
pursue claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
because it did not purchase or sell any securities. Instead, plaintiff merely provided the interface
and systems by which defendant’s purchases and sales occurred. The court further reasoned that
although plaintiff “effected” customer trades, as the broker, it did not itself initiate, order or have
any input on any trades or decisions to place orders. Accordingly, the court granted defendants’
motion to dismiss.
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C.1.e
In re Bank of America Corp. Securities, Derivative, and ERISA Litigation, 2011 WL 3211472
(S.D.N.Y. 2011).
Plaintiffs brought a class action suit asserting that defendants were liable for a series of
misstatements and omissions related to Bank of America’s acquisition of Merrill Lynch in
violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Defendants
filed a motion to dismiss based on, inter alia, lack of standing to assert claims on behalf of
certain securities holders. In particular, the court found that the complaint expanded the plaintiff
class to encompass additional categories of securities owners that purchased preferred shares,
options and debt securities. However, defendants successfully argued that these claims should
be dismissed because the class plaintiffs, who only purchased common stock, did not themselves
purchase or sell the other types of securities. In relying on Lujan v. Defenders of Wildlife, 504
U.S. 555 (1992), the court found that a plaintiff must have suffered an injury in fact, one that is
concrete and particularized, to have standing. Plaintiffs could not satisfy this requirement
without actually having purchased or sold the securities subject to the complaint. Accordingly,
plaintiffs’ claims were dismissed to the extent they encompassed non-common stock claims.
McCann v. Hy-Vee, 2011 WL 250262 (N.D. Ill. 2011).
C.1.e
Plaintiff sued her ex-husband alleging violations of Rule 10b-5 of the Securities
Exchange Act of 1934 based on his and defendant’s false statement that defendant’s stock was
non-transferrable. On defendant’s motion to dismiss, defendant claimed that plaintiff was never
a purchaser or seller of the stock at issue. Plaintiff argued that two possible transactions made
her a purchaser or seller. First, a consent decree was entered, which awarded plaintiff the stock
at issue. Second, the court, after entrance of the consent decree, later ordered plaintiff to turn
over the same shares. The defendant argued that both these transactions merely amounted to a
temporary holding of the stock, not actual ownership, purchase or sale. The court disagreed, and
held that for purposes of the motion to dismiss, the consent decree award could have constituted
a sale to plaintiff. Nonetheless, plaintiff’s claims were still dismissed because they were barred
by the five year statute of repose.
Drescher v. Baby It’s You, LLC, 2011 WL 63615 (C.D. Cal 2011).
C.1.e
Defendant approached plaintiff about investing in a Broadway production that defendant
was writing. Defendant allegedly made misrepresentations to plaintiff, which plaintiff claimed
caused him to invest in defendant’s project in violation of Rule 10b-5 of the Securities Exchange
Act of 1934. Defendant filed a motion to dismiss. As an initial matter, the court addressed
whether plaintiff had standing to bring suit. The court found that plaintiff failed to sufficiently
plead a violation of the Exchange Act because plaintiff did not include any allegation in the
complaint that he purchased securities from defendants. Although plaintiff provided defendant
81

with an sum of money in the form of an investment, it does not follow that such investment,
absent further allegations, is a purchase of securities.
Bello v. Chase Home Finance, 2011 WL 133351 (S.D. Cal. 2011).
C.1.e
Plaintiff brought suit against defendant alleging that it committed securities fraud under
the Securities Exchange Act of 1934 by securitizing plaintiff’s mortgage. On defendant’s motion
to dismiss, the court found that plaintiff lacked standing to sue for securities fraud because he
was not a purchaser of any securities resulting from the securitization of his and other loans.
Accordingly, the court granted defendant’s motion to dismiss.
Gehron v. Best Reward Credit Union, 2011 WL 976624 (S.D. Cal. 2011).
C.1.e
Plaintiffs asserted several claims against defendants relating to the securitization and sale
of plaintiff’s mortgage loans. Defendants brought a motion to dismiss plaintiff’s claims,
including defendants’ alleged violation of Section 10(b) of the Securities Exchange Act of 1934.
The court, in granting defendants’ motion, found that plaintiff’s mere allegation that defendants
securitized and sold plaintiff’s mortgage did not make plaintiffs purchasers of securities, a
required element to have standing to sue for securities fraud. Accordingly, the court dismissed
plaintiff’s claims with prejudice.
Slaughter v. Laboratory Medicine Consultants, Ltd., 2011 WL 1486228 (D. Nev. 2011).
C.1.e
Plaintiff, a prior employee of defendant, brought suit alleging violations of Rule 10b-5 of
the Securities Exchange Act of 1934 based on defendant’s conversion of stock it was allegedly
supposed to place in escrow. As an initial matter, the court addressed Plaintiff’s standing to
bring a claim under the Exchange Act. The court found that plaintiff did not state any facts in his
complaint that amounted to him either selling or purchasing defendant’s stock. Plaintiff
attempted to argue that he did not need to have purchased or sold the security because it was
“fraudulently redeemed.” However, the court ruled that plaintiff was not forced to sell his stock
or even that it was sold. Rather, defendant’s alleged actions were solely based on failing to place
the stock in escrow and then converting it. Accordingly, the court held that the claim did not fall
under the Exchange Act because it did not involve a transaction in securities within the meaning
of Rule 10b-5 or Section 10(b) of the Exchange Act.
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f. Affirmative Defenses
Wilson v. Merrill Lynch & Co., Inc., 2011 WL 5515958 (2nd Cir. 2011).
C.1.f
Investors brought a class action against Merrill Lynch alleging securities fraud in
violation of the Securities Exchange Act of 1934 related to auction rate securities (“ARS”)
purchases. Plaintiffs alleged that defendant engaged in a scheme to manipulate the ARS market
by using its own capital to place bids in order to prevent auction failures. The district court
entered an order granting defendant’s motion to dismiss and investor appealed. On appeal,
defendant argued that it had made various public disclosures of its ARS auction practices,
several of which were the result of an SEC investigation. In evaluating plaintiffs’ market
manipulation claims, the court found that Second Circuit case law clearly required a showing
that an alleged manipulator engaged in market activity aimed at deceiving investors as to how
other market participants had valued a security. The case law was less clear as to when
disclosures were sufficient to negate a claim that a certain market practice is manipulative. In
addressing the disclosures, the court recognized the “bespeaks caution” doctrine, which provided
protection to someone who adequately warned investors of certain risks. However, the court
noted that cautionary words about future risk cannot insulate one from liability for the failure to
disclose that the risk has already transpired. Nonetheless, the court, in affirming the district
court, held that Merrill’s disclosures were adequate to defeat the allegation that its practices
amounted to a market manipulation.
U.S. v. Behrens, 2011 U.S. App. LEXIS 14294 (8th Cir. July 13, 2011).
C.1.f
Defendants pled guilty pursuant to a plea agreement to, inter alia, the violation of Rule
10b-5 of the Securities Exchange Act of 1934 brought in an enforcement action. Defendants
were sentenced to serve jail time. At the sentencing hearing, Defendants asserted the “noknowledge”
provision as an affirmative defense. Under the no-knowledge provision, a defendant
is not subject to imprisonment if he or she proves that he had no knowledge of such rule or
regulation. The district court held that, as a matter of law, pleading guilty to a statutory offense
prevents a defendant from asserting the no-knowledge defense. On appeal, the Eight Circuit
reversed and remanded, holding that the government must prove that a person “willfully”
violated Rule 10b-5 prior to that person being imprisoned. Pleading guilty does not, as a matter
of law, prevent a defendant from asserting the no-knowledge defense. Accordingly, the district
court erred by holding defendants could not have asserted the no-knowledge defense.
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Maine 2011).
C.1.f
Investors brought action against investment firms and managers for, inter alia, Section
10(b) and Rule 10b-5 violations arising out of recommendation made in connection with a hedge
fund. Defendants allegedly made these recommendations verbally and through confidential
offering memoranda. Plaintiffs alleged that the hedge fund was merely a feeder fund for the
Madoff fund. Defendants made a motion to dismiss on two grounds. First, defendants argued
83

that the claims were barred by the five year statute of repose. According to defendants, the five
year statute of repose for Section 10(b) and Rule 10b-5 violations began to run from the date the
buyer purchased the securities. Second, defendants argued that plaintiffs’ complaint failed to
contain an allegation that defendants wrote or published the confidential offering memoranda.
The court recognized an exception to the statute of repose because, as the confidential offering
memoranda was sent to plaintiffs every year, the fraudulent statements were ongoing and
continuing. Accordingly, the alleged misrepresentations came from a common group of
defendants in pursuit of a common scheme and were not barred by the statute of repose. The
court also dismissed defendants’ argument that they did not make or publish the confidential
offering document. The court reasoned that plaintiffs sufficiently alleged the defendants made
these statements to survive a motion to dismiss.
Hill v. State Street Corporation, 2011 WL 3420439 (D. Mass. Aug. 3, 2011).
C.1.f
Plaintiffs brought suit alleging, inter alia, violations of the Securities Exchange Act of
1934 related to false and misleading statements about defendants’ practice and its portfolio
valuation. Defendants raised the defense that its statements should be considered honestly held
beliefs that were reasonably based on opinions that are not actionable as a matter of law. The
court differentiated two cases in which defendants relied on. First, in Virginia Bankshares, Inc.
v. Sandberg, 501 U.S. 1083 (1991), the Supreme Court held that a statement couched in
conclusory or qualitative terms purporting to explain an executive’s reasons for recommending
certain action is actionable if it includes knowingly false statements. Defendants wrongly
attempted to read this holding in the inverse: that a conclusory statement cannot be actionable if
it was not knowingly false. The court disagreed. Further, defendants wrongly relied on
Plumbers Union Local No. 12 v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011),
which held that defendants will not be liable for their opinions that were honestly held when
formed, but simply turned out later to be inaccurate; nor are they liable because they could have
formed better opinions. The court reasoned that the statements at issue in Nomura were related
to ratings established by Standard & Poor’s and Moody’s, which were more reliable than
defendants’ own, self serving assessments. Accordingly, the court dismissed defendants’ claim
that the statements were not actionable as a matter of law.
Johnson v. Siemens AG, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011).
C.1.f
Plaintiff brought a class action against defendants pursuant to the Securities Exchange
Act of 1934 alleging that defendants disseminated false statements about the financial well-being
of the company, which artificially inflated the prices of defendants’ securities. Defendants
moved to dismiss the complaint based on (1) the failure to plead scienter with particularity, (2)
the statements fell within the safe harbor provision of the Private Securities Litigation Reform
Act of 1995 (“PSLRA”) and the “bespeaks caution” doctrine, (3) the claims are barred by the
statute of limitations, and (4) the plaintiff lacks standing. The court ultimately granted the
motion to dismiss solely based on the failure to adequately allege scienter. The court reasoned
84

that the complaint failed to allege facts that gave rise to an inference of fraudulent intent
regarding the statements made by defendants because, at most, plaintiff’s allegations merely
amounted to allegations that the company was mismanaged.
C.1.f
Prime Mover Capital Partners L.P. v. Elixir Gaming Technologies, 793 F.Supp. 2d 651 (S.D.
N.Y. 2011).
Hedge fund operators brought class action against issuer and related individuals seeking
damages in connection with funds’ purchases of shares in issuer. Specifically, plaintiffs claimed
that the defendants intentionally made misrepresentations related to press releases concerning
false future prospects that inflated defendant’s share price in violation of Section 10(b) of the
Securities Exchange Act of 1934. Defendants brought a motion to dismiss, alleging, inter alia,
the affirmative defense that the statements were sufficiently forward-looking that they fell within
the safe harbor provision of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
The court held that under the PSLRA, a defendant is not liable if the forward-looking statement
is identified and accompanied by meaningful, cautionary language, is immaterial or the plaintiff
fails to prove that it was made with actual knowledge that it was false or misleading. The court
found that the plaintiffs failed to allege facts sufficient to make the requisite showing, other than
blanket assertions of knowledge, that defendants actually knew the statements were false when
made. Accordingly, the court granted defendants’ motion.
In re Smith Barney Transfer Agent Litigation, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).
C.1.f
Investor in mutual funds brought class action against funds’ investment advisors and their
affiliates, alleging securities fraud in violation of the Securities Exchange Act of 1934.
Defendants moved to dismiss plaintiff’s claims, inter alia, as barred by the statute of limitations.
Defendants contended that a reasonably diligent plaintiff would have discovered the alleged
scheme more than two years prior to filing the complaint. However, the court disagreed. The
court reasoned that investigators in a related investigation had yet to determine whether there
were violations of the disclosure rules. Accordingly, the court found that if the investigators
could not discover the scheme while the instant case was ongoing, even a reasonably diligent
plaintiff could not have discovered the alleged scheme more than two years ago.
C.1.f
In re Merrill Lynch Auction Rate Securities Litigation, 2011 WL 1330847 (S.D.N.Y. Mar. 30,
2011).
Plaintiffs brought suit alleging Section 10(b) and Rule 10b-5 Securities Exchange Act of
1934 violations related to misrepresentations concerning auction rate securities (“ARS”).
Plaintiffs alleged that defendants made misstatements related to the reasoning behind the rates of
ARS increasing during 2007 and the bid supporting procedures used by defendants. On motion
85

to dismiss, defendants claimed, inter alia, the “bespeaks caution” doctrine protected any
statements made in connection with the ARS market. The court found that the bespeaks caution
doctrine protected forward-looking statements so long as adequate cautionary language disclosed
the risks associated with ARS. The cautionary language must so clearly disclaim the risks that
the alleged misstatements could not be said to be material. The court, in dismissing defendants’
motion and taking the allegations in the complaint as a whole, held that there was a question as
to whether the alleged disclosures accurately informed the investors of the risks of ARS.
Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
C.1.f
Plaintiffs brought a complaint against defendants alleging violations of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 related to the purchase of equity linked
securities (“ELKs”). In particular, plaintiffs alleged that defendants made misrepresentations or
omissions related to the risks associated with ELKs. On defendants’ motion to dismiss,
defendants claimed that any statements they made in association with ELKs were tempered by
the plethora of warnings and disclaimers provided to plaintiffs prior to their purchase of the
ELKs. The court found this argument to essentially be the “bespeaks caution” doctrine defense,
which holds that certain forward-looking statements that directly contradict cautionary language
in the offering documents will generally be considered immaterial as a matter of law. However,
the court held that such disclaimers did not defeat plaintiffs’ allegations of misrepresentations.
Rather, the disclaimers did not directly relate to the risk that was allegedly misrepresented, a
requirement of the bespeaks caution doctrine. Accordingly, the court denied defendants’ motion
to dismiss on the Section 10(b) claim.
In re Anadigics, Inc., Securities Litigation, 2011 WL 4594845 (D. N.J. Sept. 30, 2011).
C.1.f
Plaintiffs brought a class action suit against defendant alleging violations of Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934 related to multiple statements made in
various press releases and earnings calls. Allegedly, defendant was losing its market share to
various competitors and failed to disclose this fact to plaintiffs. Moreover, defendant allegedly
made affirmative statements indicating it currently had a substantial market share of the relevant
market. On its motion to dismiss, defendant made two main arguments. First, defendant argued
that, absent an affirmative duty to disclose, it was not required to disclose the fact that it was
losing marking share. The court agreed, reasoning that defendant had no duty to disclose the
information in question. The court reasoned that the applicable information did not require
disclosure, unlike a situation in which there is insider trading, a statute requiring disclosure, or an
inaccurate, incomplete or misleading prior disclosure. Second, defendant argued that it was
protected from any statements it allegedly made by the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 (“PSLRA”). Again, the court agreed, holding that a
party is not liable under Section 10(b) or Rule 10b-5 for forward looking statements provided
they are (1) identified as such, and accompanied by meaningful cautionary statements; (2)
86

immaterial; or (3) made without actual knowledge that the statement was false and misleading.
The court found that defendant’s use of certain terms, including “expecting,” “anticipating” and
“believing,” were sufficient to indicate they were forward looking statements.
In re Lincoln Educ. Srvs. Corp. Sec. Lit., 2011 WL 3912832 (D. N.J. Sept. 6, 2011).
C.1.f
Plaintiffs filed a securities fraud claim against defendant educational institution, alleging
defendant misled investors concerning the implementation of reforms to defendant’s admissions
standards, which allegedly would have affected the student enrollment growth rate. Defendant,
on motion to dismiss, alleged that the statements allegedly made in connection with the change
in admission standards were forward-looking in nature and not subject to claims of
misrepresentations or omissions under the Securities Exchange Act of 1934. The court found
that the safe harbor provision of the Private Securities Litigation Reform Act of 1995 (“PSLRA”)
states that forward-looking statements are protected if they are identified as forward looking and
are accompanied by meaningful cautionary statements identifying important factors that could
cause actual results to differ from those in the forward-looking statement. Plaintiffs argued that,
although the statements were forward looking, the warnings were not adequate to provide
meaningful cautionary language. However, the court found that the cautionary language was
sufficient, and the statements fell within the safe harbor provision.
Love v. Alfacell Corp., 2011 WL 4915874 (D. N.J. Oct. 17, 2011).
C.1.f
Plaintiff, who executed stock options in defendant company, brought suit against
defendants for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934. Plaintiff alleged that defendants disseminated false and misleading statements related to
pharmaceutical drug trials when they claimed a phase would be completed by a certain date.
After the date passed, and the phase had not been completed, plaintiff’s stock dropped
significantly in value. Defendants asserted, in a motion to dismiss, that any statements made
were either not material, or subject to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”). The court found that a reasonable investor, in
viewing all of the information made available by defendant, would not have considered the
projections as significantly altering the total mix of information available. Moreover, the various
disclaimers given by defendants prior to each statement turned the statements into mere
predictions of the completion date of the phase at issue. Accordingly, the court dismissed
plaintiff’s Section 10(b) and Rule 10b-5 claims.
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).
C.1.f
Plaintiffs brought securities fraud class action against defendants, alleging defendants had
material information about the true state of defendant corporation’s financial condition, including
87

credit quality and delinquency of collections and wrongfully withheld such information. As a
result, plaintiffs alleged that defendants engaged in a deceptive practice to artificially inflate the
financial results and stock prices of the corporation. Defendants first argued that the statute of
limitations bars Plaintiffs’ claims. The court noted that the statute of limitations period began to
run at the point plaintiffs knew or reasonably should have discovered facts constituting the
violation, including the requisite scienter. The court could not find, as a matter of law, that
Plaintiffs’ allegations were time-barred. Next, defendants claimed that the statements about
credit quality were forward looking and protected by the bespeaks caution and safe harbor
doctrines. However, the court found that the actual statements made reported various current or
historical pieces of information, including the company’s credit quality, which were knowable at
the time the statements were made. Accordingly, those statements made were not forward
looking. Taking the allegations as a whole, the court found that the plaintiffs had made sufficient
allegations to at least survive a motion to dismiss.
C.1.f
In re Conventry Healthcare, Inc. Securities Litigation, 2011 WL 1230998 (D. Md. Mar. 30,
2011).
Arising out of defendants’ motion to dismiss, the court addressed plaintiffs’ allegations
that defendants committed securities fraud in violation of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934 by publicly praising its “Private Fee-for Service” (“PFFS”)
program, while they knew that the program was actually failing. The court found that the
plaintiffs adequately alleged the various statements made relating to the PFFS were misleading.
However, prior to making this determination, the court found that the statements may not be
actionable if they fell within the parameters articulated by the judge-made “bespeaks caution”
doctrine. Under this doctrine, cautionary language in an offering document, as part of the total
mix of information, may negate the materiality of an alleged misstatement or omission. The
court denied defendants’ motion. While the court found the decision a close question, the court
reasoned that the plaintiffs had at leased alleged enough information to survive the motion to
dismiss.
C.1.f
City of Ann Arbor Employees’ Retirement System v. Sonoco Products Co., 2011 WL 5041367
(D. S.C. Oct. 19, 2011).
Plaintiffs asserted a cause of action under Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 claiming defendants made false economic forecasts. Specifically,
plaintiffs alleged that defendants cushioned their 2007 forecasts by failing to disclose several
adverse incidents in the forecast, which created an unrealistic prediction of productivity
improvements and earnings forecasts. Purportedly, defendants knew these adverse incidents
would materially affect their financial results, and the failure to disclose the incidents artificially
inflated the company’s stock price. Defendants made a motion for summary judgment based on
plaintiffs’ inability to establish the elements of a Section 10(b) or Rule 10b-5 claim. In
particular, defendants argued that the statements were protected under the safe harbor provision
88

of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), and that the statements were
either true or not material. The court held that the statements, including the non-forward looking
statements of the assumptions underlying or relating to the forward-looking statements, were
considered forward-looking. However, in agreeing with plaintiffs’ arguments, the court found
that a question of fact existed as to whether the safe harbor provision applied to defendants’
statements based on their failure to provide adequate and meaningful cautionary language in
conjunction with the statements, a requisite of the safe harbor provision. Further, the court held
that a question of fact existed as to whether defendants’ representations were knowingly false in
light of the omitted information relating to the adverse incidents. Accordingly, the court denied
summary judgment.
Hopson v. MetroPCS Communications, Inc., 2011 WL 1119727 (N.D. Tex. Mar. 25, 2011).
C.1.f
Plaintiffs brought a class action suit under Rule 10b-5 and Section 10(b) of the Securities
Exchange Act of 1934 based on losses sustained after purchasing shares of defendants’ common
stock at allegedly artificial prices as a result of defendants’ materially false, misleading and
reckless statements. In particular, plaintiffs alleged that defendants made false statements in
their earnings guidance, their predictions about the economy and future competition from current
competitors. Defendants brought a motion to dismiss the complaint for failure to state a claim
based on, inter alia, the affirmative defense that any statements made were protected by the safeharbor
provision of the Private Securities Litigation Reform Act of 1995(“PSLRA”). The court,
in granting defendants’ motion to dismiss, held that the statements were protected under the
PSLRA, as they explicitly fell into the category of forward-looking statements, because they
simply contained projections of revenues and future economic performance. Moreover, the court
found that each statement carried meaningful cautionary language, including a warning that
certain factors may affect the forward-looking statements and used the terms “expects” in
various statements. Plaintiffs attempted to circumvent the safe harbor provision by arguing that
defendants had actual knowledge that their statements were false when made. However, the
court held that plaintiffs’ allegations did not sufficiently plead the specific information that
defendants’ had actual knowledge of, who reviewed the information or how the information
contradicted the defendants’ forward-looking statements. In addition, the court, in addressing
plaintiffs’ claims that there was a strong inference of scienter based on alleged insider trading,
held that any insider trading was made pursuant to Rule 10b5-1 trading plans. Such plans, which
are pre-determined agreements to purchase or sell stock made before any inside information is
learned, acts as an affirmative defense to insider trading. The court also held that the existence
of such plans rebutted plaintiffs’ claims that the insider trading supported the scienter claim.
SEC v. Geswein, 2011 WL 4541308 (N.D. Ohio Aug. 2, 2011).
C.1.f
The SEC brought a complaint against defendants based on, inter alia, violations of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 generally relating to
fraudulent accounting practices during the period of 2002 to 2007. Defendants moved to dismiss
89

the complaint, asserting the statute of limitations as a defense. The SEC argued that the statute
of limitations, including the five year statute of repose, was tolled based on the fraudulent
concealment by the defendants of the facts necessary to discover the fraudulent accounting
practices. In particular, the SEC alleged that defendants falsely responded to a checklist
provided by the SEC to defendants relating to their accounting practices. Defendants argued that
they simply were silent as to certain requests, thus they did not actively conceal any facts. The
court, in denying defendants’ motion to dismiss, held that the complaint adequately alleged that
the defendants engaged in active concealment. The court found that defendants engaged in
active concealment by both giving affirmatively false statements and remaining silent as to the
checklist provided by the SEC. The court reasoned that while silence is generally not enough to
allege active concealment, plaintiffs were under a duty to disclose facts requested by the
checklist.
C.1.f
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc., 788 F. Supp.2d 609 (S.D. Ohio
2011).
Plaintiff brought suit against defendants alleging a series of false or misleading
statements concerning two initiatives at defendants’ company in violation of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934. On motion to dismiss, defendants asserted
the affirmative defense that any allegedly false or misleading statements were puffery or
otherwise protected by the safe-harbor provision of the Private Securities Litigation Reform Act
of 1995 (“PSLRA”). The court agreed, finding that the safe-harbor protection is only overcome
if the statements are material, the defendants had actual knowledge of the false or misleading
nature of the statement and if the statement was not identified as forward-looking or lacking
meaningful cautionary statements. All of the statements made by defendants were either puffery,
as they were simply loosely optimistic statements that were so vague and lacking in specificity
that they clearly constituted the opinions of the speaker, or protected as forward-looking
statements.
Antelis v. Freeman, 799 F.Supp.2d 854 (N.D. Ill. 2011).
C.1.f
Investor filed suit against his former business partner alleging violations of Rule 10b-5 of
the Securities Exchange Act of 1934 based on investments in promissory notes sold by a
company allegedly recommended by defendant. Plaintiff contended that defendant used the
company as a shell corporation designed to allow defendant to defraud investors. On a motion to
dismiss, defendant argued that the two year statute of limitations period had run because plaintiff
should have discovered the facts that constituted the violation more than two years before filing
his claim. As a preliminary matter, the court noted that the statute of limitations, as an
affirmative defense, is not typically a part of a Rule 12(b)(6) motion because complaints are not
required to anticipate such affirmative defenses to survive a motion to dismiss. Accordingly, the
court limited the statute of limitation analysis strictly to whether the facts plaintiff pleaded in his
complaint showed the Rule 10b-5 violation was filed after the statute of limitations. The court
90

held that the statute of limitations begins to run at the point which plaintiff was on “inquiry
notice” of the fraud. However, the court recognized the new inquiry notice standard, as
recognized in the U.S. Supreme Court case Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010),
which focused on when a reasonable investor would have actually uncovered the facts
constituting the fraud. The court found plaintiff’s complaint was not time barred because, based
on the allegations in the complaint, nothing indicated the plaintiff should have discovered the
fraud.
In re STEC Inc. Securities Litigation, 2011 WL 2669217 (C.D. Cal. June 17, 2011).
C.1.f
Plaintiffs brought a class action suit against defendants alleging defendants made false
statements and omissions that inflated the company’s stock price and ultimately caused the price
to collapse when the truth was disclosed. In particular, plaintiffs alleged that defendants falsely
represented its business prospects, including falsely stating that a particular purchase contract by
defendants’ largest customer would be continually renewed, when in fact it would not.
Defendants moved to dismiss the claim for failure to state a claim and that Plaintiffs had not
sufficiently alleged the existence of a false statement in the registration statement or prospectus.
Defendants also asserted the affirmative defense of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 (“PSLRA”), and the bespeaks caution doctrine. The
court found that the bespeaks caution doctrine provides a mechanism by which a court can rule
as a matter of law that defendants’ forward-looking representations contained enough cautionary
language or risk disclosure to protect a defendant against claims of securities fraud. However,
the court held that the statements made by defendants were not meaningfully cautionary because
they did not relate directly to the forward-looking statements at issue. Specifically, the
cautionary statements were not of sufficient similar significance to the recurring nature of the
purchase contract to indicate it was a “one-off” contract. Accordingly, the court denied
defendants’ motion to dismiss.
In re Verifone Holdings Inc. Securities Litigation, 2011 WL 1045120 (N.D. Cal. Mar. 22, 2011).
C.1.f
This case represents the consolidation of nine securities fraud class actions filed against
defendants, including officers of defendant corporation, relating to the corporation’s public
announcement that it had to restate its quarterly financial statements for at least the previous
three quarters to correct errors that overstated previously reported profits. In particular, plaintiffs
alleged that several of the corporate officers committed insider trading in violation of the
Securities Exchange Act of 1934 by trading company stock on this information prior to the
public announcement. On defendants’ motion to dismiss, several of the defendants claimed that
Rule 10b5-1 acted as an affirmative defense to the insider trading claim. Rule 10b5-1 permits an
insider with inside information to trade in stock so long as the trades were pursuant to a contract,
instructions given to another or a written plan that did not permit the person to exercise any
influence over the purchase or sale of stock after learning the inside information. Accordingly,
the court found that so long as defendants executed the purchase or sale of defendants’ stock
91

pursuant to Rule 10b5-1, they would not be held liable for insider trading. The court held that
the defendants traded stock solely based on their 10b5-1 plans, which were in effect prior to any
known errors on the company’s financial statements. Accordingly, the court granted defendants’
motion to dismiss.
Applestein v. Medivation, Inc., 2011 WL 3651149 (N.D. Cal. Aug. 18, 2011).
C.1.f
Plaintiffs filed a securities class action against defendants based on violations of Section
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 by making misleading
representations related to the results of a clinical trial for a drug. In support of their claim,
plaintiffs argued that insider trading allegedly perpetrated by corporate officers was indicative of
scienter for the claims under the Securities Exchange Act of 1934. Defendants, in their motion
to dismiss, argued the affirmative defense that any trading done on their behalf was pursuant to
Rule 10b5-1 plans. Such plans are a predetermined plan or contract to trade in stock created prior
to becoming aware of material non-public information. However, the court concluded that
defendants could not claim the defense under Rule 10b5-1 because plaintiffs alleged that the
plans were adopted by the individual defendants after they knew of the inside information.
Nonetheless, the court determined that plaintiffs failed to adequately plead facts giving rise to an
inference of scienter, and dismissed the complaint without prejudice.
Curry v. Hansen Medical, Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).
C.1.f.
Plaintiffs, who purchased or acquired common stock in defendant corporation, brought a
class action against defendants alleging violations of Rule 10b-5 and Section 10(b) of the
Securities Exchange Act of 1934. Plaintiffs alleged that defendants induced plaintiffs to
purchase common stock at artificially inflated prices by making intentional misstatements
regarding defendant corporation’s revenue recognition and sales performance. In particular,
plaintiffs asserted that defendants specifically indicated that the company had seen four
successive quarters of increasing sales. Defendants moved to dismiss the complaint on the basis
that the complaint failed to allege securities fraud with sufficient particularity. The court, in
evaluating whether the statements were forward-looking statements protected by the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), found that
statements of present or historical fact are not protected. Accordingly, references to concrete
rates of sales and user activity were not protected by the safe harbor provision as statements of
present or historical fact. However, the court held that the plaintiffs failed to adequately allege
that the defendants made the statements with knowledge of the alleged falsity. Accordingly, and
for other reasons, the Court granted defendants’ motion to dismiss and found that plaintiffs failed
to adequately plead the misstatements were made with the requisite knowledge.
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C.1.f
In re Novatel Wireless Securities Litigation, 2011 WL 5873113 (S.D. Cal. Nov. 23, 2011).
Plaintiffs brought a class action suit against defendant corporation and various of its
corporate officers. Plaintiffs alleged that defendants engaged in insider trading by creating a
fraudulent scheme to inflate Novatel’s stock so that defendants could sell their stock for profit in
violation of the Securities Exchange Act of 1934. Defendants moved for summary judgment,
alleging, inter alia, the affirmative defense that any sale of stock was made pursuant to a Rule
10b5-1 plan. Such plan is a defense to an insider trading claim so long as the individual did not
know the inside information at the time he or she entered into the plan, and the individual
exercised no discretion over his sales after adoption of the plan. However, the court dismissed
this affirmative defense because it found that each defendant entered a new or amended 10b5-1
plan during the time frame that plaintiffs alleged defendants had inside information.
Accordingly, the court denied defendants’ motion for summary judgment and determined that a
genuine issue of material fact existed as to whether the defendants executed trades based on
inside information.
C.1.f
In re Cell Therapeutics, Inc. Class Action Litigation, 2011 WL 444676 (W.D. Wash. Feb. 4,
2011).
Plaintiffs filed a complaint against defendants alleging violations of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 relating to statements made by defendants
that a drug it produced would be approved by the FDA under a fast track approval process. The
drug failed to be approved and the company’s stock dropped by 50% in a single day. Defendants
filed a motion to dismiss based on, inter alia, the safe harbor provision of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”), which protects certain forward-looking statements
from liability under the Exchange Act. The court, in refusing to grant defendants’ motion, found
that the majority of the statements defendants made were not forward-looking. While statements
that the company had hopes for approval were forward-looking, statements that the drug had
been “fast-tracked” and other similar present-fact statements were not forward-looking to fall
within the safe harbor provision. Accordingly, the court denied defendants’ motion.
C.1.f
In re Bankatlantic Bancorp, Inc. Securities Litigation, 2011 WL 1585605 (S.D. Fla. Apr. 25,
2011).
Plaintiffs, purchasers of defendants’ common stock, brought a class action suit against
defendants contending that defendants misrepresented and concealed the true quality and value
of certain assets in defendants’ loan portfolio in violation of the Securities Exchange Act of
1934. After trial, defendants brought a motion for judgment as a matter of law and a motion for
new trial. Defendants argued, inter alia, that the court committed reversible error by instructing
the jury that four statements made by defendants were false, when the statements were protected
93

from Rule 10b-5 liability as forward-looking statements. According to defendants, Eleventh
Circuit precedent essentially held that non-forward looking statements were automatically
protected by the safe harbor provision if such statements were coupled with forward-looking
components. The court disagreed. Rather, the court found that the Eleventh Circuit, in Harris v.
Ivax, 182 F.3d 799 (11th Cir. 1999), assessed the applicability of the safe harbor provision to
statements that allegedly failed to include the risk of a certain situation occurring, namely the
possibility of a goodwill write-down. The court found that Harris stood for the proposition that a
mixed statement is still forward-looking if it simply contains an omission of material risk factors
for the forward-looking statement. On the other hand, statements are not protected by the safe
harbor provision when any of the non-forward looking statements are misleading omissions or
misrepresentations. In the instant case, the court held that defendants’ statements were not
simply omissions of material risk factors, but statements of what defendants allegedly knew.
Accordingly, the court denied defendants’ motion on the basis that the statements were not
protected under the safe harbor provision of the Private Securities Litigation Reform Act of
1995.
In re Immucor, Inc. Securities Litigation, 2011 WL 3844221 (N.D. Ga. Aug. 29, 2011).
C.1.f
Plaintiffs alleged defendant made false and misleading statements in violation of Section
10(b) of the Securities Exchange Act of 1934 in relation to its compliance with FDA regulations,
as well as its participation in an illegal price-fixing scheme. Specifically, plaintiffs alleged that
defendants made false and misleading statements based on its commitment to quality and its
belief that the company was in compliance with FDA regulations. Defendant, in a motion to
dismiss, argued that any statements made in connection with plaintiffs’ allegations were merely
statements of corporate optimism, and were protected under the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 as mere statements of belief. The court, in
denying defendants’ motion, found that the statements were not forward-looking, as defendants
used the term “ongoing” and used the present tense in various statements. Accordingly, these
statements were referencing the current state of the company. Moreover, defendant’s use of the
term “believes” did not bring the statements within the safe harbor provision. Therefore, the
court denied defendant’s motion to dismiss.
g. Other
C.1.g
Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011).
Plaintiffs asserted a cause of action against a parent company, who created a mutual fund,
and the mutual fund itself. Although the two entities maintained their legal independence, the
plaintiffs argued that both the parent company and the mutual fund were liable under Rule 10b-5
of the Securities Exchange Act of 1934 because they made material representations within the
rule. The Supreme Court held that for purposes of Rule 10b-5, the maker of a statement is the
person or entity with ultimate authority over the statement, including its content and whether and
how to communicate it. Accordingly, the Supreme Court found that it was not proper to hold a
94

parent company liable for statements made under Rule 10b-5, because the mutual fund company,
not the parent company, had control over the content of the allegedly misleading SEC filings.
Preparation or publishing of a statement on behalf of another may not constitute making a
statement under rule 10b-5.
U.S. v. Tzolov & Butler, 642 F.3d 314 (2nd Cir. 2011).
C.1.g
Defendants were convicted in the Eastern District of New York of inducing their
customers to purchase ARS by misrepresenting the non-guaranteed nature of the particular ARS
at issue. Defendants appealed the appropriateness of invoking venue in the Eastern District of
New York solely based on defendants’ use of JFK Airport for flights to their clients. The Second
Circuit reversed the Defendants’ conviction on the Section 10(b) Securities Exchange Act of
1934 count. The court held that Section 10(b) requires that a defendant be tried in the district
where his crime was “committed,” which is anywhere any act “constituting the violation
occurred.” The court found that the flights from JFK were only preparatory acts that did not
constitute the violation.
VanCook v. SEC, 653 F.3d 130 (2nd Cir. 2011).
C.1.g
Defendant stockbroker developed a scheme whereby he exploited a loophole in his
clearing firm’s mutual fund order routing system which allowed him to place mutual fund orders
up to an hour and a half after the NYSE closing bell and after the funds’ NAVs were calculated.
Based on this exploitation, defendant was able to execute trades for certain clients after NAVs
were calculated. Defendant falsified the books and records of his firm by printing screenshots of
his computer monitor by showing all orders being entered prior to 4 p.m. The court concluded
that the undisclosed late-trading of mutual funds, in conjunction with the falsification of records,
constituted a device, scheme or artifice to defraud in violation of Section 10(b) and Rule 10b-5
of the Securities Exchange Act of 1934.
Amorosa v. AOL Time Warner Inc., 409 Fed. App’x 412 (2nd Cir. 2011).
C.1.g
Plaintiff brought suit against defendants alleging violation of Section 10(b) of the
Securities Exchange Act of 1934 based on misleading statements contained in an audit of AOL’s
financial statements. The district court granted defendants’ motion to dismiss based on
Plaintiff’s failure to plead loss causation. In affirming the district court, the Second Circuit
reasoned that the plaintiff was unable to show any corrective disclosure regarding AOL’s audit
that implicated the audit opinion. Absent such a showing, plaintiff could not have established
that any misstatement or omission in the audit was revealed to the market. Without such
showing, the risk never materialized, and the plaintiff failed to establish loss causation on a
“materialization of the risk” theory.
95

C.1.g
Barnard v. Verizon Communications, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).
Plaintiffs, former shareholders of a spin-off of Verizon, appealed from the district court’s
dismissal of their claims that the spin-off was designed to defraud shareholders of their
shareholdings of Verizon in favor of the secured and unsecured creditors of the spin-off.
Plaintiffs failed to specifically allege that they individually relied on any misrepresentations
made by Verizon and essentially argued that Verizon had created a “fraud on the market” by
artificially inflating the market. Recognizing that the Third Circuit has rejected the fraud on the
market theory, the court affirmed the district court’s ruling.
Dronsejko v. Grant Thornton, 632 F.3d 658 (10th Cir. 2011).
C.1.g
Plaintiffs brought suit alleging violations of Section 10(b) of the Securities Exchange Act
of 1934 on behalf of a class of members who purchased certain common stock based on what
turned out to be an overstatement of revenues. In considering the scienter element, the Tenth
Circuit reasoned, in dicta, that other circuits have adopted a recklessness standard for Section
10(b) claims against outside auditors. Based on that standard, outside auditors act recklessly
only when accounting practices were so deficient that the audit amounted to no audit at all, to an
egregious refusal to see the obvious, or that accounting judgments that were made were such that
no reasonable accountant would have made the same decision. However, the court dismissed the
complaint and did not adopt the reckless standard because the complaint was deficient.
Basis Yield Alpha Fund v. Goldman Sachs Group, Inc., 798 F.Supp.2d 533 (S.D.N.Y. 2011).
C.1.g
Plaintiff fund brought suit against Goldman Sachs alleging securities fraud under Section
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiff alleged that Goldman
Sachs offered assurance that the CDO market was price stable and that certain collateralized debt
obligations (“CDOs”) were stable. Shortly after plaintiff purchased $50 million of CDOs that
were not listed on any exchange, it received a series of margin calls and the securities dropped by
$30 million. The district court granted Goldman Sachs’s motion to dismiss, with leave to amend,
because the complaint failed to allege sufficient facts indicating that the purchase or sale of the
CDOs was made in the United States. The district court reasoned that the Securities Exchange
Act of 1934 only applies to domestic securities transactions, and that the CDOs at issue were not
listed on any exchange. Absent a listing on the exchange, plaintiffs were required to plead in the
complaint that the securities were bought or sold in the United States.
96

C.1.g
SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).
The SEC filed suit alleging violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 based on misrepresentations contained in offering materials that falsely
stated defendant’s anticipated profits, dividends and acquisition of a separate corporation. The
SEC moved for summary judgment as to one of the corporate executives of defendant
corporation. Defendant executive argued, inter alia, that even if the offering materials contained
false statements, he was not responsible for compliance and oversight of sales personnel. The
court, in granting the SEC’s summary judgment motion, held that the requisite standard of mind
under the Exchange Act is an intent to deceive, manipulate or defraud. However, the court found
that the Second Circuit has held that the scienter element can be satisfied by a strong showing of
reckless disregard for the truth. The court held that defendant executive, as the principal of
defendant corporation, knew or should have known of the materially false and misleading
information provided to the investors and granted summary judgment in favor of the SEC.
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y. 2011).
C.1.g
Plaintiffs brought derivative claims against foreign global media corporation and its
former executives for securities fraud in violation of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934 relating to allegations of artificially inflated prices as a result of
various misrepresentations made by defendants. After a jury trial on the merits, the jury
concluded that certain defendants violated the Exchange Act. Defendants filed a motion for
judgment as a matter of law, and while the motion was pending, the U.S. Supreme Court issued
its opinion in Morrison v. National Australia Bank, 130 S.Ct. 2869, (2010), holding that Section
10(b) does not apply extraterritorially. Accordingly, the court asked defendants to submit
supplemental briefs on the matter. The court found that the transactions in securities at issue in
the case were either purchased by foreign shareholders with a foreign bank or were purchased on
a foreign exchange by Americans. Such shares were not listed on a domestic exchange or
purchased in the United States, a requisite of bringing securities fraud claims under Morrison.
Accordingly, claims by such purchasers were dismissed.
In re MRU Holdings Securities Litigation, 769 F. Supp. 2d 500 (S.D.N.Y. 2011)
C.1.g
Investors in corporation that was purchaser, holder and seller of federal and private
student loans brought class action against defendant alleging violations of Rule 10b-5 and
Section 10(b) of the Securities Exchange Act of 1934. In particular, plaintiffs alleged that
defendants issued false and incomplete financial statements and press releases relating to
defendants’ issuance of auction rate securities (“ARS”), which resulted in the inflation of MRU’s
stock price. Merrill Lynch (“Merrill”) managed the auction process for defendants. In addition
to allegations against defendants, plaintiffs claimed that Merrill was equally liable for violations
97

of the Exchange Act based on Merrill’s participation in the ARS market because Merrill failed in
its duty to disclose the description of its auction practices. Plaintiffs further argued that Merrill
could be liable as a secondary actor. The court found that plaintiffs’ allegations were essentially
a fraud based on nondisclosure, which only would have arose with a fiduciary or similar
relationship. The court held that no such relationship existed because there was no relationship
of trust and confidence between plaintiffs and Merrill. Moreover, the court reasoned that
plaintiffs’ claim against a secondary actor under the Exchange Act is only cognizable based on
an actor’s own articulated statement, or on statements made by another that have been explicitly
adopted by the secondary actor. The court found Merrill neither made nor adopted such
statements and granted defendants’ motion to dismiss.
Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
C.1.g
Plaintiffs brought a complaint against defendants alleging violations of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 related to the purchase of equity linked
securities (“ELKs”). In particular, plaintiffs alleged that defendants made misrepresentations or
omissions related to the risks associated with ELKs. On defendants’ motion to dismiss,
defendants claimed that the court lacked jurisdiction to hear the Exchange Act claims because
the transaction did not involve a security listed on a domestic exchange. Specifically, defendants
argued that the ELKs were not purchased in the United States. The court disagreed, and found
that the notes, even though not purchased in the United States, were linked to securities listed on
a domestic exchange, namely the NYSE. The court reasoned that the purchase of a foreign
derivative instrument whose value was linked to the value of stock traded on a domestic
exchange constituted the “functional equivalent” of a purchase of a domestically traded stock.
Accordingly, the court had jurisdiction over the plaintiffs’ claims.
In re Optimal U.S. Litig., 2011 U.S. Dist. LEXIS 119141 (S.D.N.Y. Oct. 14, 2011).
C.1.g
Defendants, a Madoff feeder fund, filed a motion to dismiss claims under Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934 brought by plaintiffs relating to
fraudulent statements made in the feeder fund’s Explanatory Memorandum. Defendants claimed
that they did not “make” the fraudulent statements because they were not the issuer of the
Explanatory Memorandum. In dismissing the Section 10(b) and Rule 10b-5 claims, the court
followed the U.S. Supreme Court’s holding in Janus Capital Group v. First Derivative Traders,
131 S.Ct. 2296 (2011), which held that an investment advisor was not liable for fraud in
prospectus of sponsored mutual fund because investment advisor was not the “maker” of those
statements. The court reasoned that a statement is only made by the entity that delivers it.
However, the court found control person liability under Section 20(a) of the 1934 Act.
98

C.1.g
Fishman v. Morgan Keegan & Co., Inc., 2011 WL 3705187 (E.D. La. Aug. 24, 2011).
Plaintiff brought suit against Morgan Keegan based on, inter alia, violations of Section
10(b) of the Securities Exchange Act of 1934 relating to the purchase of Auction Rate Securities
(“ARS”) in 2005. Morgan Keegan claimed that plaintiff’s claim was time barred. Morgan
Keegan asserted that it had made disclosures in 2006 as a result of an SEC investigation, and
plaintiff should have discovered the alleged fraud as a result of the disclosures. On Morgan
Keegan’s motion to dismiss, the court held that plaintiff, as a non-institutional investor, was not
required to have known the information contained in Morgan Keegan’s disclosures because
plaintiff had bought the ARS prior to the additional disclosures required as a result of the SEC
investigation. Accordingly, the court denied Morgan Keegan’s motion to dismiss.
In re Burton W. Wiand, as Receiver, 2011 U.S. Dist. LEXIS 113212 (M.D. Fla. Sept. 29, 2011).
C.1.g
An investigation by the SEC led to a guilty plea by a hedge fund manager that perpetrated
a Ponzi scheme. As a result of the investigation, a receiver was appointed that initiated over 150
“clawback” cases in an attempt to recover false profits received by certain investors. Several of
these investors moved the court to compel arbitration of the clawback cases alleging, inter alia,
the violation of Rule 10b-5 of the Securities Exchange Act of 1934. The court agreed with the
investors, finding that the arbitration agreements in their contracts mandated arbitration.
Accordingly, the court granted the investors’ motion to compel arbitration.
2. Section 14
C.2
Besinger v. Denbury Resources Inc., 2011 U.S. Dist. LEXIS 91905 (E.D.N.Y., Aug. 11, 2011)
The U.S. District Court of the Eastern District of New York denied defendant’s motion to
dismiss claims asserted by plaintiff Besinger for violations of Section 11 of the Securities
Exchange Act of 1933 and Section 14 of the Securities Exchange Act of 1934. The defendant,
Denbury Resources Inc. (“Denbury”) contends that the plaintiff has not stated a claim upon
which relief can be granted.
Besinger claimed that the defendant’s violations stem from the use of materially
misleading information in Denbury’s registration and proxy statement regarding the formula
used to calculate the amount of compensation due to Encore Acquisition Company (“Encore”)
shareholders upon completion of Encore’s merger with Denbury. As a result of the
misinformation, Encore shareholders received significantly less compensation once the merger
was completed.
In determining whether the defendant’s motion should be denied, the court examined
plaintiff’s claims against the two actionable elements required for a Section 11 and Section 14
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claim; that there is an actual misstatement or omission at the time the statement is made and that
the misstatement or omission is materially misleading. The court found that, due to the several
misstatements regarding how compensation to the Encore shareholders would be calculated,
defendant’s actions met the first requirement under both sections 11 and 14. Further, the court
found that the misstatements made are not immaterial as a matter of law. Under Section 14, the
materiality standard turns on whether a reasonable shareholder would consider the fact important
in deciding how to vote. Accordingly, since the misstatements at issue related directly to the
compensation received by Encore shareholders, the misstatements are material as a matter of
law, causing defendant’s motion to dismiss to fail.
Tiberius Capital, LLC v. Petrosearch Energy Corporation, 2011 WL 1334839 (S.D.N.Y. Mar.
31, 2011)
In March 2009, Petrosearch Energy Corp. announced that it had entered into a merger
agreement with Double Eagle Petroleum Co. (DBLE). Plaintiff, a shareholder in Petrosearch,
made a tender offer, which the Petrosearch Board rejected. A proxy statement discussing the
DBLE merger and plaintiff’s tender offer was issued in July 2009, and the merger was approved
in a shareholder meeting in August of 2009. Plaintiff filed suit alleging violations of sections
10(b), 14(a), and 20(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder, as well as
state law claims. Plaintiff alleged in connection with both the Section 10(b) and 14(a) claims,
that Petrosearch had made a material misrepresentation that plaintiff was not entitled to
dissenters’ rights. Although Petrosearch had subsequently acknowledged that their
representation was in error, the court found that the conclusion that dissenters’ rights were
available was not obvious, and could only be reached after legal analysis, and that plaintiff did
not reasonably rely on the misrepresentation, as plaintiff had communicated its independent
conclusion that it was entitled to dissenters’ rights in a letter on the day of the shareholder
meeting. With specific reference to the Section 14(a) claim, the court found that as a minority
shareholder, plaintiff could not plead transaction causation, and that plaintiff’s votes were not
necessary for the approval of the merger. Following analysis of the aiding and abetting and state
law claims, the court granted defendant’s motion to dismiss.
Strugala v. Riggio, 2011 U.S. Dist. LEXIS 115834 (S.D.N.Y. Oct. 4, 2011).
Although the underlying claim is a Section 14(a) of the Exchange Act, this particular
decision is about whether the plaintiff sufficiently alleged under Delaware law that it would have
been futile to make a demand on the board before bringing a suit against the corporation. In this
case, the plaintiff failed to show that it would have been futile. The court decided that the
following, on their own, are insufficient to establish a reasonable doubt that the shareholders
were disinterested or independent: 1) the possibility that a shareholder would face a substantial
likelihood of liability; 2) the existence of an insured versus insured insurance policy; 3) the
previous payment of director’s fees; and 4) personal or close social relationships.
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Litwin v. Oceanfreight, Inc., 2011 WL 5223022 (S.D.N.Y., Nov. 2, 2011)
Plaintiff, on behalf of a putative class of shareholders of OceanFreight, Inc. common
stock, moved to enjoin a special shareholder meeting scheduled to vote on a proposed transaction
in which OceanFreight would be acquired by a subsidiary of DryShips, Inc. Both companies
were incorporated under the law of the Marshall Islands. Plaintiff alleged that the 17-day
solicitation period used was inadequate, and that the disclosures in the proxy failed to comply
with the federal securities laws. The court found that because OceanFreight was a foreign
private issuer of securities, they were exempt from Section 14(a) of the Exchange Act, and
further that NASDAQ, on which the shares were listed, permits foreign private issuers to utilize
their home country practice with respect to proxy timing, and that a 17-day notice period was
permissible under the laws of the Marshall Islands. The court also held with respect to the
alleged misstatements or omissions in the proxy disclosures, that OceanFreight was except from
Section 14(a) and Rule 14a-9 thereunder, as a foreign private issuer, but that even if it had been
subject to those provisions of the securities laws, plaintiff would have been unable to establish
loss causation, because DryShips already owned and controlled 50.5% of OceanFreight’s shares.
The court also rejected plaintiff’s other arguments, and accordingly found that plaintiff had failed
to demonstrate a likelihood of success on the merits and denied the motion.
Resnik v. Woertz, 774 F.Supp.2d 614 (D.Del. 2011).
Plaintiff, a shareholder of Archer-Daniels-Midland Co. (ADM), sued ADM and
individual defendants in connection with alleged violations of Section 14(a) of the Exchange Act
and derivative state law claims. Plaintiff’s Section 14(a) claims against ADM centered around
proxy disclosures regarding a proposed incentive plan, approved by shareholders in the annual
meeting in November 2009. The court found that the risk a bonus might not be tax deductible
and the information necessary to determine whether it is deductable are material to the average
investor at the time of the Proxy Statement. In that connection, the court found that plaintiff had
adequately pled that the number of individuals in a particular class who are eligible to participate
in an incentive plan, whether an incentive plan was designed to comply with Section 162(m) of
the Internal Revenue Code, and the omission of information on whether improved performance
would be required to achieve a bonus, how difficult it would be to achieve target levels, or how
target levels would be calculated would be material to investors. However, the court found that
plaintiff had failed to meet the heightened pleading standards because it did not allege economic
injury. Accordingly the court granted in part ADM’s motion to dismiss.
Seinfeld v. Connor, 774 F.Supp.2d 660 (D. Del. 2011)
The U.S. District Court for the District of Delaware granted defendants’ motion to
dismiss claims asserted by plaintiff Frank David Seinfeld for violations of Section 14(a) of the
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Exchange Act. Plaintiff’s claims arise from a proxy statement distributed by Republic Services,
Inc.’s (“Republic”) board of directors in advance of Republic’s annual stockholder meeting. The
proxy statement sought shareholder approval for several items, including two compensation
plans for Republic’s senior executives. Plaintiff asserted that the proxy statement contained
materially false and misleading statements or omissions regarding the ability of the
compensation plans to comply with Section 162(m) of the Internal Revenue Code.
In granting defendants’ motion to dismiss, the court determined that the proxy statement
issued by Republic did not make any misstatements regarding the proposed compensation plans
compliance with Section 162(m). The court found that the proxy statement made reasonable
conditional statements regarding compliance with Section 162(m) and that the plaintiff’s
complaint is based on his mischaracterization of the proxy statement. Further, the court found
that the defendant complied with the disclosure requirements of Section 162(m). Accordingly,
the court found that plaintiff’s claims for violations of Section 14(a) were unfounded.
In re Heckmann Corp. Sec. Litig., 2011 U.S. Dist. LEXIS 63830 (D.Del., June 16, 2011).
Plaintiff in a shareholder action alleged fraud, recklessness, and materially false
statements in connection with a merger between Heckmann Corp. and China Water and Drinks,
Inc. (“China Water”). Defendants were Heckmann Corp., China Water, and officers and
directors of Heckmann Corp. who had indicated in the proxy solicitation that they approved the
merger. Misstatements alleged in connection with the proxy solicitation for the merger included
(1) a failure to disclose that the audit firm had informed defendants that the president and CEO
of China Water had defended inconsistent VAT payments on the ground that such was common
practice in China and (2) that Heckmann Corp. had promised to reimburse the president and
CEO of China Water for 7.6 million shares of China Water stock used to induce China Water
shareholders to approve a merger amendment that reduced the amount of cash Heckmann Corp.
would have to pay.
Defendants moved to dismiss on a number of grounds. First, defendants argued that
plaintiff’s claims under Section 14(a) relied impermissibly on group pleading, but the court
found that because the complaint alleged that each defendant had specifically indicated their
approval of the merger in the proxy solicitation. The court also rejected defendants’ claims that
plaintiff had failed to meet the heightened state of mind pleading requirements of the PLSRA,
first on the grounds that the District of Delaware has not applied heightened pleading
requirements to claims under Section 14(a), and second because even if such claims were met,
the events underlying the alleged misstatements had occurred prior to the merger, but were not
disclosed in the proxy solicitation. The court further found that plaintiff met the loss causation
requirements for claims under Section 14(a) by alleging that that because if Heckmann Corp. had
failed to complete a qualifying transaction (e.g. the merger with China Water) within twenty-four
months of its IPO, shareholders would have received the IPO proceeds back, shareholders had
suffered a loss due to the merger and the proxy solicitation.
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Hysong v. Encore Energy Partners LP, 2011 U.S. Dist. LEXIS 130688 (D. Del. Nov. 10, 2011).
The plaintiff, a holder of limited partnership shares in Encore Energy Partners (“the
partnership”), filed a class action complaint against the partnership, several general partners, and
partnership executives. The plaintiff alleged violations of Section 14(a) of the Exchange Act of
1934, claiming that the Form S-4 Registration Statement issued by the defendants was
misleading due to several omissions. Plaintiff identified two categories of omitted facts that he
claims altered the totality of information: (1) information about the sales process and the
partnership’s efforts to auction the partnership rather than enter into a merger; and (2) the
underlying methodologies to calculate the value of the partnership.
The court found that the plaintiff’s complaint “does not adduce ‘enough facts to raise a
reasonable expectation that discovery will reveal evidence’ that any statement in the Registration
Statement is either (1) affirmatively misleading, or (2) rendered misleading by the omission of a
material fact.” The court found the plaintiff’s complaint to be nothing more than a “threadbare
recital” of the elements of a Section 14(a) claim, and held that that plaintiff failed to identify any
specific misleading statement and thus failed to state a cause of action against the defendants
under Section 14(a).
Resnik v. Boskin, 2011 U.S. Dist. LEXIS 16634 (D.N.J. Feb. 17, 2011).
The plaintiff, a stockholder of Exxon, filed suit against numerous defendants, including
Exxon, the corporation, for various claims in connection with 2008 and 2009 proxy statements
soliciting shareholder votes. In 1997 and 2003, Exxon solicited and obtained shareholder
approval for an executive compensation program and an employee performance compensation
program (collectively, the “Programs”). The plaintiff alleged that Exxon’s 2008 and 2009 proxy
statements, which solicited shareholder vote for the election of Exxon directors, ratification of
the selection of Exxon’s independent auditor, and various other proposals, never asked Exxon
shareholders to vote for the Programs or the tax treatment of the Programs. Moreover, the
plaintiff claimed that Exxon violated Section 14(a) of the Securities Exchange Act of 1934 when
it improperly solicited shareholder vote by erroneously stating that the Programs were taxdeductible.
The court granted defendants’ motion to dismiss plaintiff’s Section 14(a) claim, finding
that plaintiff had failed to establish that the alleged misrepresentations regarding the tax
implications of the Programs related to anything on which Exxon shareholders were called to
vote in the 2008 and 2009 proxy statements. Indeed, the 2008 and 2009 proxy statements dealt
only with the election of Exxon directors, the ratification of an independent auditor, and other
proposals not related to the Programs. Therefore, because neither the Programs nor their taxdeductibility
were covered by the 2008 and 2009 proxy statements, the court found that
defendants did not make a materially false or misleading proxy solicitation in connection with
the 2008 and 2009 shareholder votes.
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Jasin v. Kozlowski, 2011 U.S. Dist. LEXIS 91802 (M.D. Pa., Nov. 3, 2010).
This matter came to the court on defendants’ motion for reconsideration and on
defendants’ independent motion for summary judgment. Regarding the former, the defendant
moved for reconsideration of the court’s previous order granting in part and denying in part
defendants’ motion for summary judgment on the ground that plaintiff could not identify any
evidence of loss causation, as required under sections 14(a) and 10(b) of the 1934 Securities and
Exchange Act. In granting the defendants’ motion for reconsideration, the court held it had
committed an error of fact in considering an expert report that had been “submitted on behalf of
a plaintiff in a different case.” Id. at *21. Consequently, as the expert report was the “only
competent evidence presented by plaintiff to establish loss causation, plaintiff [was] unable to
establish violations of sections 10(b) and 14(a).” Id.
KBR, Inc. v. Chevedden, 776 F.Supp.2d 415 (S.D.Tex. 2011)
KBR Inc. v. Chevedden, 2011 U.S. Dist. LEXIS 36431 (S.D. Tex. Apr. 4, 2011).
KBR, Inc. v. Chevedden, 2011 U.S.Dist.LEXIS 139257 (S.D.Tex., Dec. 5, 2011)
Chevedden, a shareholder of KBR, submitted a shareholder proposal to be included in
KBR’s proxy statement for its May 2011 annual shareholder meeting. Chevedden submitted a
written statement from RAM Trust Services (RTS) affirming that he had met the ownership
requirements under Rule 14a-8(b)(1). KBR responded that because RTS was not a record holder
of KBR stock, additional documentation would be required. Chevedden did not supply the
additional documentation requested. KBR filed suit seeking a declaratory judgment that KBR
was not required to include Chevedden’s shareholder proposal in its proxy statement.
In ruling on Chevedden’s motion to dismiss, the court found that there is a private cause
of action to enforce Rule 14a-9, and that a public company has standing to seek a declaratory
judgment that a shareholder’s proposal is properly excluded from a proxy statement because the
shareholder’s ability to sue or challenge the exclusion creates uncertainty warranting judicial
resolution. In a previous case, involving the same plaintiff, the court had found the same type of
letter from an introducing broker (such as RTS) insufficient under Rule 14a-8. The court ruled
that KBR could exclude Chevedden’s proposal, but before granting KBR’s summary judgment
motion, requested that the parties address no-action letters issued by the SEC in additional
briefing.
Both parties submitted additional briefings, but Chevedden did not comment on SEC noaction-letter
decisions. Instead, Chevedden made promised that he would not sue the Plaintiff if
it elected to remove his proposal from its proxy materials. In granting KBR’s motion for
summary judgment, the court stated that, although Chevedden had promised not to sue, the
promise did not eliminate any case or controversy. Chevedden’s refusal to withdraw his
proposal after requests from KBR to do so demonstrated his inclination to continue to litigate
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and created an uncertainty that KBR was entitled to have clarified. Subsequently, Chevedden
filed motions for reconsideration all of which were denied.
LNB Bancorp, Inc. v. Osborne, 2011 U.S. Dist. LEXIS 137705 (E.D.Ohio, Nov. 30, 2011)
Defendant, Osborne, was a shareholder of LNB. In 2008, he mounted a proxy contest
seeking to compel LNB to include language in its proxy materials. This contest was resolved
with a settlement agreement pursuant to which Osborne was entitled to designate two members
of LNB’s board. The term of the agreement lasted for 18 months, or until those board members
resigned. In 2009, Osborne filed an amended Schedule 13D indicating his intent to conduct a
proxy campaign to elect his nominees to LNB’s board. LNB filed suit seeking to enforce the
terms of the agreement. Osborne was preliminarily enjoined from engaging in activities
prohibited by the settlement agreement. In February 2010, Osborne filed a motion to dissolve
the preliminary injunction, on the grounds that the agreement was no longer in effect. The
district court found that because Osborne’s designees had not resigned from the board, the
agreement was still in effect, and therefore denied the motion. On appeal, the Sixth Circuit
upheld the reasoning of the district court. LNB moved for partial summary judgment, which
motion was granted in part and denied in part. Osborne moved for summary judgment, arguing
contra LNB that he had not violated Section 14(a) of the Exchange Act by omitting from his
preliminary proxy filings any mention of an intent to merge LNB with another company, PVF, or
by stating his belief that the agreement had been terminated. The court found that material issues
of fact remained with respect to these points, and accordingly denied Osborne’s motion for
summary judgment.
Black v. Cincinnati Fin. Corp., 2011 U.S. Dist. LEXIS 46852 (S.D. Ohio 2011)
The U.S. District Court for the Southern District of Ohio denied plaintiff’s motion for a
temporary restraining order and preliminary injunction to prevent Cincinnati Financial from
holding a shareholder vote. Plaintiff further requested that Cincinnati Financial be ordered to
revise its 2011 Proxy Statement in order to ensure compliance with Section 14(a) of the
Securities Exchange Act of 1934.
The court found that plaintiff was unlikely to succeed on the merits of the claim that the
defendant violated Section 14(a). Plaintiff alleged that the 2011 Proxy Statement contained false
and misleading statements regarding the company’s senior executive compensation plan’s
compliance with Section 162(m) of the Internal Revenue Code. Specifically, plaintiff contended
that the performance goals in the company’s stock plan were too broad to qualify for the tax
exemption offered by Section 162(m). Upon a review of Section 162(m), the court found that
the 2011 Proxy Statement issued by the defendant fully complied with its disclosure obligations
regarding the compensation plan’s compliance with Section 162(m). Accordingly, the court
found that plaintiff is unlikely to succeed on its claim that a violation of Section 14(a) occurred.
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Dixon v. Ladish Company, Inc., 785 F.Supp.2d 746 (E.D.Wis. 2011)
The U.S. District Court for the Eastern District of Wisconsin granted defendants’ motion
to dismiss claims alleged by plaintiff, Dixon, for violations of Sections 14(a) and 20(a) of the
Securities Exchange Act. The plaintiff also asserts a claim for breach of fiduciary duty, arising
under Wisconsin law. Defendants contend that the plaintiff’s claims arising under Section 14(a)
must fail because the claims are not plead with the particularity required under the Private
Securities Litigation Reform Act (“PSLRA”).
The claims arise from a merger agreement between Ladish Company Inc. (“Ladish”) and
Allegheny Technologies, Inc. (“Allegheny”), in which Allegheny agreed to acquire Ladish. The
court found that while the amended compliant alleged that the registration statement misstated
and omitted material information; the complaint did not allege any specific facts to support the
general allegations. The complaint also contained general allegations regarding the lack on
information regarding Ladish’s decision to enter into, and subsequently approve of, the merger
agreement with Allegheny. However, the court found that, without specific facts relating to how
such an omission lead to misstatements, the claim failed under the requirements of the PSLRA.
The court found this to be true regardless of whether the misstatements were material.
SEC v. Mercury Interactive, LLC, 2011 U.S. Dist. LEXIS 134580 (N.D. Cal. Nov. 22, 2011).
On a motion to reconsider the denial of defendant’s motion to dismiss plaintiff’s Section
14(a) claim, the court held that Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct.
2296 (2011), did not apply to Section 14(a) claims. The Supreme Court in Janus decided that
“[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate
authority over the statement, including its content and whether and how to communicate it.” Id.
at 2302. The court noted that Section 14(a), however, “proscribe[s] the solicitation of proxies
‘by means of’ false or misleading statements.” Mercury Interactive, 2011 U.S. Dist. LEXIS
134580, at *8 (quoting Section 14(a)). Because Section 14(a) is not limited to those situations in
which someone “makes a statement,” that is, the language that the Janus Court construed, Janus
does not apply to Section 14(a) claims.
SEC v. Zhenyu Ni, Case No. CV-11-0708 DMR, SEC Litig. Rel. No. 21859 (N.D.Cal. Feb. 16,
2011).
The Commission brought suit alleging, inter alia, that defendant had violated Section
14(e) of the Exchange Act and Rule 14e-3 thereunder by trading in shares of Bare Escentuals,
Inc., after overhearing confidential communications suggesting upcoming merger while sitting in
the office of his sister, who was then Director of Tax at Bare. The Commission also alleged
violations of Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder. Defendant
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consented to the entry of a final judgment enjoining him from violations of the aforementioned
provisions of the securities laws, requiring him to pay $157,615 in disgorgement and
prejudgment interest, and a $157,066 civil penalty.
SEC v. Kovzan, 2011 U.S. Dist. LEXIS 85794 (D. Kan. Aug. 4, 2011).
The Commission alleged violations of the securities laws by defendant, CFO and CAO of
NIC Inc., in connection with failures to disclose information about compensation and perquisites
provided to the CEO, such as compensation for his commute by private airplane from Wyoming
to Kansas, as well as reimbursement of other personal expenses. Count 9 alleged that defendant
aided and abetted violations of Section 14(a) of the Exchange Act, and Rules 14a-3 and 14a-9
thereunder.
On a motion to dismiss, the court denied the Section 14(a) to the extent it was based on
allegations that NIC’s proxy statements were misleading because they referred to NIC’s code of
ethics without also disclosing violations of that code. The court found that the disclosures did
not suggest that there had been no violations or waivers of the provisions of that code of ethics.
The court found, with respect to other allegations underlying the Section 14(a) claim, that the
Commission had sufficiently pleaded that defendant had notice of problems with the CEO’s
expenses and that without identifying all facts entering into the total mix of information
concerning NIC, it could be said as a matter of law, that the alleged perquisites to the CEO
would not have altered the total mix of information. The court also found that the complaint
alleged facts supporting a plausible inference that defendant knew the CEO was commuting from
Wyoming to Kansas, and was receiving reimbursements for personal expenses, and that this was
sufficient to show either recklessness or actual knowledge as required for aiding and abetting
liability. Accordingly, the court denied the motion to dismiss with respect to aiding and abetting
violations of Section 14(a).
SEC v. Weintraub, 2011 U.S. Dist. LEXIS 14999 (S.D. Fla. Dec. 30, 2011)
The Commission filed suit against the defendant, Allen E. Weintraub (“Weintraub”) and
AWMS Acquisition, Inc. d/b/a/ Sterling Global Holdings (“Sterling Global”) for violations of
sections 10(b) and 14(e) of the Securities and Exchange Act and Rules 10b-5 and 14e-8
thereunder. The court granted the Commission’s motion for summary judgment.
On March 19 and March 29, 2011, Weintraub issued offer letters to both Eastman Kodak
Company (“Kodak”) and AMR Corporation (“AMR”) offering to purchase the company’s
outstanding stock. Weintraub also provided the offer letters to investors of both companies and
press outlets. However, Weintraub had not secured any credit with which to finance either
purchase transaction, nor did he disclose to the companies or their investors that he had pled
guilty to organized fraud and money laundering and was on probation at the time the offer letters
were issued. The SEC alleged that Weintraub violated the above sections of the Securities and
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Exchange Act by making materially false and misleading statements regarding his ability to
secure financing and close the proposed deals with Kodak and AMR. Further, the SEC alleged
that Weintraub made materially false and misleading statements regarding his own background.
The SEC requested that the court permanently restrain and enjoin the defendants from violating
sections 10(b) and 14(e) and the rules thereunder.
In granting summary judgment on the Section 14(e) claim, the court determined that,
while the offer letters were not formal tender offers, the letters were pre-commencement
communications that fall under the purview of Rule 14e-8. Accordingly, Weintraub’s tender
offer letters and material misstatements regarding his ability to complete the proposed
transactions and his background violate the antifraud provisions of both Section 14(e) of the
Securities and Exchange Act and Rule 14e-8.
In re Sam P. Douglass and Anthony R. Moore, Securities and Exchange Commission,
Administrative Proceeding File No. 3-13934 (Feb. 24, 2011).
The Commission filed an administrative proceeding against Douglass, formerly
Chairman and CEO of Equus, a business development company, alleging misleading disclosures
regarding officer compensation in proxy statements in 2005 and 2006, and in quarterly and other
filings with the Commission. In 2005, Equus made a proxy solicitation for approval of a change
in investment adviser and fund administrator. The Commission alleged that in connection with
the 2005 proxy solicitation, Douglass had stated in a press release that the purchase price for
shares issued upon exercise of options held by officers and directors would not exceed the
current market price for shares, when an agreement had already been negotiated which would
compensate a senior vice president for his shares at a premium above market price. The
Commission alleged that in 2006, Equus’s annual proxy statement omitted to disclose more than
$460,000 which had been paid to the senior vice president as a consulting fee to the new
administrator in connection with the change in investment adviser and manager, and as a
retention bonus. Because of this and other conduct alleged, the Commission found that Douglass
had violated Section 14(a) of the Exchange Act, and Rules 13b2-1, 13b2-2, and 14a-9
thereunder, as well as causing violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Section 206(2) of
the Investment Advisers Act.
Without admitting or denying the findings, Douglass consented to the entry of an order
(1) requiring him to cease and desist the above mentioned provisions of the securities laws, (2)
censuring him, and (3) requiring him to pay a $25,000 penalty.
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3. Section 15(c)
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SEC v. Ficeto, Homm, Heatherington, Hunter World Markets, Inc., and Hunter Advisors, LLC,,
2011 SEC LEXIS 716, SEC Litigation Release No. 21865 (February 25, 2011)
The SEC charged Todd M. Ficeto, Florian Homm, their investment firms, and their hedge
fund trader, Colin Heatherington (“Defendants”) with violations of sections of the Securities
Exchange Act of 1934 (“Exchange Act”) and the Investment Advisers Act of 1940 (“Advisers
Act”). By engaging in portfolio pumping, match ordering, orders marking the close, wash
trades, and backdate orders, the Defendants reportedly generated more than $63 million in illicit
proceeds. The $63 million came from commissions, manipulated stock sales, and sales credits.
The SEC alleges that for two years from September 2005 to September 2007, Ficeto and Homm
orchestrated an elaborate scheme using the broker-dealer firm they co-owned, Hunter World
Markets, Inc. (“HWM”), and the London-based hedge fund manager, Absolute Capital
Management Holdings Limited (“ACMH”), owned by Homm. Using traders, mostly
Heatherington and HWM’s trader Tony Ahn, Ficeto and Homm purchased microcap companies
publicly and then used various manipulation techniques to increase the stock prices of these
companies before selling their shares to ACMH. Additionally, Ficeto obtained more money
from this scheme through sole ownership of an investment advisor agency, Hunter Advisors,
LLC (“Hunter Advisors”), that maintained the Hunter Fund, Ltd (the “Fund”). The Fund’s sole
investors were three of the ACMH hedge funds being used for the fraudulent scheme. The
principals from ACMH and HWM used a secret, alternative message system to send instant
messages to one another to arrange the deals.
The defendants face a number of direct charges under the Exchange Act and Advisers
Act and several aiding and abetting charges. All defendants, except Hunter Advisors, are
charged with fraud under 10(b) of the Exchange Act and Exchange Act Rule 10b-5. HMW alone
is charged with fraud under 15(c)(1), while Ficeto, Homm, and Heatherington are charged with
aiding and abetting that fraud. Additionally, HMW is charged with violations of 17(a) and Rules
17a-4(b)(4) and 17a-8. Homm, Ficeto, and Hunter Advisors are all charged with investment
adviser fraud under 206 (1) and 206(2) of the Advisers Act. Ficeto’s additional charges include
fraud under 17(a), aiding and abiding HWM’s failure to keep proper records under 17(a) and
Rules 17a-4(b)(4), and aiding and abetting Homm’s investment adviser fraud under the Adviser
Act (along with Heatherington and HMW). The SEC seeks permanent injunctive relief,
disgorgement of ill-gotten profits along with prejudgment interest, and civil penalties. The SEC
also seeks to permanently bar Ficeto from acting as an officer or director of a public company
and to impose a penny stock bar against him.
Charges were also brought against Ahn and former chief compliance officer, Elizabeth
Pagliarini, but both settled their cases without admitting or denying the allegations. Ahn’s
penalties include a $40,000 fine and prohibition from association with a broker and dealer for
five years. Pagliarini agreed to a $20,000 penalty and a one-year suspension as a supervisor with
a broker or dealer.
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SEC v. UBS Financial Services Inc., 2011 SEC LEXIS 1555, SEC Litigation Release No. 21956
(May 4, 2011)
On May 4, 2011, the SEC filed a complaint against UBS Financial Services Inc. (“UBS”)
in the U.S. District Court for the District of New Jersey alleging that UBS engaged in various
fraudulent bidding practices in connection with at least 100 municipal bond transactions.
According to the Commission, UBS made fraudulent misrepresentations and omissions to
various municipalities and their agents. Specifically, UBS illegally won bids as a provider of
reinvestment products, rigged bids for the benefit of other providers while acting as a bidding
agent for the municipalities, and facilitated the payment of improper, undisclosed amounts to
other bidding agents. As a result of this conduct, UBS generated millions of dollars in ill-gotten
gains and threatened the tax status of over $16.5 billion of underlying municipal securities.
Without admitting or denying these allegations, UBS has consented to entry of a final
judgment enjoining it from violations of Section 15(c) of the Securities Exchange Act of 1934
and has agreed to pay a penalty of $32.5 million and disgorgement of $9,606,543 with
prejudgment interest of $5,100,637. The settlement was approved by the court on May 6, 2011.
SEC v. J.P. Morgan Securities LLC, 2011 SEC LEXIS 2329, SEC Litigation Release No. 22031
(July 7, 2011)
On July 7, 2011, the SEC filed a complaint against J.P. Morgan Securities LLC (“J.P.
Morgan”) in the U.S. District Court for the District of New Jersey alleging that J.P. Morgan
engaged in various fraudulent bidding practices in connection with at least 93 municipal bond
reinvestment transactions. According to the Commission, through misrepresentations and
omissions, J.P. Morgan, acting as an agent for its affiliated commercial bank, affected the prices
municipalities paid for reinvestment products and deprived municipalities the presumption that
the reinvestment products were purchased at fair value. Specifically, J.P. Morgan engaged in
“last looks,” a process by which it won bids because it obtained information from bidding agents
about other bids, “set-ups,” a process by which it won bids because the bidding agent
deliberately obtained non-winning bids from other providers, and rigging bids for other providers
by deliberately submitting non-winning bids. As a result of this conduct, J.P. Morgan generated
millions of dollars in ill-gotten gains and threatened the tax status of billions of dollars of
underlying municipal securities.
Without admitting or denying these allegations, J.P. Morgan has consented to entry of a
final judgment enjoining it from violations of Section 15(c)(1)(A) of the Securities Exchange Act
of 1934 and has agreed to pay a penalty of $32.5 million and disgorgement of $11,065,969 with
prejudgment interest of $7,620,380. The settlement was approved by the court on July 8, 2011.
J.P. Morgan and its affiliates have also agreed to pay $177 million to settle parallel charges
brought by other federal and state authorities.
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SEC v. Stifel, Nicolaus & Co., Inc. and David Noack, 2011 SEC LEXIS 2767, SEC Litigation
Release No. 22064 (August 10, 2011)
On August 10, 2011, the SEC filed a complaint in the U.S. District Court for the Eastern
District of Wisconsin against Stifel, Nicolaus & Co, Inc. (“Stifel”), a registered broker-dealer
and investment advisor, and former Senior Vice President David Noack alleging the fraudulent
sale of unsuitable financial instruments to five Wisconsin school districts. According to the
Commission, Stifel and Noack encouraged the risk-averse school districts to invest in notes
linked to the performance of synthetic collateralized debt obligations (“CDOs”) as a means to
fund retiree benefits owed to current and former employees. However, Stifel and Noack
misrepresented the risks associates with the investment and failed to disclose material facts.
Specifically, Stifel and Noack made “sweeping assurances” to the school districts,
misrepresented that 30 of the 105 companies in the portfolio would have to default and that 100
of the top 800 companies in the world would have to fail before the school districts would suffer
a loss of their principle, and failed to disclose poor portfolio performance, credit downgrades, the
concerns by CDO providers about the investments, such as selling this type of product to this
investor, and the providers’ ultimate refusal to participate. According to the Commission, the
school districts did not have prior experience investing in CDOs and lacked the sophistication to
independently evaluate the investment. Over a few years, the school districts’ $200 million
investment became worthless.
The SEC has charged Stifel and Noack with violating Section 17(a) of the Securities Act
of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and
Stifel with violating and Noack with aiding and abetting violations of Section 15(c)(1)(A) of the
Securities Exchange Act of 1934. The investigation is ongoing.
SEC v. Finger and Black Diamond Securities LLC, 2011 SEC LEXIS 3132, SEC Litigation
Release No. 22087 (September 8, 2011)
The SEC is alleging that Richard A. Finger Jr. and his brokerage firm Black Diamond
Securities LLC (“Black Diamond”) violated Sections 10(b) and 15(c)(1)(A) of the Securities
Exchange Act of 1934 (“Exchange Act”) by cheating customers out of millions of dollars
through unauthorized, high-risk options trading and excessive commissions. Finger, who was
the sole owner and majority shareholder of Black Diamond, obtained most of his clientele from
family and friends who he served in his previous positions at other financial institutions.
The complaint, filed on September 8, 2011, alleges that Finger falsified documents and
customer receipts indicating higher account balances and lower commission percentages than
were actually in the account. In one instance, characteristic of all Black Diamond accounts,
Finger reported nearly $800,000 on his customer statement when the account actually only had
$62.00. Additionally, Finger reportedly told his clients that he was taking little or no
commission on certain transactions, while in reality he was purportedly taking hundreds of
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thousands of dollars to finance his lavish lifestyle which included a $2 million dollar home and
luxury vehicles.
Under Section 10(b) of the Exchange Act and Rule 10b-5, Finger and Black Diamond are
charged for their fraudulent behavior in connection with the purchase or sale of securities. Black
Diamond is charged under 15(c)(1)(A) as broker and Finger is charged under Section
15(c)(1)(A) for aiding and abetting the fraudulent activity of the brokerage firm. The SEC seeks
permanent injunctions, disgorgement of ill-gotten gains, civil penalties, prejudgment interest, an
asset freeze, an accounting, and orders allowing for expedited discovery and prevention of any
destruction of accounting records, ledgers, and other business instrumentalities.
In re Richard Goble, 2011 SEC LEXIS 3492, SEC Initial Decision Release No. 435 (October 5,
2011)
On October 5, 2011, administrative law judge Cameron Elliot granted the SEC’s Motion
for Summary Disposition affirming the April 27, 2011 district court decision holding Richard L.
Goble liable for committing fraud and aiding and abetting his clearing firm’s violations of
sections 10(b), 15(c)(3), and 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and
Exchange Act Rules 10b-5, 15c3-3, and 17a-3. Goble was the founder, sole owner, former board
member, and a director of North American Clearing, Inc (“North American”). North American
was a clearing firm for approximately 40 correspondent firms and more than 10,000 customer
accounts. In response to financial trouble arising in late 2007, Goble and his financial team
falsified final records in an effort to obtain operating funds through consumer funds maintained
in a special reserve account (“Account”). Based on this false documentation, Goble illegally
transferred $3.4 million from the Account. Goble was permanently enjoined from violating SEC
laws and from attempting to obtain a security license and/or engage in the securities business.
Goble also had to pay a $7,500 civil penalty.
On May 14, 2008, to comply with Exchange Act 15(c)(3) and Rule 15c3-3 weekly
reserve requirements, Goble instructed Timothy Ward, former financial and operations principal,
to record a sham purchase of approximately $5 million in money market funds and to fabricate
North American’s money market statement to show a customer credit balance of $5 million less
than its actual balance. Since these falsified documents showed customer debits exceeded
customer credits, Wade was seemingly able to lawfully withdraw $3.4 million from the Account
to meet legitimate operational expenses. On May 15, 2008, FINRA examiners discovered the
sham exchange and immediately directed North American to return the $3.4 million to the
Account. Using the proper financial data, FINRA also determined that North American actually
owed the Account $1.8 million. Unable to meet the deposit requirement, North American was
forced into bankruptcy and charges were brought against North American officials.
The SEC investigation began on May 27, 2008 when Goble, Bruce Blatman, former
North American president, and Ward were charged with violations of 10(b), 15(c)(3), and 17(a)
of the Exchange Act and Exchange Act Rules 10b-5, 15c3-3, and 17a-3. Blatman and Ward
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settled with the SEC prior to the conclusion of Goble’s case. Without affirming or denying
liability, they consented to permanent injunctions and civil penalties.
4. Section 16(b)
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Katz v. SEC, 647 F.3d 1156, 2011 U.S. App. LEXIS 16141 (DC Cir. 2011).
Petitioner, a representative associated with a member of the NYSE, sought review of an
SEC order sustaining a NYSE disciplinary action. An NYSE hearing panel had found that
petitioner caused customer funds to be transferred to other customers’ accounts without
authorization, made misstatements to a customer, effected unsuitable transactions, and engaged
in unauthorized trading. A portion of the case, and NYSE’s findings, concerned a finding that
petitioner violated SEC Rules 17a-3 and 17a-4, by entering or causing to be entered inaccurate
information on a customer’s new account forms. The SEC had sustained the NYSE’s finding
that petitioner caused her firm to fail to learn essential facts about the customer by entering, or
causing to be entered, inaccurate information on the customer’s new account forms, including
her investment objective, income, net worth, and financial experience.
Petitioner challenged the SEC’s finding that she caused her firm’s books and records to
be inaccurate, largely on the grounds that similar charges had been brought with respect to the
account forms of other similar customers and dismissed by the SEC. From this, she argued, it
was arbitrary for the SEC not to also reject the books and records violation as to the remaining
customer. But, the court pointed to various findings of the SEC that supported the conclusion
that the account form of the remaining customer was inaccurate, and that the evidence supporting
those inaccuracies stood in contrast to the lack of evidence of inaccuracies that caused the other
charged violations to be dismissed. Therefore, the court held, it was not arbitrary for the SEC to
dismiss the books-and-records charges regarding those clients’ forms while affirming the finding
of a violation with respect to the remaining client’s form. Thus, the D.C. Circuit affirmed the
SEC’s order, not only with respect to the books-and-records findings, but as to all findings.
VanCook v. SEC, 653 F.3d 130 (2nd Cir. 2011).
Petitioner, a former stockbroker, sought review of an SEC order finding that he willfully
violated the Securities Exchange Act’s antifraud and recordkeeping provisions and imposing
penalties, by virtue of a scheme involving late trading of mutual funds and aiding and abetting
and causing his firm to keep inaccurate books and records, in violation of Section 17(a)(1) and
SEC Rule 17a-3. Specifically, the Section 17 violation pertained to the requirement that the firm
maintain a memorandum of an order, including the time at which the order was received. The
receipt of the order is important to mutual fund trading because only orders received by 4:00
p.m. are entitled to receive that day’s valuation, calculated by the mutual fund after 4:00 p.m.
based on that’s day’s trading activity. The SEC had barred petition from working in the
securities industry and required him to disgorge his unjust enrichment and imposed a civil money
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penalty. The Second Circuit held that there was sufficient evidence in the record to support the
SEC’s finding that petitioner had actual knowledge that his firm’s records were inaccurate,
including that he himself had failed to record the actual times that final trading instructions were
given and that he had also designed the mechanism by which the records were falsified, and in so
doing, aided and abetted the recording keeping requirements. The Second Circuit denied the
petition and affirmed the SEC’s order.
Simmonds v. Credit Suisse Securities (USA), LLC, 638 F.3d 1072 (9th Cir. 2011)
Plaintiff appealed the district court’s dismissal of fifty-four related derivative complaints
brought under Section 16(b), seeking to recover disgorgement of alleged short-swing trading
profits. Specifically, plaintiff alleged that defendants, who were investment banks participating
in Initial Public Offerings (IPOs) of companies coordinated their activities with the issuers’
officers, directors, and principal shareholders to obtain financial benefits from increases in the
stock prices after the IPOs. The transactions in question occurred in 1999 and 2000, while the
complaints were filed in 2007.
As to thirty of the cases, the Ninth Circuit affirmed the district court’s dismissal based on
lack of a proper pre-suit demand letter. The court, however, reversed the district court’s decision
that the remaining twenty-four cases were by the two-year statute of limitations for Section 16(b)
claims. The Ninth Circuit reaffirmed its rule articulated in Whittaker v. Whittaker Corp., 639
F.2d 516 (9th Cir. 1981), tolling the two-year limitations period to recover short-swing profits
from corporate insiders under Section 16(b) until the insider reports the offending trades to the
SEC under Section 16(a). Under the Ninth Circuit rule, the plaintiff’s actual knowledge of his or
her claim and failure to sue in spite of that knowledge is not considered, which prompted the
author of the main opinion, in a special concurring opinion, to note that the rule ignores the text
of Section 16(b) and congressional intent, and that were it not for clear precedent in the Ninth
Circuit, he would have would limited the filing of Section 16(b) suits to within two years after
the short-swing trades actually took place.
The Supreme Court granted certiorari and heard oral argument on November 29, 2011.
Chechelle v. Sheetz, 2011 U.S. Dist. LEXIS 97489 (S.D.N.Y., Aug. 29, 2011).
The district court granted a motion to dismiss a shareholder’s short-swing insider trading
claim under Section 16(b) on the grounds that defendant was not shown to have beneficially
owned more than ten percent of the corporation’s stock. Although the plaintiff alleged the
existence of agreements that defendant was part of a shareholder group, the court found those
allegations too conclusory to justify maintaining the action.
Defendant was president and CEO of a public company, as well as the co-founder, cochairman
and co-CEO of a separate corporation formed “for the purpose of investing in debt and
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equity interests in real estate assets and businesses.” Defendant was allegedly a member of a
shareholder group as defined in Section 13(d) of the Exchange Act, which allegedly included the
investment corporation, and other individuals who were insiders of the public company, and
officers of the investment corporation. Plaintiff alleged that the existence of a shareholder group
could be inferred from a series of at least five agreements for the purpose of acquiring, holding,
voting, or disposing of the company’s common stock a “Credit Agreement” and “Lock-Up
Agreements,” among others. While the court credited the existence of the agreements, it did not
agree that the existence of the agreements amounted to a plausible claim that the defendant had
made an agreement with the others to form a shareholder group. The court denied leave to
amend.
Gibbons v. Malone, 801 F. Supp. 2d 243; (S.D.N.Y. 2011).
Plaintiff filed suit under Section 16(b) against a director of a public company seeking to
recover disgorgement of short-swing profits from a series of purchases and sales occurring in an
eleven day period in 2008. Referring to the plaintiff’s legal theory of liability as “novel,” the
court considered the contention that the directors sales of shares of Series C stock should be
matched with his purchases of Series A stock. The district court held that a director’s alleged
sales of the one series of stock and purchases of a different series did not constitute a short swing
transaction under Section 16(b). The court looked to the language of Section 16(b), which refers
to profits realized from “the purchase and sale, or sale and purchase, of any equity security of the
issuer.” Analyzing the features of the Series A and C shares, the court noted that unlike some
situations, where courts have held that different securities could be “matched” for Section 16(b)
purposes, the Series A and C shares were neither derivatives of, nor convertible into the same
security. Further, the voting rights of the shares were different and they had different dividend
features. As a result, the court dismissed plaintiff’s action.
Grecco v. Local.Com Corp., 806 F. Supp. 2d 653; 2011 U.S. Dist. LEXIS 4319 (S.D.N.Y. 2011).
Plaintiff, a shareholder of a public company, filed a derivative action alleging that
defendant Hearst Communications, Inc. (“Hearst”) purchased securities of the company in
violation of Section 16(b). Hearst moved for leave to amend its answer to assert the affirmative
defenses of res judicata and collateral estoppel, and for summary judgment based on such
defenses.
Plaintiff’s action challenged the same transactions as a prior action filed by a different
derivative plaintiff. That prior plaintiff’s action failed, having been dismissed on summary
judgment, with such dismissal affirmed on appeal. The new plaintiff attempted to justify the
new case, and opposed Hurst’s res judicata argument, by contending that he was not in privity
with the prior plaintiff, and that the prior plaintiff’s prosecution of the case was inadequate to
represent the shareholders. The court found that plaintiff had alleged no conflict of interest
between himself and the prior plaintiff, and that differences in legal strategy do not amount to
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inadequate representation. Moreover, the court noted that the plaintiff had notice of the prior
action and failed to intervene. As such, the court granted Hurst’s motion to amend, and granted
summary judgment in Hurst’s favor.
Klawonn v. YA Global Investments, L.P., 2011 U.S. Dist. LEXIS 88535 (D. N.J., Aug. 10, 2011).
Plaintiff alleged that defendant earned short-swing profits from trading in the stock of a
public company under a variety of theories under which defendant would be treated as a
statutory insider by virtue of beneficial ownership of more than ten percent of the company’s
common stock. The court considered the allegations under an amended complaint, designed to
remedy deficiencies concerning the beneficial ownership allegations in the original complaint.
Defendant argued that conversion caps were in place for all the relevant securities agreements
that plaintiff relied upon to establish ten percent ownership, which limited defendant’s voting
rights 4.99 percent. Plaintiff, in turn, argued that the caps were ineffective for various reasons,
both factual and legal.
The court rejected theories that the conversion caps were ineffective based on theories that: (a)
voting rights conferred to defendant by a convertible series of stock established greater than ten
percent beneficial ownership; (b) defendant was the beneficial owner of the stock held in
“escrow” by a third party; (c) the conversion caps should be deemed illusory, based on the
position taken by the SEC an amicus brief filed in a different case; and (d) SEC Rule 13d-3(b),
which prohibits the use of agreement as part of a plan or scheme to evade reporting
requirements, rendered the caps invalid. The court, however, found that the claim based a
waiver of the conversion caps as to certain convertible debentures, caused by the company’s
registration-related defaults, was sufficient to state a plausibly viable claim, and allowed the case
to proceed solely on that theory. As such, the motion to dismiss was granted in part and denied
in part.
C.4
5. Section 17
C.5
SEC v. Tecumseh Holdings Corp., 765 F.Supp.2d 340 (S.D.N.Y 2011).
This case concerns an alleged fraudulent securities offering by virtue of false and
misleading offering memoranda. The material statements and omissions were charged as
violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC also
alleged that one of the defendants (who served as counsel to one of the broker-dealer defendants)
aided and abetted the brokerage firm’s violation of Section 17(a). In a prior decision, the court
found that the evidence was insufficient to establish substantial aiding and abetting liability, but
directed the SEC to inform the court if it had additional evidence, indicating the court’s intention
to grant summary judgment against the defendant. SEC v. Tecumseh Holdings Corp., 2009 U.S.
Dist. LEXIS 119869 at *5 (S.D.N.Y., Dec. 22, 2009). The SEC provided no new evidence in
support of its renewed motion for summary judgment on the Section 17 claim, and thus, the court
granted summary judgment in favor of the individual counsel defendant. In so doing, the court
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noted that the SEC had “merely rephrase[ed] one of its arguments for why [defendant] provided
the requisite ‘substantial assistance’ to establish aiding and abetting liability” without offering
additional evidence.
6. Section 18
C.6
SRM Global Fund Ltd P’ship v. Countrywide Fin. Corp., 2011 U.S. App. LEXIS 23526 (2d Cir.
Nov. 23, 2011).
Plaintiff asserted violations of Section 18 of the Securities Exchange Act of 1934,
claiming that defendants’ statements of adequate liquidity in 2007 SEC filings were false and
misleading in light of the fact that defendants later acknowledged that the company had lost
liquidity and viability during 2007. The Second Circuit affirmed the district court’s dismissal of
the claims, reasoning that (1) because fraud cannot be pled by hindsight, a claim must be
dismissed where plaintiff fails to allege that defendants knew the allegedly fraudulent statements
were false at the time the statements were made; (2) defendants’ optimistic statements were
forward-looking and non-actionable; and (3) plaintiff improperly failed to allege that the
liquidity position in the SEC filings was, in fact, misstated.
Special Situations Fund III, L.P. v. Am. Dental Partners, Inc., 775 F. Supp. 2d 227 (D. Mass.
2011).
Defendants moved to dismiss claims under Section 18 of the Securities Exchange Act of
1934 where claims were asserted more than one year after plaintiffs discovered facts giving rise
to their claims. Plaintiffs argued that the Section 18 statute of limitations had been tolled by a
class action pending against the defendants under Section 10(b) of the Exchange Act. The court
dismissed the Section 18 claim as time-barred, rejecting the proposed application of the class
action tolling doctrine on the ground that, because of the Section 10(b) scienter requirement, “the
facts required to be pleaded and proved under section 10(b) are significantly different from the
facts that give rise to section 18 claims.”
Maverick Fund, L.D.C. v. Comverse Tech. Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).
Plaintiffs alleged that defendants violated Section 18 of the Securities Exchange Act of
1934 because: (i) Comverse’s SEC filings stated that the company complied with GAAP when in
fact the company was improperly accounting for stock options and (ii) the company announced
that it would be become current in its SEC filings by the end of 2007 but thereafter failed to do
so. The court granted defendants’ motion to dismiss with respect to the latter category of claims
because the allegations were based on forward-looking statements protected by the Private
Securities Litigation Reform Act. The court denied the motion to dismiss with respect to the
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emainder of the Section 18 claims, however, noting that the claims were not rendered
implausible by plaintiffs’ voluminous “in-and-out” trading of Comverse stock, or by the fact that
plaintiffs continued to trade in Comverse stock after the release of negative information about the
company. The court held that plaintiffs pleaded fraud with adequate particularity because they
provided enough detail to identify the allegedly fraudulent statements and show why they were
allegedly fraudulent. Further, plaintiffs adequately pleaded loss causation by alleging that they
sold their Comverse shares at a loss after the allegedly fraudulent statements were revealed and
the stock price dropped. Finally, plaintiffs adequately pleaded actual reliance under Section 18
by alleging that they “read and/or listened to and relied upon the defendants’ false and
misleading statements before investing . . . in Comverse shares.”
Int’l Fund Mgmt S.A. v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,
2011).
Plaintiffs alleged that Citigroup’s 2006 and 2007 Form 10-K filings included
misstatements and omissions in violation of Section 18 of the Securities Exchange Act of 1934
and that “in connection with [their] purchases of Securities after February 23, 2007, Plaintiffs
and/or their investment managers read and relied upon Citi’s [2006 and 2007 Form 10-Ks],
including the false financial statements and other statements alleged herein to be false or
misleading.” The court dismissed the claims for failure to plead actual reliance, holding that the
allegations were merely conclusory because they were “incredibly broad” and lacked supporting
factual matter.
Hines v. Cal. Pub. Utils. Comm., 2011 U.S. Dist. LEXIS 134583 (N.D. Cal. Nov. 21, 2011).
The court granted a motion to dismiss a claim brought under Section 18 of the Securities
Exchange Act of 1934. The court held that the plaintiff failed to state a claim where she (i) did
not identify the allegedly misleading statements, (ii) did not allege that any purportedly
misleading statements were made in a document filed pursuant to the Exchange Act, and (iii) did
not allege that she had relied on any misstatements or omissions when purchasing or selling a
security.
7. Section 19(b)
Fiero v. Financial Ind. Regulatory Auth., Inc., 660 F.3d 569 (2d. Cir. 2011).
A registered broker-dealer and its sole registered representative brought an action seeking
a declaration that FINRA lacks the authority to bring court actions to collect disciplinary fines it
has imposed. The Second Circuit held FINRA lacked authority to bring such court actions.
Although FINRA (then-NASD) had filed a rule change back in 1990 with the SEC to allow it to
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ing such court actions (the “1990 Rule Change”), FINRA filed the proposed rule change under
Section 19(b)(3)(A)(i) of the Exchange Act. That section allows self-regulatory organizations to
avoid the requirement to engage in a public notice and comment period prior to approval of rule
changes, but only for so-called “house-keeping” rules and other rules that do not substantially
effect the public interest or the protection of investors. The court held the 1990 Rule Change
was a new substantive rule that affected the rights of disciplined members regarding the payment
of fines from disciplinary proceedings. Thus, the 1990 Rule Change should have been approved
only after the prescribed notice and comment period, not as a “house-keeping” rule. Since the
1990 Rule Change was never properly promulgated, FINRA lacked authority to judicially
enforce collection of disciplinary fines.
Standard Inv. Chartered, Inc. v. National Assoc. of Sec. Dealers, Inc., 637 F.3d 112 (2d. Cir.
2011).
Suit was brought by a member of the NASD which alleged that NASD and its officers
made misstatements in connection with a proxy solicitation through which the NASD sought to
amend its bylaws as part of its consolidation with NYSE Group, Inc. The Court of Appeals held
a self-regulatory organization and its officers have absolute immunity from private damages suits
in connection with amendment of the organization’s bylaws where, as here, the amendments are
“inextricable” from the organization’s role as a regulator. As part of its reasoning, the court
found the SEC’s role in approving or adopting amendments to NASD’s bylaws to be significant.
The court found that this framework highlights the extent to which a self-regulatory
organization’s bylaws are closely linked with the regulatory powers the SEC delegates to such
organizations and confirm that immunity should apply.
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8. Margin Violations
C.8
In re Application of Philip L. Spartis and Amy J. Elias, FINRA Admin. Proc. File No. 3-13979,
2011 SEC LEXIS 1693 (May 13, 2011).
The Securities and Exchange Commission (the “SEC”) affirmed the disciplinary action
taken by NYSE Regulation (now the Financial Industry Regulatory Authority, “FINRA”)
(“NYSE”) against Philip L. Spartis and Amy J. Elias, former registered representatives of
Salomon Smith Barney, Inc. (the “Firm”), a member of the New York Stock Exchange, LLC.
The NYSE found that Spartis and Elias caused the Firm to violate NYSE Rule 472.30 by sending
customers communications that omitted material facts and/or were misleading with regards to the
risks of using margin loans. Specifically, the representatives provided marketing materials to
their customers, between 1998 and 2001, with connection with the customers’ exercise of
employee stock options that had been granted to them by WorldCom, Inc. The material
encouraged customers to utilize an exercise-and-hold strategy whereby employees could
purchase stock at the grant price and hold onto it for a period of time, paying the purchase price
of the stock, taxes, and fees with cash or by use of a margin loan obtained through the Firm. The
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materials did not disclose the downside risks of holding the WorldCom shares on margin, such as
accelerated losses including interest payments and margin calls if the share price declined, as it
ultimately did. The SEC sustained the NYSE’s censure of Spartis and Elias.
FINRA Department of Enforcement v. Kale E. Evans, FINRA Disc. Action Complaint No.
2006005977901, 2011 FINRA Discip. LEXIS 36 (Oct. 3, 2011).
The Financial Industry Regulatory Authority (“FINRA”) National Adjudicatory Council
(“NAC”) affirmed the Hearing Panel’s sanctions against Kale E. Evans for violations of various
NASD and FINRA rules. Evans, while a registered representative of TD Waterhouse Investor
Services, Inc. (the “Firm”), induced a young woman who was living with his family to entrust
him with the proceeds of her father’s life insurance plan. Evans convinced her to establish a
joint brokerage account with him at his Firm, and he opened a margin account for her. He then
proceeded to fund the account with the life insurance money and undertook risky trades, relying
heavily on margin. These trades were all executed without the young woman’s knowledge, and
the account suffered heavy losses. When the young woman learned of these losses she
confronted Evans and he tried to settle the matter with away from his Firm. FINRA charged him
with violating NASD Rules 2110, 2310, 2510(a) and Interpretive Material 2310-2(b)(2). The
Hearing Panel barred Evans from associating with any FINRA member in any capacity, and the
NAC affirmed the Hearing Panel’s decision and also ordered him to pay disgorgement in the
amount of $52,647.
FINRA Department of Enforcement v. William J. Murphy Midlothian, Carl M. Birkelbach, and
Birkelbach Investment Securities, Inc., FINRA Disc. Action Complaint No. 2005003610701,
2011 FINRA Discip. LEXIS 42 (Oct. 20, 2011).
The Financial Industry Regulatory Authority (“FINRA”) National Adjudicatory Council
(“NAC”) affirmed the Hearing Panel’s sanctions against William J. Murphy Midlothian, Carl M.
Birkelbach, and Birkelbach Investment Securities, Inc. (the “Firm) for violations of various
federal securities laws, NASD rules, and FINRA rules. Midlothian, a registered representative,
engaged in unauthorized trading in two customer accounts, and his misconduct included
churning these accounts, engaging in excessive and unsuitable trading that created large margin
debit balances, and sending the customers misleading written communications about their
accounts. He was charged with violating NASD Rule 2510(b), 2860, 2110, 2310, IM-2310-2,
2220, and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.
His supervisor Birkelbach ignored numerous red flags and failed to adequately supervise
Midlothian, and was charged with violating NASD Rules 3010, 2860(b), and 2110. The Firm
was also charged with using an improper confidentiality provision in a settlement agreement
with a customer, in violation of NASD Rule 2110. The NAC barred Murphy and fined him
$586,174.67 for disgorgement, and also barred Birkelbach in all capacities. The NAC also
affirmed the $2,500 fine on the Firm.
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D. Liabilities under the Securities Litigation Reform Act of 1995
1. Pleading
D.1
Matrixx Initiatives, Inc., v. James Siracusano, 131 S.Ct. 1309 (U.S. 2011).
The court, denied defendants’ motion to dismiss on the basis that plaintiffs’ complaint
adequately pleaded scienter under the Private Securities Litigation Reform Act of 1995.
Plaintiffs’ alleged that defendants violated federal securities laws by failing to disclose adverse
event reports linking defendants’ cold remedy to a loss of sense of smell. Plaintiffs alleged that
Defendants misrepresented the remedy’s concerns through a press release stating that the product
did not cause the loss of smell and had been reviewed by a consultant, a panel of physicians and
scientists.
City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp., 632 F.3d
751 (1st Cir. 2011).
In a securities fraud class action against issuer and its senior executives, the court
dismissed the suit, and investors appealed. The court held that even assuming the issuer
defendant knew, during the relevant period, that Japan had relaxed water testing regulations and
that such change would ultimately lead to less demand for issuer’s products and services in
Japan, such knowledge alone did not provide a sufficient basis for a cogent and compelling
inference that defendant acted with scienter in failing to disclose earlier the regulatory change.
Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011).
Shareholder brought a securities fraud action against medical device manufacturer and
three of its officers. The court granted defendants’ motion to dismiss complaint and shareholders
appealed. Plaintiffs alleged that defendant’s warnings regarding the risk of non-reimbursement
for use of one of its medical devices were misleading or false because defendants knew the level
of risk, or even of certainty, of non-reimbursement was more serious than disclosed in the
warnings. On appeal, the court affirmed the ruling of the district court that none of the omissions
by the defendants rose to level required to be shown as misleading but instead that internal
disagreements regarding proper reimbursement code choice and strategy represented risk
investors were fully informed about and that plaintiffs failed to identify any actionable
misstatements with the requisite particularity required under the PSLRA.
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Mississippi Pub. Emps.’ Ret. Sys. v. Boston Scientific Corp., 649 F.3d 5 (1st Cir. 2011).
Plaintiffs, investors brought securities fraud class action against defendants, a coronary
stent manufacturer and its executives. The court granted defendants’ motion to dismiss and
investor appealed. On appeal, the court reversed and remanded. On remand, the court granted
defendants’ motion for summary judgment and plaintiffs again appealed. On second appeal, the
court held that defendants did not act with the scienter required to establish securities fraud.
Specifically, the court found that defendants’ were not shown to be aware of a problem that
threatened the device’s viability. The court also reasoned that the defendants had no obligation
to disclose the fact that they were working on an improvement to the device to reduce
complaints.
Amorosa v. AOL Time Warner Inc., 2011 WL 310316 (2d Cir. Feb. 2, 2011).
Stockholder in company that was merged with another company brought action against
auditor for merging company and company surviving merger for alleged violations of the
Securities Exchange Act of 1934. The court granted the auditor’s motion to dismiss holding that
stockholder failed to adequately allege loss causation linking the purportedly false and
misleading statements made by auditor in a “clean” audit opinion of financial statements and the
ruling was affirmed upon appeal. Specifically, the court found that plaintiff could not establish
any misstatement or opinion in the audit opinion that was revealed to the market directly
resulting in a diminution in the value of plaintiff’s securities.
Inter-Local Pension Fund GCC/IBT v. GE, 2011 U.S. App. LEXIS 19271 (2d Cir. 2011).
The court granted defendants’ motion to dismiss plaintiffs’ securities law claims
reasoning that that plaintiffs failed to adequately plead the element of loss causation under the
heightened pleading requirements of the PSLRA. Plaintiffs alleged that defendants concealed its’
liquidity problems and plans to raise $15,000,000,000 in dilutive equity financing. The court
found that no loss occurred as a result of defendants’ announcement to offer new equity to
remedy its liquidity problems. The court held that Plaintiffs’ complaint did not adequately plead
that defendants concealed the pricing of the offering with requisite particularity.
GE Investor, v. General Electric Company, 2011 WL 5607137 (2d Cir. Nov. 18, 2011).
The court, in ruling on defendants’ motion to dismiss plaintiffs’ securities law claims,
found that plaintiffs failed to satisfy the heightened pleading requirements under PSLRA and did
not adequately plead the element of loss causation. Plaintiffs’ alleged that defendants’ concealed
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its’ liquidity problems and plans to raise $15,000,000,000 in dilutive equity financing. The court
found that no loss occurred as a result of defendants’ announcement to offer new equity to
remedy its liquidity problems. Ultimately the court held that the complaint did not adequately
plead that defendants’ concealed the pricing of the offering with requisite particularity.
New Orleans Emps. Ret. Sys. v. Celestica, Inc, 2011 WL 6823204 (2d Cir. Dec. 29, 2011).
The court, denied defendants’ motion to dismiss on the basis that plaintiffs provided
sufficient facts to satisfy the particularity requirement of the Private Securities Litigation Reform
Act of 1995. Plaintiffs’ alleged that defendants recklessly misrepresented the rising volume of
unsold inventory in one of defendant’s facilities. Plaintiffs further relied on confidential
witnesses testimony that provided them with information about rising levels of inventory to
defendants. The court found that although the witnesses were not identified by name in the
complaint, plaintiffs’ descriptions of these persons were sufficiently particular to permit the
strong inference of scienter necessary for plaintiffs to sustain their burden on a motion to
dismiss.
Michael S. Rulle Family Dynasty Trust v. AGL Life Assurance Company, 2011 WL 3510285 (3d
Cir. July 14, 2011).
Plaintiff, life insurance policy owner brought action against defendant, insurer after
policy premiums that had been invested in a Ponzi scheme lost their entire value. The court
granted defendant’s motion to dismiss and plaintiff owner appealed. On appeal, the court held
that policy owner failed to state a securities fraud claim. Specifically, plaintiff failed to meet the
PSLRA heightened pleading requirement because plaintiff did not state how or why defendant
should have known or discovered that 23% of the policy owner’s premiums would be invested
with one manager by a separate entity.
City of Roseville Empls.’ Ret. Sys. al. v. Horizon Lines, Inc, 2011 WL 3695897 (3d Cir. Aug. 24,
2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Plaintiffs alleged that defendant’s senior executives and managers made false or misleading
statements about the corporation’s financial status. The court found that plaintiffs failed to the
PSLRA heightened pleading standard by failing to properly allege that defendants acted with
scienter when making material false statements about corporation’s good financial health.
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Barnard v. Verizon Communication, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).
The court, granted defendant’s motion to dismiss reasoning that investors did not satisfy
the PSLRA particularity pleading requirement for common law fraud. Plaintiffs alleged that
defendant’s annual statement and a spin-off corporation’s prospectus omitted information
concerning tax sharing agreements. The court found that plaintiffs failed to show how any
defendants’ alleged misrepresentations impacted Plaintiffs’ decisions to purchase or sell
securities.
Katyle v. Penn National Gaming Inc., 637 F.3d 462 (4th Cir. 2011).
The court granted defendant’s motion to dismiss for failure to adequately allege loss
causation as required under PSLRA. On appeal, court held that purportedly corrective
disclosures of delays in states’ regulatory approval process for a proposed buy-out/merger
agreement, and defendant’s failure to issue press release announcing the regulatory approval
were insufficient to show loss causation. The court further stated that not every announcement
of bad news should be constitute grounds to issue a corrective disclosure.
Frank v. Dana Corporation, 646 F.3d 954 (6th Cir. 2011).
Shareholders brought a securities fraud class action against a corporation’s former CEO
and CFO who allegedly falsified corporation’s financial reports. The court granted defendants’
motion to dismiss, and plaintiffs appealed. On appeal, the court vacated and remanded. On
remand, the court granted defendants’ motion to dismiss and plaintiffs appealed again. On
appeal, the court held that shareholders adequately pleaded scienter. Specifically, plaintiffs
alleged that defendants reported inflated earnings, filed reports, made public statements and
asserted the veracity of their financials to government authorities all while key product line was
operating at 50 percent of earnings, multiple factories were failing to meet budgets and the price
of inputs had risen nearly 60%.
Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461 (6th Cir. 2011).
Plaintiff, investor brought action alleging securities fraud claims against defendant, a
broker of auction rate securities (“ARS”). The court granted defendant’s motion and plaintiff
appealed. On appeal, the court held that plaintiff’s allegations failed to give rise to strong
inference that defendant acted with scienter. The court found that plaintiff failed to allege why
or how defendant possessed advance, non-public knowledge that underwriters would jointly exit
the ARS market and cause its collapse. The court reasoned that the allegations suggested that a
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few of defendant’s employees were aware of consequences if underwriters did exit market. The
court also held that plaintiff failed to satisfy the PSLRA particularity requirement because its
sole allegation came in the vague form of a misstatement that ARS were “safe and secure.” The
court went on to reason that this statement, standing by itself did not qualify as a material
misrepresentation and did not indicate that defendant was aware of the impending ARS market
meltdown.
Anchorbank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).
Plaintiffs, bank, investment fund, and fund’s trustee brought securities fraud action
against defendant, bank employee who allegedly engaged in collusive trading scheme with coworkers
involving purchase and sale of units in a fund. The court granted defendant’s motion to
dismiss and plaintiffs appealed. On appeal, the court reversed and remanded, holding that
plaintiffs alleged securities fraud with sufficient particularity, adequately alleged reliance,
economic loss, loss causation, and scienter. The court found that defendants’ possible
explanations not to be plausible under the heightened pleading requirements of the PSLRA.
Further, the court found that reliance and economic loss were properly pleaded because the
complaint alleged that the actions taken by the fund in response to the artificially inflated and
deflated prices were caused by the employees’ fraudulent activities.
Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc., 641 F.3d 1023 (8th
Cir. 2011).
Plaintiffs, investors’ class action securities lawsuit against defendants, manufacturer of
silicon wafers used in semiconductor industry and its former president and CEO, the court
dismissed the action and plaintiff appealed. On appeal, the court affirmed the dismissal and held
that the defendants had no duty to disclose the incidents that disrupted production at two
manufacturing facilities to investors. The court found that plaintiffs’ allegations were
insufficient did not satisfy the scienter requirement under the PLSRA. Specifically, plaintiffs’
failed to properly allege that defendants knew of past production problems influencing investor
decisions. The court also emphasized defendants’ lack of motive and personal benefit from these
disruptions.
New Mexico State Investment Council v. Ernst & Young, LLP, 641 F.3d 1089 (9th Cir. 2011).
Shareholders brought action against a corporation’s outside auditor, alleging that auditor
knew of or recklessly disregarded the corporation’s fraudulent backdating actions despite issuing
audit opinions attesting to the validity of corporation’s financial statements. The court granted
defendants’ motion to dismiss. On appeal, the court reversed and remanded the ruling holding
that the shareholders’ allegations were sufficient to support an inference of scienter. The court
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acknowledged that difficulty of pleading sufficient facts because outside auditors have more
limited information and exercise complex and subjective professional judgments that can be
difficult to second guess. However, court held that auditor’s participation in corrective reforms
undertaken to ensure future option grants were treated properly was sufficient to support an
inference of scienter.
Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681 (9th Cir. 2011).
Shareholder brought a putative class action for securities fraud against an oil company
and related defendants. The court held that the defendant’s alleged breach of the operator
standard in its agreement, did not provide actionable misrepresentation supporting private
securities fraud claim. On appeal, the court held that the breach of a contractual promise, even
though filed in conjunction with U.S. Securities and Exchange Commission reporting
requirements, was not a sufficient foundation for a securities fraud action.
WPP Luxembourg Gamma Three Sari v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011).
Plaintiff shareholder, brought action against defendants, corporation asserting securities
fraud claims. The court granted defendants’ motion to dismiss without prejudice to which both
parties appealed. On appeal, the court held that shareholder had sufficiently pleaded scienter
with regard to the founders, and loss causation against founders, but failed to allege that the
remaining parties acted with scienter. The court found that plaintiffs sufficiently alleged that the
founders knew of and ignored notice requirements in the shareholder’s agreement that mandated
the company’s management provide information about the eventual sale of their shares. The
court subsequently found that the plaintiffs adequately pled loss causation by alleging that
founders’ secret sales of shares caused the shareholders’ shares of the corporation to immediately
become worthless. The court reasoned that an email conversation where the general counsel
referenced the wrong offering in response to the shareholders’ questions about secondary
offerings refuted the scienter requirement.
New York State Teachers’ Ret. Sys. v. Fremont General Corporation, 2011 WL 5930459 (9th
Cir., Nov. 29, 2011).
The court granted defendants’ motion to dismiss reasoning that plaintiff’s allegations
failed to raise strong inference of scienter with the specificity required under PSLRA. Plaintiffs’
failed to show that each individual defendant possessed contemporaneous knowledge of
undisclosed information that would render their public statements consciously misleading.
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Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011).
Shareholders brought securities fraud class action against corporation’s independent
auditor, alleging that auditor’s expression of unqualified opinions on corporation’s financial
statements artificially inflated the market price of the corporation’s stock. The court granted the
defendant’s motion to dismiss for failure to properly plead scienter under the heightened
pleading requirements of the PSLRA. Specifically, the court found that plaintiffs’ allegations
failed to raise strong inference that defendant acted recklessly in certifying corporation’s
financial statements.
Findwhat Investor Group v. Findwhat.com, 658 F.3d 1282 (11th Cir. 2011).
The court granted defendant’s motion for summary judgment reasoning that plaintiffs
failed to plead scienter adequately with respect to statements in a Form 10-K annual report filed
by an internet commerce company providing “pay-per-click” advertising services. A review of
the allegations relating to scienter lacked sufficient particularity to create a strong inference of
scienter relating to whether it was “commonly known” within the company that two of the
company’s top revenue-generating distribution partners relied on “click fraud.”
Durgin v. Mon, 2011 WL 573483 (11th Cir. Feb. 18, 2011).
Plaintiff, a union pension fund purchased shares in a residential building corporation and
brought suit against defendant for securities fraud. The court granted defendants’ motion to
dismiss. On appeal, the court held that the amended complaint did not satisfy the heightened
pleading requirements for scienter under the PSLRA. Specifically, the statements made by
defendants in SEC filings, press releases and analysts’ conference calls stating that certain joint
venture loans were not “non-recourse” was not significant because plaintiff failed to allege that
defendants knew that certain loans made to joint ventures were made without recourse.
Kadel v. Flood, 2011 WL 2015379 (11th Cir. May 24, 2011).
Investors brought putative class action against a mortgage and lending company, alleging
violations of federal securities laws. The court granted defendants’ motion to dismiss and the
investors appealed. On appeal, the court held that the investors’ allegations were insufficient to
demonstrate the necessary scienter to commit securities violations under the PSLRA. The court
found that while plaintiffs alleged that defendants expressed mistaken confidence in the
corporation’s well-being and engaged in business practices that contributed to the corporation’s
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demise, the facts alleged did not give rise to a strong inference that defendants knew that their
statements were fraudulent or were reckless.
Akamai Technologies, Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).
Plaintiff, an institutional investor sued a defendant, broker-dealer alleging violations of
federal securities laws. Plaintiff claimed that its broker made various misrepresentations and
omissions of material facts in relating to the risks involved with the purchase of auction-rate
securities (“ARS”) in its account. The court denied defendant’s motion to dismiss holding that
plaintiff’s claims were pleaded with sufficient particularity. Specifically, the complaint included
allegations that plaintiff’s broker failed to disclose or misrepresented the risk of each ARS
transaction, and that the broker knew that the statements in connection with purchase of ARS
were false and misleading. The plaintiff also alleged that that its broker doubled its ARS
holdings just prior to the collapse of the ARS market in February 2008.
Special Situations Fund III, L.P. v. American Dental Partners, Inc., 775 F.Supp.2d 227 (D.Mass.
2011).
Investment partnership that purchased common stock in a corporation brought suit
against corporation and three of its officers for alleged violations of federal securities laws.
Defendants moved to dismiss as required under the heightened pleading standard of the PSLRA.
Plaintiffs alleged that defendant’s statements regarding its future would not change manner of
operations with regard to affiliated businesses. The court denied defendants’ motion to dismiss
holding that complaint satisfied the information and belief requirement for alleging
misstatements, material omissions, scienter and loss causation.
Urman v. Novelos Therapeutics, Inc., 796 F. Supp. 2d 277 (D. Mass. 2011).
Investors brought a class action suit against defendant, biopharmaceutical company for
violations of federal securities laws. Defendant subsequently moved to dismiss for failure to state
a claim in accordance with the heightened pleading standards of the PSLRA. Plaintiffs alleged
that defendants made materially false and misleading statements concerning the success of an
experimental drug. The court granted defendant’s motion finding that corporation’s statement
that patients in its experimental drug trial were living longer than expected was not materially
misleading.
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In re Smith & Wesson Holding Corp. Sec. Litig., 2011 WL 6089727 (D. Mass. Mar. 25, 2011).
Investors brought a class action suit against gun manufacturing company and its officers
alleging violations of federal securities laws. Defendants subsequently filed a motion to dismiss
for failure to state a claim as required under the heightened pleading standards of the PSLRA.
Plaintiffs claimed that defendants issued a series of public statements in which they
misrepresented level of demand for products. The court granted defendants’ motion finding no
evidence of scienter and that statements made by corporation regarding demand and general
sales were not false or misleading.
Hill v. State Street Corporation, 2011 WL 3420439 (D. Mass. Aug. 3, 2011).
Plaintiffs brought a class action suit against defendants alleging violations of federal
securities laws. Plaintiffs alleged defendants misled the market regarding the defendant
company’s exposure when it assured investors in the fall of 2008 that debt securities contained in
its investment portfolio collateralized in part by risky mortgage-backed securities—were of high
quality. Plaintiffs further alleged that as a result of those improper statements plaintiffs suffered
substantial damages. The court denied defendants’ motion to dismiss holding that plaintiffs
satisfied heightened pleadings standard required under the PSLRA for their claims under the
Securities Exchange Act of 1934.
In re Boston Scientific Corporation Securities Litigation, 2011 WL 4381889 (D. Mass. Sept. 19,
2011).
Plaintiffs brought suit against defendant alleging violations of federal securities laws.
Defendants then filed a motion to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants made several
misrepresentations or omitted to disclose information regarding unlawful sales practices leading
to an artificial inflation of the company’s stock. The court granted defendants’ motion to dismiss
finding that plaintiffs failed to sufficiently allege a material misrepresentation, omission and a
strong inference of scienter.
Casula v. AthenaHealth, Inc, 2011 WL 45661155 (D. Mass. Sept. 30, 2011).
Lead plaintiff brought suit against defendants alleging violations of federal securities
laws. Defendants filed a motion to dismiss for failure to state a claim and failure to meet the
heightened pleading requirements under the PSLRA. Plaintiff alleged that defendant, company
and officers improperly amortized certain revenues over shorter terms instead of the expected
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performance life of a customer relationship -- effectively front-loading these revenues. The court
granted the defendant’s motion finding that there was nothing about the change in accounting
procedures that suggested a prior intent to defraud. The court also found a lack of requisite
scienter given the small portion of the company’s revenues to which the allegations related.
Ambert v. Caribe Equity Group, Inc., 2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim upon which relief can be granted.
Plaintiffs alleged that defendants knowingly and willfully omitted material facts and made false
representations in their dealings with plaintiffs relating to an investment in a company
purportedly for the purpose of creating a new HMO plan when the company, in fact, purchased a
previously existing, troubled HMO plan. The court denied defendants’ motion finding that
plaintiffs’ allegations properly particularized sufficient detail relating to defendants access to
information on the company’s finances. Plaintiff also adequately alleged a reasonable and strong
inference of scienter, reliance and loss causation given the likelihood that plaintiffs may have
changed their investment decision had they known of the alternative plans of the fund.
City of Roseville Empls.’ Ret. Sys. v. Textron, Inc., 2011 WL 3740768 (D.R.I. Aug. 24, 2011).
Investors filed securities fraud class action alleging that company and several of its senior
officers made series of statements about its financial condition that were misleading because they
omitted important qualifying information. Defendants moved to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. The court granted the
motion finding that defendant’s failure to disclose it had recently relaxed its underwriting
standards and its decision to finance deposits of aircraft sold by its subsidiary, did not render
these public statements materially misleading. The court found that plaintiff failed to establish
that the company concealed a weakness in the backlog of orders and that executive’s statement
that company was “not involved in sub-prime or other misunderstood or high-risk” products was
not false when made.
In re Sturm, Ruger & Company, Inc. Securities Litigation, 2011 WL 494753 (D. Conn. Feb. 7,
2011).
Lead plaintiff brought class action suit against defendants alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. Plaintiff alleged that defendants failed to
disclose problems with their transition to a “lean manufacturing” model and thereby misled
plaintiffs into purchasing the company’s stock at an artificially inflated value. The court denied
defendants’ motion finding that some of the statements alleged by plaintiff were properly
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particularized as materially misleading. The court also found that defendants’ motives in
delaying bad news to personally benefit themselves by selling their own shares gave rise to a
strong inference of scienter.
Maverick Fund, L.D.C. v. Comverse Technology, Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).
Hedge funds that purchased shares of a corporation’s stock brought action against
corporation, its officers, and members of the corporation’s compensation and audit committees,
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. The court granted the
defendants’ motion in part and denied it in part holding that hedge funds were not required to
plead the specific details of each purchase and sale of stock to satisfy heightened pleading
requirements but adequately alleged loss causation.
Johnson v. Siemens AG, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011).
Lead plaintiff brought class action suit against defendants alleging violations of federal
securities laws. Defendants moved to dismiss in accordance with the heightened pleading
standards of the PSLRA. Plaintiff alleged that defendants knowingly or recklessly disseminated
or approved false statements about the financial well-being of its company, resulting in an
inflated price of defendant company’s securities. The court granted defendants’ motion to
dismiss finding that plaintiff’s claim failed to allege facts giving rise to a strong inference of
scienter.
In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011).
Shareholders brought suit against bank holding company and others alleging violations of
federal securities laws. Defendants filed a motion to dismiss for failure to state a claim as
required under the heightened pleading standards of the PSLRA. Plaintiffs’ claims related to the
company’s financial disintegration. The court granted defendants’ motion to dismiss finding that
the alleged misstatements of company officials, consisting of repeated public declarations of
their conservative underwriting standards and credit risk management, were not actionable as
securities fraud. The court also held that the complaints, considered collectively, failed to plead
facts giving rise to strong inference of scienter that company and its officials acted with intent to
deceive, manipulate, or defraud the shareholders.
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In re Bear Stearns Companies, Inc. Securities, Derivative, and Erisa Litigation, 763 F. Supp. 2d
423 (S.D.N.Y. 2011).
Investors in brought a class action suit against a bank, its officers and directors, and
accounting firm that performed audits alleging violations of federal securities laws. Defendants
moved to dismiss for failure to state a claim. Plaintiffs claimed that defendants made materially
misleading statements regarding the banks financial condition and use of flawed models in its
valuations despite being aware of the its liquidity issues and potential of market failures in their
models to inflate prices. The court denied defendants’ motions to dismiss, finding that the
allegations in the complaint regarding the defendants’ continued use of out-dated valuation
models of mortgage-backed assets and allegations of glaring oversights by the auditor were
pleaded sufficiently under the PSLRA.
In re Merrill Lynch Auction Rate Securities Litigation, 765 F. Supp. 2d 375 (S.D.N.Y. 2011).
Plaintiffs, purchasers of auction rate securities (“ARS”) brought class a action suit against
a defendant, broker-dealer alleging violations of federal securities laws. Defendants moved to
dismiss for failure to state a claim as required under the heightened pleading requirements of the
PSLRA. Plaintiffs alleged that defendant in failed to disclose its own bidding activity and role in
propping up the ARS market, while the auction rate market was deteriorating. The court granted
defendant’s motion to dismiss and found that the purchasers’ conclusory allegations of
“fraudulent” or “ intentional” misrepresentations and omissions by defendant failed to meet the
PSLRA scienter requirement.
In re Smith Barney Transfer Agent Litigation, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).
Plaintiff, investors in mutual funds brought class action suit against a defendant, funds’
investment advisors and their affiliates alleging violations of federal securities laws. Defendants
then moved to dismiss for failure to state a claim in accordance with the heightened pleading
requirements of the PSLRA. Plaintiffs alleged defendants’ fraudulently induced them into
purchasing shares in its fund based on material misrepresentations regarding transfer agent fees
in prospectuses. The court held that plaintiff sufficiently alleged that defendants’ subsidiary’s
senior vice president had helped evaluate an agreement to use the transfer agent, drafted a
comprehensive memorandum concerning its details, and presented the allegedly fraudulent
proposal to the board. The court also found that the plaintiff adequately alleged that over a fouryear
defendant signed numerous prospectuses that failed to disclose the transfer agent scheme.
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Stephenson v. Pricewaterhousecoopers, LLP, 768 F. Supp. 2d 562 (S.D.N.Y. 2011).
Plaintiff, investor in a feeder fund to a firm engaged in a massive Ponzi scheme brought a
class action suit against a defendant, auditor of the firm alleging violations of federal securities
laws. Defendants filed a motion to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court granted the defendant’s motion to
dismiss finding that the allegations that the auditor ignored certain red flags relating to verifiable
controls, aggregate asset value reporting discrepancies, and exceptional returns insufficient to
establish scienter.
In re Jeanneret Associates, Inc., 769 F.Supp.2d 340 (S.D.N.Y. 2011).
Plaintiffs, investors brought suit against defendants, investment advisors, asset
management consultant, accounting firm, and individuals associated with investment firm
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a
claim as required under the heightened pleading requirements of the PSLRA. Plaintiffs claimed
defendants failed to disclose a lack of diligence concerning a multi-billion dollar investment firm
when soliciting investors. Plaintiffs further claimed that they would not have entrusted firm with
their money if they had understood it would be placed with the un-investigated firm. The court
denied defendants’ motion to dismiss reasoning that the plaintiffs sufficiently alleged facts
giving rise to inference of recklessness. However, the court granted the independent auditor’s
motion to dismiss finding that the allegation of defendants’ failure to identify the problems with
firm that was engaged in Ponzi Scheme was insufficient to plead the required scienter.
Alki Partners, L.P. v. Vatas Holding Gmbh, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).
Plaintiff, hedge fund filed suit against defendants, international corporations, their
executives, and their subsidiaries alleging violations of federal securities laws. Defendants filed
a motion to dismiss for failure to state a claim as required under the heightened pleading
standards of the PSLRA. The court granted defendants’ motion in part and denied it in part
finding that plaintiff failed to allege facts sufficient to give rise to scienter on the part of
defendants’ corporation or its U.S. agent. The court also held that allegations of
undercapitalization and that the corporation and its managing director knew that trading would
have an impact on the market price were insufficient to allege scienter. However, plaintiff did
sufficiently allege the managing director’s deceptive acts with requisite particularity.
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In re MRU Holdings Securities Litigation, 769 F. Supp. 2d 500 (S.D.N.Y. 2011)
Plaintiffs, investors in corporation that was purchaser, holder, and seller of federal and
private student loans brought class action suit against defendants alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. Specifically, plaintiffs claimed that defendant
issued press releases and investor presentations that omitted fact that the securities issued were
auction rate securities (“ARS”), and provided false assurances to the market concerning its
reliance on the ARS. The court granted defendants’ motions to dismiss finding that plaintiffs
allegations failed to allege with particularity any false or misleading statements by senior
executive officers and directors. The court also held that plaintiffs failed to provide any evidence
of scienter against defendants banker and auditor.
Glaser v. The9, Ltd., 772 F. Supp. 2d 573 (S.D.N.Y. 2011).
Investors brought class action suit against a company alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants fraudulently
misrepresented facts relating to the likelihood of their renewal of an exclusive license granted to
them by a third party. The court granted defendants’ motion to dismiss with leave for plaintiffs
to amend finding that plaintiffs failed to adequately plead scienter in showing that defendants
knew about statements it made regarding the progress of the licensing renewal.
In re Sanofi-Aventis Securities Litigation, 774 F. Supp. 2d 549 (S.D.N.Y. 2011).
Investors filed class action suit against French pharmaceutical company and executives
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that
defendants misrepresented information regarding the association between an obesity drug,
rimonabant, and suicidality. Plaintiffs alleged that this misrepresentation resulted in losses to
investors upon company’s withdrawal the drug’s application for approval. The court denied and
granted defendants’ motion in part finding that plaintiffs’ omissions claim was not sufficiently
alleged, however, plaintiffs claim based on material defendants’ omissions regarding an FDA
approval letter was sufficiently alleged. The court also held that plaintiffs sufficiently alleged
material omissions and scienter through defendants’ public statement denying a submission of
additional data to the FDA.
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Russo v. Bruce, 777 F. Supp. 2d 505 (S.D.N.Y. 2011).
Shareholder brought class action suit against gold mining company and its officers
alleging violations of federal securities laws. Defendants filed a motion to dismiss for failure to
state a claim as required under the heightened pleading standards of the PSLRA. Plaintiff
claimed that defendants made fraudulent misrepresentations regarding the status of, and
likelihood that it would obtain an environmental permit necessary to mine for gold in Venezuela.
The court granted defendants’ motion to dismiss finding that none of the allegations made were
sufficiently particularized or gave sufficient facts to adequately allege scienter.
Stratte-McClure v. Stanley, 784 F. Supp. 2d 373 (S.D.N.Y. 2011).
Investors brought class action suit against corporation and its officers and former officers
for alleged violations of federal securities laws. Defendants moved to dismiss for failure to state
a claim as required under the heightened pleading standard of the PSLRA. The court granted
defendants’ motion to dismiss finding that statements made regarding the corporation’s risk
controls were puffery rather than factually verifiable, objective statements. The court also held
that although the investors sufficiently alleged material misrepresentations regarding
corporation’s mark down of losses, plaintiffs failed to sufficiently allege loss causation through a
specific disclosure by defendants’ that negatively affected the value of plaintiffs’ securities.
Prime Mover Capital Partners L.P v. Elixir Gaming Techs., Inc., 793 F. Supp. 2d 651 (S.D.N.Y.
2011).
Hedge fund operators brought suit against issuer, a defendant, corporation and
corporation’s chairman, alleging violations of federal securities laws. Defendants moved to
dismiss for failure to state a claim as required under the heightened pleading standards of the
PSLRA. The court granted defendants’ motion to dismiss finding that one plaintiff failed to
adequately allege transaction loss causation. The court also found some operators had
sufficiently pleaded transaction loss causation, through the representations regarding misreported
expected average net win rates for electronic gaming machines placed in certain venues. Other
plaintiffs, however, failed to plead loss causation adequately with respect to most of the alleged
misrepresentations. Specifically, the court pointed out that other alleged misrepresentations did
not become public until after time when share price had already dropped to lowest level alleged
in complaint.
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Brecher v. Citigroup, Inc., 797 F. Supp. 2d 354 (S.D.N.Y. 2011).
Employees who participated in an employer’s stock purchase program brought action
against employer, members of its board of directors, and board’s committee which administered
the program, for alleged violations of federal securities laws. Defendants moved to dismiss for
failure to state a claim as required under the heightened pleading standard of the PSLRA.
Plaintiffs claimed that defendants failed to disclose the stock purchase program’s subprime
mortgage exposure. The court granted defendants’ motion to dismiss finding that the employees
failed to allege scienter through declarations concerning corporation’s overall business outlook.
The court found these to be announcements of corporate optimism and not actionable as
fraudulent misstatements.
In re Lehman Brothers Securities and Erisa Litigation, 799 F. Supp. 2d 258 (S.D.N.Y. July 27,
2011).
Investors brought class action suit against a financial services corporation and its former
officers, directors, auditors, and underwriters, for violations of federal securities laws.
Defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that defendants made materially false and
misleading statements and omissions regarding corporation’s liquidity risk and value of real
estate holdings. The court granted defendants’ motion to dismiss in part and denied in part
holding that plaintiffs sufficiently alleged material misrepresentations, scienter and loss
causation by its former officers. The court found, however, that plaintiffs failed to allege
material misrepresentations by auditor.
In re Manulife Financial Corporation Securities Litigation, 276 F.R.D. 87 (S.D.N.Y. 2011).
Investors brought a class action suit against a financial services corporation and its
former officers, for alleged violations of federal securities laws. Defendants moved to dismiss
for failure to state a claim as required under the heightened pleading standard of the PSLRA.
Specifically, plaintiffs alleged that defendants made material misrepresentations and omissions
concerning the corporation’s risk management activities. The court granted defendants’ motion
to dismiss finding that investors failed to allege a material misrepresentation, scienter and loss
causation.
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Jacquemyns v. Spartan Mullen Et Cie, S.A., 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants moved to dismiss for failure to state a claim as required under the heightened
pleading requirements of the PSLRA. Plaintiffs alleged money damages based on defendants’
offer and sale of a fraudulent investment scheme that resulted in the misappropriation of
plaintiffs’ investment. The court granted the defendants’ motion to dismiss finding that plaintiffs
failed to plead securities fraud with the requisite particularity.
In re Citigroup, Inc., 2011 WL 744745 (S.D.N.Y. Mar. 1, 2011).
Plaintiff brought a class action suit against defendants alleging violations of federal
securities laws. Defendants then filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants
mislead participants concerning defendants’ intervention in the auction-rate-securities (“ARS”)
market giving a misleading picture of the market’s stability. The court granted defendants’
motion to dismiss finding that plaintiffs failed to allege sufficient facts in order to demonstrate
that defendants’ conduct was deceptive. Plaintiffs also failed to prove that they reasonably relied
on any of the alleged misleading impressions, given that defendants’ policies regarding
participation in the markets were publicly posted and available to plaintiffs.
Fried v. Lehman Brothers Real Estate Associates III, L.P., 2011 WL 1345097 (S.D.N.Y. Mar.
29, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants subsequently filed a motion to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants omitted
material information in its investment prospectus, and related documents regarding the risks and
use of the investment entities as a vehicle to dispose of over-valued assets to losses. The court
granted defendants’ motion to dismiss finding that plaintiffs failed to plead facts supporting an
inference of scienter with the required specificity and failed to allege that defendants knew or
should have known that certain properties being transferred had sustained losses with the
requisite specificity.
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Kuriakose v. Federal Home Loan Mortgage Corp., 2011 WL 1158028 (S.D.N.Y. Mar. 30,
2011).
Plaintiffs, brought class action suit against defendants alleging violations of federal
securities laws. Defendants then filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendant
corporation and its officers materially misrepresented the corporation’s exposure to risky
mortgage products, the sufficiency of its capital, and the accuracy of its financial reporting
resulting in inflated share prices. The court granted defendants’ motion to dismiss but gave
plaintiffs leave to amend finding that plaintiffs failed to adequately plead the existence of
actionable misstatements or omissions relating to exposure to non-prime mortgage loans, or
capital adequacy. The court also found that plaintiffs failed to plead loss causation with respect
to alleged claims relating to internal controls and financial statements.
In re Merrill Lynch Auction Rate Securities Litigation, 2011 WL 1330847 (S.D.N.Y. Mar. 30,
2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Specifically, plaintiffs claimed that
defendants made misstatements and omissions about the safety and liquidity of the Auction Rate
Securities market in which plaintiffs had invested. The court denied defendants’ motion to
dismiss finding that the two allegations made by plaintiff, taken together, supported that the facts
that defendants’ continued to sell an illiquid product to investors with a need for liquidity and
withdrawing support from the products while continuing to tout them as safe adequately alleged
a strong inference of scienter. The court also found that plaintiffs reasonably alleged reliance
because defendants’ represented and plaintiffs relied on the fact that auction rate securities were
liquid instruments.
Plumbers and Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco Inc., 2011 WL
1198712 (S.D.N.Y. Mar. 30, 2011).
Plaintiffs brought a class action suit against defendants alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants, an
insurance company and its officers, failed to properly disclose potential liabilities relating to its
inability to integrate nineteen separate computer systems of recently acquired insurance
companies. The complaint went on to allege that this lack of integration often resulted in
accidental payments over policy maximums and payments for uncovered incidents. The court
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granted the defendants’ motion to dismiss finding that plaintiff failed to adequately allege
scienter and that the disclosures in the complaint, equated to a much more likely showing of nonculpable
attempts to remedy internal business difficulties while keeping the market informed to
the extent practicable.
Oughtred v. E*Trade Financial Corporation, 2011 WL 1210198 (S.D.N.Y. Mar. 31, 2011).
Plaintiffs brought a class action suit against defendants for alleged violations of federal
securities laws. Defendants moved to dismiss for failure to state a claim as required under the
heightened pleading standard of the PSLRA. Plaintiffs alleged that defendants defrauded
purchasers of auction rate securities by making misrepresentations and omissions of material fact
about the risks, value and liquidity of those securities. The court granted defendants’ motion to
dismiss finding that plaintiffs did not properly plead scienter by failing to show a motive,
opportunity, and circumstantial evidence of conscious misbehavior or recklessness of defendants.
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Tiberius Capital, LLC v. Petrosearch Energy Corporation, 2011 WL 1334839 (S.D.N.Y. Mar.
31, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiff claimed that defendant made material misstatements
stating that plaintiff was not entitled to dissenter’s rights as a shareholder prior to a merger. The
court noted that defendant subsequently admitted it had been mistaken and plaintiff was in fact
entitled to those rights. However, the court granted defendants’ motion to dismiss finding that
although plaintiff did sufficiently particularize the relevant misstatement, scienter was not
sufficiently pleaded in relation as plaintiff failed to show that any contradictory information was
in the possession or knowledge of defendants. The court also noted that plaintiff failed to
adequately plead economic loss or loss causation through a lack of evidence of a mispriced
merger.
Egan v. Tradingscreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011).
Plaintiff brought suit against his employer for alleged violations of federal securities
laws. Defendant moved to dismiss for failure to state a claim as required under the heightened
pleading standard of the PSLRA. Plaintiff alleged that he was induced by defendant to invest in
the offering of certain stock options and grants. Plaintiff claimed that defendant concealed
certain underlying misconduct that affected the price of the options and stock. Plaintiff also
claimed that defendant misrepresented the payout policy and failed to allow him to exercise
rights in relation to them that he was promised. The court granted defendant’s motion to dismiss
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ut granted leave to amend finding that plaintiff failed to plead with sufficient particularity any
specific misrepresentations that could subsequently be shown to have known to be false.
City of Omaha v. CBS Corporation, 2011 WL 2119734 (S.D.N.Y. May 24, 2011).
Investor brought suit against a broadcasting corporation and several of its officers for
alleged violations of federal securities laws. Defendants moved to dismiss for failure to state a
claim as required under the heightened pleading standard of the PSLRA. Specifically, plaintiffs
alleged that defendants failed to disclose an impairment to the defendants’ corporation’s value
when, in the first quarter of 2008, the corporation experienced advertising revenue declines and a
dip in market capitalization. The court granted defendants’ motion to dismiss for failure of the
plaintiff to plead specific misrepresentations. The court also found that the alleged omission of
certain loan reports was not misleading given no duty to disclose on the part of the defendants.
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In re Bank of America Corp. Securities, Derivative, and Employee Retirement Income Security
Act (ERISA) Litigation, 2011 WL 3211472 (S.D.N.Y. July 29, 2011).
Plaintiffs brought suit against defendant alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that defendant, bank and several of its
officers did not adequately disclose the bank’s deteriorating financial condition in the fourth
quarter of 2008 and government’s subsequent financial support of the bank. The court denied
defendants’ motion to dismiss with respect to the fourth quarter losses claims finding that the
complaint raised a strong inference of recklessness. The court, however, granted defendants’
motion to dismiss with respect to plaintiff’s claim regarding federal financial support.
Board of Trustees of the City of Ft. Lauderdale General Employees’ Retirement System v.
Mechel OAO, 2011 WL 3502016 (S.D.N.Y. Aug. 9, 2011).
A retirement system and pension fund plans brought a class action suit against a mining
and metals company along with three of its officers alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. The court granted defendant’s motion to dismiss holding that
allegations that defendants’ had motivation to inflate stock prices, along with the company’s
subsequent failure to investigate those prices and knowledge that the company’s subsidiaries
were engaged in anti competitive behavior, were all insufficient to establish scienter.
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Egan v. Tradingscreen, Inc., 2011 WL 4344067 (S.D.N.Y. Sept. 12, 2011).
Plaintiff brought suit against defendant for violation of federal securities laws. Defendant
filed a motion to dismiss for failure to state a claim under the heightened pleading standards
required by the PSLRA. Plaintiff alleged that defendants made various misrepresentations to
him concerning his purchases of stock options and the terms and conditions of his employment.
The court granted defendants’ motion to dismiss finding that the plaintiff’s amended complaint
failed to adequately allege a strong inference of scienter in relation to the alleged
misrepresentations.
380544 Canada, Inc. v. Aspen Technology, Inc., 2011 WL 4089876 (S.D.N.Y. Sept. 14, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. The court granted defendants’ motion to dismiss, even upon
finding that plaintiffs failed to satisfy the particularity requirement because their allegations
never specified any of the individuals making the alleged misrepresentations at meetings the
plaintiffs attended. The court also held that plaintiffs failed to link each individual defendant to a
specific fraudulent statement in any meaningful way.
City of Monroe Employees’ Retirement System v. Hartford Financial Services Group, Inc., 2011
WL 4357368 (S.D.N.Y. Sept. 19, 2011).
Plaintiff investors brought suit against defendants alleging violations of federal securities
laws and defendants filed motion to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court granted defendants’ motion finding that
plaintiffs complaint did not include a single allegation of a self-interested motive or opportunity
by any individual whose statements were challenged. The court reasoned that plaintiffs, instead
based their entire complaint on a unilateral, and ultimately unsupported, interpretation of the
defendants’ insurance filing.
In re Sec. Capital Assur. Ltd. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Plaintiff claimed defendants issued misstatements relating to certain credit scores used to
delineate subprime loans as well as assertions of utilizing a distinct internal model for assessing
the risks of subprime exposure. The court granted defendants’ motion to dismiss for failure to
state a claim finding that plaintiff’s amended complaint continued to fail to adequately plead loss
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causation as required under the PSLRA. Specifically the court did not find a link between later
partial corrective disclosures that the plaintiff claimed negatively affected its stock price. The
court also did not find how those partial disclosures related to the improper credit score and
internal model misstatements alleged in plaintiff’s complaint.
Wyatt v. Inner City Broadcasting Corporation, 2011 WL 4484071 (S.D.N.Y. Sept. 28, 2011).
Plaintiff brought suit against defendants alleging violations of federal securities laws.
Defendants moved to dismiss for failure to state a claim in accordance with the heightened
pleading requirements of the PSLRA. Plaintiff a shareholder in defendant company, alleged that
defendant failed to provide him with information relating to a debt purchase agreement, and
information concerning whether the company planned to seek approval of disinterested
shareholders and directors regarding the debt purchase agreement. The court granted the
defendants’ motion to dismiss finding that plaintiff failed to allege fraud with the requisite
particularity, reliance and loss causation.
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Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Company, Inc., 2011 WL 4526517
(S.D.N.Y. Sept. 29, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that defendants fraudulently misrepresented
material facts concerning inventories of certain materials in relation to an acquisition. The court
denied defendants’ motion to dismiss finding that plaintiffs’ complaint adequately pleaded the
specified false and deceptive statements made by defendants with the particularity required and
alleged facts giving rise to a strong inference of scienter.
Tyler v. Liz Claiborne, Inc., 2011 WL 4498983 (S.D.N.Y. Sept. 29, 2011).
Investors brought a putative class action against corporation, its president and CEO,
alleging defendants fraudulently misrepresented facts relating to corporation’s relationship with a
department store in violation of the Securities Exchange Act of 1934. Defendants moved to
dismiss for failure to state a claim as required under the heightened pleading standards of the
PSLRA. The court denied defendants motion to dismiss holding that plaintiffs’ allegation that
the corporation failed to repurchase its own stuck was insufficient to allege scienter.
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City of Roseville Employees’ Retirement System v. Energysolutions, Inc., WL 4527328
(S.D.N.Y. Sept. 30, 2011).
A pension fund brought suit against company, officers and directors, company’s sole
stockholder prior to public offerings, and three underwriters alleging violations of federal
securities laws. The court granted defendants’ motion with respect to violations of the Securities
Exchange Act of 1934 and plaintiffs’ failure to meet the heightened pleading requirements of the
PSLRA. The court held that plaintiffs’ allegations contained sufficient particularity and were
sufficient to scienter with regard to certain defendants. The court held, however, that the
complaint failed to sufficiently allege that the defendants’ statements were false or that
defendants omitted facts necessary to make disclosures materially misleading.
International Fund Management S.A. v. Citigroup, Inc., 2011 WL 4529640 (S.D.N.Y. Sept. 30,
2011).
Foreign investors brought suit against corporation and its affiliates alleging violations of
federal securities laws. The court granted and denied defendants’ motion to dismiss in part.
The court held that certain claims under the Securities Exchange Act of 1934 were not subject to
the heightened pleading requirements under the PSLRA but other claims were. In reference to
those claims that the PSLRA covered, the court held that the investors failed to state claims
based on misstatements or omissions regarding structured investment vehicles. Plaintiffs also
failed to properly allege that the corporation’s failure to disclose its auction rate securities
holdings, raised a strong inference of scienter in connection with write-downs of corporation’s
collateralized debt obligations. Plaintiffs failed to sufficiently allege actual reliance based on
corporation’s alleged misstatements in filings with the Securities and Exchange Commission.
The court did hold that certain of the investors’ allegations were sufficient to raise strong
inference of recklessness with respect to corporate officer’s collateralized debt obligation related
statements.
Wilamowsky v. Take-Two Interactive Software, Inc., 2011 WL 4542754 (S.D.N.Y. Sept. 30,
2011).
Short-seller of corporation’s stock opted out of class action and brought private action
against corporation, its former CEO and former directors, alleging violations of federal
securities laws. Plaintiff’s complaint pertained to defendants’ misrepresentations and omissions
regarding a corporation’s stock option plans. The court granted defendants’ motion holding that
plaintiff had failed to sufficiently allege loss causation. The court found that seller’s transactions
in corporation’s stock began after the price was already allegedly inflated and ended 14 months
prior to the relevant curative disclosures.
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Engstrom v. Elan Corporation PLC, 2011 WL 4946434 (S.D.N.Y. Oct. 18, 2011).
Plaintiffs brought a putative securities fraud class action individually and on behalf of all
purchasers of American Depository Shares of defendant corporation claiming violations of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for alleged false and
misleading statements made by CEO and CFO. The court held that plaintiffs failed to plead facts
raising a strong inference of scienter as required under the heightened pleading requirements of
the PSLRA. In granting defendants’ motion to dismiss, the court found that defendants’
participation in and failure to disclose certain actions that subsequently were ruled by the court
as a breach of an important contract did not amount to showing that defendants recklessly or
intentionally engaged in fraud. The court noted that this was especially true when the alleged
false and misleading material information was for the failure to disclose such a breach or risk of
such a breach rather than failing to disclose the contract itself.
Shenk v. Karmazin, 2011 WL 5148667 (S.D.N.Y Oct. 28, 2011).
Shareholders brought derivative action on behalf of corporation against corporate officers
alleging violations of federal securities laws. Shareholders alleged that officers made
misrepresentations concerning a pending merger. Specifically, the shareholders alleged that the
merger would result in lower prices and more selections for consumers. The shareholders further
alleged that the officers knew of the large amount of debt to be assumed by corporation in the
merger, ultimately requiring defendants to raise a substantial revenues to necessitate increased
prices. Defendant’s moved to dismiss claiming that plaintiff’s failed to adequately allege
scienter. The court denied defendant’s motion to dismiss holding that on could infer that the
officers and directors recklessly disregard the truth. The court reasoned that the scienter
requirement was met through the allegation that defendants made, and failed to correct,
statements that contradicted reasonably available data.
Pope Investments II LLC v. Deheng Law Firm, 2011 WL 5837818 (S.D.N.Y. Nov. 21, 2011).
Plaintiffs brought suit against defendants for violations of Section 10(b) and Rule 10b-5
of the Securities and Exchange Act of 1934. The defendants were professionals and law firms
who advised plaintiffs in transactions that allegedly ended in the embezzlement of over $10
million. Defendants filed a motion to dismiss on the basis that plaintiffs had not pleaded with the
requisite particularity that defendants acted with scienter as required under the heightened
standards of the PLSRA. In granting the defendants’ motion to dismiss, the court found that
plaintiffs did not allege that defendants possessed any motive other than normal receipt of
professional fees and did not state any specific sources from which defendants would have
learned of the fraud.
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Solow v. Citigroup, Inc., 2011 WL 5869599 (S.D.N.Y. Nov. 22, 2011).
Investor brought action against financial corporation and its chief executive officer
alleging misrepresentations and omissions in violation of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934. Defendants filed a motion to dismiss under the heightened
pleading standards of the PSLRA. The court found that defendants knew that the corporation’s
capital and liquidity were deteriorating, while continuing to represent that its capital and liquidity
were strong. The court reasoned that this gave rise to a strong inference of scienter. The court
found, however, that investors had failed to establish loss causation because the complaint did
not draw any link between these events and artificial inflation of stock price or loss of value of
the investments at issue.
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Sawabeh Information Services Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).
Plaintiffs brought suit against defendants alleging various violations of federal securities
law. Defendants filed a motion to dismiss. The court found that plaintiff’s allegations of fraud
were sufficiently specific and plausible to survive a motion to dismiss under the heightened
pleading standards imposed by the PSLRA. Specifically, defendants failed to reveal the
presence of certain documents establishing substantial liabilities owed to the defendants by the
company prior to selling the company to the plaintiffs. The court found that defendant’s failure
to disclose such material documents prior to the sale was a material omission and that failure to
disclose constituted a sufficient allegation of scienter. The court also held that the complaint
sufficiently pleaded reliance and causation of damages in the plaintiff’s decision to purchase the
company while being unaware of these outstanding liabilities.
U.S. Education Loan Trust III, LLC v. RBC Capital Markets Corp., 2011 WL 6778480
(S.D.N.Y. Dec. 21, 2011).
Plaintiffs were issuers of auction rate securities (“ARS”) that brought suit against their
underwriter and broker-dealer alleging violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934. The court granted defendant’s motion to dismiss finding that
plaintiff did not provide a factual basis for the omissions it alleged and did not suggest a
plausible inference with respect to the facts that were actually known. Specifically, the court
found that while the defendant had discussed whether it was advisable to stop supporting ARS
auctions and developed contingency plans should the ARS market collapse, this alone was not
sufficient to show the defendant came to a firm conclusion the market was doomed prior to
selling ARS to plaintiffs. The court found the allegation of defendant’s improper behavior in
extracting fees to be insufficient to adequately plead scienter under the heightened requirements
of the PSLRA.
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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
Plaintiffs brought suit against defendant alleging violations of Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1934. The court denied defendants’ motion to dismiss.
The court concluded plaintiff had adequately demonstrated the materiality of at least some of the
misstatements and omissions identified in the complaint. The court found that the failure of
defendants to provide relevant information relating to the extremely risky nature of many of the
instruments underlying their investments departed from ordinary practice enough to justify a
finding of scienter. The court also held that the shaky economic background during which many
of the investments were made complicated the analysis of loss causation but that such
complications were to be resolved at trial.
Saunders v. Morton, 2011 WL 1135132 (D. Vt. Feb. 17, 2011).
Plaintiff brought suit against defendant alleging violations of federal securities laws.
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Specifically, plaintiff claimed defendant made
misrepresentations as to the use plaintiff’s invested funds, ultimately utilizing them for personal
use and making payments to perpetuate a Ponzi scheme. The court denied defendant’s motion to
dismiss finding that plaintiff’s complaint, as amended, contained sufficient factual matter to state
a claim.
Resnik v. Woertz, 774 F. Supp. 2d 614 (D.Del. 2011).
Shareholders brought separate suits against corporation and individual officers and
members of the board of directors alleging violations of federal securities laws. Defendants filed
a motion to dismiss for failure to state a claim as required under the heightened pleading
standards of the PSLRA. Plaintiffs alleged defendant’s proxy statement failed to make required
disclosures. The court granted defendants’ motion in part and denied in part. The court denied
the motion to dismiss, finding that defendants’ failed to disclose eligibility and other aspects of a
compensation plan. The court, however, granted the motion to dismiss with respect to the
shareholder’s direct claim against officers and board members for failure to adequately allege
loss causation requirement of economic harm.
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Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675
(D.Del. June 14, 2011).
Lead plaintiff brought consolidated suit against various officers for alleged violations of
federal securities laws. Defendants moved to dismiss for failure to state a claim as required under
the heightened pleading standard of the PSLRA. Plaintiffs alleged that defendants deliberately
misrepresented the financial performance of a yellow pages publishing company, resulting in an
artificial inflation stock price. The court denied defendants’ motion to dismiss finding that
plaintiffs’ complaint pleaded sufficient facts regarding defendants alleged material
misrepresentations, omissions and scienter.
In re Heckmann Corp. Sec. Lit., 2011 WL 2413999 (D. Del. June 16, 2011).
Plaintiffs brought suit against defendants alleging violations of federals securities laws.
Defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Specifically, plaintiffs alleged that defendants misrepresented
the strength of a potential acquisition target’s past financial and operating results, its past and
future growth prospects, managers’ experience, valuation of the business and the amount of due
diligence that had been done in relation to such business. The court denied the defendants’
motion to dismiss finding that the failure of defendants to inform voting shareholders on the
acquisition, raised the strong inference of scienter. The court also found an inference that
disclosures were withheld from shareholders in order to mislead or deceive them.
In re Heckmann Corporation Securities Litigation, 2011 WL 2446388 (D.Del. June 16, 2011).
Plaintiffs brought suit against defendants alleging violations of federals securities laws
and defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Specifically, plaintiffs alleged that defendants misrepresented
the strength of a potential acquisition target’s past financial and operating results, growth
prospects, managers’ experience, valuation of the business and the amount of due diligence that
had been done in relation to such business. The court denied the defendants’ motion to dismiss
finding that the individual defendants’ signatures on the proxy solicitations properly
particularized those specific statements to the defendants. The court found plaintiffs adequately
pleaded scienter, that defendants omitted material facts in approving the merger and economic
loss causation.
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White v. Kolinsky, 2011 WL 1899307 (D.N.J. May 18, 2011).
Investors brought suit against defendants for alleged violations of federal securities laws
and defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standard of the PSLRA. Plaintiffs alleged that defendants knew of prior costs already
incurred prior to soliciting investment from plaintiffs and failed to disclose those costs as well as
other potential financing hurdles the investment project was experiencing. The court granted
defendants’ motion to dismiss finding that plaintiffs’ allegations rested on inadequately
particularized “group pleading” claims which were not permitted under the PSLRA. The court,
however, denied the other defendants motion to dismiss finding that whether many of the
statements contained in a private offering memorandum were actionable was a question of fact.
In re Merck & Co., Inc. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8,
2011).
Plaintiffs brought a class action suit against defendant pharmaceutical company for
violations of federal securities laws and defendants filed motion to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that
defendant overstated the commercial viability of one of their drugs or at least recklessly
downplayed the possible link between the drug and cardiovascular complications. Plaintiffs
claimed that the company had strong evidence of heart-attack link with the drug even before the
product launched. Plaintiffs alleged that this evidence continued to increase while company
continued to tout its safety on the market. The court granted defendants’ motion to dismiss with
respect to the alleged misrepresentations of all defendants except for one.
In re Anadigics, Inc., Securities Litigation, 2011 WL 4594845 (D.N.J. Sept. 30, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws and
defendants moved to dismiss for failure to state a claim under the heightened pleading
requirements of the PSLRA. Plaintiffs alleged defendants misled investors about its capability to
meet demand for its products. The court granted defendants’ motion to dismiss holding that the
allegedly false or misleading statements were not actionable because they had not been pleaded
with the requisite particularity as to either falsity or scienter. Specifically, the court found that
statements regarding supply shortages no longer being a concern and demand no longer
outstripped capacity to be pleaded with the requisite particularity. The court held, however, that
plaintiff failed to allege any facts with regard to those statements from which the court could
infer scienter.
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Love v. Alfacell Corp., 2011 WL 4915874 (D.N.J. Oct. 17, 2011).
Plaintiff brought suit against defendants for violations of Section 10(b) and Rule 10b-5
under the Securities Exchange Act of 1934 and defendants moved to dismiss for failure to meet
the heightened pleading standards under the PSLRA. The court granted defendants’ motion
holding that plaintiff failed to specify whether many of the statements alleged in the complaint
were misleading or note the reasons why such statements were misleading. The court found the
other claims not to be material the would not alter the total mix of information available to a
reasonable investor.
Monk v. Johnson and Johnson, 2011 WL 6339824 (D.N.J. Dec. 19, 2011).
Plaintiff brought suit against certain former and current officers and directors of a
company and its wholly owned subsidiary, alleging that defendants misrepresented and omitted
material information about system quality control failures at the subsidiary’s over-the-counter
drug manufacturing plants. Defendants filed a motion to dismiss for failure to allege that each
defendant possessed the requisite scienter to commit securities fraud under the heightened
pleading standards of the PSLRA. The court held that plaintiff had sufficiently pled scienter with
respect to certain defendants but that the scienter allegations against other defendants were
insufficient and dismissed those defendants from the suit without prejudice. More specifically,
the court differentiated treatment of defendants based on a lack of specificity with which certain
actions and inactions of the company.
Barnard v. Verizon Communications, Inc., 2011 WL 294027 (E.D. Pa. Jan. 31, 2011).
Plaintiff shareholders brought suit against defendants alleging violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
heightened pleading requirements of the PSLRA. Plaintiff claimed their stock in a company was
rendered useless when the company went into bankruptcy. The plaintiff further alleged that the
bankruptcy was deliberately engineered several years ago when the company was divested and
spun off from another larger company as an intricate way to “unsaddle” debt from the larger
company’s balance sheet. The court granted defendants’ motions to dismiss finding that
plaintiffs failed to allege any specific misleading statements or omissions.
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).
Plaintiffs brought suit against various officers of a company alleging violations of federal
securities laws. Plaintiffs alleged that defendants had information about the true state of the
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company but engaged in deceptive practices to artificially inflate the company’s financial results
and stock prices. Defendants moved to dismiss all counts for failure to state a claim under the
heightened pleading requirements of the PSLRA. The court denied certain defendants’ motions
to dismiss, finding that the plaintiffs had adequately pleaded that those defendants elected to
issue misstatements and omitted statements with knowledge that the information was misleading
and would likely impact the market. The court granted other defendants’ motions to dismiss for
failure to allege any facts upon which it could be shown that those defendants acted with the
requisite scienter.
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Fulton Bank, N.A. v. UBS Securities, LLC, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011).
Plaintiff brought suit against defendants alleging violations of Pennsylvania state
securities laws in connection with its purchase and retention of various auction rate securities
(“ARS”) in auctions that the defendants managed. The court granted the defendant’s motion to
dismiss and found that, given the lack of determining state case law, that an analysis identical to
federal securities law violations of Section 12(b) and Rule 12b-5 of the Securities Exchange Act
of 1934 was appropriate. Under this analysis, the court held that plaintiff failed to sufficiently
allege many required elements under the heightened pleading standards of the PSLRA. The
court found that loss causation was difficult to prove given the surrounding market wide
phenomenon causing comparable losses to other investors. The court also found that plaintiff
failed to allege with reliance with requisite particularity.
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In re Conventry Healthcare, Inc. Securities Litigation, 2011 WL 1230998 (D.Md. Mar. 30,
2011).
Plaintiffs brought class action suit against defendant health insurance corporation and
many of its officers allege alleging violations of federal securities laws and defendants filed a
motion to dismiss for failure to state a claim as required under the heightened pleading standards
of the PSLRA. The court granted defendants’ motion to dismiss in part and denied it in part
finding that plaintiffs failed to adequately plead that certain statements alleged were intentionally
misleading and failed to plead sufficient facts that other statements made prior were made with
knowledge of their falsity or reckless disregard to their falsity but that two statements pleaded
were actionable under the Securities Exchange Act of 1934.
In re Coventry Healthcare, Inc. Securities Litigation, 2011 WL 3880431 (D. Md. Aug. 30,
2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Defendants requested reconsideration of the court’s prior decision to deny certain motions for
dismissal in relation to certain alleged statements and certain defendants. Plaintiffs alleged that
defendants failed to disclose problems they were incurring with the roll-out of a new Private-
Fee-For-Services healthcare plan product and that such difficulties were known or recklessly
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disregarded and resulted in omissions and misrepresentations of certain figures to investors. The
court declined to reconsider, stating that the confidential witness testimony offered by plaintiff
supported the inference that the problems were pervasive problems and discussed by the
company prior to several of the statements alleged as misrepresentations and that even though
circumstantial, plaintiffs evidence alleged in complaint was sufficient to give rise to a strong
inference of scienter.
Brown v. Schwartzberg, 2011 WL 5599214 (M.D. La. Nov. 16, 2011).
Defendants brought a counter-complaint of fraud against plaintiff under the Securities
Exchange Act of 1934. The court found that the allegations in defendant’s counter-complaint
were vague and lacking factual specificity as to particular misleading statements, information, or
misrepresentations and the source of said statements, information or misrepresentations and
therefore, failed generally and under the PSLRA to connect the allegations of fraud to any
specific statement, document or alleged fact. The court required defendants to amend their
counter-complaint to allege with specificity any claim pursuant to the Securities Exchange Act of
1934.
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
heightened pleading requirements of the PSLRA. Plaintiffs claim that defendants operated a
Ponzi-like scheme targeting members of the Chinese-American community to obtain direct and
indirect investments in the Oversea China Fund and made material misrepresentations to deceive
plaintiffs and influence their decisions to invest. The court granted defendants’ motion to dismiss
finding that plaintiffs failed to sufficient particularize facts showing defendants made fraudulent
misrepresentations to investors. Further, the court found that plaintiffs failed to show specific
acts raising the requisite scienter and, similarly to the alleged misleading statements, relied on
over generalizations rather than specific statements or actions or other facts.
Hopson v. MetroPCS Communications, Inc., 2011 WL 1119727 (N.D.Tex. Mar. 25, 2011).
Plaintiff brought suit against defendants alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs claimed losses sustained after purchasing shares of
defendant company’s stock at artificially inflated prices resulting from the defendants’ materially
false, misleading, and reckless statements and omissions regarding company’s business
prospects. The court granted defendants’ motion to dismiss finding that plaintiff had not pleaded
sufficient facts to support a strong inference of scienter and that even if plaintiff had adequately
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alleged scienter, plaintiff had also failed to plead with particularity claims relating to defendants’
knowledge of “churn” data and that other statements were protected as either forward-looking or
mere puffery.
In re Franklin Corp. Securities Litigation, 782 F.Supp.2d 364 (S.D.Tex. 2011).
Purchasers of common and preferred stock brought class action suit against bank and
bank’s officers and directors, its outside auditor, and underwriter alleging violations of federal
securities laws and defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed damage to preferred
shares purchased from bank were caused by bank’s concealing adverse information concerning
bank’s operations, financial condition, and performance alleged to be caused by concealed highrisk
strategy and lack of risk management protocols. The court granted defendants’ motions to
dismiss finding that purchasers failed to plead with sufficient particularity claim that chairman of
bank’s board of directors made material misrepresentations regarding its capitalization and
reserves; purchasers failed to allege scienter; bank’s CEO had no duty to disclose to investors of
mortgage lender’s default on warehouse line of credit; and registration statement did not contain
any false statements or material omissions.
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Hawaii Ironworkers Annuity Trust Fund v. Cole, 2011 WL 1257756 (N.D.Ohio Mar. 31, 2011).
Institutional investor brought class action suit as lead plaintiff against defendants for
alleged violations of federal securities laws and defendants moved to dismiss for failure to state a
claim as required under the heightened pleading standard of the PSLRA. Plaintiff claims that
defendants contributed to the restatement of earnings of a company plaintiff invested in, which
was the result of a fraudulent scheme and wrongful course of business whereby defendants, highlevel
employees, caused the company to issue false financial statements. The court denied
defendants’ motion finding that plaintiff sufficiently alleged that defendants substantially
participated in making misrepresentations, that if not for the defendants’ misleading statements
the plaintiff and others similarly situated might not have made the investment. The court found
that plaintiff sufficiently pleaded scienter and loss causation.
Hawaii Ironworkers Annuity Trust Fund v. Cole, 2011 WL 1257756 (N.D. Ohio Mar. 31, 2011).
Plaintiff brought class action suit against defendants alleging violations of federal
securities laws and defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants
overstated the results of operations at one unit of their business, representing that it was thriving
while the automotive parts manufacturing industry was encountering severely adverse conditions
and once the company was forced to redo its financial statements for those quarters the effects of
the statements on the value of the stock was catastrophic. The court denied defendants’ motion to
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dismiss finding that plaintiff’s allegations sufficiently alleged that defendants substantially
participated in the alleged misstatements, that plaintiffs sufficiently alleged reliance, that
allegations gave rise to strong inference of scienter, and plaintiff’s allegations were sufficient to
plead loss causation.
Louisiana Municipal Police Employees Retirement System v. KPMG LLP, 2011 WL 4629299
(N.D. Ohio Sept. 30, 2011).
Investor filed putative private securities fraud class action alleging that company, its
officers, and its outside auditor participated in fraudulent scheme and wrongful course of
business that caused company to falsify its financial records by improperly recognizing revenue
and manipulating its recording of expenses. Defendants moved to dismiss for failure to
adequately plead scienter against corporate officers and outside auditor and failure to adequately
plead loss causation against all defendants. The court denied the motion, holding that investors
adequately pleaded scienter against corporate officers and outside auditor and that they had also
adequately pleaded loss causation.
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc., 788 F. Supp. 2d 609 (S.D.Ohio
2011).
Investors brought class action suit against corporation and its executives alleging
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that
corporation’s executives made false or misleading statements to conceal reckless behavior. The
court granted defendants’ motion to dismiss finding that investors’ claims that corporation
participated in nefarious scheme by high-level executives to conceal problems within company,
failed to sufficiently allege scienter; that investors’ claims that corporation’s executives would
receive larger bonuses if stock price was inflated was insufficient motive to satisfy scienter
requirement; that allegations of executives knowing but failing to disclose that its interactive
software system was “doomed to fail” failed to adequately allege scienter given company’s $18
million investment in system start-up, that many of the other corporate statements were either not
false, not material, merely puffery or could not be directly attributed to any executive.
Garden City Employees’ Retirement System v. Psychiatric Solutions, Inc., 2011 WL 1335803
(M.D.Tenn. Mar. 31, 2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws and defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants
engaged in and/or materially assisted in a scheme and course of business to artificially inflate the
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value of defendant company’s stock by concealing increasing financial difficulties with
appropriately staffing facilities necessary for patient safety and minimizing the significance of
repeatedly published reports of patient safety incidents at the company’s facilities. The court
denied defendants’ motion to dismiss finding that given the extent of state enforcement agencies’
findings and sanctions for inadequate services and patient care, defendants’ statements were
actionable and the allegations gave rise to a strong inference of scienter.
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys
Healthcare Solutions, Inc., 778 F. Supp. 2d 858 (N.D. Ill. 2011).
Investors brought class action suit against corporation, its CEO and CFO alleging
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. The court granted
defendants’ motion to dismiss in part, finding that CEO’s statements about corporation’s ability
to deliver solid results were not material, and denied defendants’ motion to dismiss in part,
finding that investors sufficiently alleged that CEO’s statement concerning corporation’s work
on implementation was misleading when made and that investors had sufficiently alleged
scienter.
Antelis v. Freeman, 799 F.Supp.2d 854 (N.D.Ill. 2011).
Plaintiff investor brought suit against former business partner for violations of federal
securities laws. Plaintiff alleged that (i) defendant failed to disclose that he would receive
approximately $100,000 in purported kickbacks for convincing investor to loan approximately
$333,000 to a third party for a real estate venture, (ii) the defendant falsely claimed he was an
equal investor in the venture, and (iii) the defendant made other misstatements about his wealth
and the likely success of the venture. Defendant moved to dismiss for failure to state a claim as
required under the heightened pleading standards of the PSLRA. The court dismissed
defendant’s motion, finding that Plaintiff’s allegations failed to allege a sufficient inference of
scienter. The court particularly relied on the fact that Defendant had also purchased a note from
the same third party in the same amount as plaintiff. Further, the court reasoned that a nonculpable
explanation most likely existed for defendants’ actions, especially given the fact that
plaintiff and defendant were friends for long duration prior to the investment at issue.
St. Lucie County Fire District Fire-Fighters’ Pension Trust Fund v. Motorola, Inc., 2011 WL
814932 (N.D. Ill. Feb. 28, 2011).
Plaintiffs brought class action suit against defendants alleging violations of the federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed they suffered damage
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from a decline of defendant’s stock price as a result of defendants’ failure to disclose material
facts regarding projected revenue, demand for its products, progress in turning around a mobile
device division and a legal dispute. The court granted defendants’ motion to dismiss because (i)
given the various disclosures made to plaintiff, plaintiff failed to allege any material
misrepresentations or omission and (ii) that plaintiff failed to adequately plead scienter with
respect to any misstatements alleged.
City of Livonia Employees’ Retirement System v. The Boeing Company, 2011 WL 824604 (N.D.
Ill. Mar. 7, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Plaintiffs claimed that defendants intentionally deceived them regarding the testing and delivery
schedule for an anticipated commercial aircraft. Defendants filed a motion to dismiss for failure
adequately allege scienter as required under the heightened pleading standards of the PSLRA.
The court denied the motion based, in part, on the testimony of a confidential witness who
allegedly testified regarding the scienter element. Later, the court granted reconsideration of the
motion given that the confidential witness had since been identified and recanted all previous
testimony. Upon reconsideration, the court granted defendants’ motion to dismiss finding that
absent the confidential witness’s testimony, plaintiff did not meet the heightened pleading
standard of the PSLRA.
Garden City Employees’ Retirement System v. Anixter International, Inc., 2011 WL 1303387
(N.D.Ill. Mar. 31, 2011).
Plaintiffs brought a class action suit against defendants alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs alleged that during the class
period, defendants engaged in a scheme to deceive and defraud investors of the true value of
defendant company’s stock. Specifically, Plaintiffs alleged that certain “organic growth
projections” were given to the market without a reasonable basis in fact and contained material
misrepresentations and omission by failing to indicate that the company was negatively affected
by the slowing economy. The court granted the defendants’ motion to dismiss without prejudice,
finding that plaintiffs’ claims failed to adequately plead falsity with the requisite particularity
and failed to sufficiently plead scienter.
Wehrs v. Benson York Group, Inc., 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).
Plaintiff brought suit against defendant for violations of federal securities laws. Plaintiff
filed a motion for summary judgment, which was granted by the court. Later, the court granted
defendants’ motion to vacate on the issue of damages. The court held that the previous ruling
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failed to adequately address whether the plaintiff properly plead each allegation with sufficient
particularly. On review, the court found that all of plaintiff’s claims, with the exception of one
misstatement, lacked sufficient particularity to meet the pleading standard. Further, for the
single misstatement that was adequate pled, plaintiff failed to plead reliance.
City of New Orleans Employees’ Retirement System v. Private Bancorp, Inc., 2011 WL 5374095
(N.D. Ill. Nov. 3, 2011).
Plaintiffs brought suit against defendants for violations of federal securities laws and
defendant moved to dismiss for failure to state a claim. Plaintiffs alleged that defendant, a
regional bank, concealed the deterioration of certain loans in its portfolio and falsely represented
its financial condition by knowingly and purposefully failing to write off $109 million in
defaulting loans. The court granted defendants’ motion to dismiss and found that plaintiffs failed
to allege particularized facts sufficient to give rise to a strong inference that any of the
defendants acted with scienter or had knowledge of any purported credit losses that would merit
a write-down.
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Antelis v. Freeman, 2011 WL 6009609 (N.D. Ill. Nov. 30, 2011).
Plaintiff brought suit against defendant alleging various violations of federal securities
laws. Plaintiff alleged that defendant made numerous material misrepresentations and concealed
material facts to induce plaintiff to make loans to an individual who subsequently went bankrupt.
As a result, plaintiff allegedly lost nearly all of his lifesavings. In particular, plaintiff alleged that
the company which guaranteed the notes was a shell corporation designed to defraud investors
with defendant’s assistance and that defendant received thousands of dollars in kickbacks and
other payments. The court granted the defendant’s motion to dismiss, finding that the plaintiff
had failed to plead scienter with the requisite particularity required under the heightened
standards of the PSLRA. The court found that, based on the allegations, it was just as likely that
defendant had also been defrauded because he had also lost $333,000. Further, the court fund
that the defendant was never actually paid the alleged kickbacks because payment was
contingent on repayment of the notes, which were never repaid.
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 2011 WL
338865 (S.D. Ind. Jan. 28, 2011).
Plaintiffs brought a class action suit against defendants alleging violations of federal
securities laws based on the defendants’ alleged failure to disclose known complaints about a
company’s medical device. Defendants moved to dismiss for failure to state a claim as required
under the heightened pleading requirements of the PSLRA. Allegedly, defendant corporation and
its officers were privy to doctors’ complaints about the medical device product and were required
to disclose such information. The court granted defendants’ motions to dismiss finding that
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plaintiffs failed to (i) create strong inference of scienter and (ii) adequately allege the CEO and
CFO had knowledge of the complaints. Further, the court found that Plaintiffs allegations failed
to adequately plead the CEO’s and CFO’s involvement in the concealment. Finally, the court
found that the CEO and CFO had actually disclosed certain facts about the product, which
weighed against an inference that their statements were knowingly false.
Dixon v. Ladish Company, Inc., 785 F. Supp. 2d 746 (E.D.Wis. 2011).
Shareholder brought suit against corporation and its directors alleging violations of
federal securities laws based on misleading statements contained in corporation’s registration
statement. Defendant filed a motion to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court granted the motion finding that
shareholder failed to plead a securities fraud claim with requisite particularity where her
complaint (i) contained conclusory allegations and (ii) did not include any specific facts as to
what the corporation omitted from its registration statement to make the statement false or
misleading.
Puskala v. Koss Corporation, 799 F. Supp.2d 941 (E.D. Wisc. July 28, 2011).
Investors brought putative class action against corporation, its former accountant, its
principal accounting officer, and its CEO, alleging violations of federal securities laws.
Defendant moved to dismiss for failure to meet the heightened pleading standards required under
the PSLRA. The court granted defendant’s motion to dismiss on the basis that the investors
failed to adequately plead with the requisite particularity required under the PSLRA. The court
noted that, based on the allegations, plaintiffs only way to have stated a claim would have been
to show that the corporation’s internal controls were completely unreliable. The investors failed
to make such an allegations, which meant that they failed to adequately plead their claim.
Pet Quarters, Inc. v. Ladenburg Thalmann and Company, Inc., 2011 WL 1135902 (E.D.Ark.
Mar. 28, 2011).
Plaintiff brought suit against defendants alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiff alleged that defendants continued to underwrite and
earn large commissions on auction rate securities with knowledge that credit markets were
deteriorating. Further, plaintiff alleged that defendants knew of the deteriorating markets
because defendants submitted “support” bids on behalf of itself to artificially prop up the market.
Without these support bids, the defendants knew the market would no longer exist. The court
granted one defendant’s motion to dismiss with leave for plaintiff to amend finding that plaintiff
had not alleged sufficient facts to demonstrate either scienter or justifiable reliance. The court
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denied another defendant’s motion to dismiss finding that the plaintiff adequately plead that the
complicated structured investments fell outside the scope of the plaintiff’s investment guidelines.
In re Meta Financial Group, Inc., Securities Litigation, 2011 WL 2893625 (N.D. Iowa July 18,
2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws and defendants filed motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants either
knowingly or recklessly published a series of materially false and misleading statements and
omissions about defendant company’s operations and finances. The court denied defendants’
motion finding that plaintiffs adequately pleaded their claims with the requisite particularity.
Yary v. Voight, 2011 WL 6781003 (D. Minn Dec. 27, 2011).
Plaintiffs brought suit against defendant asserting claims under the Securities Exchange
Act of 1934 and defendant moved to dismiss. Plaintiffs claimed various statements made by
defendant in advising them to invest in a real estate financing company and other subsequent,
related investments and transfers of their original investments were fraudulent. The court found
that the complaint contained many of the specific statements made by defendant to plaintiffs
relating to the investments, as well as a subsequent release. The court found that these
statements contained the requisite particularity required for stating misrepresentations or
omissions under the heightened pleading standards of the PSLRA. Further, the court found
sufficient evidence for plaintiffs to assert a conversion claim. Finally, the court noted that the
behavior of defendant in making statements about the safety of the investments and encouraging
elderly, unsophisticated investors of limited means to concentrate on extremely risky investments
gave rise to a strong inference of scienter.
McDonald v. Compellent Technologies, Inc., 805 F. Supp. 2d 725 (D. Minn. Aug. 1, 2011).
Investor brought class action suit against defendant corporation and five of its officers
and directors for violations of federal securities laws. Plaintiffs alleged that defendants
participated in fraudulent scheme to artificially inflate corporation’s stock prices. Defendants
moved to dismiss for failure to state a claim as required under the heightened pleadings standards
of the PSLRA. The court granted defendants’ motion, holding that (i) the investor failed to plead
a securities fraud claim with the requisite particularity required, (ii) that defendants’ general
statements about the business, drop in gross margin, and future revenues were not actionable,
and (iii) that statements forecasting corporation’s revenues were not false or misleading when
made and did not rise to the level of required scienter.
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In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).
Plaintiff brought suit against defendants alleging violations of Section 10(g) and Rule
10b-5 of the Securities Exchange Act of 1934. Defendant filed a motion to dismiss claiming that
allegations of complaint fail to satisfy the heightened pleading requirements of the PSLRA with
respect to the identification of false or misleading statements and the requisite state of mind, as
well as other legal requirements for pleading securities fraud claims, particularly with respect to
loss causation. The court granted the motion in part and denied it in part, finding that the
allegations of the complaint relating to undisclosed sales and channel stuffing practices directly
related to representations of the company’s healthy economic status were sufficiently
particularized and that such practices could by the officers do support a strong inference of
scienter as well as loss causation.
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 2011 WL 1253250
(D.Ariz. Mar. 31, 2011).
Plaintiffs brought suit against defendants for alleged violations of federal securities laws
and defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standard of the PSLRA. Plaintiffs claimed various fraudulent activities relating to
improper backdating of options and misleading statements made in conjunction with such
practices. The court granted defendants’ motion to dismiss finding a lack of circumstances
contributing to a strong inference of scienter relating to certain claimed misstatements. The
court also found that plaintiff failed to plead falsity with requisite particularity.
In re Apollo Group, Inc. Securities Litigation, 2011 WL 5101787 (D.Ariz. Oct. 27, 2011).
Plaintiffs brought suit against a company that owns and operates proprietary
postsecondary education institutions and several of its officers alleging violations of Section
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs claimed that defendants
made false and misleading statements and omissions of material fact regarding the company’s
financial condition, business focus, ethics, compensation and recruitment practices, and
compliance with applicable laws. These statements and omissions resulted in an artificial
inflation of the company’s stock and led plaintiffs to purchase stock at inflated prices.
Defendants filed a motion to dismiss for failure to meet the heightened pleading requirements
under the PSLRA. The court granted the defendants’ motion with leave for the plaintiffs to
amend, finding that plaintiffs did not adequately plead a strong inference of scienter and loss
causation. The court held that Plaintiffs allegations, which were based on the defendants’ trading
activities, the testimony of mostly low-level confidential witnesses and the failure of defendants
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to correct erroneous accounting procedures, did not adequately support a strong inference of
scienter. Further, the court reasoned that the allegations regarding subsequent corrective
disclosures did not adequately allege loss causation.
Plichta v. Sunpower Corporation, 790 F.Supp.2d 1012 (N.D. Cal. 2011).
Shareholders brought class action suit against company and its executives alleging
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a
claim as required under the heightened pleading standards of the PSLRA. Shareholders alleged
that defendants unsubstantiated accounting entries rendered the company’s filings with the
Securities and Exchange Commission false and misleading. The court granted defendants motion
to dismiss finding that the shareholders failed to plead scienter sufficiently. Further, the court
found that plaintiffs allegations did not support a strong inference that management could have
known that the underlying data entered into the accounting entries were false. Plaintiffs
allegations that executives had made acknowledgements and admissions regarding a lapse in
internal control mechanisms was not sufficient to survive the motion to dismiss.
Lapiner v. Camtek, Ltd., 2011 WL 445849 (N.D. Cal. Feb. 2, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws and
defendants moved to dismiss for failure to state a claim as required under the heightened
pleading requirements of the PSLRA. Plaintiffs were stockholders claiming defendants engaged
in a scheme to inflate the price of stock by making material misrepresentations regarding its cash
flow and revenue. Allegedly, defendants cashed in letters of credit on orders for products before
the orders were accepted. The court granted defendants’ motion to dismiss, finding that plaintiffs
did not identify the basis of their belief that the letters of credit were used in this manner. The
court also found plaintiffs’ grounds for scienter based on stack sales and positions held in the
company to be deficient and an additional ground for dismissal.
In re Bank of America Corp. Auction Rate Securities (ARS) Marketing Litigation, 2011 WL
740902 (N.D. Cal. Feb. 24, 2011).
Investors brought suit against bank alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs claimed that bank earned lucrative fees in
connection with its role in a securities market and that it took advantage of the opportunity to
manipulate the market. The court granted defendants’ motion to dismiss, finding that plaintiffs
failed to sufficiently allege the manipulative acts on which the alleged scheme was based.
Further, the court found that the mere allegation that defendants desired to earn a commission
was too common a motive and not adequately particularized.
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Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that defendants solicited individuals with
good credit scores to participate in a real estate investment scheme that was misrepresented as
having little or no risk. Further, plaintiffs alleged that defendants fraudulently marketed and sold
securities relating to the scheme, which violated federal securities laws. The court denied
defendants’ motion to dismiss. The court found that plaintiffs had adequately alleged scienter
based on defendants’ repeated representations that the investment was a low-risk investment
opportunity. Further, plaintiffs adequately alleged loss causation based on defendants potentially
fraudulent inducement to enter into the contracts.
In re Infineon Technologies AG Securities Litigation, 2011 WL 7121006 (N.D.Cal. Mar. 17,
2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws and defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed defendants engaged in
securities fraud by participating in an illegal price-fixing conspiracy involving a product and then
manipulated the price of stock by making misrepresentations about the impact of the artificially
inflated product prices on underlying company’s corporate value. The court granted defendants
motion to dismiss and gave plaintiffs leave to amend. The court found that plaintiffs failed to
adequately particularize any specific misrepresentations and instead relied on a generalized
statement that defendants misrepresented inflated product prices during a specific period.
In re Verifone Holdings Inc. Securities Litigation, 2011 WL 1045120 (N.D.Cal. Mar. 22, 2011).
Plaintiff brought consolidated class action suit against transaction automation company
and certain of its officers and directors alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged defendants’ failures to make appropriate
accounting corrections resulted in overstated and misreported revenues. This, in turn, caused
plaintiffs to purchase defendants’ stock at artificially inflated rates. The court granted
defendants’ motion to dismiss finding that none of plaintiffs’ allegations gave rise to a strong
inference of scienter but that the stronger inference was mistake or gross negligence by the
officer.
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In re Nuveen Funds/City of Alameda Securities Litigation, 2011 WL 1842819 (N.D.Cal. May 16,
2011).
Investors brought suit against defendants for alleged violations of federal securities laws
and defendants filed a motion for summary judgment on the grounds that plaintiffs cannot
establish loss causation, materiality or scienter as required under the PSLRA. Plaintiffs claim
that they purchased notes pursuant to an offering statement prepared by defendants which
contained inflated and wildly optimistic and unrealistic projections. The court granted
defendants’ motion for summary judgment finding that plaintiffs failed to show any evidence of
a causal relationship between the alleged unrealistic projections and the sale of the underlying
project for less than projected.
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Wozniak v. Align Technologies, Inc., 2011 WL 2269418 (N.D.Cal. June 8, 2011).
Plaintiff brought suit against removable teeth aligner manufacturer and several of its
officers for alleged violations of federal securities laws and defendants moved to dismiss for
failure to state a claim as required under the heightened pleading standard of the PSLRA.
Specifically, plaintiffs allege that as a result of a settlement with a competitor, defendant
manufacturer was forced to take on competitor’s customers causing a shift from pursuing a
growth strategy to handling backlog of new non-paying customers. Plaintiffs claim that the
acquisition of these non-paying customers was misrepresented or improperly omitted in various
conference calls and press releases. The court granted defendants’ motion to dismiss finding that
the misstatements alleged were generalized statements of optimism and constituted “nonactionable
puffery” rather than deliberate or reckless misrepresentations. Further, the court
found that the omissions claimed were actually disclosed numerous times prior to and throughout
the class period. The court also found plaintiff failed to sufficiently allege scienter for any of the
statements or inactions as required.
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2011 WL 3501733 (N.D. Cal. Aug. 10,
2011).
Plaintiffs brought suit against defendant alleging violations of federal securities laws and
defendants filed motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that, throughout the class period, individual
defendants were repeatedly asked about the effects of the economic crisis and “steadfastly”
assured analysts and investors that “the economic crisis was not negatively impacting sales and
revenues. Plaintiff also alleged that defendant failed to inform investors that it had effectively
saturated the market with its current product and growth prospects were minimal. The court
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granted defendants’ motion to dismiss with leave to amend finding that, out of nineteen alleged
misstatements, plaintiffs had failed to allege any such dramatically false statement that would
merit the inference of scienter. Further, plaintiff had thus far failed to adequately allege even a
single misrepresentation or omission with respect to any individual corporate officer.
Applestein v. Medivation, Inc., 2011 WL 3651149 (N.D. Cal. Aug. 18, 2011).
Lead plaintiff brought a securities class action against defendant company and several of
its senior officers alleging violations of federal securities laws. Defendants moved to dismiss for
failure to state a claim as required under the heightened pleading standards of the PSLRA. The
court granted defendants’ motion to dismiss with leave for plaintiff to amend, finding that each
of plaintiffs’ allegations were insufficient to give strong inference of scienter and, even
collectively, the allegations were insufficient to meet the threshold for a showing of scienter.
Curry v. Hansen Medical, Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).
Shareholders brought suit against medical company and its officers for violations of
federal securities laws and defendants moved to dismiss for failure to state a claim as required
under the heightened pleading standards required under the PSLRA. Plaintiffs alleged that
defendants induced them to acquire common stock at artificially inflated prices during certain
class periods by making knowing and intentional misstatements regarding the company’s
revenue recognition and sales performance. The court granted defendants’ motion to dismiss
with leave to amend finding that plaintiffs failed to allege fraud with sufficient particularity.
Lapiner v. Camtek, Ltd., 2011 WL 3861840 (N.D. Cal. Aug. 31, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws and
defendants filed motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged defendants engaged in a systematic scheme
to inflate the price of certain stock by publishing false and materially inflated reports of
revenues, earnings, cash flow from operations and days sales outstanding that omitted relevant
developments. Purportedly, defendants failed to disclose their sale of accounts receivables,
cashing in of letters of credit and various other unreported activities. The court granted
defendants’ motion to dismiss, finding that plaintiffs failed to identify materially misleading
statements or omissions by the defendant after giving plaintiffs repeated opportunities to amend.
The court also noted that, though not required to be addressed, plaintiff failed to remedy
previously found deficiencies in loss causation and scienter as well.
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Philco Investments, LTD., v. Martin, 2011 WL 4595247 (N.D. Cal. Oct. 4, 2011).
Plaintiffs brought suit against pharmaceutical company and several of its officers alleging
violations of federal securities laws. Plaintiffs alleged defendants made false and misleading
statements about the efficacy and safety of two of defendants’ drugs. The defendants filed a
motion to dismiss for failure to state a clam and the court granted their motion finding that
plaintiffs failed to adequately allege the violations pursuant to the heightened pleading standards
under the PSLRA for particularity of misrepresentations and omissions as well as scienter.
In re NVIDIA Corporation Securities Litigation, 2011 WL 4831192 (N.D. Cal. Oct. 12, 2011).
Plaintiffs brought suit against defendants for violations of federal securities laws.
Plaintiffs alleged defendants were aware of a $150 million to $200 million charge against cost of
revenue to cover expenses arising from defective packaging prior to issuing a press release.
Defendants filed a motion to dismiss the complaint. The court granted the motion to dismiss,
holding plaintiffs failed to plead the element of scienter as required under the heightened
pleadings standards of the PSLRA. The court found that the defendants’ response to the
defective products did not represent an extreme departure from the standards of ordinary care in
the industry and did not support the conclusion that defendants acted with fraudulent intent or
deliberate recklessness.
In re Xenoport, Inc. Securities Litigation, 2011 WL 6153134 (N.D. Cal. Dec. 12, 2011).
Defendants moved to dismiss all claims asserted against them in plaintiff’s first amended
complaint for violation of various federal securities laws. Specifically, plaintiff alleged that
defendant misrepresented that a drug it produced had received similar results in toxicology
studies to an approved competitor drug currently on the market. In reality, the product had
actually been shown to potentially cause cancer in both male and female mice where the
competitor product had only shown carcinogenic effects in male mice. The court granted the
defendant’s motion to dismiss finding that, although defendant’s misleading statements were
pled with sufficient particularity and found to be misleading, the plaintiff did not plead scienter
sufficiently under the heightened standards of the PSLRA.
In re Immersion Corp. Sec. Litig., 2011 WL 6303389 (N.D.Cal. Dec. 16, 2011).
Plaintiff brought suit against defendants alleging violations of various federal securities
laws and defendants filed a motion to dismiss. Plaintiff alleged that defendants prematurely and
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improperly recognized revenue on sales of medical devices and falsely reported other expenses
and incomes. Plaintiff further alleged that such improper accounting practices led defendants to
materially misstate revenue and income in financial disclosures as well as misrepresent the
quality of the company’s internal controls and compliance with GAAP. The court granted the
defendants’ motion to dismiss finding that magnitude of financial statement restatements and the
small size of the business alone were not sufficient to establish scienter as required under the
heightened pleading requirements of the PSLRA. Further, none of the confidential witnesses
provided information sufficient to show that defendants, at the time the incorrect financial
reports were made, had actual access to information showing the content therein was incorrect.
Finally, the mere departures of executives shortly after an audit as well as defendants signing
Sarbanes-Oxley certificates that financial statements were true did not adequately support a
finding of scienter.
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial corporation, 793
F.Supp.2d 1138 (C.D.Cal. 2011).
Investors brought suit against defendant issuer of convertible senior debentures and
against defendant’s former senior executives, officers and directors for violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court denied defendant’s motion finding that
(i) a factual issue existed as to whether investors suffered economic loses and (ii) investors had
adequately plead alleged loss causation, reasonable reliance on defendants’ misrepresentations
and strong individualized inference of scienter against each defendant.
In re STEC Inc. Securities Litigation, 2011 WL 4442822 (C.D. Cal. Jan. 10, 2011).
Investors brought class action suit against defendants alleging violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
heightened pleading requirements of the PSLRA. Plaintiffs claimed defendants omitted a
material contract in certain filings, materially misrepresented purchases made to certain
manufacturers, inflated reported revenues and revenue projections and misrepresented the
competition faced by one of its products. The court granted defendants motion to dismiss finding
that plaintiff failed to particularize the part of the omitted contract that was misleading, failed to
show how and when purchasers learned of certain contracts to show how it impacted stock,
failed to allege the amount of inflation that defendants’ misleadingly projected and failed to
show defendants acted with deliberate recklessness in failing to adequately judge the competition
to a product. The court also found that delays in the product’s initial launch were the more likely
reason for increased competition, rather than intentional misrepresentations related to the
company’s predictions.
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Healthy Habits, Inc., v. Fusion Excel Corp., 2011 WL 2448256 (C.D.Cal. June 17, 2011).
Plaintiffs brought suit against defendants for alleged violations of federal securities laws
and defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs’ claims arose out of an alleged “multi-level
marketing” program of certain products of defendant corporation which plaintiffs claim should
have been characterized as the sale of alleged unregistered securities. Further, plaintiffs alleged
that defendants made fraudulent misrepresentations associated with sales under the program. The
court found that plaintiffs had adequately pleaded their claims and denied defendants’ motion to
dismiss.
In re Stec Inc. Securities Litigation, 2011 WL 2669217 (C.D.Cal. June 17, 2011).
Plaintiffs brought suit against defendants for violations of federal securities laws and
defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged that defendants made false statements and
omissions that dramatically inflated the company’s stock price and ultimately caused the stock
price to collapse when the truth of the misstatements and omissions was disclosed. Specifically,
plaintiffs’ claimed that defendants misrepresented an extraordinary purchase by a single buyer as
an ordinary course contract, that defendants were expecting other similar large volume purchases
by other customers and that such misrepresentations were incorporated in faulty revenue
projections. The court denied defendants’ motion, finding that plaintiffs had adequately alleged
the requisite elements in their allegations about statements and omissions regarding the large
customer contract and that scienter had been sufficiently pled.
In re Toyota Motor Corp. Securities Litigation, 2011 WL 2675395 (C.D.Cal. July 7, 2011).
Plaintiffs brought suit against defendant automobile manufacturers alleging violations of
federal securities laws and defendants moved to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs alleged violations relating to
defendants failure to disclose or properly handle a massive internal defect in one of their major
car lines relating to reported unintended acceleration of the vehicle. The court granted
defendants’ motion in part and denied in part, holding that (i) scienter was not adequately alleged
by the plaintiffs for a variety of misstatements and (ii) some statements were not sufficiently
alleged to be false, but other statements alleged were adequately pled.
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Henning v. Orient Paper, Inc., 2011 WL 2909322 (C.D. Cal. July 20, 2011).
Plaintiffs brought suit against defendant alleging violations of federal securities laws and
defendants filed motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiffs alleged defendant company and several of its
officers issued an annual report containing false and misleading financial statements. The court
denied defendants’ motion to dismiss finding that plaintiffs met their burden under the PSLRA,
pled their claim with sufficient particularity, and created a strong inference of scienter.
Kexuan Yao v. Crisnic Fund, S.A., 2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).
Plaintiff brought suit against defendant for violations of federal securities laws and
defendant moved to dismiss for failure to state a claim pursuant to the heightened pleading
standards required under the PSLRA. Plaintiff alleged that he was deceived into a stock
transaction by defendants’ misrepresentations. The court granted the defendants’ motion to
dismiss finding that plaintiff failed to allege facts that suggested the misrepresentations stated by
plaintiff were made by defendant and relied upon by plaintiff.
In re China Education Alliance, Inc. Sec. Litig., 2011 WL 4978483 (C.D. Cal. Oct. 11, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws.
Plaintiffs alleged that defendants overstated revenues and profits and fraudulently maintained
two sets of books, one an accurate set of financial statements filed with Chinese regulators and
the other a false set of financial statements filed with the SEC. Defendants filed a motion to
dismiss on the grounds that plaintiffs’ complaint failed the heightened pleading standards under
the PSLRA because plaintiffs’ evidence was a supporting report that was anonymous, and that
there was no evidence of scienter presented. The court denied the motion to dismiss on the
grounds that the reliability of the report was a question of fact and that plaintiffs had adequately
alleged scienter.
Nguyen v. Radient Pharmaceuticals Corporation, 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct.
26, 2011).
Plaintiffs brought action against pharmaceuticals company for alleged violations of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Specifically, plaintiffs
alleged that defendant made intentionally misleading statements about a partnership with the
prestigious Mayo Clinic in testing their star product, which defendant capitalized upon in a
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subsequent equity offering before later press releases revealed no such partnership agreement
existed. Defendant filed a motion to dismiss for failure to state a claim under the heightened
pleading standards of the PSLRA. The court held that plaintiffs’ allegations were sufficient to
allow a strong inference of scienter given the strong financial red flags being experienced by the
company at the time and the company’s motive to raise cash cheaply. Accordingly, the court
denied the defendants’ motion to dismiss.
Dean v. China Agritech, Inc.,2011 WL 5148598 (C.D. Cal. Oct. 27, 2011).
Plaintiffs brought suit against defendants alleging violations of Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1934. Defendants filed a motion to dismiss for failure to
state a claim. Plaintiffs alleged that defendants materially misstated net revenue and income for
various time periods and concealed certain related-party transactions. Allegedly, these
misstatements and omissions were incorporated in defendants’ subsequent registration statement
and prospectus for public offering. Plaintiff alleged that these statements and omissions caused
plaintiffs to suffer damages in connection with purchases of the company’s stock. The court held
that plaintiffs adequately pled the contested elements of falsity, scienter and loss causation. The
court found that plaintiff (i) adequately pled particularized misrepresentations in the SEC filing
sufficient for falsity, (ii) that defendant’s underlying idle business and factories during the
alleged misrepresentations gave a strong inference of scienter and (iii) that the
misrepresentations were sufficiently pled as a substantial cause of plaintiffs loss. Accordingly,
plaintiff met the heightened pleading requirements under the PSLRA.
Rentea v. Janes, 2011 WL 5822255 (C.D. Cal. Nov. 16, 2011).
Plaintiff filed a complaint against defendant, an officer and director of a medical device
manufacturer, alleging violations of Section 10(b) and Rule 10b-5 of the Securities Exchange
Act of 1934. Plaintiff alleged defendant made false or misleading statements regarding FDA
approval of a product that influenced plaintiff’s decision in purchasing securities of the medical
device manufacturer. The court granted the defendant’s motion to dismiss on the grounds that
plaintiff failed to meet the heightened pleading requirements under PSLRA and therefore did not
plead with the requisite particularity of a Section 10(b) and Rule 10b-5 claim. Specifically, the
court found that plaintiff (i) failed to point to a single specific misleading or false statement, (ii)
offered no detailed facts to support the scienter allegation and (iii) generally failed to meet the
other required elements of a Section 10(b) and Rule 10b-5 claim.
Mannkind Securities Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).
Shareholders of a company that developed an inhalable insulin treatment for diabetes
brought suit against defendants alleging violations of federal securities laws. Specifically,
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plaintiffs alleged that defendants serially misrepresented to investors facts relating to the
existence and likelihood of FDA approval. Defendants moved to dismiss on the grounds that it
failed to meet the heightened pleading requirements under the PSLRA. The court denied the
defendant’s motion and held that the alleged misstatements, taken together, were sufficient to
show a “strong inference” of scienter, that plaintiffs had adequately pled loss causation and that
the statements plaintiffs relied upon were actionable under the PSLRA.
Luciani v. Luciani, 2011 WL 3859707 (S.D. Cal. Sept. 1, 2011).
Plaintiffs brought suit against defendants alleging violations of federal securities laws and
defendant brought a motion to dismiss for failure to state a claim under the heightened pleading
standards required by the PSLRA. Plaintiffs alleged that defendants sought dissolution of a
company that plaintiffs and defendants were investors in with the intention of forcing a
distressed sale of the company. The distressed sale allegedly would benefit defendants in
purchasing the plaintiffs’ membership interests at “low-ball” prices. The court denied
defendants’ motion to dismiss, finding that even though plaintiff failed to specifically identify
which statements contained alleged misrepresentations, the defendants could clearly infer which
statements the plaintiffs alleged contained misrepresentations.
Rich v. Shrader, 2011 WL 4434852 (S.D. Cal. Sept. 22, 2011).
Plaintiff brought suit against defendant alleging violations of federal securities laws and
defendant filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiff alleged that defendant violated federal securities laws
by not disclosing, at the time plaintiff retired, that the company had discarded its longstanding
policy to remain one company. Plaintiff further alleged that defendant was planning to sell its
government division to a private equity firm, which would have entitled plaintiff to a greater
profit from selling his shares under the company’s stock plan. The court granted defendants’
motion to dismiss and found that the entirety of plaintiff’s complaint failed to contain sufficient
facts to create a strong inference of scienter and failed to identify any material facts in the
relevant time period that would support allegation that defendant knew of the plan before.
Lifschitz v. Nextwave Wireless Inc., 2011 WL 5839682 (S.D. Cal. Nov. 21, 2011).
Plaintiff brought suit against defendants alleging violations of Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1935. Plaintiff alleged that numerous statements made
by Defendants were false and misleading relating to defendants’ knowledge of liquidity
problems and acquisition strategy. The court granted the defendants’ motion to dismiss the
plaintiff’s third amended consolidated complaint with prejudice, finding that plaintiff had failed
to plead a Section 10(b) violation because seventeen out of twenty-four misleading statements
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were forward-looking statements protected by the PSLRA’s “Safe Harbor” Provision. Further,
the remaining seven allegedly misleading statements failed to indicate scienter. Such failure was
based, in part, on plaintiff’s failure to show specific facts relating to its confidential witness’s
position in the company and access to company records to show actual knowledge or deliberate
recklessness in not knowing that the statements were false.
In re Novatel Wireless Securities Litigation, 2011 WL 5873113 (S.D.Cal. Nov. 23, 2011).
Shareholders brought securities fraud class action against corporation and its officers,
alleging that defendants engaged in fraudulent scheme to inflate corporation’s stock value.
Defendants moved for judgment on the pleadings and summary judgment. The court found that
genuine issues of material fact precluded summary judgment on the grounds of scienter or
materiality. Further, a question of fact existed related to the securities fraud claim based on the
misrepresentation that the superiority of the corporation’s products would enable it to outperform
the competition. The court also found that genuine questions of material fact precluded judgment
on the pleadings regarding allegations that the corporation misrepresented its true financial
condition because defendants failed to disclose a customer’s plan to stop ordering corporation’s
product.
City of Marysville General Employees Retirement System v. Nighthawk Radiology Holdings,
Inc., 2011 WL 4584778 (D. Idaho Sept. 12, 2011).
Plaintiff brought suit against defendant alleging violations of federal securities laws and
defendant moved to dismiss for failure to state a claim as required under the heightened pleading
standards of the PSLRA. Plaintiff alleged that defendants misled investors with respect to
defendant company’s purchase of certain businesses pursuant to an expansion plan and the
disastrous effects those acquisitions had upon the company’s services. Specifically, plaintiff
asserted that defendants misrepresented the success of their acquisitions, falsely assured
investors that legacy customers were continuing with the company, and issued false earnings
guidance statements for 2007 and 2008. The court granted the motion to dismiss finding that the
complaint failed to state particularized facts that, taken as a whole, raised a strong inference of
scienter rather than simple over-optimism.
RS-ANB Fund, LP, v. KMS SPE LLC, 2011 WL 5352433 (D. Idaho Nov. 7, 2011).
Plaintiff brought suit against an investment company alleging violations of Section 12(b)
and Rule 12b-5 of the Securities Exchange Act of 1934 and defendant filed motion to dismiss for
failure to state a claim. Plaintiff alleged that defendant made fraudulent misrepresentations or
omissions when soliciting investment from plaintiff by failing to disclose that the individual
owner of the company was insolvent at that time. The insolvency allegedly activated provisions
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in various contracts of the company with the FDIC, which placed it in default and severely
limited the income stream to the company. The plaintiff’s main purchase was the income stream
of the company. The court held that plaintiff’s allegation failed to satisfy the heightened pleading
requirements for scienter under the PSLRA and that none of the facts asserted by plaintiff, read
alone or read together, supported an inference that the individual was insolvent at the time in
question. Specifically, that defendant went bankrupt two years later, that his bankruptcy occurred
one day before trial in a civil action to which he was a defendant and that the action was filed
before the Participation Agreement was signed was found insufficient.
Szymborski v. Ormat Technologies, Inc., 776 F.Supp.2d 1191 (D. Nev. 2011).
Shareholders brought class action suit against corporation engaged in the geothermal and
recovered energy power business and its corporate officers, alleging violations of federal
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants made
misleading disclosures about corporation’s accounting method and about the completion and
capacity of a geothermal power plant. The court denied defendants’ motion with respect to the
accounting method claims, finding that shareholders pled with sufficient particularity their claim
based on allegedly deceptive and improper accounting methods. Further, the court found that the
allegations were sufficient to give rise to strong inference of scienter. Nonetheless, the court
granted defendants’ motion with respect to the geothermal power plant because that
corporation’s allegedly misleading statements about projected completion date were insufficient
to give rise to inference defendants acted with scienter.
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech., 2011 WL
915115 (D. Nev. Mar. 15, 2011).
Plaintiff brought class action suit against defendant gaming company and several of its
officers alleging violations of federal securities laws. Defendants filed a motion to dismiss for
failure to state a claim as required under the heightened pleading standards of the PSLRA.
Plaintiff claimed defendants made false and misleading statements concerning optimistic
disclosures and projections about the company and failed to disclose material facts about low
sales levels during class period. As a result, plaintiff purchased the defendant’s stock at an
inflated price. The court denied defendants’ motion to dismiss, finding that plaintiff sufficiently
alleged inferences that defendants intentionally misled investors. These allegations supported a
strong inference of scienter with regard to statements concerning play levels and certain
agreements, while other claims relating to a technology schedule forecast, operating expense
forecast and stock sales were insufficiently pled to allege fraud.
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Fosbre v. Las Vegas Sands Corp., 2011 WL 3705023 (D. Nev. Aug. 24, 2011).
Investors brought class action suit against defendants for violations of federal securities
laws and defendants filed motion to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. Plaintiffs alleged that during the class period,
defendants knowingly and recklessly made misrepresentations and omissions about the
company, its development plans, and its financial condition. The court granted the motion in part
and denied the motion in part, finding that plaintiffs sufficiently alleged that most false
statements of material fact or omissions of material fact created a strong inference of scienter.
The court further found that the allegations sufficiently plead loss causation.
In re Cell Therapeutics, Inc. Class Action Litigation, 2011 WL 444676 (W.D. Wash. Feb. 4,
2011).
Plaintiff brought class action suit against defendants alleging violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
heightened pleading requirements of the PSLRA. Plaintiffs alleged certain statements by
defendants that a drug product had been agreed to be fast-tracked by the FDA, when in fact the
FDA had not agreed to defendants’ modifications of the study and was unaware at the time they
were taken. The court denied defendants’ motion to dismiss finding that plaintiffs’ alleged
sufficient evidence that, in the totality, passed the threshold of a strong inference of scienter.
Further, plaintiffs adequately pled loss causation with evidence of decrease in stock prices
directly after release of the corrective disclosures.
In re Coinstar Inc. Securities Litigation, 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011).
Plaintiff brought suit against defendants for violations of the federal securities laws.
Plaintiffs alleged that defendants failed to disclose various adverse business developments and
risks that allegedly caused it to have to finally report a revenue shortfall and accounting
correction. Defendants moved to dismiss and the court granted in part and denied in part. The
court found that plaintiffs failed to adequately plead many of defendants’ statements with the
requisite particularity required under the PSLRA, but that several were adequately pled as false.
In addition, the court found that plaintiffs adequately pled scienter by alleging defendants’ knew
of on-going business challenges and still made strong financial forecasts despite such
knowledge.
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In re Crocs, Inc. Securities Litigation, 774 F. Supp. 2d 1122 (D. Colo. 2011).
Investors brought class against suit against corporation, its auditor, its officers and
directors alleging violations of federal securities laws and defendants filed a motion to dismiss
for failure to state a claim as required under the heightened pleading standards of the PSLRA.
Plaintiffs claimed that despite difficulties in demand and an inventory buildup, (i) the CEO
signed the company’s financial reports, (ii) various representations were made relating to rapid
growth and distribution, and (iii) the auditor’s participated in verifying such financial statements.
These actions, when taken into consideration with the deteriorating demand, effectively misled
investors into thinking the company was strong. The court granted defendants’ motion to
dismiss finding that investors failed to allege material misrepresentations or omissions and failed
to allege scienter on the part of the CEO and the auditor.
Mishkin v. Zynex Inc., 2011 WL 1158715 (D.Colo. Mar. 30, 2011).
Plaintiffs brought class action suit against defendants alleging violations of federal
securities laws and defendants filed a motion to dismiss for failure to state a claim as required
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that during the class
period, defendants engaged in a systematic scheme to over-bill insurance companies. Plaintiffs
alleged that defendants routinely billed more than they reasonably expected to be paid in order to
inflate revenue numbers. The court denied defendants’ motion to dismiss finding that the
defendants’ statements of optimism could be actionable if defendants were aware of specific
facts that undermined the basis for their statements, and that the totality of plaintiffs allegations
supported a strong inference of scienter.
Simmons Investments, Inc. v. Conversational Computing Corporation, 2011 WL 673759 (D.
Kan. Feb. 17, 2011).
Plaintiff brought suit against defendants alleging violations of federal securities laws and
defendants filed a motion to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. Plaintiff alleged that defendants made a series of material
misrepresentations and omissions of material facts in order to get plaintiff to first invest in
convertible notes and then to extend the maturity date on the notes. The court denied defendants’
motions to dismiss finding that plaintiff’s allegations pled the alleged misstatements with the
requisite particularity.
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In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).
Investors brought class action suit against mortgage company officers, alleging violations
of federal securities laws and defendants moved to dismiss for failure to state a claim as required
under the heightened pleading standard of the PSLRA. The court granted officers’ motion,
finding that investors failed to allege that any material misstatements or omissions by officers
were made with scienter. The court found that certain statements made in official filings were
declared as mere puffery, and that the complaint did not attribute any wrongful conduct or
statements to individual officers.
Meyer v. St. Joe Company, 2011 WL 3750324 (N.D. Fla. Aug. 24, 2011).
Plaintiffs brought a class action suit against defendant company and several of its officers
alleging violations of federal securities laws. Plaintiffs alleged defendants intentionally deceived
investors about the value of certain properties located throughout Florida. Defendants filed a
motion to dismiss for failure to state a claim as required under the heightened pleading standards
of the PSLRA. The court granted the defendants’ motion to dismiss finding that plaintiffs’ claims
of misrepresentation were insufficient to meet the standard of pleading fraud with particularity
because they failed to allege that defendants acted with the requisite scienter. Further, plaintiffs
failed to show defendants made statements that they knew were materially false at the time.
Additionally, Plaintiff failed to establish loss causation.
BCJJ, LLC v. Lefevre, 2011 WL 1296682 (M.D.Fla. Mar. 31, 2011).
Plaintiff brought suit against defendant for alleged violations of federal securities laws
and defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standard of the PSLRA. Plaintiff alleged that defendant solicited investment from
plaintiff and made several misleading and material statements regarding appraisal values, the
guarantee of the loan and other matters relating to the investment in property to be developed.
The court granted defendants’ motion, holding that the defendants expressly warned of the
potential for inaccuracies in the appraisal values and did not warrant the purchase agreement.
Further, the court found that the contract contained a merger clause, which made any prior
statements insufficient to show reliance.
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Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enterprises, Inc., 2011 WL 4591541 (S.D. Fla. Sept. 30,
2011).
Plaintiffs brought suit against defendants alleging violations of federals securities laws
and defendants filed a motion to dismiss for failure to meet the heightened pleading standards of
the PSLRA. Specifically, defendants argued that plaintiffs failed to properly plead material
misrepresentations and omissions or allege the requisite scienter. Plaintiffs alleged that
defendants made material misrepresentations and omissions in SEC filings, press releases, and
other public statements about defendants’ “rigorous” processes to ensure the “efficient” and
“accurate” handling of foreclosures, when in fact defendants’ often took short cuts and used
processes that “were, in fact, entirely chaotic in substantial disarray.” The court did not find that
defendants’ statements were false or misleading because many were not specific, verifiable facts
that reasonable investors would rely on, but instead the type of vaguely positive assertions
considered “puffery.” Further, plaintiff failed to adequately plead scienter.
Patel v. Patel, 761 F. Supp. 2d 1375 (N.D. Ga. 2011).
Investors brought action against bank’s officers and directors alleging violations of
federal securities laws and defendants moved to dismiss for failure to state a claim as required
under the heightened pleading requirements of the PSLRA. Plaintiffs claimed defendants
concealed bank’s true financial condition and business operations. The court granted defendants’
motion to dismiss finding that investors’ allegations were insufficient to plead a strong inference
of scienter and that investors failed to allege loss causation.
City of Pontiac General Employees Retirement System v. Schweitzer-Maudit International, Inc.,
806 F. Supp. 2d 1267 (N.D. Ga. 2011).
Investors brought securities-fraud class action against corporation and its officers and
directors alleging defendants engaged in a fraudulent scheme to artificially inflate corporation’s
stock price in violation of federal securities laws and defendants moved to dismiss. The court
granted the defendants’ motion and found that investors failed to plead fraud with particularity.
Further, the court found that plaintiffs failed to sufficiently allege scienter, but did sufficiently
allege loss causation.
In re Immucor, Inc. Securities Litigation, 2011 WL 2619092 (N.D.Ga. June 30, 2011)
Plaintiffs brought suit against defendant medical supplier alleging violations of federal
securities laws and defendants moved to dismiss for failure to state a claim as required under the
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heightened pleading standards of the PSLRA. Plaintiffs alleged that defendant’s made
misstatements regarding its commitment to quality. Further, plaintiffs alleged that defendants’
claim that it was in compliance with FDA regulations were false and misleading because the
FDA actually found multiple, continuing violations. The court granted the defendants’ motion to
dismiss and found that the allegations sufficiently alleged misrepresentations or omissions.
Further, the allegations supported a strong inference that defendants were severely reckless when
making the alleged misleading statements. However, plaintiff failed to adequately plead
economic loss causation, especially given that stock prices rebounded several months after the
final disclosures and plaintiffs could have still sold their stock for a profit.
2. Appointment of Lead Plaintiff/Class Counsel
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Plumbers Local No. 200 Pension Fund v. Washington Post Co., 274 F.R.D. 33 (D.D.C 2011).
In a putative securities fraud class action, the district court appointed a pension fund as
lead plaintiff and approved its selection of lead counsel. The court noted that the pension fund’s
claim of having the largest financial interest in the outcome of the case was unchallenged.
Accordingly, after finding that the pension fund met the requirements of Fed. R. Civ. P. 23, the
court appointed it as lead plaintiff and approved its selection of counsel.
Endress v. Gentiva Health Servs., Inc., 276 F.R.D. 62 (E.D.N.Y. 2011).
After consolidating five related securities fraud class actions, the district court considered
the appropriate procedure for appointing a lead plaintiff where the named plaintiff moved to
withdraw and none of the proposed lead plaintiffs were eligible under the Private Securities
Litigation Reform Act of 1995 to be appointed lead plaintiff. Specifically, the PSLRA requires
potential lead plaintiffs to either file the original complaint or move to be appointed lead plaintiff
within 60 days of the PSLRA notice. The court had previously denied the motion of the
Minneapolis Police Relief Association to be appointed lead plaintiff because it did not meet the
PSLRA’s requirements. Thereafter, other class members filed nearly identical complaints on
behalf of the class and filed competing motions for appointment as lead plaintiff after the named
plaintiff moved to withdraw. The court noted that the PSLRA did not provide any specific
guidance for this unique situation and “[d]ue to [an] apparent loophole” the parties were racing
to file complaints in order to qualify to be appointed lead plaintiff. Relying on the intent and
purpose of the PSLRA, the court determined that the most appropriate course was to consider
whether any other class members desired to be appointed as lead plaintiff. The court held that
any class members who filed applications within 60 days of the withdrawal of the named
plaintiff would be considered eligible for appointment. Finally, the court concluded that
publication of an additional PSLRA notice was not necessary because class members had already
been given the opportunity to make an informed decision about whether to apply for the lead
plaintiff position and interested class members would be following the case status and would
know of the new procedure for applying to be named lead plaintiff.
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Waterford Twp. Police & Fire Ret. Sys. v. Smithtown Bancorp, Inc., 2011 WL 3511057
(E.D.N.Y. May 31, 2011).
After consolidating two related putative securities fraud class actions, the district court
considered an unopposed joint motion filed by an individual investor and a retirement system to
be appointed co-lead plaintiffs. Since their motion was unopposed, the court appointed them colead
plaintiffs after finding that they satisfied the requirements of Fed. R. Civ. P. 23. The court
also approved their selection of lead counsel.
Bensley v. FalconStor Software, Inc., 2011 WL 3849541 (E.D.N.Y. Aug. 29, 2011).
In a putative securities fraud class action, the court considered two competing motions for
appointment as lead plaintiff filed by an individual investor and Rochester Laborers Pension
Fund (the “Fund”). Although the Fund had suffered the greatest losses on the securities at issue
during the class period, the court found that it was subject to unique defenses because it had sold
all of its shares months before disclosure of the alleged fraud. While the Fund argued that it had
sold its shares after a partial disclosure, the court found that the alleged partial disclosure did not
reveal the fraudulent conduct at issue. Thus, the court found that the Fund was a “total in-andout
trader,” may be unable to demonstrate loss causation, and, thus, was not an adequate lead
plaintiff. Accordingly, after finding that individual investor satisfied the requirements of Fed. R.
Civ. P. 23, the court appointed him as lead plaintiff and approved his choice of counsel.
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., 793 F. Supp. 2d 651 (S.D.N.Y.
2011).
In a securities fraud action brought by several hedge funds, the district court granted in
part defendants’ motion to dismiss claims relating to allegedly false and misleading statements
concerning the defendant casino’s business prospects. Defendants argued that certain statements
concerning the expected “average net win rate per machine” were forward-looking statements
entitled to protection under the Private Securities Litigation Reform Act of 1995’s safe harbor.
The court held such statements were shielded from liability because they were forward-looking
and plaintiffs had failed to adequately allege that defendants had actual knowledge of the falsity
of such statements. Accordingly, the court granted defendants’ motion to dismiss the securities
fraud claims.
Foley v. Transocean Ltd., 272 F.R.D. 126 (S.D.N.Y. 2011).
In a putative securities fraud action, the court considered three competing motions for
appointment as lead plaintiff filed by an institutional investor, a foreign pension fund, and a
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domestic retirement system. The court determined that the foreign institutional investor, Danica,
had the greatest losses, which exceeded the next movant’s losses by enough to offset that
movant’s greater net funds expended and net shares purchased. The court rejected one movant’s
attempt to calculate losses using a different holding date and price chosen by its expert because
the court held that a 90-day “lookback period” for calculating losses should apply absent some
credible argument to the contrary. The court also noted that the competing movant was an
investment advisor and might lack constitutional standing to assert claims based on all his shares
of stock. The court further expressed concerns about this movant’s suitability as lead plaintiff
due to certain procedural maneuvers by its counsel that the court found to be forum-shopping.
Finally, the court rejected several attempts to rebut the presumption that Danica was the most
adequate lead plaintiff. Specially, the court found that: (a) although Danica was a net seller
during the class period, it did not benefit from the fraud because all of its shares were sold after it
had been harmed by partial corrective disclosures; (b) purported conflicts resulting from alleged
relationships between Danica and the defendant were merely speculative; (c) Danica’s status as a
foreign entity did not render it an improper lead plaintiff, since it was suing as a result of
purchases made on a domestic securities exchange; and (d) Danica did not lack constitutional
standing as an investment advisor because as a pension fund it had purchased defendant’s stock
in its own name. Accordingly, after finding that Danica met the requirements of Fed. R. Civ. P.
23, the court appointed it lead plaintiff and approved its choice of counsel.
Richman v. Goldman Sachs Group, Inc., 274 F.R.D. 473 (S.D.N.Y. 2011).
After consolidating six related putative securities fraud class actions, the court considered
three competing motions for appointment as lead plaintiff filed by: (i) a group of pension funds
(the “Pension Funds Group”); (ii) a group of foreign and domestic institutional investors (the
“Institutional Group”); and (iii) an individual investor who bought and sold stock and options
during the class period. The court first rejected the individual investor’s argument that neither
the Pension Funds Group, nor the Institutional Group could adequately represent options
purchasers and, therefore, the individual investor should be appointed as lead plaintiff. The court
noted that the individual investor’s claimed losses were de minimis and that options purchasers’
interests could be adequately protected in other ways. Next, the court rejected the Pension Funds
Group’s arguments regarding the composition of the Institutional Group noting that groups may
be formed by lawyers for the purposes of obtaining lead plaintiff status and that foreign investors
are entitled to the protection of U.S. securities laws. The court also rejected the Institutional
Group’s argument that losses of one of the members of the Pension Funds Group should not be
considered because it was a net seller during the class period. Notwithstanding its sales, the
Pension Funds Group member still suffered losses during the class period and the court found no
reason why such losses should not be recognized. The court then found that the Pension Funds
Group was entitled to presumptive lead plaintiff status because it had the greatest financial losses
using either a LIFO or FIFO methodology. The court rejected the Institutional Group’s
argument that the Pension Fund Group’s larger losses should be discounted in favor of the
Institutional Group’s larger number of net shares purchased and net funds expended. The court
noted that most courts agree that the largest loss is the critical factor in determining which
movant has the largest financial interest. Accordingly, after finding that the Pension Funds
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Group met the requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and
approved its choice of counsel.
Pipefitters Local No. 636 Defined Benefit Plan v. Bank of Am. Corp., 275 F.R.D. 187 (S.D.N.Y.
2011).
After consolidating three related securities fraud class actions involving mortgage-backed
securities, the court considered three competing motions for appointment as lead plaintiff filed
by a group of funds that included a Swedish pension fund manager and two other competing
retirement funds. Utilizing the LIFO methodology, the court determined that the group of funds
had the largest losses and, thus, it was presumptively the most adequate lead plaintiff. The
group, however, was subject to a unique standing defense because it included the Swedish
pension fund manager who did not directly own any shares of the stock at issue. Although a
Swedish law expert opined that the Swedish fund manager was the only entity permitted to sue
on behalf of the Swedish pension fund, the court found that a third-party standing defense could
be raised and potentially prejudice the class. Further, the court was not satisfied by conclusory
assurances in the group’s certifications and was concerned that the group would function
cohesively because its members had no preexisting relationship. Considering the movant with
the next-largest loss, the court rejected an argument that this movant was barred from being
appointed as lead plaintiff because it had initially filed for lead plaintiff status as part of a group
with a Swedish fund manager and had not filed individually. The court found that individual
members of proposed lead plaintiff groups are routinely appointed as lead plaintiffs and the
withdrawal of one of the members of a proposed group is irrelevant. Accordingly, after finding
that the movant with the second largest losses satisfied the requirements of Fed. R. Civ. P. 23,
the court appointed it as lead plaintiff and approved its selection of counsel.
In re Bear Stearns Cos., Inc. Sec., Derivative and ERISA Litig., 2011 WL 321142 (S.D.N.Y. Feb.
1, 2011).
In a consolidated securities fraud class action, the court denied an individual investor’s
motion for reconsideration of the court’s appointment of the State of Michigan Retirement
Systems (“SMRS”) as lead plaintiff. The individual investor argued that SMRS lacked standing
to pursue claims of current and former employees who had obtained their stock as compensation
pursuant to deferred compensation or restricted stock plans. The court noted that the Private
Securities Litigation Reform Act of 1995 did not require a court to choose a lead plaintiff with
standing to sue on every available cause of action. Rather, courts only require that at least one
named plaintiff have standing to represent each claim. Further, the court reiterated its earlier
finding that claims asserted by current and former employees were identical to those asserted by
other investors. The court distinguished authorities cited by the individual investor, as cases
where lead or named plaintiffs had suffered losses through purchases of different securities or as
a result of different alleged misstatements. Accordingly, the court denied the motion for
reconsideration.
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In re IMAX Sec. Litig., 2011 WL 1487090 (S.D.N.Y. Apr. 15, 2011).
In a putative securities fraud class action, the district court considered two competing
motions for appointment as substitute lead plaintiff filed by a pension fund and an investment
fund. The court had reopened the lead plaintiff selection process for a second time after the first
two lead plaintiffs had been removed. The court found that the investment fund had the greatest
financial stake in the outcome of the case due to its greater losses during the class period and,
thus, was presumptively the most adequate lead plaintiff. The pension fund attempted to rebut
the presumption by arguing that the investment fund was subject to unique defenses. First, the
court rejected the argument that the investment fund’s assertion of claims violated New York’s
anti-champerty statute. The fund had originally assigned its claims to its investment advisor,
who served as the first lead plaintiff in the case, and the investment advisor had now reassigned
the fund’s claims back to the fund. The court found that this reassignment of the fund’s own
claims hardly violated the anti-champerty statute, which was designed to “curtail the
commercialization of litigation.” Next, the court found that the fund’s sophisticated mergerarbitrage
investment strategy did not subject it to unique defenses because the strategy was not
“reliant upon the proposition that the market is inefficient.” Finally, the court summarily
rejected as irrelevant the pension fund’s argument that it was a more appropriate lead plaintiff
because some of its purchases of the defendant company’s stock pre-dated the fund’s purchases.
After finding that the fund met the requirements of Fed. R. Civ. P. 23, the court appointed it lead
plaintiff and approved its choice of lead counsel, which replaced prior lead counsel.
Kokkinis v. Aegean Marine Petroleum Network, 2011 WL 2078010 (S.D.N.Y. May 19, 2011).
In a putative securities fraud class action, the district court granted an individual
investor’s motion for appointment as lead plaintiff. The court found that the individual met the
requirements of Fed. R. Civ. P. 23 because his claim arose from the same course of events as
other class members and each class member made similar arguments with minor factual
variations to prove defendants’ liability. The court further found that the movant was likely to
fairly and adequately represent the interests of the class based on the unchallenged
representations in his certification. Accordingly, the court appointed the individual investor as
lead plaintiff and approved his choice of counsel.
In re Weatherford Int’l Sec. Litig., 2011 WL 2652443 (S.D.N.Y. Jul. 6, 2011).
In a putative securities fraud class action, the district court denied “unusual” motions for
reconsideration filed by “disgruntled applicants for lead plaintiff.” While the movants alleged
that the appointed lead plaintiff had misled the court about its financial interest in the outcome of
the litigation, the court found that the movants essentially disagreed with the court’s method of
calculating potential recovery. The court found that the movants had not raised any new issues
that were overlooked by the court or that could not have been discussed when the court
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appointed a lead plaintiff. The court also noted that the choice of method used to determine
financial loss is a context-specific determination within the discretion of the court. Next, the
court rejected the argument that the appointed lead plaintiff was inappropriate to represent the
class because it had not yet filed papers with the Multi-District Litigation (“MDL”) panel that
was considering whether to consolidate the action with another class action pending in
California. The court found that this was not a proper basis for a motion for reconsideration and
the proceedings before the MDL panel were likely moot, given that the California class action
was to be voluntarily withdrawn. Accordingly, the court denied the motions for reconsideration.
Quan v. Advanced Battery Tech., Inc., 2011 WL 4343802 (S.D.N.Y. Sept. 9, 2011).
In a consolidated securities fraud class action, the district court considered two competing
motions for appointment as lead plaintiff filed by individual investors. The court found that the
movant who held the largest number of retained shares at the end of the class period was the
presumptive most adequate lead plaintiff because he had the largest potential recoverable losses.
The court rejected the argument that sales of securities during the class period and prior to
disclosure of the alleged fraud undermined the presumptive lead plaintiff’s adequacy to represent
the class. Despite sales of stock during the class period, the presumptive lead plaintiff had
retained more than double the number of shares retained by the competing movant and, thus, had
undisputedly suffered the greatest financial losses of any of the competing movants.
Accordingly, after finding that the presumptive lead plaintiff met the requirements of Fed. R.
Civ. P. 23, the court appointed him lead plaintiff and approved his selection of counsel.
Teran v. Subaye, Inc., 2011 WL 4357362 (S.D.N.Y. Sept. 16, 2011).
After consolidating two related putative securities fraud class actions, the district court
considered four competing motions for appointment as lead plaintiff filed by three separate
individual investors and a group of investors. While the court found that the investor group had
the greatest financial interest, the court further held it inappropriate to aggregate the group’s
losses because the group had not demonstrated that it would be able to act cohesively and
effectively manage the litigation apart from its lawyers. Except for two brothers, the group had
no pre-existing relationship. Moreover, the group failed to provide specifics regarding its plans
for communication and decision-making or past activities. The court also noted that a competing
individual movant had a significantly greater financial interest than any of the members of the
group, even if the court were to consider the two brothers together. The court rejected an
argument that the individual movant did not have standing to assert claims based on all the
shares reflected in his certification because he had submitted a declaration reaffirming that all the
shares at issue had been purchased for his own account. Accordingly, after finding that the
individual movant satisfied the requirements of Fed. R. Civ. P. 23, the court appointed him lead
plaintiff and approved his choice of counsel.
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Faris v. Longtop Fin. Techs. Ltd., 2011 WL 4444176 (S.D.N.Y. Sept. 22, 2011).
In a putative securities fraud action, the court considered competing motions for
appointment as lead plaintiff filed by two groups of investors. The court found that one of the
groups which included an investment manager had the largest financial interest in the suit and,
thus, was presumptively the most adequate lead plaintiff. The court found that the investment
manager had standing to assert the claims at issue because there had been a valid assignment by
underlying shareholders. The court found that the assignment did not violate New York’s antichamperty
statute because the statute does not apply to assignments made for the collection of
legitimate claims. The court further found that the competing investor group would not be an
adequate lead plaintiff because three of its members had purchased the bulk of their shares after
certain public disclosures of the alleged fraud. The court also expressed concern that one
member of the competing group was involved in an ongoing lawsuit where it was accused of
having knowingly profited from a Ponzi scheme. Accordingly, after finding that the presumptive
lead plaintiff met the requirements of Fed. R. Civ. P. 23, it appointed that group lead plaintiff and
approved its choice of counsel.
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin. Holdings Ltd.,
2011 WL 4831209 (S.D.N.Y. Oct. 12, 2011).
In a putative securities class action, the district court granted an unopposed motion for
appointment as lead plaintiff filed by a pension fund. The court concluded that the pension
fund’s losses rendered it suitable as a lead plaintiff since the court did not have financial
information about any of the other class members. Accordingly, after finding that the pension
fund met the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court appointed it
lead plaintiff and approved its selection of co-lead counsel.
Canson v. WebMD Health Corp., 2011 WL 5331712 (S.D.N.Y. Nov. 7, 2011).
In a securities fraud class action, the district court considered three competing motions
for appointment as lead plaintiff. The court determined that a proposed lead plaintiff group
comprised of a retirement system and a pension fund had the largest financial interest in the
outcome of the case utilizing the LIFO method of calculating losses and was presumptively the
most adequate lead plaintiff. The court rejected a competing movant’s argument that the group’s
losses should not be aggregated. The court found no evidence that the group members’
combined litigation efforts were in bad faith, the two members had a pre-existing relationship,
and they had affirmed their intention to work together on behalf of the class. Moreover, the
court noted that each member of the group had incurred significantly higher losses than any other
competing movants. Accordingly, after finding that group satisfied the typicality and adequacy
requirements of Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its selection
of lead counsel.
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IBEW Local 90 Pension Fund v. Deutsche Bank AG, 2011 WL 6057812 (S.D.N.Y. Dec. 5,
2011).
In a putative securities fraud class action, the court considered two competing motions for
appointment as lead plaintiff filed by a group of pension funds and an individual investor. The
individual investor, however, withdrew his motion because the group of pension funds
undisputedly had a larger financial interest in the relief sought by the class and had made a prima
facie showing of adequacy and typicality as required by Fed. R. Civ. P. 23. Accordingly, the
court appointed the group of pension funds as lead plaintiff and approved its choice of counsel.
Goldstein v. Puda Coal, Inc., 2011 WL 6075861 (S.D.N.Y. Dec. 6, 2011).
After consolidating eleven related securities fraud class actions, the court considered four
competing motions for appointment as lead plaintiff filed by four groups of investors. The court
found that a group of investors led by Mr. Querub (the “Querub Group”) suffered the largest
collective financial loss and, thus, it was presumptively the most adequate lead plaintiff. The
court rejected the argument that Mr. Querub was subject to unique defenses because he had
purportedly purchased shares after disclosure of the alleged fraud. The court noted that the
alleged disclosure was merely an unconfirmed third-party report and not a “curative disclosure”
rendering Mr. Querub’s claims atypical. The court also rejected the argument that one of the
Querub Group member’s claims were atypical because he had purchased stock options. The
court noted that the member had purchased both common stock and options and focused the
typicality analysis on defendants’ alleged misconduct that caused injury to the class. The court
further rejected a challenge to the aggregation of the Querub Group’s losses because the Querub
Group submitted sworn declarations that satisfied the court that the group would act cohesively.
Finally, the court rejected the argument that confusion regarding the relationship between one of
the Querub Group’s member LLCs and the individual who had signed a declaration on the
LLC’s behalf subjected the Querub Group to unique defenses because the signatory was the sole
owner of the LLC. Accordingly, after finding that the Querub Group met the requirements of
Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its choice of counsel.
Turner v. Shengdatech, Inc., 2011 WL 6110438 (S.D.N.Y. Dec. 6, 2011).
After consolidating related securities fraud class actions, the district court considered two
competing motions for appointment as lead plaintiff filed by two groups of individual investors.
The court first rejected the argument that the consolidated action should be stayed for publication
of a new Private Securities Litigation Reform Act of 1995 notice. Although one of the movants
had filed a complaint which significantly expanded the class period, the court found that the new
complaint was sufficiently similar to the first filed class action. Next, the court found that there
was no dispute regarding which movant had the greatest financial stake in the outcome of the
litigation and was thus entitled to presumptive lead plaintiff status. Accordingly, after finding
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that the presumptive lead plaintiff met the requirements of Fed. R. Civ. P. 23, the court appointed
that movant lead plaintiff and approved his selection of counsel.
In re Smith Barney Transfer Agent Litig., 2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011).
In a consolidated securities fraud class action, the court had originally appointed a union
trust fund along with an individual investor as lead plaintiff. The court was subsequently
informed by lead counsel that the union trust fund never actually owned any shares of the
security at issue and the court invited the filing of new motions for appointment as lead plaintiff.
The court now considered three competing motions for appointment as substitute lead plaintiff
filed by: (i) a group of investors including Weber, the individual plaintiff who had originally
been appointed as lead plaintiff along with the union trust fund; (ii) Zagunis, an individual
investor who had previously moved for appointment as lead plaintiff; and (iii) an individual
investor who had not previously moved for appointment as lead plaintiff. In considering which
movant should be appointed as substitute lead plaintiff, the court considered: (i) whether the
substitute lead plaintiff has made a timely request for appointment as lead plaintiff; (ii) whether
the substitute lead plaintiff had the largest financial stake in the outcome of the litigation; and
(iii) whether the substitute lead plaintiff otherwise satisfied the requirements of Fed. R. Civ. P.
23. The court also gave priority to movants who had originally timely filed for appointment as
lead plaintiff. In applying this test, the court found that Zagunis was presumptively the most
adequate lead plaintiff because he clearly had the largest financial stake in the outcome of the
litigation and had originally filed a timely motion for appointment as lead plaintiff. The court
rejected defendants’ argument that Zagunis may not be an adequate class representative because
he purchased his shares of the fund at issue through a dividend reinvestment program. The court
noted that defendants had objected to the appointment of each available lead plaintiff and the
court was not required to consider defendants’ argument at this stage of the litigation.
Accordingly, after finding that Zagunis met the requirements of Fed. R. Civ. P. 23, the court
appointed him lead plaintiff and approved his choice of lead counsel, thereby replacing class
counsel who had served for the last six years.
Vandevelde v. China Natural Gas, Inc., 2011 WL 2580676 (D. Del. Jun. 29, 2011).
In a putative securities fraud class action, the district court denied two competing motions
for appointment as lead plaintiff and declined to appoint a lead plaintiff. The court noted that
Third Circuit precedent requires the court to consider whether a potential lead plaintiff has
demonstrated the ability to negotiate a reasonable retainer agreement with counsel. However,
neither plaintiff had submitted materials related to fees or retainer agreements necessary for the
court to determine the adequacy of either movant with respect to this issue. Accordingly, the
court ordered both movants to submit supplemental briefs detailing their respective efforts in
retaining counsel and describing any fees or retainer agreements.
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Vandevelde v. China Natural Gas, Inc., 277 F.R.D. 126 (D. Del. Aug. 12, 2011).
In a putative securities fraud class action, the district court considered two competing
motions for appointment as lead plaintiff after the court had initially denied both movants’
motions and ordered each to submit supplemental briefs detailing information regarding their
efforts to retain counsel and negotiated fee arrangements. The court first determined that the
movant with the greatest losses during the class period was presumptively the most adequate lead
plaintiff. The competing movant attempted to rebut the presumption by arguing that frequent
contact with the defendant company’s public relations and investor relations firm subjected the
presumptive lead plaintiff to a unique non-reliance defense. The competing movant also argued
that the presumptive lead plaintiff’s credibility was in question given his various postings on
Yahoo! message boards regarding the defendant company. The court rejected the former
argument because there was no substantial proof that the presumptive lead plaintiff had received
any non-public information. The court rejected the latter argument because the movant did not
carry his burden of establishing that the posts reflected poorly on the presumptive lead plaintiff’s
credibility. Accordingly, after finding that the presumptive lead plaintiff met the requirements of
Fed. R. Civ. P. 23, the court appointed him lead plaintiff and approved his choice of lead and
liaison counsel.
Burgraff v. Green Bankshares, Inc., 2011 WL 613281 (E.D. Tenn. Feb. 11, 2011).
In a putative securities fraud class action, the court considered competing motions for
appointment as lead plaintiff filed by two groups of investors, one led by Mr. Molnar and another
led by Mr. Blomgren. The court found that Blomgren’s group had the largest financial interest in
the outcome of the case considering: (i) the number of shares purchased during the class period;
(ii) the number of net shares purchased during the class period; (iii) the total net funds expended
during the class period; and (iv) the amount of loss suffered. Specifically, Blomgren’s group had
purchased a greater number of shares and expended more funds than Molnar’s group. While
both groups appeared to have nearly identical losses, Blomgren actually had suffered a greater
financial loss once differences with respect to the average daily share price used to calculate
losses were considered. Thus, the court found Blomgren’s group was presumptively the most
adequate lead plaintiff. Accordingly, after finding that Blomgren’s group satisfied the
requirements of Fed. R. Civ. P. 23, the court appointed the group lead plaintiff and approved its
choice of counsel.
Norfolk County Ret. Sys. v. Cmty. Health Sys., Inc., 2011 WL 6202585 (M.D. Tenn. Nov. 28,
2011).
After recommending that three related putative securities fraud class actions should be
consolidated, the magistrate judge considered two competing motions for appointment as lead
plaintiff filed by a group of related New York City funds (the “NYC Funds”) and a group
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comprised of a retirement system and an investment fund. The court found that the NYC Funds
had the largest financial losses using either a LIFO or FIFO method of calculating losses and,
thus, was presumptively the most adequate lead plaintiff. In doing so, the court rejected the
argument that one of the NYC Fund’s member’s losses should not be considered because it was
subject to unique defenses as a net seller and net gainer during the class period. The court found
that the NYC Funds still had the greater financial losses even if that member’s losses were not
considered. The court also rejected the argument that it should focus on factors other than losses,
such as net shares purchased and net expenditures, given that the difference in total losses
suffered by the competing movants was insignificant. Since there was no evidence that the NYC
Funds would not fairly and adequately represent the class, the court recommended that the NYC
Funds be appointed lead plaintiff after finding that it satisfied the typicality and adequacy
requirements of Fed. R. Civ. P. 23. The court also recommended that the NYC Funds’ choice of
lead counsel be approved.
Bang v. Acura Pharms., Inc., 2011 WL 91099 (N.D. Ill. Jan. 11, 2011).
In a putative securities fraud class action, the court considered two competing motions for
appointment as lead plaintiff filed by an individual investor and a group of three investors (the
“Investors Group”). The court found that the Investors Group had a slightly larger combined
loss amount than the individual investor and, thus, the Investors Group was the presumptive most
adequate lead plaintiff. The individual investor argued that the Investors Group had been
improperly cobbled together solely to attain lead plaintiff status. The court found that two of the
members of the Investor Group had a pre-existing relationship and there was no proof that the
group could not adequately serve as lead plaintiff. On the other hand, the court found that the
individual investor’s atypical high trading volume might subject him to unique defenses and,
thus, he was likely an inadequate lead plaintiff. Accordingly, after finding that the Investor
Group met the requirements of Fed. R. Civ. P. 23, the court appointed the group lead plaintiff
and approved its choice of counsel.
Hufnagle v. RINO Int’l Corp., 2011 WL 710704 (C.D. Cal. Feb. 14, 2011).
After consolidating six related securities fraud class actions, the court considered ten
competing motions for appointment as lead plaintiff. The court found that a public investment
company, Stream, reported the largest financial interest in the action and, thus, was
presumptively the most adequate lead plaintiff. The court rejected the argument that Stream did
not have constitutional standing because the court found that Stream had invested its own assets
to purchase the defendant company’s stock and operated like a mutual fund, not as an investment
advisor. The court also noted that courts routinely appoint foreign investors as lead plaintiff and
there was no demonstration that a judgment of the court would not enjoy res judicata effect in
Luxembourg, where Stream was located. Finally, the court rejected the argument that purchases
of defendant’s stock after full or partial disclosures of the alleged fraud disqualified Stream as
lead plaintiff, noting that such purchases “even after the close of the class period do not destroy
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typicality.” Accordingly, the court tentatively found that Stream met the requirements of Fed. R.
Civ. P. 23 and tentatively appointed it as lead plaintiff and approved its choice of counsel.
Hufnagle v. RINO Int’l Corp., 2011 WL 710676 (C.D. Cal. Feb. 16, 2011).
In a consolidated securities fraud class action, the district court had tentatively appointed
a foreign investment company, Stream, as lead plaintiff. Here, the court adopted its previous
decision in Hufnagle v. RINA Int’l Corp., 2011 WL 710676 (C.D. Cal. Feb 14, 2011) for reasons
set forth in that opinion. The court further noted that evidence had now established that Stream
had purchased all of its shares of stock in the defendant company on the NASDAQ exchange
and, thus, was entitled to the protection of U.S. securities laws. The court also found that Stream
had provided evidence that it operated similarly to a U.S. open-ended mutual fund and, thus,
adequately established its standing to pursue claims related to the underlying securities it
purchased on behalf of its shareholders. Finally, the court noted that the movant with the second
largest financial interest was a group comprised of unrelated individuals who had no pre-existing
relationship prior to the litigation. The court noted that while courts disagree as to whether
groups of unrelated investors should be allowed to aggregate their losses for purposes of
obtaining lead plaintiff status, “the emerging majority position looks askance at the appointment
of a group of unrelated persons as lead plaintiff.” Accordingly, the court appointed Stream lead
plaintiff and approved its choice of counsel.
Perlmutter v. Intuitive Surgical, Inc., 2011 WL 566814 (N.D. Cal. Feb. 15, 2011).
In a putative securities fraud class action, the district court considered three competing
motions for appointment as lead plaintiff filed by a police retirement system and two individual
investors. In determining which movant had the largest financial interest, the court found that
recoverable damages were more indicative of financial interest than total losses suffered trading
in a particular stock. Thus, although one of the individual investors had the greatest total losses
using the FIFO methodology of calculating loss, that investor likely had little, if any, recoverable
damages because he was a net seller during the class period and had not retained any shares in
the defendant company’s stock at the end of the class period. Rather, the court found that the
retirement system had the greatest financial interest in the outcome of the litigation because it
had the greatest number of retained shares at the end of the class period. The court declined to
consider claimed tax losses in determining which movant had the greatest financial interest
because no court decisions were cited to support such a method. The court also rejected the
argument that the retirement system’s failure to file a complaint weighed against its appointment
as lead plaintiff because the Private Securities Litigation Reform Act of 1995 does not require a
movant to file a complaint. The court also accepted that the retirement system’s certification
regarding its stock trades was correct despite alleged inaccuracies raised by competing movants.
Accordingly, after finding that the retirement system met the requirements of Fed. R. Civ. P. 23,
the court appointed it lead plaintiff and approved its choice of counsel.
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Westley v. Oclaro, Inc., 2011 WL 4079178 (N.D. Cal. Sept. 12, 2011).
In a putative securities fraud class action, the court granted a pension fund’s unopposed
motion for appointment as lead plaintiff. The court noted that it had insufficient information
before it to determine whether the pension fund was presumptively the most adequate lead
plaintiff because it did not know who in the putative class actually had the greatest financial
stake in the outcome of the case. Nevertheless, since the pension fund was the only plaintiff to
move for appointment and had made a prima facie case that it satisfied the requirements of Fed.
R. Civ. P. 23, the court appointed the pension fund as lead plaintiff and approved its choice of
counsel.
Russo v. Finisar Corp., 2011 WL 5117560 (N.D. Cal. Oct. 27, 2011).
In a securities class action, the district court considered competing motions for
appointment as lead plaintiff filed by a pension fund, two individual investors, and a group
comprised of two pension funds and an individual investor. The court found that the pension
fund reported the largest financial losses and was thus entitled to presumptive lead plaintiff
status. Since no other movants attempted to rebut the presumption, the court appointed the
pension fund as lead plaintiff after finding that it met the typicality and adequacy requirements of
Fed. R. Civ. P. 23. The court also approved the pension fund’s choice of counsel.
Krieger v. Atheros Communc’n, Inc., 2011 WL 6153154 (N.D. Cal. Dec. 12, 2011).
In a putative securities fraud class action, the court considered an unopposed motion for
appointment as lead plaintiff filed by an individual investor. Since there were no other movants,
the individual investor was presumptively the most adequate lead plaintiff. Accordingly, after
finding that the individual investor satisfied the requirements of Fed. R. Civ. P. 23, the court
appointed the movant as lead plaintiff and approved his selection of lead counsel.
Mallen v. Alphatec Holding, Inc., 2011 WL 175687 (S.D. Cal. Jan. 19, 2011).
In a putative securities fraud class action, the district court granted an unopposed motion
for appointment of lead counsel filed by a retirement association. The court concluded that the
retirement association had the largest financial interest in the outcome of the litigation since no
other plaintiff had come forward claiming a larger loss. Accordingly, after finding that the
retirement association met the requirements of Fed. R. Civ. P. 23, the court appointed it as lead
plaintiff and approved its selection of counsel.
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Sparano v. Lief, 2011 WL 830109 (S.D. Cal. Mar. 3, 2011).
After consolidating three related shareholder derivative actions, the court denied
competing motions for appointment as lead plaintiff. The court noted that the Private Securities
Litigation Reform Act of 1995 governs the appointment of lead plaintiffs in securities fraud
actions, but that no such authority existed for shareholder derivative suits. While some courts
have appointed lead plaintiffs in derivative suits, the court could not find any benefit to doing so.
Accordingly, the court denied the motions for appointment of lead plaintiff and appointed only a
lead counsel.
Schueneman v. Arena Pharms., Inc., 2011 WL 3475380 (S.D. Cal. Aug. 8, 2011).
After consolidating related securities fraud class actions, the court considered numerous
competing motions for appointment as lead plaintiff. In determining the movant with the
greatest financial stake in the outcome, the court focused on potential recovery and, thus,
primarily considered the number of net shares retained at the end of the class period. In doing
so, the court narrowed the field of potential lead plaintiffs to two individual investors, Ghayour
and Schwartz. The court found that Schwartz had the greatest potential recovery and, thus, was
presumptively the most adequate lead plaintiff because he had a significantly higher number of
retained shares than Ghayour, even though Ghayour had suffered a slighter larger total estimable
loss. The court rejected the argument that Schwartz lacked standing to adequately represent
options purchasers, noting that lead plaintiffs need not have standing to pursue all causes of
action of the class and additional named plaintiffs could be added later to represent sub-sets of
the class. The court further found that alleged inaccuracies in Schwartz’s Private Securities
Litigation Reform Act of 1995 certification regarding his stock transactions did not make him
unreliable or inadequate as a lead plaintiff. The court also rejected the argument that Schwartz
was subject to unique defenses as a “day trader” because absent evidence that Schwartz did not
rely on the stock’s market price, day-trading was not enough to rebut the presumption that he
was the most adequate lead plaintiff. Accordingly, after finding that Schwartz met the
requirements of Fed. R. Civ. P. 23, the court appointed him lead plaintiff and approved his
choice of counsel.
Moradi v. Adelson, 2011 WL 5025155 (D. Nev. Oct. 20, 2011).
In a consolidated shareholder derivative action, the district court considered two
competing motions for appointment of lead counsel brought by a group of individual
shareholders and a retirement fund. The retirement fund also sought appointment as lead
plaintiff and the shareholders argued that there was no need to appoint a lead plaintiff. The court
noted that while there is a statute to appoint a lead plaintiff in securities fraud actions, there is no
such statute in derivative actions. Nor had the parties cited any Ninth Circuit authority indicating
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that a lead plaintiff should be appointed. Accordingly, the court declined to appoint a lead
plaintiff.
Niederklein v. PCS Edventures!.com, Inc., 2011 WL 759553 (D. Idaho Feb. 24, 2011).
In a putative securities fraud class action, the court considered two competing motions for
appointment as lead plaintiff filed by an individual investor and a group of two individual
investors. The court found that the group of investors had no pre-existing relationship and failed
to present evidence that the group was cohesive and not purely lawyer-driven. The group’s
motion failed to set forth an established process of sharing information, a protocol for how
decisions would be made, or any other indication that the individual members would act
cohesively. The court declined to consider the group’s individual members separately for
appointment as lead plaintiff because the group had not requested such relief. Next, the court
rejected several arguments against the adequacy of the individual investor to serve as lead
plaintiff. The court held that the individual investor’s objection to a group serving as lead
plaintiff did not indicate a failure to understand the fiduciary obligations of a lead plaintiff, as the
individual investor’s objection did not suggest any conflict of interest with other class members.
The court also found that clerical errors in the individual investor’s sworn certification did not
undermine his ability to fairly and adequately represent the class. Finally, the court rejected as
conjecture the argument that the individual investor was inadequate because he had selected
counsel that had been subject to non-monetary sanctions for lack of communication with a client
in an unrelated matter three years prior. Accordingly, after finding that the individual investor
satisfied the requirements of Fed. R. Civ. P. 23, the court appointed him lead plaintiff and
approved his choice of counsel.
Moomjy v. HQ Sustainable Maritime Indus., Inc., 2011 WL 4048796 (W.D. Wash. Sept. 12,
2011).
In a putative securities fraud class action, the district court considered six competing
motions for appointment as lead plaintiff. The court found that a foreign investment fund based
in Estonia (the “Estonian Fund”) undisputedly had greater losses than any other movant and
appeared to satisfy the typicality and adequacy requirements of Fed. R. Civ. P. 23. Despite
geographic remoteness, the court found that the fund could adequately protect the interests of the
class because the fund manager was fluent in English, frequently traveled to the US, and
scheduling and communication difficulties would be minimized with the use of modern
technology. One movant argued that the Estonian Fund should not be appointed as lead plaintiff
because a judgment in favor of defendants may not be binding on the Estonian Fund under
Estonian law. Noting that courts routinely appoint foreign investors as lead plaintiffs, the court
found that such res judicata concerns were speculative and insufficient to rebut the presumption
that the Estonian Fund was the most adequate plaintiff. The court also noted that the Estonian
Fund had filed a statement agreeing to be bound by any judgment of the court. The court also
rejected the argument that the Estonian Fund should not be appointed lead plaintiff because
Estonian law would not find a class action judgment binding on other Estonian investors. This
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argument was irrelevant because there was no evidence that any other Estonian investors existed
and the possible lack of preclusive effect as to other Estonian investors would be an issue
regardless of the identity of the lead plaintiff. Accordingly, the court appointed the Estonian
Fund as lead plaintiff and approved its choice of lead and liaison counsel.
Frias v. Dendreon Corp., 2011 WL 6330179 (W.D. Wash. Dec. 19, 2011).
In a putative securities fraud class action, the court considered two competing motions for
appointment as lead plaintiff filed by a retirement association and a seven-member group of
investors. Although the group of investors collectively had the greatest financial stake in the
outcome of the litigation, the retirement association objected to aggregating the group’s losses
because the group had no pre-existing relationship and was allegedly formed solely for purposes
of obtaining lead plaintiff status. The court found that the group had been introduced by counsel
and the court was unconvinced that it would act cohesively to protect the interests of the class.
Specifically, the group’s proposed plan for making decisions by a majority vote was susceptible
to failure and lacked provisions to address tie-breaking and potential indecision among married
couples who had agreed to cast only one vote. Accordingly, since the retirement association had
a greater financial stake in the outcome of the litigation over any individual movant and appeared
to satisfy the requirements of Fed. R. Civ. P. 23, the court appointed the retirement association as
lead plaintiff and approved its choice of counsel.
Wolfe v. Aspenbio Pharma, Inc., 2011 WL 2726019 (D. Colo. Jul. 11, 2011).
In a putative securities fraud class action, the court granted an individual investor’s
motion for appointment as lead plaintiff. The court found that the individual investor had timely
filed the requisite motion and there was no evidence that any other class member had a larger
financial interest. Accordingly, after finding that the individual investor met the requirements of
Fed. R. Civ. P. 23, the court granted his motion and approved his choice of counsel.
Kinnett v. Strayer Educ., Inc., 2011 WL 317758 (M.D. Fla. Jan. 31, 2011).
In a putative securities fraud class action, the district court initially considered two
competing motions for appointment as lead plaintiff filed by two pension funds. One of the
pension funds withdrew its motion. Thus, the remaining pension fund was the only movant for
lead plaintiff and there was no dispute that it had the greatest financial stake in the outcome of
litigation. Accordingly, after finding that the remaining movant satisfied the requirements of
Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its choice of lead and liaison
counsel.
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3. Safe Harbor/Bespeaks Caution Defense
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New Orleans Emps. Ret. Sys. v. Celestica, Inc., 2011 WL 6823204 (2d Cir. Dec. 29, 2011).
In an unpublished opinion, the Second Circuit reversed and remanded the district court’s
dismissal of a putative securities fraud class action. Plaintiffs asserted that the district court erred
by, among other things, finding that certain allegedly false and misleading statements were
shielded from liability by the Private Securities Litigation Reform Act of 1995’s safe harbor for
forward-looking statements. The Second Circuit found that many of the statements at issue were
not forward-looking statements and, thus, the safe harbor did not apply. Specifically, the Second
Circuit found that defendants did more than offer “rosy predictions,” and instead allegedly made
false statements of present or historical fact related to an ongoing restructuring plan and the
cause of problems associated therewith. Accordingly, the Second Circuit found that dismissal
was not warranted and reversed the decision of the district court.
Hill v. State St. Corp., 2011 WL 3420439 (D. Mass. Aug. 3, 2011).
In a consolidated securities fraud and ERISA class action, the district court denied
defendants’ motion to dismiss claims related to allegedly false and misleading statements
regarding the defendant bank’s exposure to risk due to mortgage-backed securities holdings.
Defendants argued that the alleged misstatements were inactionable under the bespeaks caution
doctrine due to cautionary language in their regulatory filings referenced by defendants.
Although defendants made various disclosures in their regulatory filings regarding the mortgagebacked
securities market and unrealized losses on their portfolio, the court found that such
disclosures were insufficient to render the alleged misstatements at issue immaterial pursuant to
the bespeaks caution doctrine. The court referenced the investing public’s response and the
drastic drop in the defendant bank’s stock price after disclosure of the alleged fraud. Given these
facts, the court found that defendants’ disclosures simply failed to provide sufficient warning or
detail. Accordingly, the court denied defendants’ motion to dismiss.
In re Sturm, Ruger & Co., 2011 WL 494753 (D. Conn. Feb. 7, 2011).
In a putative securities fraud class action, the district court granted in part and denied in
part defendants’ motion to dismiss claims related to the defendant company’s transition to a
“lean” manufacturing model which defendants allegedly knew would jeopardize the company’s
long-term profitability. Essentially, plaintiffs alleged that defendants failed to disclose known
problems with the transition while making materially false and misleading statements regarding
the company’s prospects. Defendants argued that alleged misstatements regarding the expected
liquidation of the defendant company’s inventory and its possession of sufficient raw materials
to meet demand were forward-looking statements shielded from liability by the Private Securities
Litigation Reform Act of 1995’s safe harbor provisions. The court found that these statements
were forward-looking, accompanied by cautionary language warning about the very risks at
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issue, and therefore qualified for safe harbor protection. The court found that other statements
regarding various financial projections, however, were not eligible for safe harbor protection
because plaintiffs adequately alleged that defendants knowingly omitted relevant information
regarding the impact of its new manufacturing model that would have provided meaningful
context for investors. Accordingly, the court granted in part and denied in part defendants’
motion to dismiss.
Maverick Fund, L.D.C. v. Comverse Tech., Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).
In a securities fraud action, the district court granted defendants’ motion to dismiss
claims related to allegedly false and misleading statements about when the defendant company
would become current with its regulatory filings in the wake of publicized accounting
irregularities. Defendants argued that the alleged misstatements were forward-looking
statements shielded from liability by the Private Securities Litigation Reform Act of 1995’s safe
harbor provisions. Plaintiffs argued that certain portions of the statements at issue, including that
defendants “continue[d] to make substantial progress towards restatement,” were not forwardlooking
but rather misrepresented present fact and, thus, were not eligible for protection under
the safe harbor. The court found that the present-tense portions of the statements were so vague
as to be inseparable from the forward-looking portions and, thus, the statements qualified for safe
harbor protection. Accordingly, since plaintiffs did not challenge the adequacy of cautionary
language that accompanied the statements at issue, the court granted defendants’ motion to
dismiss.
In re Bear Stearns Co., Inc. Sec., Derivative & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y.
2011).
In a set of consolidated actions arising out of the collapse of Bear Stearns, the district
court denied defendants’ motion to dismiss claims related to alleged misstatements and
omissions concerning valuation of mortgage-backed assets, asset write-downs, GAAP violations
and the company’s liquid assets. The Bear Stearns defendants argued that statements about
models used to value mortgage-backed securities were forward-looking statements shielded from
liability by the Private Securities Litigation Reform Act of 1995’s safe harbor and the bespeaks
caution doctrine. The court found that these statements referred to present risk factors and were
therefore not forward-looking statements. Additionally, to the extent the statements were
forward-looking, they were still not protected by the safe harbor because defendants allegedly
knew at the time the statements were made that their valuation models were fundamentally
flawed but had failed to include meaningful cautionary language to warn investors of the known
risks. Accordingly, the court denied defendants’ motion to dismiss.
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SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).
In a securities fraud enforcement action, the district court granted in part the SEC’s
motion for summary judgment. The SEC alleged that the defendant corporation and its officer
made false and misleading statements regarding the company’s anticipated profits, returns on
investments, and NASD approval of an acquisition. Although allegedly misleading profit
projections were forward-looking, the court held that they were not entitled to safe harbor
protection because the corporate officer who made the projections knew the company was
operating at a loss and that fact should have been disclosed. With respect to allegedly
misleading statements referencing “dividends” to be paid to investors, such statements were not
entitled to protection under the bespeaks caution doctrine because the term “dividend”
misleadingly indicated that the company was profitable. Accordingly, the court granted the
SEC’s motion with respect to defendants’ liability for these statements.
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y 2011).
In a securities fraud class action, the district court denied defendants’ motion for
judgment notwithstanding a jury verdict because, inter alia, certain alleged misstatements and
omissions were not entitled to protection under the Private Securities Litigation Reform Act of
1995’s safe harbor for forward-looking statements. Defendants argued that certain projections
primarily related to Vivendi’s expected EBITDA and cash flow figures were forward-looking
statements as to which the jury could not have found liability under the PSLRA because: (1) they
were accompanied by meaningful cautionary language, or (2) the jury found that Vivendi acted
recklessly, and PSLRA shields forward-looking statements from liability if they are not made
with actual knowledge of their falsity. The court found that the safe harbor did not apply
because plaintiffs had not challenged the forward-looking portions of these statements. Rather,
plaintiffs alleged that defendants had knowingly failed to disclose that a huge one-time purchase
accounting benefit was built into the projections and rendered them misleading. Accordingly,
the court found that the safe harbor did not apply and denied defendants’ motion with respect to
these statements.
In re Barclays Bank PLC Sec. Litig., 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).
In a putative securities fraud class action, the district court denied in part defendants’
motion to dismiss claims related to defendants’ alleged failure to timely disclose exposure to
risky assets and comply with accounting standards and SEC requirements, as well as allegedly
false and misleading assurances concerning the defendant company’s risk management practices.
Defendants argued that certain statements related to valuation of risky assets were shielded from
liability under the Private Securities Litigation Reform Act of 1995’s safe harbor provision and
the bespeaks caution doctrine. The court rejected defendants’ argument because the statements at
issue were made in connection with an initial public offering and, thus, safe harbor protection
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was not available. Moreover, the court found that defendants’ risk warnings were too generic to
be meaningful. Accordingly, the court denied defendants’ motion to dismiss to the extent it
relied on the safe harbor and/or bespeaks caution doctrine.
In re Merrill Lynch Auction Rate Sec. Litig., 2011 WL 1330847 (S.D.N.Y. Mar. 30, 2011)
In a consolidated multi-district securities fraud action against auction rate securities
(“ARS”) underwriters and managing broker-dealers, the district court denied in part defendants’
motion to dismiss claims related to alleged misstatements and omissions about the deteriorating
state of the ARS markets. Defendants argued that statements reassuring investors about the ARS
markets were not material under the bespeaks caution doctrine. The court rejected this argument
because plaintiffs had adequately alleged that defendants were “aware of actual danger or cause
for concern” but failed to disclose known risks and, thus, defendants could not rely upon generic
disclaimers to shield their statements from liability. Accordingly, the court denied defendants’
motion to dismiss to the extent it relied upon the bespeaks caution doctrine.
City of Roseville Employees’. Ret. Sys. v. EnergySolutions, Inc., 2011 WL 4527328 (S.D.N.Y.
Sept. 30, 2011).
In a putative securities fraud class action, the district court granted in part defendants’
motion to dismiss claims related to allegedly false and misleading statements made in connection
with the defendant company’s IPO. Defendants argued that statements related to the possibility
of a regulator granting a policy change were forward-looking statements accompanied by
adequate warnings entitled to protection under the Private Securities Litigation Reform Act of
1995’s safe harbor provision and the bespeaks caution doctrine. The court found that
defendants’ failure to disclose that the regulator at issue had repeatedly denied the company’s
proposed rule change in the past rendered cautionary language insufficient since subsequent
rejections of the policy change were virtually certain. The court also rejected defendants’
argument that the regulator’s prior rejections were immaterial because they were publicly
available information. The court held that such rejections were not well-known enough to be
considered part of the “total mix” of information. Accordingly, the court denied defendants’
motion to dismiss to the extent it relied on the safe harbor or bespeaks caution doctrine.
Valentini v. Citigroup Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
The district court denied defendants’ motion to dismiss securities fraud claims related to
losses incurred in connection with investments in equity-linked notes. Plaintiffs alleged that
defendants failed to advise them of the notes’ “knock-in” provision, which was triggered by a
specified decline in the value of the securities linked to the notes and acted to convert the notes
into a specified number of the lowest valued security linked to them. Defendants argued that
certain alleged misstatements were inactionable under the bespeaks caution doctrine given
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extensive disclosures regarding the risks contained in the notes’ offering documents. The court
held that defendants could not avail themselves of the bespeaks caution doctrine because
plaintiffs denied receiving the offering documents which contained the risk disclosures cited by
defendants. The only documents plaintiffs indisputably received in connection with their
investment did not contain disclosures related to the conversion of the notes to securities.
Accordingly, the court found that the bespeaks caution doctrine did not apply and denied
defendants’ motion to dismiss.
Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675
(D. Del. June 14, 2011).
In a consolidated securities fraud class action against former officers and directors of a
leading publisher of yellow pages directories, the district court denied defendants’ motion to
dismiss claims related to an alleged scheme to artificially inflate the publishing company’s stock.
Defendants argued that alleged misstatements regarding future demand for yellow pages and the
publisher’s ability to grow its online business were forward-looking statements shielded from
liability by the Private Securities Litigation Reform Act of 1995’s safe harbor provisions. The
court found that the statements were mixed statements that referenced present and historical facts
and, thus, did not qualify for safe harbor protection. Moreover, defendants failed to warn
investors of an overall industry decline and, thus, cautionary language relied upon by defendants
was not adequate to warn investors of the risk plaintiffs alleged defendants had knowingly failed
to disclose. The court also found that plaintiffs adequately alleged that defendants had actual
knowledge that their stated growth projections were inaccurate given defendants’ attendance at
certain meetings and review of internal company reports. Accordingly, the court denied
defendants’ motion to dismiss.
In re Lincoln Educ. Srvs. Corp. Sec. Litig., 2011 WL 3912832 (D.N.J. Sept. 6, 2011).
In a consolidated securities fraud class action, the court granted defendants’ motion to
dismiss claims related to the defendant school’s admissions process, in part, because the alleged
misstatements were shielded from liability by the Private Securities Litigation Reform Act of
1995’s safe harbor. Plaintiffs alleged that in the wake of new regulations denying funding to
schools that failed to provide “gainful employment” for students, defendants announced plans to
limit enrollment of students without a high school diploma and misled investors regarding the
impact of this new policy on enrollment numbers. Plaintiffs conceded that the statements at
issue were forward-looking but argued that they were not accompanied by meaningful cautionary
language. The court found that cautionary language accompanying the alleged misstatements
discussing the new Department of Education regulations as likely to have short-term impact on
growth was sufficiently “tailored” to warn investors about risks that might affect the projection at
issue. The court further found that plaintiffs’ complaint improperly isolated certain words or
comments from the defendants’ overall remarks in press releases and conference calls in an
attempt to create the impression of fraud. Accordingly, the court found that the alleged
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misstatements were shielded from liability by the safe harbor and granted defendants’ motion to
dismiss.
Love v. Alfacell Corp., 2011 WL 4915874 (D.N.J. Oct. 17, 2011).
In a securities fraud action brought by a CFO against his former employer, the district
court granted defendants’ motion to dismiss claims related to allegedly false and misleading
statements about the completion date of a trial phase for a new cancer treatment drug. The court
found that plaintiff had failed to demonstrate that any of the alleged misrepresentations or
omissions were material given the total mix of information available to investors. Specifically,
defendants had filed multiple quarterly and annual reports during the relevant time period that
warned investors that the defendant company could not predict the completion date of the trials.
Given these warnings, the court found that plaintiff’s alleged reliance on the allegedly false
predictions about the completion date was not reasonable as a matter of law. While the court did
not specifically cite the Private Securities Litigation Reform Act of 1995’s safe harbor as
grounds for its decision, it did reference the safe harbor in reviewing applicable legal standards.
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).
In a securities fraud action, the district court denied defendants’ motion to dismiss claims
related to allegedly false and misleading statements about the defendant company’s loan loss
reserves. Specifically, plaintiff alleged that defendants knowingly failed to adhere to the
defendant company’s stated methodology for calculating required reserves and, therefore,
materially understated the defendant company’s reserves. The court rejected defendants’
argument that the statements at issue were inactionable estimates or opinions shielded from
liability by the bespeaks caution doctrine. The court found that plaintiffs’ claims regarding
defendants’ failure to adhere to the company’s stated methodology involved misstatements of
present or historical fact, such as defendants’ failure to include current known liabilities in its
calculations. Accordingly, the bespeaks caution doctrine did not apply and the court denied
defendants’ motion to dismiss to the extent it relied on that doctrine.
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sep. 30, 2011).
In a putative securities fraud class action, the district court denied in part defendants’
motion to dismiss claims related to allegedly false and misleading statements about the credit
quality of the defendant company’s new customers. Specifically, plaintiffs alleged that
defendants exaggerated the credit quality of new customers in order to induce investments when,
in fact, defendants knew the credit scores of new customers had declined. Defendants attempted
to cast their statements about credit quality as inactionable forward-looking statements shielded
from liability by the bespeaks caution doctrine and the Private Securities Litigation Reform Act
of 1995’s safe harbor provisions. The court found that while credit scores may be predictive, the
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actual data collected by defendants was not forward-looking. Thus, the court found that the
alleged misstatements at issue dealt with verifiable facts and neither the safe harbor nor the
bespeaks caution doctrine applied. Accordingly, the court denied defendants’ motion to dismiss
with respect to these alleged misstatements.
In re Conventry Healthcare, Inc. Sec. Litig., 2011 WL 1230998 (D. Md. Mar. 30, 2011).
The district court denied defendants’ motion to dismiss a consolidated securities fraud
class action premised upon the healthcare insurance company’s purported failure to disclose
difficulty in processing claims under a new plan which expanded providers for Medicare-eligible
customers. Defendants argued that the statement that they were “pleased to confirm [their]
businesses continue[d] to perform well [“and were”] fundamentally sound” was a forwardlooking
statement shielded from liability by the Private Securities Litigation Reform Act of
1995’s safe harbor. The court noted that it could construe this statement as mere puffery or an
inactionable statement of future economic performance. However, the statement was not
accompanied by any cautionary language and plaintiffs had adequately alleged that when this
statement was made defendants knew about certain claims processing problems that were
expected to negatively impact their business. Defendants had also failed to disclose the risks
associated with the claims processing issue in their regulatory filings and, thus, reference to
cautionary language contained in their filings was inadequate to warn investors about the risks at
issue. Accordingly, the court found that the safe harbor did not apply and denied defendants’
motion to dismiss.
City of Ann Arbor Employees’ Ret. Sys. v. Sonoco Prod. Co., 2011 WL 5041367 (D.S.C. Oct. 19,
2011).
In a putative securities fraud class action, the district court denied defendants’ motion for
summary judgment with respect to claims that defendants attempted to hide declining revenue by
artificially inflating projected productivity gains to offset losses. Defendants argued that their
revenue forecasts were forward-looking statements shielded from liability by the Private
Securities Litigation Reform Act of 1995’s safe harbor. The court held that a genuine issue of
material fact existed regarding whether cautionary language cited by defendants was sufficiently
meaningful in light of evidence proffered by the plaintiff that defendants knew price concessions
and lost customers were negatively impacting their projections but failed to warn investors. The
court further held that a factual dispute existed with respect to whether the defendants knew the
forecasts were false when they were made, as evidenced by defendants’ use of estimated
productivity gains that exceeded prior productivity gains. Accordingly, the court denied
defendants’ motion for summary judgment.
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Hopson v. MetroPCS Commc’ns, Inc., 2011 WL 1119727 (N.D. Tex. Mar. 25, 2011).
In a putative securities fraud class action, the district court granted defendants’ motion to
dismiss because the plaintiff class failed to adequately allege scienter. Defendants argued that
certain allegedly false and misleading statements were shielded from liability by the Private
Securities Litigation Reform Act of 1995’s safe harbor provision. Specifically, plaintiffs alleged
that defendants made false and misleading statements concerning earning guidance, the strength
of the defendant company’s business model, the impact of increased competition, and the
relationship between subscriber growth and churn. The court found that plaintiffs failed to
adequately allege scienter and, thus, had not established that defendants made any of the
forward-looking statements at issue with actual knowledge of their falsity. Accordingly, the
court found that the safe harbor would shield the forward-looking statements from liability and
granted defendants’ motion to dismiss.
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Ltd. Brands, Inc., 788 F. Supp.2d
609 (S.D. Ohio 2011).
In a securities fraud class action, the district court granted defendants’ motion to dismiss
claims related to an alleged scheme to mislead investors about development of a new system of
internet sales of defendants’ Victoria’s Secret brand. Plaintiffs alleged that defendants touted a
new distribution center and attendant technology as a key initiative that would increase sales but
failed to disclose known problems with the system that caused the company to abandon the new
platform. Defendants argued that some of the statements at issue were forward-looking
statements shielded from liability by the Private Securities Litigation Reform Act of 1995’s safe
harbor provisions or mere non-actionable corporate puffery. The court found that each of the
allegedly misleading and overly optimistic statements were couched as forward-looking and
accompanied by cautionary language which adequately disclosed specific risks associated with
the retail and fashion industry. Accordingly, the court found that the safe harbor applied and
granted defendants’ motion to dismiss with respect to the forward-looking statements at issue.
Garden City Employees’ Ret. Sys. v. Psychiatric Solutions, Inc., 2011 WL 1335803 (M.D. Tenn.
Mar. 31, 2011).
In a putative securities fraud class action, the district court denied defendants’ motion to
dismiss claims premised on alleged misstatements related to the defendant medical provider’s
performance, accounting, and compliance with regulatory rules in the wake of disclosure of
nationwide occurrences of patient harm, neglect, and sexual and physical violence. Plaintiffs
alleged that defendants engaged in a scheme to artificially inflate the company’s stock through
overly optimistic, false, and misleading statements in 10-Ks, press releases, and other public
statements by corporate representatives. Defendants asserted that many of the alleged
misstatements were “soft” statements of a nonfactual nature and/or forward-looking statements
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subject to protection under the Private Securities Litigation Reform Act of 1995’s safe harbor.
The court found that most of the alleged misstatements related to objectively verifiable facts and,
thus, were not forward-looking statements eligible for safe harbor protection. In addition, the
court found that plaintiffs adequately alleged that defendants knew the forward-looking
statements were false when they were made and, thus, even the forward-looking statements were
not protected by the safe harbor. Accordingly, the court denied defendants’ motion to dismiss.
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys
Healthcare Solutions, Inc., 778 F. Supp. 2d 858 (N.D. Ill. 2011).
In a putative securities fraud class action, the district court granted defendants’ motion to
dismiss claims related to allegedly false and misleading financial forecasts and statements
regarding implementation of new software developed by the defendant company. Defendants
argued that statements related to these issues were forward-looking and accompanied by
meaningful cautionary language which shielded them from liability under the Private Securities
Litigation Reform Act of 1995’s safe harbor provisions. Plaintiffs argued that defendants’
cautionary language was not meaningful because it was not specific enough and defendants’
allegedly knew that the risks they were warning about were actually occurring. The court
rejected the former argument because cautionary language in the defendant company’s
regulatory filings which was incorporated by reference into the statements at issue discussed at
length twenty-five separate business-specific risk factors, including the very risks plaintiffs
alleged had caused the company’s underperformance. The court rejected the latter argument
because it found that defendants’ state of mind was irrelevant to whether forward-looking
statements qualify for protection under the first prong of the safe harbor. Accordingly, the court
found that safe harbor protection was warranted and granted defendants’ motion to dismiss.
St. Lucie Cty. Fire Dist. Fire-Fighters’ Pension Trust Fund v. Motorola, Inc., 2011 WL 814932
(N.D. Ill. Feb. 28, 2011).
In a putative securities fraud class action, the district court granted defendants’ motion to
dismiss claims related to allegedly false and misleading earnings per share forecasts.
Specifically, plaintiffs alleged that defendants engaged in “channel stuffing” and made various
false and misleading statements regarding the company’s financial performance as a result.
Defendants argued that its earnings per share forecasts were accurate and, even if they were not
accurate, then they were forward-looking statements shielded from liability by the Private
Securities Litigation Reform Act of 1995’s safe harbor provisions. The court first noted that
defendants’ forecasts appeared to be accurate once special charges that were specifically
excluded from the forecasts were considered. Next, to the extent that the projections were false
because they did not include the special charges, the court found that cautionary language cited
by defendants rendered the projections inactionable under the safe harbor because the warnings
addressed plaintiffs’ particular allegations in individualized terms. Accordingly, the court
granted defendants’ motion to dismiss.
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In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).
In a putative securities fraud class action, the district court denied defendants’ motion to
dismiss claims predicated on alleged misrepresentations in press releases and quarterly
statements pertaining to the defendants’ alleged practice of artificially inflating revenues through
“channel stuffing.” Specifically, plaintiffs alleged that defendants intentionally sold large
quantities of heavily discounted products at quarter end to customers which artificially inflated
inventories in order to create the false appearance that the company was meeting previous
financial guidance. Defendants argued that allegedly false and misleading financial projections
were forward-looking statements shielded from liability by the Private Securities Litigation
Reform Act of 1995’s safe harbor provisions. The court found that cautionary language
accompanying defendants’ projections was insufficient to warrant safe harbor protection because
it was boilerplate, related solely to external macroeconomic variables, and did not address
defendants’ alleged practice of “channel stuffing” or other related accounting misconduct. The
court further found that plaintiffs had adequately alleged scienter and that, if plaintiffs’
allegations regarding channel stuffing were true, defendants knew the financial projections at
issue were false when they were made. Accordingly, the court found that the safe harbor did not
apply and denied defendants’ motion to dismiss.
In re Stec Inc. Sec. Litig., 2011 WL 2669217 (C.D. Cal. Jun. 17, 2011).
In a putative securities fraud class action, the district court denied defendants’ motion to
dismiss claims related to an alleged scheme to artificially inflate the defendant company’s stock
prior to a secondary public offering. Plaintiffs alleged, among other things, that defendants
misled investors about the nature of an agreement with one of its largest customers in order to
create the impression that revenue generated from the agreement would be recurring.
Defendants argued that statements regarding the agreement were forward-looking and shielded
from liability by the Private Securities Litigation Reform Act of 1995’s safe harbor. The court
found that cautionary language cited by defendants was generic and simply warned of the
inability to forecast customer demand, whereas plaintiffs alleged that defendants knew that the
agreement was a one-off deal and that the customer would not continue purchasing at the same
volume. Accordingly, the court declined to find that the safe harbor shielded the statements at
issue from liability and denied defendants’ motion to dismiss with respect to these forwardlooking
statements.
MannKind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).
In a putative securities fraud class action, the district court denied defendants’ motion to
dismiss claims premised on allegedly false and misleading statements regarding FDA approval
of the defendant pharmaceutical company’s flagship product. Plaintiffs alleged that defendants
continued to make overly optimistic statements regarding anticipated FDA approval despite
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numerous known complications and delays in the approval process. Defendants argued that
these statements were forward-looking statements shielded from liability by the Private
Securities Litigation Reform Act of 1995’s safe harbor provision. The court rejected this
argument because the majority of the alleged misstatements were not forward-looking, but
instead related to past interactions with the FDA. Moreover, the court found that cautionary
language cited by defendants was too generic to be meaningful and did not relate to the specific
complications that had arisen with respect to FDA approval of the product at issue. Accordingly,
the court held that the safe harbor did not apply and denied defendants’ motion to dismiss.
Wozniak v. Align Tech., Inc., 2011 WL 2269418 (N.D. Cal. Jun. 8, 2011).
In a securities fraud action, the district court granted defendants’ motion to dismiss
claims related to defendants’ alleged failure to disclose a backlog created by an agreement to
treat a competitor’s patients. As a result of the failure to disclose this backlog, plaintiffs alleged
that defendants made various false and misleading statements about expected shipments and
growth in press releases and conference calls with analysts. Defendants argued that the alleged
misstatements were shielded from liability by the Private Securities Litigation Reform Act of
1995’s safe harbor for forward-looking statements. The court found that the statements at issue
were identified as forward-looking and accompanied by meaningful cautionary language that
identified the specific risks plaintiffs alleged had materialized. Accordingly, the court found that
the safe harbor applied to these forward-looking statements and granted defendants’ motion to
dismiss.
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2011 WL 3501733 (N.D. Cal. Aug. 10,
2011).
In a putative securities fraud class action, the district court granted defendants’ motion to
dismiss claims related to allegedly false and misleading statements about the defendant
company’s financial prospects during the 2008 economic crisis. Defendants argued that
statements about the defendant company’s projected revenue were forward-looking statements
accompanied by meaningful cautionary language and, thus, shielded from liability under the
Private Securities Litigation Reform Act of 1995’s safe harbor. The court found that the
statements at issue were identified as forward-looking and accompanied by a warning that results
could vary based on the risks identified in the company’s SEC filings. The court further found
that cautionary language in the company’s SEC filings was adequate and meaningful because it
detailed a number of risks, including unforeseen economic downturns and slow market adoption
of the company’s product. Accordingly, the court found that safe harbor protection was
warranted and granted defendants’ motion to dismiss.
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Curry v. Hansen Med., Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).
In a putative securities fraud class action, the district court granted defendants’ motion to
dismiss claims premised on alleged misstatements related to the defendant company’s revenue
recognition policy and sales performance. The court noted that while certain alleged
misstatements were of present or historical fact, others were forward-looking and qualified for
safe harbor protection. Ultimately, the court found that plaintiffs had failed to adequately plead
scienter with regards to any of the statements since there was no sufficient basis to find that
defendants had any knowledge of any alleged inaccuracies. Accordingly, plaintiffs’ claims were
dismissed.
Szymborski v. Ormat Techs., Inc., 776 F. Supp. 2d 1191 (D. Nev. 2011).
In a putative securities fraud class action, the district court granted in part defendants’
motion to dismiss claims related to, among other things, allegedly false and misleading
statements about the completion date of a new factory. Defendants argued that statements
regarding the anticipated completion date were shielded from liability by the Private Securities
Litigation Reform Act of 1995’s safe harbor provision for forward-looking statements. The
court found that the statements at issue were sufficiently identified as forward-looking through
the use of phrases such as “we expect” and “subject to change at any time.” The court further
found that cautionary language cited by defendants warned investors of the very risks plaintiffs
alleged caused the target completion date to be missed. The court rejected plaintiffs’ argument
that reference to the project being “on track” was actually a statement of present fact. The court
acknowledged a circuit split on whether such a statement was forward-looking, but noted that its
holding adhered to Third Circuit precedent that such a statement was not meaningfully distinct
from a prediction. Accordingly, the court granted defendants’ motion to dismiss to the extent it
relied on the safe harbor.
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech., 2011 WL
915115 (D. Nev. Mar. 15, 2011).
In a consolidated securities fraud class action, the district court granted defendants’
motion to dismiss claims related to allegedly false and misleading EPS forecasts and statements
about the defendant company’s future prospects, in part, because the alleged misstatements were
shielded from liability by the Private Securities Litigation Reform Act of 1995’s safe harbor.
Plaintiffs alleged that defendants knowingly announced unrealistic EPS forecasts, misrepresented
operating expenses, and misrepresented that certain technology in development would generate
significant revenue through deals with third parties. The court found that defendants’ EPS
forecasts were forward-looking and accompanied by language that cautioned investors that the
company’s business was vulnerable to changing economic conditions which could result in
reduced revenues. Likewise, with regard to prospective deals with third-parties, defendant had
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specifically cautioned that the deals were subject to approval. Accordingly, these two categories
of alleged misstatements were shielded from liability by the safe harbor. On the other hand, the
court rejected defendants’ argument that risk factors it had identified for investors that might
affect revenue were also clearly applicable to projected operating expenses stated as a percentage
of revenue. Nevertheless, the court found that plaintiffs failed to allege facts creating a strong
inference that defendants knew their operating expense forecasts were false. Accordingly, the
court granted defendants’ motion to dismiss.
Fosbre v. Las Vegas Sands Corp., 2011 WL 3705023 (D. Nev. Aug. 24, 2011).
In a putative securities fraud class action, the district court granted in part defendants’
motion to dismiss claims premised on allegedly false and misleading statements about the
company’s development plans and financial condition. Defendants argued that statements
concerning construction costs in Macao, predictions of future Macao market conditions and the
company’s financing plans, cash flows and future liquidity were forward-looking statements
entitled to protection under the Private Securities Litigation Reform Act of 1995’s safe harbor
provision. Plaintiffs argued that these statements were not entitled to protection because when
they were made defendants merely referenced cautionary language in other documents, such as
SEC filings, that was boilerplate and insufficient. The court rejected plaintiffs’ argument
because there was meaningful cautionary language referenced by defendants that described
“what kind of misfortunes could befall the company” and legal authority supported crossreferenced
cautionary statements for purposes of the safe harbor. Accordingly, the court granted
defendants’ motion to dismiss to the extent it relied on the safe harbor.
In re Cell Therapeutics, Inc. Class Action Litig., 2011 WL 444676 (W.D. Wash. Feb. 4, 2011).
The district court denied defendants’ motion to dismiss plaintiffs’ federal securities fraud
class action stemming from the defendant pharmaceutical company’s decision to modify drug
evaluation trials and, thus, forfeit eligibility for fast-tracked FDA approval. Defendants claimed
that plaintiffs’ entire complaint should be dismissed because most of the allegedly false and
misleading statements at issue were forward-looking statements accompanied by “cautionary
language concerning the perils of new drug approval” and, thus, were shielded from liability by
the Private Securities Litigation Reform Act of 1995’s safe harbor provision. The court rejected
this argument because plaintiffs’ allegations centered on statements of present or historical fact
related to the defendant company’s ongoing evaluation trials and the trials’ current qualification
for fast-track approval. Accordingly, the court found that the safe harbor did not apply and
denied defendants’ motion to dismiss.
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In re Coinstar Sec. Litig., 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011).
In a putative securities fraud class action, the district court granted in part and denied in
part defendants’ motion to dismiss claims related to allegedly false and misleading revenue
projections for the video-rental company Redbox. Specifically, plaintiffs alleged that
defendants’ revenue projections did not account for several known negative developments and
facts, including that: (a) movie producers were delaying delivery of DVDs to Redbox;
(b) Redbox’s new blu-ray business was not performing well; (c) defendants’ internal financial
projections reflected deteriorating sales; (d) upcoming releases were unlikely to generate
significant revenue; and (e) Redbox was incurring costs associated with migrating DVDs
between locations. Defendants argued that the various statements at issue were forward-looking
statements shielded from liability by the Private Securities Litigation Reform Act of 1995’s safe
harbor and that plaintiffs had failed to establish that the statements were false. With respect to
allegedly false projections contained in a press release, the court found that the release warned
investors that results might differ and specifically listed several risks that might affect actual
performance, including the risks plaintiffs alleged defendants failed to disclose to the public.
With regard to allegedly false oral statements made during an analyst conference call, the court
found that defendants’ reference to cautionary language in the defendant company’s regulatory
filings was adequate to warrant safe harbor protection. The court distinguished cases holding
that mere reference to warnings elsewhere was insufficient for written communications and
noted that oral forward-looking statements are protected as long as investors are orally referred
to warnings in a readily available written document. Given the adequate cautionary language
accompanying the allegedly false projections, the court found that defendants’ state of mind was
irrelevant and the forward-looking statements at issue were shielded from liability by the safe
harbor. On the other hand, the court found that certain reiterations of the company’s earnings
projections were not protected by the safe harbor because there was an unresolved issue of fact
regarding whether these reiterations were accompanied by cautionary language. Moreover, the
court found that plaintiffs had adequately pleaded that defendants knew the reiterated guidance
was false and misleading and, thus, the safe harbor did not apply. Accordingly, the court granted
in part and denied in part defendants’ motion to dismiss.
Mishkin v. Zynex Inc., 2011 WL 1158715 (D. Colo. Mar. 30, 2011).
In a securities fraud class action against a supplier of medical devices, the district court
denied defendants’ motion to dismiss claims related to an alleged scheme to inflate reported
revenue. Specifically, plaintiffs alleged that defendants knowingly overbilled insurance
companies and reported revenue based upon the inflated billing rather than revenue it expected to
collect. Defendants argued that certain alleged misstatements made by its CEO in a press release
were forward-looking statements shielded from liability by the Private Securities Litigation
Reform Act of 1995’s safe harbor provisions. The court found that some parts of the press
release discussed present and historical facts, such as “sales and rentals… continue at a strong
pace,” which were not forward-looking and, thus, did not qualify for protection under the safe
harbor. To the extent the press release contained forward-looking statements, the court found
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that cautionary language in the press release relied upon by defendants did not shield the relevant
statements from liability given that plaintiffs had adequately alleged facts establishing a strong
inference of scienter. Accordingly, the court denied defendants’ motion to dismiss.
Simmons Invs., Inc. v. Conversational Computing Corp., 2011 WL 673759 (D. Kan. Feb. 17
2011).
In a securities fraud action, the district court denied defendants’ motion to dismiss claims
related to an allegedly false and misleading statement about expected investments by other
investors in the defendant company. Defendants argued that the alleged misstatement was
forward-looking and shielded from liability by the Private Securities Litigation Reform Act of
1995’s safe harbor provisions. The court acknowledged the Tenth Circuit’s recognition that
neither vague statements of corporate optimism nor forward-looking statements accompanied
with sufficient cautionary language were material as a matter of law. The court found, however,
that plaintiff adequately alleged it had relied on optimistic statements about future investments
that defendants knew were false at the time they were made. Accordingly, the court found that
the safe harbor did not apply and denied defendants’ motion to dismiss.
Genesee County Employees’ Ret. Sys. v. Thornburg Mortgage Sec. Trust, 2011 WL 5840482
(D.N.M. Nov. 12, 2011).
In a putative securities fraud class action related to several investment offerings of
mortgage-backed securities (“MBS”), the district court denied in part defendants’ motion to
dismiss claims related to allegedly false and misleading statements regarding the risks associated
with the MBS investments at issue. Plaintiffs alleged that defendants misrepresented several
aspects of the MBS, including loan origination and underwriting standards and failed to disclose
alleged manipulation of appraisal information. Plaintiffs also alleged that credit rating agency
defendants knowingly issued false and misleading credit ratings in connection with the MBS
offerings. The court first rejected defendants’ argument that cautionary language in the MBS
offering documents was sufficient to bar plaintiffs’ claims pursuant to the bespeaks caution
doctrine. The court found that defendants’ warnings were insufficient to warn that loan
originators would systematically abandon underwriting guidelines. The court further found that
an alleged disclosure about loan originators possibly pressuring property appraisers did not help
defendants because the court could not find this disclosure in the MBS offering documents at
issue. Finally, the court found that cautionary language accompanying MBS credit ratings was
insufficient to invoke the protection of the bespeaks caution doctrine because plaintiffs had
adequately alleged that the credit rating agency did not believe its own ratings and/or lacked any
reasonable basis for them. Accordingly, the court denied defendants’ motion to dismiss to the
extent it relied on the safe harbor and/or bespeaks caution doctrine.
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Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys
In re Immucor, Inc. Sec. Litig., 2011 WL 2619092 (N.D. Ga. June 30, 2011).
In a securities fraud action, the district court denied in part defendants’ motion to dismiss
claims related to statements about the defendant company’s compliance with FDA regulations.
Plaintiff alleged that repeated warnings from the FDA about defendants’ maintenance of blood
reagent facilities were glossed over in public filings, where defendants stated that the company
believed “its manufacturing and ongoing quality control procedures conformed to the required
statutes, regulations and standards,” rendering the public filings false and misleading. The court
rejected defendants’ argument that these alleged misstatements were inactionable “corporate
optimism” and shielded from liability by the Private Securities Litigation Reform Act of 1995’s
safe harbor for forward-looking statements. The court found that defendants’ blood reagent
facilities were subject to revocation by the FDA at the time the statements at issue were made
and, thus, the statements appeared to be designed to reassure investors. The court further found
that statements regarding defendants’ belief that its “manufacturing and ongoing quality control
procedures” complied with FDA regulations were not forward-looking because the use of the
present tense implied that the company had sufficient quality control procedures already in place.
Accordingly, the court denied defendants’ motion to dismiss to the extent it relied upon the safe
harbor.
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E. Liabilities under the Securities Litigation Uniform Standards Act of 1999
E.
Atkinson, MD v. Morgan Asset Mgmt., Inc., 2011 WL 3926376 (6th Cir. Sept. 8, 2011).
In a putative state law class action removed under the Securities Litigation Uniform
Standards Act of 1998 (“SLUSA”), the Sixth Circuit affirmed the denial of plaintiffs’ motion for
remand and dismissal of plaintiffs’ claims. In their suit, plaintiffs asserted various state law
claims related to the decline in value of their Morgan Keegan Select mutual fund shares. On
appeal, plaintiffs alleged that their action fell into the “first Delaware carve-out” preserving class
actions involving the purchase or sale of securities by an issuer from holders because plaintiffs
had entered into contracts with the defendant fund obligating it to redeem their shares. The Sixth
Circuit rejected this argument because plaintiffs failed to allege any misconduct related to the
fund’s redemption obligation. Further, plaintiffs provided no authority for their argument that a
redemption obligation amounted to a “purchase” under the carve-out. The court also rejected
plaintiffs’ argument that all “holder” claims involving fraud were covered by the carve-out.
Finally, the court rejected plaintiffs’ argument that certain of their claims lay beyond SLUSA’s
scope because they did not require proof of an untrue statement or omission of a material fact, as
plaintiffs could not avoid SLUSA’s application through artful pleading. Accordingly, the Sixth
Circuit affirmed the denial of plaintiffs’ motion for remand and the dismissal of their suit as
precluded by SLUSA.
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E.
Brown v. Calamos, 2011 WL 5505375 (7th Cir. Nov. 10, 2011).
In a putative class action brought by common shareholders alleging that company
officials breached their fiduciary duties and were unjustly enriched by causing the redemption of
certain preferred shares in a manner that unfairly benefited preferred shareholders, the trial court
dismissed plaintiffs’ complaint, holding that the action was preempted by Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”), and the Seventh Circuit affirmed. At the trial court
level, plaintiffs alleged that the preferred shares issued by the company provided favorable
returns to preferred shareholders and benefited common shareholders by providing favorable
investment financing to the company which afforded common shareholders the benefit of
leveraged investing that was not subject to any maturity date. Plaintiffs alleged that defendants
caused the company to redeem the preferred shares and replace them with less advantageous
financing. They asserted that this breached defendants’ fiduciary duties to the common
shareholders and alleged that defendants were motivated by an economic interest in maintaining
their relationships with the investment banks and brokers who initially sold the preferred shares
to investors. The plaintiffs argued that alleged misrepresentations were not at the heart of their
claim, although they did not dispute that the action met the other elements of SLUSA coverage.
The trial court held that substance must triumph over form and found that Plaintiffs’ attempts
within their complaint to expressly characterize their claims as not arising from a
misrepresentation or omission and to argue that these were merely “background facts” were
unavailing because the heart of plaintiffs’ claims was based on the misrepresentation that the
preferred shares were “perpetual” and on omissions as to the defendants’ alleged conflicts of
interest. The Seventh Circuit went further, reasoning that SLUSA requires dismissal if the
complaint’s allegations merely make it “likely that an issue of fraud will arise in the course of
the litigation.” The Seventh Circuit also found that dismissal under SLUSA must be with
prejudice, reasoning that otherwise issues of misrepresentation could be revived during the
course of state court litigation at a point so far down the road that removal and dismissal
pursuant to SLUSA at that time would be impracticable. In so holding, the Seventh Circuit also
rejected the view of the Ninth Circuit that a dismissal under SLUSA can be averted by amending
the complaint so as to delete an allegation that might be seen to inject fraud into the case.
Stoody-Broser v. Bank of Am., 2011 WL 2181364 (9th Cir. June 6, 2011).
The Ninth Circuit affirmed the district court’s order dismissing plaintiff’s class action
complaint, but remanded for leave to amend. The court held that the essence of plaintiff’s
complaint was a fraudulent scheme of self-dealing in connection with an investment in
proprietary mutual funds, which was precluded under the Securities Litigation Uniform
Standards Act of 1998. However, the court held that amendment would not necessarily be futile
and, thus, reversed the district court’s denial of leave to amend.
E.
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E.
Backus v. Conn. Cmty. Bank, N.A., 2011 WL 2183984 (D. Conn. March 30, 2011).
In a consolidated state law action that was removed to federal court, the district court
denied plaintiffs’ motion for remand and granted defendant’s motion for judgment on the
pleadings because plaintiffs’ claims were precluded by the Securities Litigation Uniform
Standards Act of 1998 (“SLUSA”). Plaintiffs were a group of at least 51 customers of a
nationally chartered bank that had invested plaintiffs’ assets in the Madoff Ponzi scheme.
Plaintiffs brought various state law claims alleging that the bank had breached custodian
agreements and fiduciary duties owed to plaintiffs by misrepresenting that plaintiffs’ assets were
safe and fairly valued. Plaintiffs first argued that the action was not a “covered class action”
because sixteen of the plaintiffs had invested through four profit sharing plans and SLUSA’s
“entity exception” applied. The court rejected this argument because the sixteen members had
sued in their individual capacities and the four profit sharing plans were not plaintiffs in the
action. Relying on the plain language of the statute and Congressional intent that SLUSA should
apply broadly, the court further held that plaintiffs’ consent to consolidation was not required
under SLUSA for their claims to be precluded. Next, the court found that the “in connection
with” requirement was satisfied because plaintiffs’ relationship with the bank clearly
contemplated investments in covered securities and the bank’s alleged facilitation of the Madoff
Ponzi scheme sufficiently coincided with the purchase of covered securities. The court further
rejected plaintiffs’ argument that their claims did not involve “covered securities” because the
purported purchase and sale of covered securities through Madoff’s entities was an integral part
of the alleged misconduct. Finally, the court found that plaintiffs’ breach of contract and
negligence claims were based on the same alleged misconduct as plaintiffs’ fraud-based claims.
Accordingly, the court denied plaintiffs’ motion for remand and dismissed their all of their state
law claims as precluded by SLUSA.
Backus v. Conn. Cmty. Bank, N.A., 2011 WL 2119240 (D. Conn. May 27, 2011).
After the district court had dismissed plaintiffs’ state law class action as precluded by the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), the district court denied
defendant’s motion to permanently enjoin plaintiffs from filing individual actions in state court.
The court noted that SLUSA does not preempt any state law cause of action and its prior order
never barred plaintiffs from filing individual actions in state court. The court held that the filing
of individual actions is precisely what Congress intended by enacting SLUSA. Since none of the
pending state court actions sought damages on behalf of more than 50 persons, the court found
its order dismissing plaintiffs’ class action was not implicated. Finally, the court rejected
defendant’s argument that the individual state law actions were vexatious or harassing because
both parties would face the same costs and difficulties and plaintiffs’ counsel had notified
defendant that it intended to file the individual actions shortly after the court’s ruling but
defendant never objected. Accordingly, the court denied defendant’s motion for a permanent
injunction.
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In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).
In a state law class action that was removed to federal court, the district court granted
defendants’ motion to dismiss plaintiffs’ state law claims as precluded by the Securities
Litigation Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs brought various state law
claims against their investment advisors, an asset management consultant, an accounting firm,
and associated individuals seeking to recover losses incurred as a result of “feeder funds’”
investments in the Madoff ponzi scheme. In determining that plaintiffs’ state law claims were
precluded, the court relied upon the decision in In re Beacon Associates Litig., 745 F.Supp. 2d
386 (S.D.N.Y. 2010), where Judge Leonard Sand had dismissed similar state law claims
involving the Madoff ponzi scheme as precluded by SLUSA. The court added that the
preclusion of plaintiffs’ state law claims was unrelated to the viability of their federal securities
laws claims against certain defendants. While state law claims for breach of contract and
negligence against the accountant defendants were not precluded by SLUSA, the court declined
to exercise supplemental jurisdiction over these claims and dismissed them as well.
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 307 (S.D.N.Y. 2011).
This case was an adversary action brought by Irving Picard (“Picard”), the bankruptcy
trustee for Bernard L. Madoff (“Madoff”) and Bernard L. Madoff Investment Securities, LLC
(“BMIS”), against J.P. Morgan Chase & Co. and numerous related entities (collectively, “JPM”)
in bankruptcy court alleging various common law and clawback causes of action for the putative
benefits of BMIS investors. The district court granted JPM’s motion to withdraw the bankruptcy
reference because it determined that the case raised issues of first impression under federal law
including, inter alia, whether Picard’s common law claims were preempted by the Securities
Litigation Uniform Standards Act of 1998 (“SLUSA”). It is mandatory to withdraw a
bankruptcy reference under § 157(d) when the case will require a bankruptcy court to interpret,
not merely apply, a federal law outside of Title 11. The issue at hand was whether the
underlying case was a “covered class action” under SLUSA. This question turned on whether
Picard, as the Trusteee, was a single entity not established for the purpose of participating in the
action or whether he was acting in a representative capacity respecting the interests of the many
investors in BMIS. The court first acknowledged that the issue had not yet been addressed by
the Second Circuit. The court then reasoned that “because the Trustee’s common-law claims are
on behalf of BMIS customers, and not the BMIS estate, determining whether the Trustee’s action
is preempted by SLUSA requires substantial interpretation of federal non-bankruptcy law” and,
therefore, held that the bankruptcy reference was subject to mandatory withdrawal.
In re Kingate Mgmt. Ltd. Litig., 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011).
In an action arising from the Madoff Ponzi scheme brought by classes of investors in two
feeder funds, the district court dismissed all of plaintiffs’ state law claims pursuant to the
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Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In finding that the state law
claims were “covered” claims under SLUSA, the court reasoned that the Supreme Court’s
holding in Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (2010) – that §10(b) of the
1934 Act was not intended by Congress to regulate extraterritorial conduct – did not bar the
application of SLUSA to a class action in a court of the United States, regardless of where
plaintiffs made their investment. Plaintiffs’ argument that they invested in foreign funds, and not
“covered securities,” was equally unavailing. The court concurred with the majority of district
courts within the Second Circuit which have considered this issue, and found that SLUSA only
requires that the claims be “in connection with covered securities” and that the conduct at issue
arising from plaintiffs’ intended purchase and sale of securities by the Madoff fund satisfied this
standard.
Grund v. Delaware Charter Guar. & Trust Co., 2011 WL 2118754 (S.D.N.Y. May 26, 2011).
In a consolidated putative state law class action brought on behalf of IRA investors who
directed investments in a fund which proved to be a Ponzi scheme, the district court denied
defendant’s motion to dismiss plaintiffs’ claims as precluded by the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged that defendant breached its
fiduciary duties to plaintiffs by improperly delegating control of plaintiffs’ accounts. The court
found that plaintiffs’ claims did not allege any misrepresentation or omission of material fact in
connection with the purchase or sale of any covered security. The court also found that fraud
was not a necessary component of any of plaintiffs’ claims. Additionally, the investment at issue
was an intermediate fund, not a covered security. Accordingly, the court found that SLUSA
preclusion was not warranted and denied defendant’s motion to dismiss.
Brecher v. Citigroup Inc., 797 F.Supp.2d 354 (S.D.N.Y. 2011).
In a class action alleging securities fraud and various state law claims brought on behalf
of employees, the district court granted defendants’ motion to dismiss, in part, because plaintiffs’
state law claims were precluded by the Securities Litigation Uniform Standards Act of 1998
(“SLUSA”). Plaintiffs alleged that the defendant company and its board of directors
misrepresented and omitted material information in selling and managing securities purchased by
plaintiffs through the company’s Voluntary Financial Advisor Capital Accumulation Program.
Plaintiffs alleged that they were “prevented from learning” about the defendant company’s
exposure to subprime risk and misled by overly optimistic and false projections about overall
performance. The court dismissed plaintiffs’ federal securities fraud claims as time-barred and
for failure to state a claim. The court then dismissed plaintiffs’ state law claims as precluded by
SLUSA. Plaintiffs argued that SLUSA preclusion only applied when a state law claim is
“coterminous with a federal securities fraud claim.” The court disagreed, citing Second Circuit
precedent precluding claims brought under the same state law statute upon which plaintiffs relied
for their claims. Accordingly, the district court granted defendants’ motion to dismiss.
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E.
In re Refco Inc. Sec. Litig., 2011 WL 4035819 (S.D.N.Y. Sept. 6, 2011).
The special master recommended that defendants’ motion to dismiss plaintiffs’ claims as
precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) should be
denied. As liquidators of a family of hedge funds and trustees of a trust formed for purposes of
litigation, plaintiffs sought to recover cash that the hedge funds had diverted from customer
accounts to offshore accounts, where the assets were ultimately lost in the Refco scandal. While
plaintiffs were not entitled to be treated as a single “entity” because their trust was formed solely
for litigation, the special master concluded that the action was not a “covered class action”
because it did not seek damages on behalf of more than 50 persons. The special master rejected
defendants’ argument that the number of plaintiffs should be aggregated with plaintiffs in a
related action because the claims in the two cases were not sufficiently related to warrant
grouping. The special master also concluded that, although the hedge fund shares at issue were
not “covered securities,” the claims did involve “covered securities” as they related to the Refco
LBO and IPO. Nevertheless, the special master held that claims based on unauthorized transfers
of cash did not satisfy the “in connection with” requirement because the alleged wrongdoing did
not coincide with the Refco LBO and IPO. Accordingly, the special master found that SLUSA
preclusion was inappropriate and recommended that defendants’ motion to dismiss should be
denied.
In re Merkin and BDO Seidman Sec. Litig., 2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011).
The district court dismissed plaintiffs’ class action alleging state law claims arising out of
investments in three hedge funds that invested in Madoff’s Ponzi scheme as precluded by the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The court rejected plaintiffs’
argument that their claims did not involve “covered securities” because they had purchased
shares in hedge funds. The court held that it was sufficient that the alleged fraud coincided with
the hedge funds’ subsequent purchases of covered securities. Accordingly, the court dismissed
plaintiffs’ state law claims as precluded by SLUSA and denied plaintiffs’ leave to replead as
futile.
In re Herald, Primeo, and Thema Sec. Litig., 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).
The district court dismissed all three foreign plaintiffs’ class actions brought under New
York State common law as prohibited under the Securities Litigation Uniform Standards Act of
1998 (“SLUSA”). The named plaintiffs in each of the three class actions were foreign citizens
who purported to represent other foreign citizens who had invested in foreign investment funds
which had, in turn, invested the plaintiffs’ money in the notorious Ponzi scheme perpetrated by
Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (collectively, “Madoff”).
Their complaints included claims brought against Bank of New York (“BNY”) and various JP
Morgan entities (collectively, “JPM”), alleging that BNY and JPM, as Madoff’s bankers, had
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willfully ignored numerous red flags that should have made them aware of numerous
improprieties committed by Madoff, thereby aiding and abetting Madoff’s Ponzi scheme.
Plaintiffs conceded that they were bringing covered class actions under state law, but asserted
that because Madoff never actually purchased any securities, their claims did not involve
“covered securities” and denied that the fourth prong of SLUSA was met because their complaint
did not allege any misrepresentations or omissions by the defendants. The court held that it was
sufficient that Madoff represented its trading strategy to involve covered securities and it was not
necessary that the securities transactions actually transpired. The court also held that plaintiffs’
allegations that BNY and JPM knew or should have known of Madoff’s fraud and failed to
disclose that to plaintiffs was sufficient to fall squarely within the ambit of SLUSA, even if fraud
was not an essential element of the claims. The court also rejected plaintiffs’ argument that
SLUSA did not apply on the basis that federal securities claims are limited to securities
transactions that take place within the United States, holding that the application of SLUSA
depended only on whether it was brought in a state or federal court in the United States.
In re Mutual Funds Inv. Litig., 767 F. Supp. 2d 542 (D. Md. 2011).
The district court, overseeing a multi-district litigation (“MDL”), considered defendants’
motion to administratively close and terminate an action originally brought in Illinois state court
on behalf of investors who claimed that their mutual fund advisors had charged excessive fees.
The underlying case, Kircher v. Putnam Funds Trust, had been the subject of numerous removal
and remand proceedings in Illinois, as plaintiffs attempted to avoid removal and preclusion under
the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). Most recently, the Illinois
appellate court found that plaintiffs’ action was covered by SLUSA and mandated that the
Illinois circuit court dismiss the case. After the Illinois circuit court dismissed plaintiffs’ action
with prejudice, plaintiffs moved to modify the order so that dismissal would be without prejudice
and for leave to file an amended complaint. In the meantime, defendants removed the action to
federal court in Illinois and plaintiffs again moved to remand. While those motions were
pending, the MDL panel transferred the case to the federal court in Maryland to be considered as
part of the ongoing Mutual Funds MDL. The court first rejected plaintiffs’ argument that
defendants’ most recent removal was improper because it was untimely. The court noted that
defendants’ notice of removal appeared to be timely because SLUSA’s 30-day window for
removal did not begin to run until plaintiffs’ time to appeal the Illinois appellate court’s decision
had expired and the Illinois appellate court issued a mandate enforcing its decision. The court
found, however, that plaintiffs had waived any objection they might have had to any procedural
defect with the removal because plaintiffs had actively engaged for the last six months in
settlement negotiations in the Mutual Funds MDL. Finally, the court rejected plaintiffs’
argument that they could amend their complaint to state a negligence claim that would not be
precluded by SLUSA because plaintiffs “market timing” claims essentially alleged that
defendants misrepresented the value of securities sold or consideration received in return to the
detriment of shareholders. Accordingly, the court granted defendants’ motion and closed the
action.
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Broyles v. Cantor Fitzgerald & Co., 2011 WL 4737197 (M.D. La. Sept. 14, 2011).
In a state law class action that was removed to federal court, the magistrate judge
recommended that plaintiff’s motion to remand the action to state court should be denied. The
named plaintiff sought damages on behalf of a class of investors who had purchased defendants’
investment funds and suffered damages resulting from various allegedly wrongful investment
transactions related to “troubled” mortgage-backed securities held by the funds and the sale of
those assets to form a collateralized debt obligation (“CDO”). The magistrate judge found that
plaintiff’s claims sufficiently coincided with the purchase or sale of covered securities because
he had alleged that he liquidated his retirement portfolio of covered securities due to
misrepresentations that the investment funds would hold conservative securities similar to those
he sold. Thus, plaintiff had specifically asserted a claim based on misrepresentations in
connection with the sale of covered securities and the Securities Litigation Uniform Standards
Act of 1998 (“SLUSA”) applied. The magistrate judge rejected plaintiff’s argument that these
allegations were personal to him and that his sale of his retirement portfolio was not the crux of
the class’s claims against defendants. The magistrate judge noted that plaintiff had included the
allegations about his retirement portfolio in a section of his complaint entitled “Allegations
Applicable to All Claims For Relief” and that as a class representative his claims should fairly
represent those of the purported class. The magistrate judge further found that the sale of
plaintiff’s investment portfolio was “the beginning of a chain of events that ma[de] up the
plaintiff’s claim” and, thus, it was germane to his overall claims against defendants.
Accordingly, the magistrate judge found that SLUSA preclusion was appropriate and
recommended that plaintiffs motion to remand should be denied.
Richek v. Bank of Am., 2011 WL 3421512 (N.D. Ill. Aug. 4, 2011).
Plaintiff’s claims which arose from alleged non-disclosure of fees charged by the
defendant bank to customers whose cash balances were automatically “swept” on a daily basis
into certain customer-selected investment vehicles were held to be precluded by the Securities
Litigation Uniform Standards Act of 1998 (“SLUSA”). Plaintiff alleged that defendant had
undisclosed fee arrangements with various money market mutual funds and other mutual fund
investment vehicles on its “approved list” from which plaintiff and similarly situated customers
could select investments for daily cash “sweeps.” These sweep fees were alleged to be as much
as .35 or .45 percent of the average daily cash balance swept from plaintiff’s account. Plaintiff
alleged that these fees were being charged for a number of years beginning as early as 1985 and
that he first learned of the sweep fees on June 30, 2009, when defendant wrote to inform him that
it was eliminating the fees. Plaintiff did not dispute that the action was a “covered class action,”
that it was based on state law, or that the securities in question were “covered securities” under
SLUSA. Instead, plaintiff argued that any purchase or sale of covered securities was
“incidental” to the alleged misrepresentations and omissions of fact in the complaint. Plaintiff
argued that this did not meet SLUSA’s requirement that defendant misrepresented or omitted a
material fact “in connection with” the purchase or sale of a covered security. However, the court
found that the “essence” of the complaint was alleged misrepresentations and omissions of
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material facts “relating to” the transfer of trust assets into mutual funds which constituted a
purchase and sale of securities. Accordingly, the court held that the case fell within the ambit of
SLUSA and dismissed the complaint.
Bourienne v. Calamos, 2011 WL 3421559 (N.D. Ill. Aug. 4, 2011).
In a putative state law class action brought on behalf of Calamos Convertible
Opportunities and Income Fund common shareholders, the district court granted defendants’
motion to dismiss various state law claims as precluded by the Securities Litigation Uniform
Standards Act of 1998 (“SLUSA”). In their complaint, plaintiffs alleged that the Fund had
redeemed and replaced certain preferred shares to the detriment of common shareholders.
Plaintiffs argued that their claims were not precluded by SLUSA because they did not allege that
“any statements attributed to any of the defendants were false.” Nevertheless, the court found
that the premise of plaintiffs’ complaint was that defendants misled common shareholders by
falsely representing that the financing provided by the replaced preferred shares would exist into
perpetuity. The complaint also alleged undisclosed conflicts of interest driving defendants’
decision to redeem the preferred shares. Accordingly, the court concluded that SLUSA
preclusion was appropriate and granted defendants’ motion to dismiss.
Jorling v. Anthem, 2011 WL 6755157 (S.D. Ind. Dec. 23, 2011).
Plaintiffs’ attempt to sustain a class action on behalf of all persons who received shares of
stock instead of cash as part of the defendant insurance company’s demutualization process
failed to survive summary judgment on the basis of preemption under the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”). In granting defendant’s motion for summary
judgment, the court found only two other cases that addressed similar issues and relied on the
Eighth Circuit’s holding in Sofonia v. Principal Life Ins. Co., 465 F.3d 873 (2006). In Sofonia,
the Eighth Circuit held that although the mutual interests surrendered by plaintiffs were not
covered securities, the stock they received in exchange for those interests clearly were covered
securities. Moreover, plaintiffs’ claim that defendants made false or deceptive statements in the
information provided to policy holders prior to their vote on accepting the plan was an “integral
step in the exchange of mutual interests for stock” and, therefore, satisfied the SLUSA
requirement that there be fraud in connection with the purchase or sale of covered securities.
The court also distinguished the holding in In re MetLife Demutualization Litig., 2006 WL
2524196 (E.D.N.Y. Aug. 28, 2006). The MetLife court found that SLUSA did not preclude the
action because it fell within the Delaware Carve-Out. That case included a step in the
demutualization process whereby policyholders were given common stock, which was then
traded for either cash, policy credits, or shares of the trust holding the stock of the defendant.
The Metlife court viewed this extra step as establishing plaintiffs as “holders of equity securities”
and reasoned that the Delaware Carve-Out applies to claims which arise from an issuer’s offering
of securities to its existing equity security holders. However, because the court found that this
extra step was absent from the Anthem demutualization, it held that the Delaware Carve-Out was
inapplicable, embracing the reasoning of the district court in Sofonia. Sofonia v. Principal Life
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Ins. Co., 378 F.Supp.2d 1124, 1133 (S.D. Iowa 2005). The court also rejected plaintiffs’
argument that their failure to expressly plead a material misrepresentation or omission rendered
SLUSA inapplicable, reasoning that to hold otherwise would be to elevate form over substance,
allowing plaintiffs to evade SLUSA through artful pleading.
Hanson v. Morgan Stanley Smith Barney, LLC, 762 F. Supp. 2d 1201 (C.D. Cal. 2011).
The district court dismissed a putative state law class action on behalf of defendant’s
employees and their immediate family members as precluded under the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged defendant misrepresented its
obligations under securities industry rules related to its policy that required employees to
maintain personal investment accounts with the defendant brokerage firm, as well as “postage
and handling” fees charged in connection therewith. Plaintiffs argued that SLUSA did not apply
because they had not alleged that defendant made any material misrepresentations “in connection
with” the purchase or sale of a security and their state law claims did not require proof of any
misrepresentation. The court held that, in essence, plaintiffs alleged misrepresentations that
coincided with the purchase or sale of covered securities in their personal investment accounts
and plaintiffs could not circumvent SLUSA preclusion through artful pleading. Accordingly, the
court granted defendant’s motion to dismiss but granted plaintiffs leave to amend.
West Va. Laborers Trust Fund v. STEC Inc., 2011 WL 6156945 (C.D. Cal. Oct. 7, 2011).
The district court granted plaintiffs’ motion to remand their action alleging violations of
the 1933 Act, finding that the Securities Litigation Uniform Standards Act of 1998 did not
provide a right to remove covered class actions that were not based upon state law. In reaching
this conclusion - which was the antithesis of that reached by the court in Northumberland Cty.
Retirement Sys. v. GMX Resources, Inc., 2011 WL 5578963 (W.D. Okla. Nov. 16, 2011) – the
California Central District Court reasoned that the statutory language of subsection (c) providing
that “any covered class action” was removable to federal court, “as set forth in subsection (b),”
and “shall be subject to subsection (b)” meant that the right to removal was limited to those
actions precluded entirely under the language of subsection (b). This approach which first read
subsection (c) and then read subsection (b) as limiting its scope is in stark contrast to the
approach taken by the Oklahoma Western District Court, which read subsection (b) as merely
setting forth actions that were wholly precluded and then reading subsection (c) as providing a
basis for removal that was independent of the limited grounds for preclusion set forth in
subsection (b). In reaching this conclusion, the court relied on the dicta in Kircher v. Putnam
Funds Trust, 547 U.S. 633, 643-44 (2006), as well as the Ninth Circuit’s holdings in Luther v.
Countrywide Home Loans Serv. LP, 533 F.3d 1031, 1033 (9th Cir. 2008) and Madden v. Cowen
& Co., 576 F.3d 957, 965 (9th Cir. 2009).
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E.
Northstar Fin. Advisors, Inc. v. Schwab Invs., 781 F. Supp. 2d 926 (N.D. Cal. 2011).
In a putative state law class action brought on behalf of investors in the Schwab Total
Bond Market Fund (the “Fund”), the district court granted in part and denied in part defendants’
motion to dismiss plaintiffs’ state law claims as precluded by the Securities Litigation Uniform
Standards Act of 1998 (“SLUSA”). Plaintiffs asserted various state law claims alleging that
defendants’ deviated from the Fund’s investment objective to track the Lehman Brothers U.S.
Aggregate Bond Index (the “Index”) by investing in high risk non-U.S. agency collateralized
mortgage obligations (“CMOs”) and over-concentrating the Fund’s assets in mortgage-backed
securities and CMOs. The court rejected plaintiffs’ argument that it did not allege
misrepresentations because all of plaintiffs’ claims were based on alleged reliance on the Fund’s
fundamental investment objectives and harm as a result of defendants’ alleged failure to follow
stated investment objectives. Thus, the gravamen of plaintiffs’ complaint alleged
misrepresentations for purposes of SLUSA preclusion. The court also found that the “in
connection with” requirement was met because plaintiffs’ claims coincided with the purchase or
sale of covered securities on the Index. Finally, the court found that SLUSA’s “Delaware Carve
Out” saved plaintiffs’ breach of fiduciary duty claim to the extent the claim was based on the law
of Massachusetts, where the Fund was organized. Accordingly, the court dismissed all of
plaintiffs’ claims precluded by SLUSA except for its breach of fiduciary duty claim and granted
leave to amend.
Tuttle v. Sky Bell Asset Mgmt., LLC, 2011 WL 208060 (N.D. Cal. Jan. 21, 2011).
The district court held that plaintiffs’ state law claims were not preempted under the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), but found jurisdiction under
the Class Action Fairness Act and denied plaintiffs’ motion to remand. Plaintiffs had amended
their original complaint to remove allegations of fraud and defendants argued that plaintiffs had
changed the language, but not the substance of their claims. The court held that plaintiffs’ state
law claims were not “predicated” upon a misrepresentation in connection with a securities
transaction and references to misrepresentations or omissions were simply “extraneous details.”
Accordingly, SLUSA did not apply. However, the court denied plaintiffs’ motion to remand
pursuant to the Class Action Fairness Act, but granted leave to amend.
Smit v. Charles Schwab & Co., 2011 WL 846697 (N.D. Cal. Mar. 8, 2011).
In a putative state law class action brought on behalf of Schwab Total Bond Fund
investors, the district court granted defendants’ motion to dismiss plaintiffs’ claims as precluded
by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged that
their investments declined in value because the fund deviated from its stated objective of
tracking the Lehman Brothers U.S. Aggregate Bond Index (the “Index”) by investing in high risk
non-U.S. agency Collateralized Mortgage Obligations (“CMOs”) and over-concentrating its
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holdings in mortgage backed securities and CMOs. Plaintiffs had previously amended their
complaint in an attempt to avoid references to any alleged misrepresentations by defendants.
Nevertheless, the court found that plaintiffs’ amended complaint still alleged that defendants
“did not keep their word” about how the fund would be managed and that plaintiff suffered
losses as a result. The court also rejected plaintiffs’ argument that their claims were not barred
by SLUSA because they were not “in connection with the purchase or sale of a covered security”
because plaintiffs’ allegations centered around defendants’ alleged deviation from the Index and,
thus, plaintiffs’ allegations sufficiently “coincided” with the purchase or sale of covered
securities. Accordingly, the court granted defendants’ motion to dismiss but allowed plaintiffs
leave to amend their complaint in order to state a claim based on an alleged violation of §§ 13(a)
and 48(a) of the Investment Company Act for deviating from the investment objective of the
Fund without a shareholder vote – a claim the court found could be stated without implicating
SLUSA.
Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).
The district court held that plaintiffs’ proposed class action on behalf of victims of an
alleged Ponzi scheme was precluded by the Securities Litigation Uniform Standards Act of 1998
(“SLUSA”). Plaintiffs alleged that defendant brokerage firm knew that a non-party actor
misappropriated funds that plaintiffs believed were being used to purchase securities. The court
rejected plaintiffs’ argument that SLUSA did not apply because some of the securities at issue
were not “covered securities.” The court also held that the “in connection with” requirement was
satisfied because defendant was alleged to have actively participated in misleading plaintiffs to
give their funds to the non-party actor, who plaintiffs believed would use their funds to purchase
covered securities. The court rejected plaintiffs’ argument that the alleged misrepresentations
were only tangential or extraneous to a fraudulent securities transaction because plaintiffs
themselves alleged that their losses resulted directly from what they believed to be legitimate
transactions involving covered securities. The court distinguished the securities purchase
agreements at issue from a mere pledge of a security as collateral, which the Ninth Circuit had
held did not satisfy the “in connection with” requirement. The court also held that SLUSA
applied to plaintiffs’ aiding and abetting claims even though § 10(b) of the 1934 Act does not
permit a private right of action against secondary actors. Accordingly, the court dismissed
plaintiffs’ claims as precluded by SLUSA but granted leave to amend.
West Palm Beach Police Pension Fund v. Cardionet, Inc., 2011 WL 1099815 (S.D. Cal. Mar. 24,
2011).
The district court granted plaintiff’s motion to remand a federal securities class action to
state court pursuant to the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).
Plaintiff alleged that defendants’ registration statements and prospectuses for an IPO and
secondary offering contained false and misleading statements and omissions in violation of the
1933 Act. The court concluded that because plaintiff’s action was brought in state court alleging
only federal claims under the Securities Act of 1933 and no claims under state law, it was not
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precluded or removable under SLUSA. Accordingly, the district court remanded the case to state
court.
Good v. DeLange, 2011 WL 6888649 (S.D. Cal. Nov. 29, 2011).
In a federal court class action, the district court granted defendants’ motion to stay all
discovery in three concurrent state court class actions during the pendency of defendants’ notyet-filed
motions to dismiss, pursuant to the Securities Litigation Uniform Standards Act of 1998
(“SLUSA”). Defendants’ motion was opposed only by the state court plaintiffs, who argued that
the motion should be denied because there was an applicable exemption to SLUSA’s stay
provision, there was little risk of the federal court plaintiff obtaining state court discovery, the
federal and state claims did not overlap, and defendants would not be burdened if required to
respond to state court discover requests. The court rejected all four bases of the state plaintiffs’
arguments. First, the court held that the “Savings Clause” or “Delaware Carve-Out” exemption
was only applicable to removability, which issue was not before the court. Second, the court
held that although protective orders barred the federal plaintiff from direct access to state court
discovery, it did not preclude the federal court plaintiff from obtaining the fruits of that discovery
through public channels, such as state court motion practice or amendments to the state court
complaints. Third, the court found that although the state court actions were based only on
alleged breaches of fiduciary duty, the federal and state claims overlapped because they were
based on nearly identical factual allegations. Finally, the likelihood of wasted judicial resources
and inefficiency resulting from potential litigation of discovery disputes in multiple fora also
weighed in favor of the stay.
Mandelbaum v. Fiserv, Inc., 2011 WL 1225549 (D. Colo. Mar. 29, 2011).
In an action arising from the Madoff Ponzi scheme, a putative class of holders of selfdirected
IRAs complained that the IRA administrators, as fiduciaries/trustees of the IRAs,
breached their duties to safeguard the IRA funds and to avoid commingling the IRA funds with
other assets. The district court held that plaintiffs’ state law claims were barred under the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The court noted that plaintiffs
made all investment decisions for the IRA accounts at issue and, pursuant to plaintiffs’ express
instructions, defendants sent plaintiffs’ funds to Bernard L. Madoff Investment Securities LLC
for investment in securities. The court found that plaintiffs’ argument that their claims were not
in connection with the purchase or sale of securities simply because their account statements
falsely reported that plaintiffs’ funds were held in cash and treasuries was without merit. The
court held that all that was necessary was that plaintiffs submitted their funds with the
understanding that they would be used to purchase securities. Further, relying on numerous
precedential cases, the court held that plaintiffs’ argument that any fraud was committed by a
third party and not by defendants was unavailing. The court reasoned that where defendants’
alleged conduct is connected to a fraud tied to the purported purchase and sale of securities, the
claims are within the ambit of SLUSA. The fact that plaintiffs’ allegations against defendants
did not include the words “misrepresentations” or “omissions” was of no moment. The court
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found that such pleading tactics used in an attempt to evade the reach of SLUSA were
unavailing. The court further held that that SLUSA is not a preemption statute, but rather, “it
denies plaintiffs the right to use the class-action device to vindicate certain claims.”
Northumberland Cty. Ret. Sys. v. GMX Resources, Inc., 2011 WL 5578963 (W.D. Okla. Nov. 16,
2011).
The district court denied plaintiffs’ motion to remand their action alleging violations of
the Securities Act of 1933 because it found that the Securities Litigation Uniform Standards Act
of 1998 (“SLUSA”) conferred a right to remove the action. Plaintiffs argued that SLUSA’s §
77p(b) restriction on class actions applies only to state law claims and that the removal rights
conferred by § 77p(c) had to be read together with subsection (b) and, therefore, actions based on
Federal law could not be removed. The court disagreed, reasoning that while subsection (b)
prohibited a covered class action based upon state law being brought in either a state or federal
forum, the express language of subsection (c) providing that “any covered class action” was
removable to Federal court stood on its own. The court acknowledged a clear division of
authority among courts which had considered the issue. Interestingly, it noted that both parties
in the case and courts on both sides of the issue cited to Supreme Court dicta in Kircher v.
Putnam Funds Trust, 547 U.S. 633 (2006). Accordingly, the court looked to the legislative
history and found that Congress had an overarching goal of making the federal courts the
“exclusive venue” for the overwhelming preponderance of securities class actions. Viewing the
literal language of the statute together with the legislative history, the court concluded that
securities class actions were removable to federal court, regardless of whether they alleged
violations of state or federal law.
RGH Liquidating Trust v. Deloitte & Touche LLP, 955 N.E.2d 329 (N.Y. 2011).
In an action brought by a Chapter 11 bankruptcy liquidating trust, the New York Court of
Appeals reversed the lower court’s decision dismissing the action as precluded by the Securities
Litigation Uniform Standards Act of 1998 (“SLUSA”). The trust had brought the action on
behalf of the bankrupt company’s creditors and bondholders alleging that the defendant
accounting firm had committed fraud in connection with various accounting and actuarial
services rendered. In the lower court, defendant moved to dismiss, arguing in part that the trust’s
claims on behalf of bondholders were precluded by SLUSA. The trial court found that the trust
was a single entity within the meaning of SLUSA because it was formed for broader purposes
than bringing the fraud claims at issue and denied defendant’s motion to dismiss in that regard.
The appellate court disagreed, finding that the trust’s claims originally belonged to the individual
bondholders, were not being asserted on behalf of the bankruptcy’s estate and, thus, SLUSA
applied. The Court of Appeals disagreed with the appellate court and found that the trust was
one person within the meaning of SLUSA because the trust was the debtor’s successor. The
Court of Appeals relied upon legislative history to find that SLUSA was not intended to prevent
entities “duly authorized by law ... to seek damages on behalf of another person or entity.” Since
the trust was not formed only for the purpose of bringing the fraud claim or to otherwise
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circumvent SLUSA, the Court of Appeals reversed the appellate court’s decision as to the
preclusion of the bondholder’s claims and reinstated the decision of the trial court.
Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789 (Cal. Ct. App. 2011).
The California appellate court reversed the trial court’s holding that plaintiff’s claims
were precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) and held
that the state trial court had concurrent jurisdiction over investors’ claims asserted under the
1933 Act. The trial court had found that although the Securities Act of 1933, as amended under
SLUSA, generally provides for concurrent state and federal jurisdiction, SLUSA expressly
provides an exception with respect to “covered class actions.” The appellate court held that this
exception was not broad enough to include all “covered class actions” and, instead, only applies
to covered class actions that involved misrepresentations, omissions, or deceptive devices or
contrivances in connection with the purchase or sale of a “covered security.” Here, plaintiff’s
claims concerned mortgage-backed securities that were not traded nationally and listed on a
regulated national exchange and, thus, were not covered securities. In reaching its conclusion
the California appellate court rejected the reasoning in Knox v. Agria Corp., 613 F. Supp. 2d 419
(S.D. N.Y. 2009), that SLUSA exempted all covered class actions from concurrent jurisdiction,
while distinguishing the Knox holding as a case involving covered securities.
E.
F. Liabilities under State Statutory and Common Law
1. Blue Sky Laws
F.1
Ashland, Inc. v. Oppenheimer & Co. Inc., 648 F.3d 461 (6th Cir. 2011).
Plaintiff purchased auction rate securities (“ARS”) and student-loan-backed ARS
(“SLARS”) from defendant, a securities broker-dealer that brokered ARS and SLARS. When
the ARS and SLARS market collapsed in early February 2008, plaintiff held $194 million in
illiquid SLARS. Plaintiff sued defendant in the Eastern District of Kentucky asserting numerous
claims including violation of Kentucky Blue Sky Laws. Plaintiff claimed that defendant knew
about the ARS collapse and withheld material information. The district court dismissed the
claims and plaintiff appealed. The Sixth Circuit affirmed, stating that because the Kentucky
Blue Sky Law provision claimed by plaintiff is nearly identical to its federal counterpart, Rule
10b-5 promulgated under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must
allege the same elements as under Rule 10b-5. The court found that many of defendant’s
supposed misstatements and omissions were not actionable because they lacked materiality or
because there was no duty to disclose them. The court held that in this instance there was no
duty to disclose the incentives the defendant provided to its employees and that the correlation
between ARS’ credit ratings and low penalty rates is public information. As to plaintiff’s crucial
claim, that defendant withheld vital market factors relating to underwriters abandoning the ARS
market, the court held that there were no facts showing why or how defendant possessed
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advanced, non-public knowledge that underwriters would leave the ARS market and cause its
collapse.
Anwar v. Fairfield Greenwich Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).
Plaintiffs opened accounts with a broker-dealer firm that was later acquired by defendant.
Defendant recommended that plaintiffs invest in a feeder fund that in turn invested in Bernard L
Madoff Investor Securities, a now well-known Ponzi scheme. Plaintiffs filed suit against
defendant claiming fraud under the Florida securities statutes. The court found that the elements
for a cause of action for fraud under the Florida securities statutes are identical to those under
Section 10(b) of the Securities Exchange Act of 1934, except that the scienter requirement under
Florida law is satisfied by a showing of negligence. The court held that plaintiffs’ state fraud
claim, under the Florida securities statutes, should be dismissed for a number of reasons. First,
plaintiffs did not allege where misstatements were made or when all misstatements occurred;
second, plaintiffs failed to show what defendant obtained from the fraud; and third, plaintiffs
failed to show that defendant acted with the requisite state of mind, which requires conscious
misbehavior or recklessness. Additionally, plaintiffs did not show the buyer-seller privity
required by the Florida securities statutes.
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)
Fulton Bank (“Fulton”) brought an action against UBS Securities (“UBS”) for violation
of sections 1-401 and 1-403 of the Pennsylvania Securities Act. Fulton held institutional
investment accounts with two broker-dealers, PNC and NatCity. Using these accounts, Fulton
purchased Auction Rate Securities (“ARS”) at an auction managed by UBS. In its complaint,
Fulton stated that UBS was Fulton’s broker-dealer and improperly misled Fulton by placing
support bids that artificially inflated the value of ARS. Fulton also alleged that had it known
about the instability of the ARS market, or been told that UBS supported the auctions despite
insufficient investor demand, it would not have continued investing in ARS. The court granted
UBS’ motion to dismiss and barred Fulton’s claim under section 1-401 because the facts as
alleged failed to satisfy any element of the offense. The court also found that UBS had not
conducted any market manipulation in violation section 1-402. In order to violate section 1-402,
a party must employ “intentional and willful conduct designed to deceive or defraud investors by
controlling or artificially affecting the price of securities.” Here, the court did not find any
conduct which satisfied the elements of section 1-402.
Fishman v. Morgan Keegan & Co., 2011 WL 4853367 (E.D. La. Oct. 13, 2011).
Defendant, a registered securities broker-dealer, was a major participant in the market for
Auction Rate Securities (“ARS”). In 2005, at the direction of plaintiffs, an institutional customer
F.1
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of defendant purchased ARS bonds from defendant and distributed the ARS bonds to plaintiffs’
accounts. In 2006 the Securities and Exchange Commission (SEC) reported that it had settled an
investigation into fifteen firms, including defendant, who were participants in the ARS market.
As part of the settlement, defendant posted disclosures on its public website containing
information regarding its practices. The disclosures included statements that defendant could bid
for its own accounts to prevent auction failures, but that investors should not assume that
defendant would bid or that failed auctions would not occur. The ARS market collapsed in 2008
and in 2010 plaintiffs filed a suit alleging various claims, including violations of Louisiana Blue
Sky Law. The court held that loss causation is an essential element of fraud under Louisiana
Blue Sky Law and that plaintiffs failed to establish loss causation. The court found that even
accepting that defendant materially misrepresented or omitted the truth regarding the liquidity
risks of ARS or defendant’s participation in the ARS auctions, the corrected disclosures required
by the SEC order occurred before the plaintiffs’ economic losses occurred in 2008. Additionally,
the court found that any alleged misrepresentations or omission regarding the ARS bonds could
have been discovered by the institutional investor who purchased the ARS bonds for plaintiffs.
Because fraud under Louisiana Blue Sky Law limits recovery where reasonable care would
reveal the untruth or omission, the court held that plaintiffs could not recover.
Perfecting Church v. Royster, Carberry, Goldman & Assocs., Inc., 2011 WL 4407439 (E.D.
Mich. Sept. 22, 2011).
Plaintiff filed a complaint claiming that defendants, a financial services company and
some of its employees, violated section 451.810 of the Michigan Uniform Securities Act
(MUSA). In 2007 and 2008, defendant claimed to be a financial services company that
specialized in commodity futures contracts. Plaintiff collectively invested $504,171.04 with the
defendants. In November 2008, plaintiff sought to recover its investment and interest accrued,
but defendants were unable to repay. Plaintiff filed a motion for partial summary judgment
arguing that the defendants violated section 451.810(a) of MUSA, which creates a cause of
action against those who either (1) transact business as a broker-dealer or agent without
registering as such, or (2) offers to sell a security that is not registered, exempted, or covered by
federal securities law. The court ruled that although the company was liable for conducting the
transaction, certain employees were not because plaintiff did not buy the securities from those
employees. Plaintiff also claimed that defendants violated section 451.810(b), which extends
liability for the sale of unregistered securities to “[e]very person who directly or indirectly
controls a [liable] seller.” The court agreed and recognized numerous facts which revealed that
the employees named by the plaintiff were in control of the financial services company.
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D. Mich. Feb. 28, 2011).
Plaintiffs filed a complaint against the stock broker and investment advisor (“Broker”)
who solicited them into investing in telecommunication companies that never existed. Plaintiffs
also named the securities broker-dealers that employed Broker as a registered representative.
F.1
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One of the broker-dealer defendants (“BD”) filed a motion to dismiss the claims filed against it
by plaintiff, including plaintiff’s claims that BD violated the Michigan Uniform Securities Act
(“MUSA”) by selling unregistered securities and selling securities by means of an untrue
statement or omission of a material fact. The court held that BD was not a statutory seller
subject to MUSA liability because BD did not urge the sale of the securities or actively
participate in the solicitation.
Louisiana-Pacific Corp. v. Money Market 1 Institutional Investment Dealer, 2011 WL 1152568
(N.D. Cal. 2011).
Louisiana Pacific Corporation (“LP”) brought an action against Deutsche Bank Securities
Inc. (“DBSI”) and Money Market 1 Institutional Investment Dealer (“MM1”) for violation of the
California Corporate Securities Law of 1968 (the “Code”), §§ 25500 and 25501. These sections
of the Code prohibit misrepresentation and market manipulation in the sale of securities. In its
complaint, LP alleged that DBSI, in its capacity as sole broker-dealer, placed support bids on
Auction Rate Securities (“ARS”), which artificially inflated their value. In addition, LP claimed
that MM1, in its capacity as LP’s financial advisor and broker-dealer, made representations that
ARS were highly liquid and safe cash equivalents that posed virtually no risk of principal loss.
In reliance on MM1’s advice, LP invested more than $300 million of its working capital in ARS.
The court dismissed LP’s claim because (1) LP failed to allege strict contractual privity in the
purchase of the subject securities, and (2) the facts alleged did not establish scienter under
California law.
Gibbons v. Nat’l Real Estate Investors, LC, 2011 WL 1086364 (D. Utah Mar. 23, 2011).
Defendant, an individual, was the manager and 50% owner of a limited liability company
that invested in various real estate projects. Defendant sold plaintiffs a total 15% interest in the
LLC for $1.1 million. Plaintiffs brought suit against defendant under Utah Code Ann. Section
61-1-22(1)(b) for violation of Utah Uniform Securities Act. Specifically, plaintiffs alleged that
defendant violated Utah Code Ann. Sections 61-1-3(1) and 61-1-7 by acting as a broker-dealer
without the proper license and selling unregistered securities. The court found that defendant
was never licensed as a broker-dealer, that under Utah law a security includes an interest in a
limited liability company (notwithstanding certain exceptions), and that the securities sold by
defendant were never registered and did not fit into any exception. The court granted plaintiffs’
motion for summary judgment on the Utah Securities Act claims. Additionally, the court found
that the defendant knew and intentionally sold interests in the limited liability company, which
made his conduct intentional and reckless, and the court awarded plaintiffs treble damages under
Utah Code. Ann. Section 61-1-22(2).
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2. Consumer Protection and Other Statutes
F.2
No cases decided in 2011.
3. Common Law Fraud
F.3
Ashland, Inc. v. Oppenheimer & Co. Inc., 648 F.3d 461 (6th Cir. 2011).).
Plaintiff purchased auction rate securities (“ARS”) and student-loan-backed ARS
(“SLARS”) from defendant, a securities broker-dealer that brokered ARS and SLARS. When
the ARS and SLARS market collapsed in early February 2008, plaintiff held $194 million in
illiquid SLARS. Plaintiff sued defendant in the Eastern District of Kentucky asserting numerous
claims including common law fraud. Plaintiff claimed that defendant knew about the ARS
collapse and withheld material information. The district court dismissed the claims and plaintiff
appealed. The Sixth Circuit affirmed, holding that although common law fraud claims do not
need to meet the heightened pleading requirements of the Private Securities Litigation Reform
Act, such claims must still fulfill Federal Rule of Civil Procedure 9(b)’s particularity
requirements and there were no facts showing that defendant acted with recklessness or knowing
and deliberate intent to manipulate, deceive or defraud.
In re Kingate Mgmt. Limited Litigation, 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011)
Plaintiffs filed an Amended Consolidated Class Action Complaint against defendants
asserting common law claims for fraud, negligent misrepresentation, gross negligence,
negligence, breach of fiduciary duty, constructive fraud, third-party beneficiary breach of
contract, mutual mistake, aiding and abetting breach of fiduciary duty, aiding and abetting fraud,
and unjust enrichment. Plaintiffs alleged that defendants, both of which were investment funds,
acted as “feeder funds” by channeling capital into Bernie Madoff’s fraudulent operations.
Defendants filed a motion to dismiss asserting that the state law claims presented by the
plaintiffs were pre-empted under federal law. The court opined that under the Securities
Litigation Uniform Standard Act (“SLUSA”), each of the state claims presented in the class
action suit must be dismissed. Under SLUSA, covered class actions, based on the statutory or
common law of state or subdivision, may not be maintained in any state or federal court by a
private party that alleges (1) an untrue statement or omission of material fact in connection with
the purchase or sale of a covered security, or (2) that defendant used or employed any
manipulative or deceptive device or contrivance in connection with the purchase or sale of a
covered security.
F.3
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F.3
Berman v. Morgan Keegan & Co., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).
Using proceeds from the sale of stock, plaintiffs acquired floating rate notes with a
market value of approximately $8.3 million. Under section 1042 of the Internal Revenue Code,
the plaintiffs could defer capital gains tax on the sale of the stock as long as they did not sell the
replacement property, the floating rate notes. The plaintiffs participated in a 90% loan program,
which was run by two affiliated companies (the “Companies”). The Companies claimed that the
90% loan program would allow the plaintiffs to pledge their floating rate notes as loan collateral
and in return receive 90% of the collateral value in cash without selling the replacement property
and triggering the tax consequences. Instead of holding the collateral, the Companies
immediately sold the collateral upon receipt. The Companies had an account with defendant, a
securities broker-dealer. The collateral was deposited into the Companies’ account with
defendant, and the Companies instructed the defendant to direct a trader to sell the pledged
collateral. The defendant then wired the sale proceeds to the Companies’ bank account. The
Internal Revenue Service informed plaintiffs that because the replacement property was sold,
plaintiffs did not qualify for the deferred capital gains tax and were liable for taxes and penalties.
Plaintiffs alleged that defendant aided and abetted the Companies’ common law fraud. The court
found that plaintiffs pleaded the underlying fraud with the requisite particularity, but that
plaintiffs failed to plead facts with the requisite particularity to support their claim that defendant
had actual knowledge of the underlying fraud. Defendant did not know, nor was it responsible
for knowing how the 90% loan program was marketed to customers. Additionally, the “Know
Your Customer Rules” refer to what broker-dealers should know, but do not reflect actual
knowledge required for aiding and abetting fraud.
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)
Fulton Bank (“Fulton”) brought a claim against UBS Securities (“UBS”) for (1) common
law fraud, and (2) aiding and abetting common law fraud. Fulton held institutional investment
accounts with two broker-dealers, PNC and NatCity. Using these accounts, Fulton purchased
Auction Rate Securities (“ARS”) at an auction managed by UBS. In its complaint, Fulton stated
that UBS was Fulton’s broker-dealer and improperly misled them by placing support bids that
artificially inflated the value of ARS. Fulton also alleged that had it known about the instability
of the ARS market, or been told that UBS supported the auctions despite insufficient investor
demand, it would not have continued investing in ARS. The court granted UBS’ motion to
dismiss. With respect to the common law fraud claim, the court concluded that the complaint did
not allege facts sufficient to establish that (1) UBS had a duty to disclose, (2) Fulton justifiably
relied on UBS’s omissions, or (3) UBS acted with scienter. In addition, the court found that
there was no allegation that UBS knew of any fraud being perpetuated by PNC or NatCity. The
only role UBS played in this transaction was running an auction at the request of issuers and
paying commissions to brokers, neither of which constituted aiding and abetting.
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F.3
Borsellino v. Putnam, 2011 WL 6090694 (Ill. App. 1st Dist. Dec. 2, 2011).
Plaintiff and defendant were business associates whose companies were members of an
Illinois limited liability company (the “LLC”). One of the companies owned by the defendant
was a broker-dealer that specialized in options trading. Plaintiff filed a derivative suit on behalf
of the LLC claiming that defendant and its respective companies used the LLC’s resources to
create a competing company run by defendant. Defendant’s broker-dealer was allegedly tasked
with providing broker-dealer services to this new company. Shortly after the suit was filed, the
parties entered a Settlement Agreement and Mutual Release (the “Release”). The Release
provided that plaintiff would not bring any claims against defendant in exchange for a payment
of $250,000. Soon after the Release was executed, plaintiff filed suit alleging that numerous
misrepresentations were made during the parties’ settlement negotiations. Plaintiff claimed that
he was entitled to monetary damages due to fraud committed by defendant. The court explained
that fraud in the inducement of a contract renders the contract void. Although the perpetrator of
the fraud cannot enforce it, the innocent party may either (1) rescind the contract, or (2) choose
to waive the defect, ratify the contract, and enforce it. However, under the facts of this case, the
court found that plaintiff ratified the Release even after learning of the alleged fraud. The court
explained that plaintiff’s retention of payment after discovering the fraudulent nature of the
release, and statements that he remained bound by the Release, were sufficient to uphold its
enforcement. Therefore, the language barring plaintiff from bringing claims against defendant
was upheld and the plaintiff’s claim was dismissed.
4. Breach of Fiduciary Duty and Other Common Law Claims
F.4
Anwar v. Fairfield Greenwich Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).
Plaintiffs opened accounts with a broker-dealer firm that was later acquired by defendant.
Defendant recommended that plaintiffs invest in a feeder fund that in turn invested in Bernard L
Madoff Investor Securities, a now well-known Ponzi scheme. Plaintiffs filed suit against
defendant claiming, among other things, breach of fiduciary duty and negligent
misrepresentation. The breach of fiduciary duty claim was based on two separate theories:
(1) that the defendant failed to conduct due diligence prior to recommending the feeder fund and
(2) that defendant failed to monitor plaintiffs’ investments in the feeder fund. The court held that
defendant owed only a limited set of duties to plaintiffs because plaintiffs held nondiscretionary
accounts with defendant, but that even nondiscretionary broker-dealers have a duty to become
sufficiently informed before recommending investments. Because the lawsuit was part of
multidistrict litigation (“MDL”) the court looked to the fiduciary duty claims in defendant’s
other lawsuits. In another case against defendant the plaintiffs’ cause of action for breach of
fiduciary duty, similarly pled, defeated dismissal. In order to ensure uniformity among the
rulings in the MDL, the court held that plaintiffs sufficiently stated causes of action for breach of
fiduciary duty. The negligent misrepresentation claim was dismissed as being essentially
identical to plaintiffs’ fraud claim under Florida securities laws.
227

F.4
Berman v. Morgan Keegan & Co., Inc., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).
Using proceeds from the sale of stock, plaintiffs acquired floating rate notes with a
market value of approximately $8.3 million. Under section 1042 of the Internal Revenue Code,
the plaintiffs could defer capital gains tax on the sale of the stock as long as they did not sell the
replacement property, the floating rate notes. The plaintiffs participated in a 90% loan program,
which was run by two affiliated companies (the “Companies”). The Companies claimed that the
90% loan program would allow the plaintiffs to pledge their floating rate notes as loan collateral
and in return receive 90% of the collateral value in cash without selling the replacement property
and triggering the tax consequences. Instead of holding the collateral, the Companies
immediately sold the collateral upon receipt. The Companies had an account with defendant, a
securities broker-dealer. The collateral was deposited into the Companies’ account with
defendant, and the Companies instructed the defendant to direct a trader to sell the pledged
collateral. The defendant then wired the sale proceeds to the Companies’ bank account. The
Internal Revenue Service informed plaintiffs that because the replacement property was sold,
plaintiffs did not qualify for the deferred capital gains tax and were liable for taxes and penalties.
Plaintiffs alleged that defendant aided and abetted the Companies’ breach of fiduciary duty.
Under New York law, a claim for aiding and abetting a breach of fiduciary duty requires: (1) a
breach by a fiduciary of obligation to another, (2) that the defendant knowingly induced or
participated in the breach, and (3) that plaintiff suffered damage as a result of the breach. The
court found that plaintiffs failed to show that defendant had actual knowledge of the breach.
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)
Fulton Bank (“Fulton”) brought a claim against UBS Securities (“UBS”) for breach of
fiduciary duty. Fulton held institutional investment accounts with two broker-dealers, PNC and
NatCity. Using these accounts, Fulton purchased Auction Rate Securities (“ARS”) at an auction
managed by UBS. In its complaint, Fulton stated that UBS was Fulton’s broker-dealer and
improperly misled them by placing support bids that artificially inflated the value of ARS.
Fulton also alleged that had it known about the instability of the ARS market, or been told that
UBS supported the auctions despite insufficient investor demand, it would not have continued
investing in ARS. The court dismissed and found that UBS did not breach any fiduciary duty
because “no such relationship developed between UBS and Fulton.” In order to prove that a
breach of fiduciary duty occurred, a party must show confidence reposed by one side and
domination and influence exercised by another. The court emphasized that it is not enough to
show that plaintiff reposed its trust in defendant. Instead, defendant must have accepted the
fiduciary relationship. Here, the court explained that Fulton’s interaction with UBS was solely
through its retail brokers. This indirect relationship was not enough to create any fiduciary duty.
F.4
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F.4
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D. Mich. Feb. 28, 2011).
Plaintiffs filed a complaint against the stock broker and investment advisor (“Broker”)
who solicited them into investing in telecommunication companies that never existed. Plaintiffs
also named the securities broker-dealers that employed Broker as a registered representative.
One of the broker-dealer defendants (“BD”) filed a motion to dismiss the numerous claims filed
against it by plaintiff, including plaintiff’s common law causes of action against BD, which
consisted of: failure to supervise Broker, respondeat superior, apparent authority, negligence,
unjust enrichment, and breach of fiduciary duty. The court found that although failure to
supervise, respondeat superior, apparent authority, and negligence were stated as being grounded
in negligence, the claims were rooted in fraud. Because the court found that plaintiffs’ federal
fraud claims did not meet the heightened pleading standards, the court held that the plaintiffs’
common law claims rooted in fraud were also dismissed. The court held that the breach of
fiduciary duty claim must be dismissed because plaintiffs failed to show that the accounts
allegedly held by BD were discretionary. Under Michigan law, a fiduciary relationship only
arises between a broker and his client where the account is discretionary. The unjust enrichment
claim also failed because plaintiff did not establish: (1) the receipt of a benefit to BD from
plaintiff and (2) an equity resulting to plaintiff because of the retention of the benefit by BD.
Louisiana-Pacific Corp. v. Money Market 1 Institutional Investment Dealer, 2011 WL 1152568
(N.D. Cal. 2011).
Louisiana Pacific Corporation (“LP”) brought an action against Deutsche Bank Securities
Inc. (“DBSI”) for common law fraud, and against Money Market 1 Institutional Investment
Dealer (“MM1”) for common law fraud, common law negligent misrepresentation, and common
law breach of fiduciary duty. In its complaint, LP alleged that DBSI, in its capacity as sole
broker-dealer, placed support bids on Auction Rate Securities (“ARS”), which artificially
inflated their value. In addition, LP claimed that MM1, in its capacity as LP’s financial advisor
and broker-dealer, made representations that ARS were highly liquid and safe cash equivalents
that posed virtually no risk of principal loss. In reliance on MM1’s advice, LP invested more
than $300 million of its working capital in ARS. To successfully present a claim of common law
fraud under California law, a party must prove (1) misrepresentation, either false representation,
concealment, or nondisclosure; (2) knowledge of the falsity; (3) intent to defraud; (4) justifiable
reliance; and (5) resulting damage. Here, the court dismissed LP’s common law fraud claim
because it failed to establish scienter and justifiable reliance.
F.4
229

G. Liabilities Involving Clearing Brokers
G.
Katz v. Pershing, LLC, 2011 U.S. Dist. LEXIS 94107 (D. Mass. Aug. 23, 2011).
Plaintiff investor, on behalf of herself and those similarly situated, brought suit against
defendant clearing broker alleging its use of a proprietary software program made investor’s
non-public personal information (NPPI) vulnerable to unauthorized access by third parties.
Plaintiff alleged violations of Massachusetts Unfair and Deceptive Trade Practices Act, Mass.
Gen. Laws ch. 93A; various other state unfair trade practices statutes, including Chapter 93H;
breach of express and implied contract; negligent breach of contract; and unjust enrichment. The
court found that plaintiff failed to establish statutory standing under Massachusetts Unfair and
Deceptive Trade Practices Act, as she alleged only potential, not actual misappropriation of
NPPI and thus failed to show any injury-in-fact. This divested the court of subject matter
jurisdiction. The court also found that Chapter 93H does not include a private right of action and
may be enforced only by the State Attorney General. Plaintiff did not have standing as a thirdparty
beneficiary of the contract between the introducing firm and defendant clearing broker, as
the contract expressly stated that it was not intended to confer any benefits on third parties,
including customers. Plaintiff’s implied-in-fact contract claims also failed, as defendant was
already required to safeguard NPPI pursuant to its contract with the introducing broker, and any
alleged promise to plaintiff to do the same was thus not valid consideration. Finding no express
or implied contract existed, the court dismissed plaintiff’s negligent breach of contract claim.
Finally, plaintiff’s unjust enrichment claim was dismissed because she failed to allege that
defendant requested, or that plaintiff conferred, any benefit on the defendant. Defendant’s
motions for lack of subject matter jurisdiction and failure to state a claim were thus granted.
Alki Partners, L.P. v. Vatas Holdings GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).
Plaintiffs, hedge funds, brought suit against various defendants alleging defendants
created and carried out a market-manipulation scheme to inflate the price of a stock. The stock
was traded on the over-the-counter bulletin board (“OTCBB”). The stock collapsed, causing
plaintiffs to sustain large losses. Plaintiffs alleged that one defendant, a limited liability
company, purposely avoided acquiring shares of the stock on the open market by instructing
others to purchase large blocks of shares of the stock with the understanding that the company,
through institutions in Europe, including a co-defendant investment bank, would thereafter
repurchase the shares in an off-market transaction on a delivery-versus-payment (“DVP”) basis.
To conduct a DVP trade, plaintiffs had their clearing broker deliver the shares to the investment
bank which would pay the clearing broker for the shares upon their receipt. Defendants brought
motions to dismiss for failure to state a claim. The court found that plaintiffs could not claim
their damages were caused by reliance on the assumption of an efficient market, as OTCBB had
never been held as such. The court held that the complaint failed to sufficiently allege scienter
with regard to the investment bank and its broker since the only profit these defendants received
were the normal transaction costs, which courts have held insufficient to establish motive. The
court found plaintiffs’ failure to allege scienter also caused their Section 10(b) claim, under the
Securities Exchange Act of 1934, based on misstatement or omission, to fail. The court also held
G.
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that the complaint failed to allege that these defendants acted recklessly. Furthermore, plaintiffs’
claim for control person liability under Section 20(a) of the Exchange Act failed as the plaintiffs
failed to plead a primary violation by any person named in the complaint. The court declined to
exercise supplemental jurisdiction over the remaining claims, all of which were Washington state
law and common law claims. Finding any amendment would be futile, the court granted
defendants’ motions to dismiss, dismissing plaintiffs’ federal claims with prejudice.
Litchfield Capital, LLC v. BNY Clearing Services LLC, 2011 U.S. Dist. LEXIS 120207
(S.D.N.Y. Oct. 14, 2011).
Plaintiff, an investment advisory firm, brought suit against defendant bank and a clearing
broker, alleging breach of contract and various tort claims arising from the firm’s transfer of
$5 million worth of cash or bonds into an account established at the bank by a broker-dealer.
When the firm instructed the bank to transfer the contents of the account to another firm, the
bank notified the broker-dealer. When the broker-dealer refused to authorize any transfers from
the account, the bank refused to follow the firm’s directive. The bank brought a motion for
summary judgment alleging that the relationship between the firm and broker-dealer was illegal
and, thus, the firm was not entitled to judicial recourse. Specifically, the bank alleged that the
broker-dealer was seeking a subordinated loan to help it address its regulatory “net capital” needs
under Rule 15(c)(3)-1 of the Securities Exchange Act of 1934. Although the firm denied that the
relationship was as the bank had alleged, it provided no alternative explanation of the
relationship nor did it explain why the broker-dealer filed forms with the NASD consistent with
such a relationship. The court found that the agreement between the firm and the bank was
unenforceable as a matter of public policy, as enforcing it would permit the parties to commit a
fraud on the NASD. The court therefore refused to enforce any agreement between the firm and
the bank and thereby dismissed the firm’s breach of contract claim. The court also dismissed the
firm’s tort claims finding they were duplicative of its breach of contract claims. Accordingly,
the court granted the bank’s motion for summary judgment.
Javitch v. Prudential Sec. Inc., 2011 U.S. Dist. LEXIS 6925 (N.D. Ohio Jan. 25, 2011).
Plaintiff, a court-appointed receiver of two entities that had been controlled by a common
principal, brought suit against defendant clearing broker for conduct related to brokerage
accounts that the principal had entered into in his individual capacity. Upon opening the
accounts, the principal signed the introducing broker’s new account agreement. The agreement
contained an arbitration clause expressly providing that defendant clearing broker was a thirdparty
beneficiary to the agreement, and that the arbitration provision applied to “all matters”
between the principal and defendant clearing broker. Plaintiff argued that the arbitration
provision was void, because it was executed after the court had appointed a receiver for the
entities. The court dismissed this argument because when the agreement was executed the
receiver did not yet have authority over the accounts opened by the principal in his individual
capacity, and defendant clearing broker had no notice of the receivership state. The court
pointed out that the clearing broker performed only recordkeeping and ministerial functions and
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had no direct contact with the principal. The court found plaintiff receiver equitably estopped
from avoiding the arbitration provisions found in the agreement. Although plaintiff receiver was
not a signatory to this agreement, he was nonetheless bound to its provisions because the claims
he asserted against the clearing broker would not have existed but for the agreement between the
principal and the introducing broker. The receiver was thus seeking a direct benefit from the
relationship created by the agreement. The court refused to allow plaintiff receiver to
simultaneously assert claims arising from the agreement while avoiding the arbitration
provisions contained therein. Defendant’s motion to compel arbitration was granted.
Prestwick Capital Mgmt. Ltd. v. Peregerine Fin. Group, Inc., 2011 U.S. Dist. LEXIS 95324
(N.D. Ill. Aug. 25, 2011).
Plaintiff investment advisory firm brought suit for commodities fraud under the
Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq. against an introducing broker and
certain of its principals. Plaintiffs alleged that the introducing broker engaged in unauthorized
trading in an account opened with a clearing firm resulting in losses of roughly $4 million. The
firm also sought to hold the clearing firm liable for the introducing broker’s alleged fraud by
virtue of a guarantee agreement between the clearing firm and the introducing broker. The
clearing firm moved for summary judgment arguing that the guarantee agreement was not
effective at the time of the introducing broker’s fraudulent activities. The court applied contract
interpretation principals and found that at the time the introducing broker engaged in the fraud
the guarantee agreement between the clearing firm and the introducing broker had terminated
and no new agreement had been put in its place. The court also noted that the Commodity
Futures Trading Commission has promulgated regulations designed to address the problem of
judgment-proof introducing brokers in that introducing brokers are required to meet certain net
capitalization requirements unless they have a guarantee agreement with a futures commission
merchant such as the defendant. The court rejected plaintiff’s assertion of equitable estoppel as
plaintiff failed to make clear precisely when any alleged misrepresentation was made. Although
plaintiff requested it be allowed to take additional discovery pursuant to Federal Rule of Civil
Procedure 56(d)(2), the court found that such discovery would be futile and granted the
introducing broker’s motion for summary judgment.
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2011 N.Y. App. Div. LEXIS 8829 (N.Y. App. Div.
Dec. 13, 2011).
Plaintiffs, an introducing broker and its clearing firm, brought suit against defendant
insurance company for breach of contract in a declaration that defendant had a duty to indemnify
plaintiffs for a disgorgement payment that plaintiffs made pursuant to a settlement with the
Securities and Exchange Commission. The insurance program at issue obligated defendant to
indemnify plaintiffs for all “loss which the insured shall become legally obligated to pay as a
result of any claim . . . for any wrongful act.” Defendant filed a motion to dismiss arguing the
payment was not an insurable loss or was excluded from coverage. The trial court denied
defendant’s motion to dismiss. On appeal, the court found that under New York law the risk of
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eing directed to return improperly acquired funds is not insurable and, thus, disgorgement of illgotten
gains or restitution damages does not constitute an insurable loss. As the SEC order
illustrated how plaintiff’s trading desk actively collaborated with its clients to execute an illegal
late trading and market timing scheme, the court rejected plaintiff’s arguments that it was merely
found guilty of inadequate supervision and failure to place adequate controls on its electronic
entry system. The court also rejected plaintiff’s arguments that the fact that the SEC did not
itemize how it reached the disgorgement figure raised an issued as to whether the disgorgement
payment was in fact compensatory, thus bringing it within the ambit of the insurance program.
The court noted that the amount disgorged must only be a reasonable approximation of profits
causally connected to the violation. Accordingly, the appellate court reversed the trial court’s
order denying defendant’s motion to dismiss.
Brooks v. Transamerica Fin. Advisors, 57 So. 3d 1153 (La. Ct. App. 2011).
Plaintiff customer brought suit against defendant clearing broker alleging defendant paid
unauthorized checks from plaintiff’s brokerage checking account without obtaining proper
identification and approval from plaintiff. Defendant moved for summary judgment claiming it
was entitled to the preclusive effects of Chapter 4 of the Uniform Commercial Code (“U.C.C.”),
codified by Louisiana Revised Statute 10:4-101 et seq., which requires customers to exercise
reasonable promptness in examining the account statements issued to them by a bank, to
determine if any payment was unauthorized, and if so, to promptly notify the bank of the relevant
facts. If the bank proves the customer failed to exercise reasonable care, the customer is
precluded from asserting her unauthorized signatures against the bank. Here, it was undisputed
that the customer did not exercise reasonable care in handling her brokerage account; she failed
to examine account statements for five years and did not notify the clearing broker of alleged
forgeries until she amended her petition to add the clearing broker as a defendant, sixteen months
after filing her initial suit. As such, the case turned on whether the clearing broker was a “bank”
under the U.C.C./Louisiana Revised Statutes. The court noted that the U.C.C. broadly defines
“bank” as a “person engaged in the business of banking.” Here, the clearing broker provided a
checking account as a service to customers who opened a brokerage account with a particular
introducing firm. The clearing broker created the account and administered the checking account
in connection with a bank to which it supplied the customers’ names and account numbers. As
part of its regular business, the clearing broker maintained the checking accounts to allow
customers easy access to, and use of, their funds. The court found that considering the U.C.C.’s
broad definition of “bank” and the U.C.C.’s directive that its provisions be liberally construed,
the clearing broker engaged in the business of banking and was therefore entitled to the
protections of Louisiana Revised Statute 10:4-406. Defendant’s motion for summary judgment
was granted.
G.
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Howard Family Charitable Found., Inc. v. Trimble, 259 P.3d 850 (Okla. Civ. App. 2011).
Plaintiffs, investors in a hedge fund, brought suit against a Futures Commission Merchant which
acted as a clearing broker for the hedge fund’s principal and manager. The clearing broker
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provided clearing and execution services for accounts opened with it by the fund’s principal and
manager, and provided them software allowing them to execute trades. Plaintiffs brought suit
under the Oklahoma Uniform Securities Act of 2004, specifically Oklahoma Statute
Section 1-509(G), which imposes joint and several liability “to the same extent” as those liable
for conducting an unlawful sale of securities, and those who materially aid “in the conduct giving
rise to a liability.” The issues on appeal relevant to defendant clearing broker’s liability were
whether plaintiffs had a cause of action under the Oklahoma Uniform Securities Act, and
whether the Federal Commodities Exchange Act preempted the Oklahoma state court’s exercise
of jurisdiction. The court found that because plaintiffs’ claims against defendant clearing broker
arose solely from commodity transactions, the Oklahoma Uniform Securities Act was
inapplicable; Congress had placed jurisdiction over private rights of action in violation of federal
commodities regulations solely within the federal district court. As such, plaintiffs’ causes of
action against defendant clearing broker were preempted. As no further amendment of their
petition could cure this jurisdictional defect, defendant’s motion for summary judgment was
granted and plaintiffs’ claims were thereby dismissed as a matter of law.
H. Secondary Liability
1. Respondeat Superior
City of Roseville Employees Ret. Sys. v. Horizon Lines, Inc., 2011 U.S. App. LEXIS 17701 (3d
Cir. June 23, 2011).
Defendants pleaded guilty to price fixing. Plaintiffs sued for losses under the doctrine of
respondeat superior. The district court dismissed the claims, finding an insufficient showing of
scienter. Plaintiffs appealed the district court’s dismissal of securities fraud allegations arising
out of the defendant’s statements that defendant corporation was financially healthy when that
wellbeing was based on price fixing and not other reasons identified. With regard to the
defendant corporation, the district court found plaintiffs did not allege that an individual
defendant made material false statements on behalf of the corporation that were relied upon by
plaintiffs, and acted with scienter. The appellate court agreed with the district court’s reasoning
that securities fraud allegations require heightened pleading, including alleging a strong
inference that the defendant acted with scienter. The district court found no strong inference of
the requisite state of mind as to the senior executives, and therefore the defendant corporation’s
scienter could not be based on an individual’s scienter. While plaintiffs argued that scienter
could be attributed to the defendant corporation without pleading a successful claim against an
underlying individual, the district and appellate courts disagreed. The appellate court determined
that the facts as alleged would not survive a motion to dismiss even if no individual was needed.
The dissent believed the plaintiffs alleged sufficient facts to show an inference that defendant
senior executives acted with scienter. The defendant also noted that the Seventh Circuit has
approved the doctrine of respondeat superior in determining whether an individual defendant’s
scienter could be attributable to the corporate defendant and did not interpret Congress’
heightened pleadings requirement as a bar against pleading corporate scienter in the absence of
establishing a named executive officer’s scienter.
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H.1
U.S. v. Reyes, 660 F.3d 454 (9th Cir. 2011).
Appellant, chief executive officer of a corporation, appealed from a conviction for
securities fraud, making false filings to the Securities and Exchange Commission, falsifying
corporate books and records, and making false statements to auditors with regard to backdated
and improperly recorded stock options. Appellant asserted prosecutorial misconduct, which
included a claim that the prosecution’s focus on corporate responsibility and rejection of
proposed jury instructions gave no significance to the legal concept of respondeat superior. The
appellate court found that the lower court did not abuse its discretion because the instructions
provided to the jury made clear that the appellant could not be found guilty simply due to his
position of CEO.
Ledford v. Peeples, 657 F.3d 1222 (11th Cir. 2011).
Appellants related to limited liability company (“LLC 1”) sued appellee-financier for
federal and state securities violations, including alleged violations of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934. LLC 1 specifically alleged it would not
have sold its interest in another company (“LLC 2”) had it known the financier was supplying
financing to the buyers. Financier was sued under the doctrine of respondeat superior for the
board of directors’ fraudulent conduct and breach of fiduciary duty for failure to inform LLC 1
of financier’s intent to provide the buy-out funds. The district court granted summary judgment
to financier, despite financier’s denial of its involvement in the purchase transaction. The
appellate court found that the district court did not abuse its discretion because it found no
evidence that the financier’s denial of involvement in the purchase transaction affected LLC 1’s
decision to sell its interest in the corporation. Thus, the financier could not be held liable under
the doctrine of respondeat superior.
STMicroelectronics v. Credit Suisse Group, 775 F. Supp. 2d 525 (E.D.N.Y. 2011).
Plaintiff alleged control person liability under Section 20(a) of the Securities Exchange
Act of 1934 against defendant, the bank of a non-party subsidiary. Among plaintiff’s claims was
a Section 10(b) allegation, for which the district court determined the plaintiff could not
prosecute under a respondeat superior theory imputing liability directly from the subsidiary’s
registered representatives to the parent company. The district court reasoned that the agents’
misrepresentations were made simultaneously on behalf of the subsidiary and parent company,
and thus both were considered principals. Because plaintiff previously secured an arbitration
award against the subsidiary for misrepresentations made by the registered representatives, the
plaintiff could not now assert the same respondeat superior theory of liability as against the
parent corporation as well.
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H.1
In re Tronox, Inc. Sec. Litig., 769 F. Supp. 2d 202 (S.D.N.Y. 2011).
These federal securities class action suits were brought on behalf of all purchasers of a
corporation’s stock. A wholly-owned subsidiary materially misstated financial results
throughout and following the subsidiary’s initial public offering. Defendants are the original
parent company and the successor in interest to the original parent company. The class sued the
parent company and successor in interest under control person liability arising out of the
misstatements. The successor in interest was also sued under respondeat superior theory for the
original parent company’s primary control person liability. After the class filed their amended
complaint, the defendants (parent and successor company) moved to dismiss certain claims. The
district court noted that an independent corporation may assume the role of a second
corporation’s agent if the facts show such a relationship and found the class alleged sufficient
facts to show the original parent company was acting as the successor’s agent. The court held
that plaintiff’s allegations supported a finding that: (1) the successor consented to the original
parent company’s implementation of the master separation agreement on its behalf; and (2) the
successor controlled and directed the original parent company’s actions. The court found the
successor’s consent in implementing the master separation agreement was plausible based on the
original parent company’s reimbursement obligations and control over the parent company was
shown by alleging the successor’s “deep involvement in implementing the terms of the master
separation agreement.” The original parent company’s motion to dismiss was denied in whole.
The successor in interest’s motion to dismiss was granted in part and denied in part. It was
denied with respect to the respondeat superior claim.
In re Platinum & Palladium Commodities Litig., 2011 U.S. Dist. LEXIS 105040 (S.D.N.Y.
Sept. 13, 2011).
Plaintiffs were a class who sued defendant-advisors for violations of the Commodity
Exchange Act, the Sherman Act, and the Racketeer Influenced and Corrupt Organizations Act.
The class alleged the advisors’ portfolio manager manipulated settlement prices of palladium and
platinum futures contracts. The class sued the advisors for their portfolio manager’s actions on
the basis of respondeat superior. Defendants moved to strike certain allegations in the complaint
and to dismiss the action for failure to state a claim. The court found the respondeat superior
allegation did not fail merely because the class failed to establish advisor’s complete control over
the portfolio manager; it was sufficient that class pleaded that the portfolio manager was “acting
for” the advisors in executing the trades. Defendants’ motion to dismiss the complaint was
granted, with leave to amend.
Puskala v. Koss Corporation, 799 F. Supp.2d 941 (E.D. Wis. July 28, 2011).
Plaintiffs, alleged victims of an embezzlement scheme, brought a claim against the
embezzler, who was the corporation’s Vice President of Finance, as well as the corporation’s
CEO and former accounting firm. Defendants, other than the Vice President of Finance, moved
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to dismiss the complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(6) for failure to
state a claim. Defendant corporation argued it could not be held liable for the Vice President of
Finance’s embezzlement because the embezzlement was outside the scope of his employment.
While the court held that no vicarious liability through respondeat superior could be established
for that reason, the court found vicarious liability through apparent authority could be
established. The court held that because scienter of controlling officers of a corporation may be
attributed to the corporation itself to establish a primary violator under Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934, then the senior officers were acting within
the scope of their apparent authority. The court granted the corporation’s motion to dismiss in
part because the plaintiff-victims failed to plead facts ruling out an inference that the
corporation’s internal controls were reasonably effective, but denied the motion in part with
respect to respondeat superior.
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).
Plaintiffs, a pension trust fund, sued a corporation and four officers for alleged violations
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for false statements of
material fact, as well as violation of Section 20(a) for control person liability. The trust fund
alleged the corporation engaged in “channel stuffing,” or seeking or pressuring its customers to
acquire large quantities of the corporation’s products at the end of a final quarter, so as to
artificially inflate the corporation’s revenues and earnings for a particular quarter. The trust fund
further alleged that the corporation indicated growing revenues to the public while in reality the
company’s revenues were slowing. Eventually the corporation had to disclose the loss.
Defendants moved for dismissal of the complaint. The court noted that liability under
respondeat superior is appropriate in securities fraud cases; however, to establish corporate
liability for a violation of Rule 10b-5 the court would have to find scienter by looking to the state
of mind of the individual corporate officer who made the statements. The court found that the
complaint alleged sufficient facts to support a strong inference of scienter with respect to at least
some of the individual corporate officers and that the requisite showing may be imputed to the
corporation itself. The court granted the motion to dismiss in part by dismissing the Rule 10b-5
claim against two of the four corporate officers. The court denied the remainder of the motion to
dismiss.
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D. Cal. 2011).
Plaintiffs are family enterprises whose real estate investment advisor claimed that he
acted as an independent contractor for the defendant broker-dealer. The plaintiffs alleged he was
an agent of the broker-dealer for purposes of establishing he was a statutory seller and violated
the Securities Act of 1933 and unfair competition laws. The real estate investment advisor was
required by agreement to funnel securities sales exclusively through the broker-dealer, to obtain
authorization from the broker-dealer prior to a sale, and to inform the firm prior to engaging in
outside business. The families alleged that the broker-dealer was vicariously liable for the
advisor’s representations through the doctrine of respondeat superior. Defendants, real estate
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and securities firms and their representatives, moved for summary judgment on all alleged
violations of the Securities Act. The court denied summary judgment, finding that control
person liability may reach beyond respondeat superior liability, which does away with the
distinction between an independent contractor and an agent. However, it found that the claim for
respondeat superior was improper because: (1) a Section 20(a) claim would only be proper for a
control person claim; (2) the advisor had no actual authority from the broker-dealer; and (3) the
facts as to apparent authority remained in dispute, and therefore proper for determination by the
trier of fact. Because the facts did not preclude a finding of vicarious liability based on apparent
authority, the motion for summary judgment was denied.
Hosier v. Citigroup Global Markets, Inc., 2011 U.S. Dist. LEXIS 1446670 (D. Colo. Dec. 21,
2011).
Petitioners petitioned the court to confirm an arbitration award for entry of judgment and
respondent, a broker-dealer, moved to vacate the arbitration award. The petitioners brought an
arbitration action for breach of fiduciary duty, breach of contract, constructive fraud, violation of
FINRA rules, unsuitability, failure to supervise, and respondeat superior, alleging they lost
money in investments they made through the broker-dealer because the risk involved was
misrepresented. The registered representatives were not named in the action. The broker-dealer
alleged the petitioners received and understood the written risk disclosure. The court confirmed
the award issued in favor of the petitioners and denied the broker-dealer’s motion to vacate the
arbitration award.
Cianci v. Sentaurus Fin., 2011 Cal. App. Unpub. LEXIS 3346 (May 5, 2011).
A broker-dealer appealed from an order denying its petition to compel arbitration with
respect to 12 of the plaintiffs and to stay the civil action as to another 11 plaintiffs. The
underlying claims involved the broker-dealer’s failure to supervise one of its registered
representatives who defrauded the plaintiffs. The broker-dealer argued there was no possibility
for a conflicting ruling in a civil action and arbitration and that the plaintiffs in the case should be
distinguished according to their legal relationship to the broker-dealer. The court found that
allowing the registered representatives to use the broker-dealer’s name for purposes of
misleading people was relevant to many of the causes of action, including respondeat superior.
The fact that use of the broker-dealer’s name on the issue of respondeat superior would not
render different results in an arbitration or civil proceeding was not dispositive, thus, there was
no error in denying the motion to compel arbitration.
H.1
H.1
2. Control Person
H.2
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).
Plaintiff representing a class of shareholders filed suit against a corporation and its
wholly-owned subsidiary for violating Section 10(b) and Rule 10b-5 of the Securities Exchange
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Act of 1934 alleging it made false statements in a mutual fund prospectus which affected the
price of the corporation’s stock. Defendants filed a motion to dismiss. The subsidiary was the
investment advisor and administrator for an investment fund. Although the corporation made the
statements at issue, plaintiff sought to hold the subsidiary liable as a control person under
Section 20(a) of the Exchange Act for statements made by the corporation. The court held that
for purposes of Rule 10b-5, the maker of a statement is the person or entity with the ultimate
authority over the statement, including its content and how to communicate it and refused to
expand liability beyond the person or entity that has ultimate authority over a false statement.
Though the court noted that the relationship influence between the subsidiary and the investment
fund resembled the liability imposed by Congress for control, it noted that to find that the
subsidiary was a control person for the purpose of Section 20(a) liability would broaden the
application of Section 20(a). The court declined to do so, and granted the motion to dismiss.
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011).
Plaintiff investors alleged that defendant rating agencies were statutory underwriters
because they helped structure securities transactions to achieve desired ratings and because rating
agencies provided advice and direction to primary actors and violators of the Securities Act of
1933. As such, plaintiff investors alleged that defendant rating agencies were liable for control
person liability under Section 15 of the Securities Act. The defendant rating agencies’ motion to
dismiss was granted. Plaintiff investors appealed. The appellate court held that to qualify as an
underwriter and be liable as a control person, the rating agency must have either participated
directly or indirectly in the purchase of securities with a view toward distribution or participated
in the sale or offer of securities in connection with a distribution. Because defendant rating
agencies’ provision of advice and guidance regarding transaction structures was insufficient to
permit an inference that they had the power to direct the management or policies of alleged
primary violators, the Section 15 control person claims were properly dismissed.
Wyo. State Treasurer v. Moody’s Investors Serv., 2011 Fed. Sec. L. Rep. (CCH) 96,310 (2d
Cir. May 11, 2011).
Plaintiff pension funds brought three separate suits against defendant rating agencies as
underwriters alleging violations of Sections 11 and 15 of the Securities Act of 1933 based on
misstatements or omissions of material facts in securities offering documents. Plaintiffs also
alleged that defendants were liable as control persons because they provided advice and direction
to primary violators regarding transaction structures. The district court dismissed the three
separate complaints. Because all three appeals raised common questions of law, the court
disposed of them in one opinion. The court held that because there was no dispute as to primary
Section 11 violations, the only question was whether the defendants controlled the primary
violators. The court noted that it had previously defined “control” for the purpose of
Section 20(a) of the Securities Exchange Act of 1934 as the power to direct or cause the
direction of the management and policies of the primary violators whether through the ownership
of voting securities by contract or otherwise. The court explained that because Section 15 and
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Section 20(a) are roughly parallel control provisions of the Securities Act and the Securities
Exchange Act of 1934, respectively, it would extend the definition of “control” used with
Section 20(a) to Section 15. The court held that plaintiffs’ allegations of advice, feedback, and
guidance failed to raise a reasonable inference that the rating agencies had the power to direct
rather than to merely inform. The court noted that although Section 20(a) requires an additional
element of “culpable participation,” it did not need to address whether that requirement applied
to Section 15 because plaintiffs failed to plead the undisputed element of control. The appellate
court affirmed the district court’s dismissal of the control person liability claims.
Inter-Local Pension Fund GCC/IBT v. GE, 2011 U.S. App. LEXIS 19271 (2d Cir. Sept. 19,
2011).
Shareholders filed a class action suit against a corporation and its officers alleging
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and control
person liability under Section 20(a). The district court dismissed the claims for failure to state a
claim and plaintiffs appealed. The Second Circuit held that plaintiffs failed to plead facts
creating a strong inference of scienter related to the alleged misstatements of quarterly earning
prospects. Finding that the complaint failed to state an underlying primary securities violation,
the Court of Appeals held that it also failed to state a claim for Section 20(a) control person
liability, thus affirming the district court’s dismissal.
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).
Plaintiff investors brought a class action suit against a corporation and its executives for
securities fraud under Section 10(b) of the Securities Exchange Act of 1934 for allegedly making
false statements regarding the financial health of the corporation. Plaintiffs also alleged
violations of Section 20(a) control person liability by two individuals—the chief executive
officer and chief financial officer. The district court granted defendants’ motion to dismiss the
Section 10(b) claim for failure to meet the heightened pleading standard based on plaintiffs’
failure to plead facts from which scienter is the most plausible inference. The district court
dismissed the Section 20(a) claim stating that plaintiffs failed to allege that the individuals did
not act in good faith. On appeal, the court reversed the district court’s order granting dismissal
holding that the facts pleaded must show only that scienter was at least as plausible as another
non-culpable inferences. Further, the court held that the good faith defense to Section 20(a) is an
affirmative defense and plaintiffs need not plead that defendants acted without it.
SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011).
The Securities and Exchange Commission filed suit against senior officers of a
corporation claiming it unlawfully misrepresented the corporation’s financial condition to meet
the earning and revenue expectations of financial analysts. The district court granted the former
president and CEO’s motion for summary judgment as to the alleged violations of Section 10(b)
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and Rule 10b-5 of the Securities Exchange Act of 1934 and control person liability under
Section 20(a). The SEC appealed the district court’s granting of the officer’s motion for
summary judgment asserting that: (1) there were genuine issues of material fact as to whether
that officer was a control person for purposes of finding liability under Section 20(a); and (2) the
district court erred in ruling that the officer met his burden of establishing a good faith defense of
relying on others. The court found that the indicia of control include whether the person
managed the company on a day-to-day basis and was involved in the formulation of financial
statements. It further held that the actual authority over the preparation and presentation to the
public of financial statements is sufficient to demonstrate control. In this case, the court held that
there was sufficient evidence to create a genuine issue of material fact as to whether the officer
was properly considered a control person because the corporation’s bylaws gave the officer
“general management and control of the business and the officers and the employees.”
Additionally, the court held that the officer did not meet his burden of showing that he was
entitled to a good faith defense. The court held that the use of the good faith defense requires
defendant to demonstrate an absence of scienter and that defendant did not directly or indirectly
induce the act or acts constituting the violation. In this case, evidence of the officer’s scienter
existed, as he engaged in the dissemination of misleading information to the public. As such, the
appellate court reversed the district court’s dismissal and held that there was a genuine issue of
material fact as to whether the officer was a control person under Section 20(a) and further held
that the officer’s good faith defense failed at the summary judgment stage.
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Me. Aug. 4, 2011).
Plaintiff filed suit against a financial company and its directors and officers for fraud
under Maine state laws and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
and control person liability under Section 20(a) based on alleged misstatements and omissions
regarding who would control and invest plaintiff’s assets. Defendants moved to dismiss. The
court found that sufficient facts existed for the Section 10(b) claims to survive the motion to
dismiss. The court then turned to the control person liability issue under Section 20(a). The
court found that the complaint alleged that two individuals were managers and directors who
played an active role and thus was sufficiently pleaded to overcome a motion to dismiss. The
motion to dismiss was denied.
Akamai Techs., Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).
Plaintiff brought suit against a financial institution alleging that its subsidiary had made
inappropriate investments in toxic auction rate securities. Plaintiff asserted that defendant was
liable under Section 20(a) of the Securities Exchange Act of 1934 and Massachusetts General
Laws ch. 110A, § 410(b). Defendant argued that plaintiff’s “control person” liability claims
should be dismissed both for failure to plead facts that support any underlying claim of securities
fraud and for failure to plead facts that support a claim that defendant was a “control person.” In
pointing to the original pleadings, the court held that the plaintiff had adequately shown
defendant’s control over its wholly-owned subsidiary that had made the investments; thus,
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defendant’s challenge of the Section 20(a) claim was premature. The motion to dismiss was
denied.
In re Credit Suisse-AOL, 2011 U.S. Dist. LEXIS 95889 (S.D. Mass. Aug. 26, 2011).
Shareholders filed a consolidated class action suit against a corporation and its officers
and directors based on allegations that defendants intentionally ignored material information
regarding the corporation’s financial future in formulating recommendations to the investing
public in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
Plaintiffs also alleged control person liability under Section 20(a). Defendants moved for
summary judgment. The court found that plaintiffs’ claims of transactional causation and loss
causation for the Section 10(b) and Rule 10b-5 allegations necessarily relied on expert witnesses
and that summary judgment without a full hearing and analysis of Daubert factors would be
inappropriate, thus denying the motion for summary judgment. See Daubert v. Merrell Dow
Pharms., Inc., 509 U.S. 579 (1993). The court further denied the motion for summary judgment
on the control person liability claim reasoning that whether a defendant is a control person is an
intensely factual question.
In re Textron, Inc., 2011 U.S. Dist. LEXIS 103775 (D.R.I. Sept. 13, 2011).
Plaintiff filed a shareholder derivative action on behalf of a corporation against two of the
corporation’s officers and eleven of its thirteen directors. Plaintiff based his claims on a stock
purchase plan that the company’s board of directors approved in a series of allegedly misleading
statements that the corporation’s CEO and CFO made concerning the company’s backlog of
aircraft and helicopter orders, violating Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934. Defendants responded with a motion to dismiss based on the argument
that plaintiff filed the action without first demanding that the company bring the suit itself. The
court, evaluating whether a pre-suit demand would have been futile, assessed plaintiff’s demand
futility argument on the claim that the directors were not disinterested because they faced
substantial likelihood of liability. However, the court held that plaintiff failed to adequately
plead why defendants’ omissions regarding the backlog were actually misleading in anything
other than conclusory terms. As such, the court held that because plaintiff had not pleaded a
viable primary violation under Section 10(b), the Section 20(a) claim against the directors failed
as well.
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, 792 F. Supp.2d 328 (D. Conn. 2011).
Plaintiff filed claims against a broker-dealer and registered investment advisors for
securities fraud under Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange
Act of 1934. One defendant, sued only for control person liability pursuant to Section 20(a),
brought a motion to dismiss. The court found that the plaintiff’s complaint plausibly alleged that
the defendant had the ability to control the alleged primary violators, including the ability to
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exert control over the content of communications. In addition, the court concluded that plaintiff
alleged with the particularity required that the defendant was a culpable participant in the alleged
underlying primary violations. The motion to dismiss was denied.
STMicroelectronics v. Credit Suisse Group, 775 F. Supp. 2d 525 (E.D.N.Y. 2011)
Plaintiff invested in auction-rate securities backed by federally guaranteed student loans
sold by a subsidiary of defendant, a multinational banking institution. On several occasions, the
securities were touted as virtually risk-free and highly liquid. Following plaintiff’s discovery of
the fraud, it brought suit against defendant under Section 20(a) of the Securities Exchange Act of
1934. First, the court held that an investor’s successful arbitration against a financial institution
does not bar a claim for control person liability against it. Second, the court held that plaintiff
sufficiently pleaded control on the part of the defendant to survive defendant’s motion to dismiss
by pleading a mix of substantial stock ownership, shared officers and principals, and at least
some direct involvement by the individuals to survive a motion to dismiss.
Maverick Fund L.D.C. v. Comverse Tech. Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).
Plaintiffs, a group of seven broker-dealers, filed suit after opting out of a class action
against a defendant corporation, its officers, and its compensation/audit committee for violations
of Sections 10(b), 18, and 20(a) of the Securities Exchange Act of 1934. Defendants moved to
dismiss. The court found that plaintiffs adequately pleaded a primary violation of the federal
securities laws by defendant for some of the alleged misstatements, but not all. The court found
that plaintiffs adequately pleaded that the officer defendants were control persons until they left
the company and that they may be held liable as control persons for the fraudulent disclosures
that occurred while they were officers, including material misrepresentations concerning the
company’s financial statements as well as partial disclosures that continued to conceal the nature
and scope of the fraud. Even if the company did not fully disclose the nature and scope of the
fraud until sometime after the officers’ departure from the company or make additional
fraudulent statements that helped conceal the nature and scope of the fraud, that did not excuse
the officer defendants from control person liability for the fraudulent disclosures or omissions
while they were officers. The motion to dismiss was denied.
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).
Plaintiff, a limited partnership, alleged that defendant investment advisors and affiliates
carried out a market manipulation scheme to inflate the price of a corporation’s stock causing it
to sustain a large loss. Plaintiff claimed that, through market manipulation, defendants violated
Section 10(b) of the Securities Exchange Act of 1934. Plaintiffs also alleged defendants were
control persons subject to liability under Section 20(a) of the Exchange Act. Defendants moved
to dismiss. Plaintiff’s Section 10(b) claims were dismissed because they failed to allege
manipulative acts with specificity. Further, plaintiff could not show that its damages were
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caused by defendants nor did plaintiff’s allegations demonstrate that defendants acted with the
required scienter. Because plaintiff failed to adequately plead a primary violation the court
dismissed the derivative claim for control person liability.
In re Bear Stearns Cos. Sec., Derivative & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y. 2011).
Shareholders brought a class action against an investment bank and its senior officers and
directors arising out of the collapse of a major financial institution. The complaint alleged
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and violations
of Section 20(a) of the Exchange Act against various officers. The defendant officers moved to
dismiss the complaint. With respect to the Section 20(a) claims, the court noted that three
elements must be met to establish a prima facie case of liability under Section 20(a): (1) a
primary violation by a controlled person; (2) control of the primary violator by the defendant;
and (3) that the controlling person was in some meaningful sense a culpable participant in the
primary violation. Plaintiffs alleged that each of the officer/director defendants were
“controlling persons” of the investment bank by reason of their positions as officers and/or
directors, their ability to approve the issuance of statements, their ownership of the investment
bank’s securities, and/or by contract. As defendants did not challenge such allegations, the court
held that the facts pleaded were sufficient to establish the first two elements. Finally, the court
held that the plaintiffs had adequately pleaded scienter to satisfy the third element. Thus,
defendants’ motion to dismiss the complaint was denied.
In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).
Plaintiff investors filed a class action, seeking to recover from feeder funds and their
fiduciaries. The defendants invested client assets with Bernard L. Madoff. Plaintiffs alleged
various federal securities law violations as well as state law claims. With respect to
Section 20(a) violations of the Securities Exchange Act of 1934, the first motion to dismiss
against the majority of fiduciaries was granted because the court found that the plaintiffs did not
plead the facts with sufficient particularity to establish their culpable participation in any
fraudulent activity. However, the second motion to dismiss against a different fiduciary was
denied. That fiduciary was alleged to have been a control person by virtue of his role as Director
of Research. The court found that because the complaint contained very specific allegations
rather than vague assertions of control, the motion to dismiss was denied. Finally, plaintiffs also
alleged Section 20(a) violations against a third set of fiduciaries. The court denied this motion to
dismiss because the complaint clearly alleged that the individuals were high-level executives at
the company with discretion over the investment advice, oversight, and administrative services
that the company provided to clients generally.
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In re Sanofi-Aventis Sec. Litig., 774 F. Supp. 2d 549 (S.D.N.Y. 2011).
Investors asserted claims against a major pharmaceutical company and certain related
individuals for violations of Section 10(b) of the Securities Exchange Act of 1934, and
Rule 10b-5 thereunder, and for control party liability pursuant to Section 20(a) of the Exchange
Act, all relating to statements concerning the production of a developing drug. Defendants filed
a motion to dismiss on all counts. The court denied defendants’ motion to dismiss the securities
fraud claims, but dismissed control person liability claims against all but two individual
defendants. The court found that two of the individual defendants were decision-making
officials who had made allegedly fraudulent statements about the drug. The court found that
each also had knowledge of, or access to, the omitted facts that allegedly rendered his statements
misleading and thus, for purposes of the pleading stage, engaged in conduct that would constitute
recklessness. The court found that the plaintiffs’ factual allegations with respect to the
remaining defendants, however, were insufficient to survive a motion to dismiss. The court
noted that none of those individual defendants were alleged to have made statements that
constituted actionable omissions. Plaintiffs failed to allege any particularized facts indicating
that those defendants had “actual control” over the statements that were made or otherwise
played some discernable role in the making of those statements. The court held that merely
generally alleging persons were decision-making officials or had access to material information
was inadequate circumstantial evidence that did not indicate involvement in perpetrating the
fraud. Thus, the plaintiffs failed to establish culpable participation as to any of those individual
defendants. The motion to dismiss as to those defendants was granted.
In re Tronox, Inc. Sec. Litig., 769 F. Supp. 2d 202 (S.D.N.Y. 2011).
Plaintiffs brought a class action alleging that a corporation and its fiduciaries made false
and misleading statements during and following an initial public offering and asserted claims
under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. Defendants
moved to dismiss the claims. The court held that the plaintiffs properly alleged that the
corporation was liable as a controlling person under Section 20(a) because the allegations
supported the plausible inference that the corporation controlled the dissemination of the
statements in the Securities and Exchange Commission filings that were materially false and
misleading. Additionally, the plaintiffs made a successful showing that certain defendants had
the power to direct or cause the direction of the management and policies of the corporation.
Thus, the motion to dismiss as to those defendants was denied. In addition, the court found that
the plaintiffs properly alleged that the successor-in-interest to the corporation was also liable as a
controlling person.
Wachovia Equity Sec. Litig. v. Wachovia Corp., 753 F. Supp. 2d 326 (S.D.N.Y. 2011).
Plaintiffs brought claims, under the Securities Act of 1933 and the Securities Exchange
Act of 1934, against defendant and a variety of related entities and individuals. Defendants
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ought numerous motions to dismiss. The motions to dismiss the claims alleging control person
liability under Section 20(a) of the Exchange Act were granted because of a lack of a primary
violation necessary to reach the secondary liability issues. However, the motion to dismiss the
alleged violation of Section 15 of the Securities Act was denied because the plaintiffs had
adequately pleaded a primary violation under Section 11 of the Securities Act and had
sufficiently pleaded that the individual defendants had exercised control over the documents in
question.
Employees’ Ret. Sys. v. JP Morgan Chase & Co., 2011 Fed. Sec. L. Rep. (CCH) 96,278
(S.D.N.Y. Mar. 23, 2011).
A putative class of purchasers of mortgage pass-through certificates brought a claim
against the defendant issuer. The lead plaintiff alleged causes of action against the defendant
along with six officers or directors under Sections 11, 12(a)(2), and 15 of the Securities Act of
1933. The defendants moved to dismiss. For the control person liability Section 15 claim, the
court granted the motion to dismiss as to the corporation, but denied the motion to dismiss as to
the individual defendants. The court first noted that allegations that an entity was the parent
corporation of a primary violator, standing alone, were insufficient to state a claim of control
person liability. Nor did the fact that the corporate name appeared prominently on the prospectus
supplement lending the investment the approval of the larger corporation, establish control
person liability. Further, the court found that the plaintiffs’ allegation that the corporation “had
the power to, and did, direct [the subsidiary]” was too conclusory to warrant an inference in the
plaintiffs’ favor. However, the court found that the plaintiffs’ allegations of liability as to the
individual defendants were sufficient. The plaintiffs alleged that the individual defendants were
officers or directors of the corporation, and that they directly participated in the alleged primary
violation because their signatures enabled the corporation’s participation in the allegedly
unlawful conduct. The court found this to be sufficient to sustain control person liability at the
motion to dismiss stage. The motion to dismiss as to those defendants was thus denied.
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 Fed. Sec. L. Rep. (CCH)
96,303 (S.D.N.Y. Apr. 28, 2011).
Plaintiff investors alleged misrepresentations and omissions in the offering documents for
certain mortgage-backed securities the plaintiffs purchased from defendants. Plaintiffs filed
claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Defendants moved to
dismiss. The court held that the allegations of control in the claim were insufficient to sustain
the Section 15 claims. The court noted that “control” was not the mere ability to persuade but
rather the practical ability to direct the actions of people who issue or sell securities. The court
found the conclusory allegations made by plaintiffs that the individual defendants had the power
to influence, and exercised power and influence insufficient to claim violations of Section 15.
The court had previously found identical allegations were insufficient under Section 15;
therefore, the court dismissed the plaintiffs’ amended complaint since they failed to correct the
original anemic allegations. Thus, the Section 15 claims were dismissed.
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Camofi Master LDC v. Riptide Worldwide Inc., 2011 U.S. Dist. LEXIS 31237 (S.D.N.Y.
Mar. 23, 2011).
Plaintiffs brought a wide range of securities claims, including Section 20(a) violations of
the Securities Exchange Act of 1934, against defendants alleging a multimillion-dollar fraud,
stemming from a failed acquisition and related loan repayment. Defendants moved to dismiss
each and every claim against them. The court held that to establish a prima facie case of liability
under Section 20(a) a plaintiff must show: (1) a primary violation by a controlled person;
(2) control of the primary violator by the defendant; and (3) that the controlling person was in
some meaningful sense a culpable participant in the primary violation. Moreover, the court
noted that Section 20(a) also contains the requirement that “plaintiff allege culpable participation
in some meaningful sense by the controlling person in the fraud.” In this case, the individual
defendants were President and Senior Vice President of the corporation. The court found that the
most plausible inference to be drawn from their positions was that the individual defendants were
familiar with the company’s day to day financial outlook and, as such, should have known that
the company was misrepresenting its ability to repay the loan in the transaction documents and
Securities and Exchange Commission filings. The court found that the plaintiffs sufficiently pled
particularity of facts that raised a strong inference of scienter. Thus, the motion to dismiss was
denied.
Bd. of Trs. of Fort Lauderdale Gen. Emps. Ret. Sys. v. Oao, 2011 U.S. Dist. LEXIS 88143
(S.D.N.Y. Aug. 9, 2011).
Plaintiffs brought a putative class action suit against a corporation and its officers for
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 based on
failure to disclose that a portion of the company’s income and revenue during the class period
derived from unlawful conduct which, upon discovery, would subject the corporation to
significant fines and penalties. Plaintiffs also brought claims for control person liability under
Section 20(a). Defendants moved to dismiss. The court found that plaintiffs did not plead a
sufficiently strong inference of scienter and dismissed the Section 10(b) and Rule 10b-5 claims.
The court further found that because plaintiffs failed to sufficiently plead Section 10(b) and
Rule 10b-5 claims, the Section 20(a) claims must also be dismissed.
In re Deutsche Bank AG, 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).
Shareholders in a consolidated class action against a corporation and related individuals
alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 based on
misstatements and omissions related to the corporation’s prospectus and registration statement.
Shareholders also alleged control person liability under Section 15. Defendants moved to
dismiss. The court found that although some of the Section 11 claims merely pleaded legal
conclusions and should be dismissed, other Section 11 claims and the Section 12(a)(2) claims
survived the motion to dismiss. The court further held that the control person liability claims
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ased on the failed Section 11 claims had to be dismissed for failure to state a primary violation.
However, the court, finding that there was no culpable participation requirement under
Section 15 because the primary violation under Section 11 contains no intent element, allowed
the remaining Section 15 control person claims to proceed despite the complaint failing to allege
culpable participation.
Roseville Emps. Ret. Sys. v. Nokia Corp., 2011 U.S. Dist. LEXIS 101264 (S.D.N.Y. Sept. 6,
2011).
Plaintiff investors brought a class action against a defendant corporation and related
individuals for allegedly making false and misleading statements about defendant’s market
position which constituted fraud on the market by causing shares of the corporation to be
overvalued. Plaintiffs brought fraud claims under Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 and a control person liability claim under Section 20(a). Defendants
moved to dismiss. The court found that plaintiffs failed to plead actionable misstatements or
omissions, scienter, or loss causation and thus granted defendants’ motion to dismiss on the
Section 10(b) and Rule 10b-5 claims. The court then found that because plaintiffs failed to
allege an underlying securities violation of Section 10(b) or Rule 10b-5, the claim for control
person liability under Section 20(a) failed as a matter of law and was also dismissed.
In re Sec. Capital Assur. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).
Shareholders filed a consolidated, amended class action suit against a corporation and its
officers alleging a claim for securities fraud under Section 10(b) of the Securities Exchange Act
of 1934 and for control person liability under Section 20(a) based on defendants’
misrepresentation and use of their FICO scores. The court held that plaintiffs failed to plead
causation of damages by such misrepresentation and therefore dismissed plaintiffs’
Section 10(b) claims. The court then dismissed the control person claims under Section 20(a)
based on plaintiffs’ failure to plead a primary violation.
Int’l Fund Mgmt. S.A. v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,
2011).
Plaintiff investors were members of a putative class action and two class action suits
against two corporate defendants and their officers. Plaintiffs filed their own suit which mirrored
the complaints in the class actions. Defendants moved to dismiss. The complaints alleged
defendants made material misrepresentations and omissions of material facts in violation of
Sections 10(b) and 18 of the Securities Exchange Act of 1934. Plaintiffs also brought claims
under the Securities Act of 1933 and the common law of New York. Plaintiffs alleged that the
violations arose from material misrepresentations and omissions concerning defendants’
exposure to collateralized debt obligations, structured investment vehicles, alternative A class
residential mortgage-backed securities, auction-rate securities, mortgage lending practices, and
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solvency. The district court held that the prior rulings of the courts in the two class action suits
controlled this case. As such, the court allowed the Section 10(b) claims to move forward
against one of the class action defendants and defendants conceded that those claims should not
be dismissed. Plaintiffs also alleged control person liability against the corporate officers under
Section 20(a). The court found that because plaintiffs stated primary violations of Section 10(b)
which were allowed to proceed and because plaintiffs adequately pled scienter for control person
defendants, the claims for control person liability under Section 20(a) were allowed to proceed as
well.
Roseville Emps. Ret. Sys. v. EnergySolutions, Inc., 2011 U.S. Dist. LEXIS 113630 (S.D.N.Y.
Sept. 30, 2011).
Shareholders brought a class action suit against a corporation, its officers, and its sole
stockholder prior to public offerings under Sections 11, 12(a)(2), and 15 of the Securities Act of
1933, and Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated
thereunder, and Section 20(a). Defendants moved to dismiss. The court found that the
allegations of material misrepresentations and omissions which must be assumed to be true for
the purposes of the motion to dismiss were well pleaded and could go forward. Further, because
defendants’ only defense to the control person claims was that plaintiffs failed to show a primary
violation, the motion to dismiss the Section 20(a) and Section 15 claims for control person
liability was denied.
Wilamowsky v. Take-Two Interactive Software Inc., 2011 WL 4542754 (S.D.N.Y. Sept. 30,
2011).
Plaintiff opted out of a class action that settled for an amount in excess of $20 million.
He then brought his own suit against the corporation and its executives. Plaintiff’s complaint
alleged breach of fiduciary duty, violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934, and control person liability under Section 20(a) based on defendant’s
routine manipulation of the dates of stock option grants making them fall on days with the lowest
stock prices. The court found plaintiff failed to sufficiently plead loss causation and dismissed
the securities claims. The court held that because the complaint did not adequately allege a
primary violation under Section 10(b) or Rule 10b-5, the claim for control person liability under
Section 20(a) must also be dismissed.
Mandell v. Reeve, 2011 U.S. Dist. LEXIS 114804 (S.D.N.Y. Oct. 4, 2011).
Plaintiffs sought to vacate, and defendant sought to confirm, an arbitration award
rendered by a FINRA arbitration panel in favor of investor plaintiffs against defendant securities
firm. In the FINRA hearing, the investors brought securities claims against the securities firm,
including claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
arbitration panel ruled in favor of the investors and found control person liability violations.
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First, the court noted that corporate officers are usually presumed to possess the requisite power
to control the actions of their employees and are often held accountable as controlling persons.
The court also found that the arbitration panel was plainly entitled to find that as founder, CEO,
sole shareholder, and registered principal of the securities firm, that the officer had at least “some
indirect means of discipline or influence” over the controlled person, and did not dispute the
liability of the controlled person. Thus, the award was upheld.
Local 731 I.B. of T. Excavators & Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675
(D. Del. June 14, 2011).
Plaintiff brought a consolidated class action suit against officers and a director of a
corporation for securities fraud in violation of Section 10(b), Rule 10b-5, and for control person
liability under Section 20(a) of the Securities Exchange Act of 1934. The complaint alleged that
defendants deliberately misrepresented the financial performance of the corporation which
resulted in artificial inflation of the stock price. Defendants filed a motion to dismiss. The court
found that plaintiff adequately pleaded a claim for primary securities fraud under Section 10(b)
and Rule 10b-5. Because the complaint alleged that defendants had high level positions within
the corporation, participated in and were aware of the corporation’s operations and decision
making, sufficient facts were alleged to allow the Section 20(a) claim to survive the motion to
dismiss.
In re Heckmann Corp. Sec. Litig., 2011 WL 2413999 (D. Del. June 16, 2011).
Plaintiff brought a class action suit against a corporation and its officers for violation of
Section 10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934 based on
materially false and misleading statements regarding a shareholder-approved merger.
Defendants moved to dismiss. The court found that plaintiff had pleaded with particularity
omitted facts that were material to the merger at issue and therefore satisfied the pleading
requirement for Section 10(b) and Rule 10b-5. Defendants’ only defense to the Section 20(a)
control person liability claim was that plaintiff failed to adequately plead a primary violation and
that the individual defendants had control over the corporation. The court found that in addition
to adequately pleading a primary violation, the complaint alleged control by the individual
defendants as well. As such, the motion to dismiss was denied.
In re Wash. Mut., Inc., 2011 Bankr. LEXIS 5008 (Bankr. D. Del. Dec. 20, 2011).
Plaintiff investment fund alleged that defendant investment corporations solicited,
offered, and sold trust certificates to plaintiff pursuant to offering documents containing material
misrepresentations and omissions. Plaintiff alleged that defendant investment corporations were
liable as control persons under Section 15 of the Securities Act of 1933 and the California
Corporations Code Section 25504 for the misstatements made by the issuing bank. The
investment corporations objected to plaintiff’s control person liability claims on two grounds:
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(1) the investment corporations’ lack of control over the underlying violator, the bank; and
(2) plaintiff’s failure to sufficiently plead culpable participation by the investment corporations.
Defendants claimed that plaintiff’s claims should be subrogated and the parties agreed to have
the court treat the matters as a motion to dismiss. The court found that plaintiff had sufficiently
pleaded facts to state a claim that the investment corporations controlled the bank as required for
control person liability. Though the use of the term “control” in Securities and Exchange
Commission filings was not dispositive, plaintiff alleged several other facts to support its
contention that defendants were control persons. The court further found that plaintiff was not
required to plead culpable participation as a part of its prima facie case under either the state or
federal control person liability claims. A prima facie case for control person liability only
requires a plaintiff to plead facts showing the underlying violation and establishing the
defendants’ control over the underlying violator. As such, the court found that the investment
corporations failed to demonstrate that the plaintiff investment fund’s control person claims
should be subrogated.
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011).
Plaintiff shareholders brought a class action suit against a pharmaceutical corporation and
its officers alleging violations of Sections 10(b) and Rule 10b-5 of the Securities Exchange Act
of 1934 based on material misrepresentations or omissions regarding the safety of its product.
Plaintiffs also brought suit under Section 20(a) for control person liability. Further, plaintiffs
alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 15 of the
Securities Act for control person liability. Defendant corporation and defendant officers filed a
motion to dismiss, and individual defendants filed a separate motion to dismiss. The court found
that due to plaintiff’s “group pleading” the complaint failed to plead scienter adequately under
Section 10(b) with regard to all but two individual defendants. The court then found that
because the only defense presented to the Section 20(a) claims was failure to state an underlying
claim, and because the court found that the complaint did state underlying claims, the
Section 20(a) claims were allowed to proceed as to those two individuals for whom scienter was
found. Accordingly, the court found that the claims based on Sections 11, 12(a)(2), and 15 also
survived the motion to dismiss as to the corporation and those two individuals for whom scienter
was found.
In re Lincoln Educ. Srvs. Corp. Sec. Litig., 2011 WL 3912832 (D.N.J. Sept. 6, 2011).
Plaintiff filed a putative class action on behalf of shareholders against a corporation and
its officers and directors for violations of Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934. Defendants moved to dismiss. Plaintiff alleged that defendants, a forprofit
school, misled investors about the implementation of certain reforms to admissions
standards that would affect the student enrollment growth rate predicted for 2010. The court
found that the alleged misleading statements fell squarely within the safe-harbor provision
protecting forward looking statements, and, as such, dismissed the claims under Section 10(b).
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The court further found that in the absence of primary liability, the claim for control person
liability under Section 20(a) must fail and granted defendants’ motion to dismiss.
In re Anadigics, Inc., 2011 WL 4594845 (D.N.J. Sept. 30, 2011).
Plaintiff investors brought a putative class action against defendant corporation and its
officers for violations of Section 10(b) and Rule 10-5 of the Securities Exchange Act of 1934 and
for Section 20(a) control liability based on defendants allegedly misleading investors by making
statements regarding Anadigics’ capability to meet demand for its products. Defendants filed a
motion to dismiss. The court held that such statements were forward looking, accompanied by
meaningful language and/or immaterial. As such, the court found that plaintiffs had not
established a material misrepresentation or omission as required for the securities fraud claims.
Further, the court held that because plaintiffs did not plead a primary securities violation under
Section 10(b) and Rule 10b-5 with adequate particularity, there could be no control person
liability under Section 20(a). The motion to dismiss was granted.
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).
Plaintiff brought a class action suit on behalf of shareholders against a bankrupt
corporation and its officers and directors under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934 for making misrepresentations that artificially inflated the corporation’s
financial results and stock prices. Defendants moved to dismiss. The court found that the
Section 10(b) claims against the management defendants were adequately pleaded, and control
was also adequately pleaded, so the Section 20(a) claims were allowed to proceed against the
management defendants. However, the court found that the plaintiff failed to plead adequate
scienter against outside directors, and thus the Section 10(b) allegations against outside directors
were dismissed, and the derivative Section 20(a) claims were dismissed for lack of an underlying
violation. The court found that the Section 20(a) claims against the chief credit officer failed
because the inference that defendant did not intend to be involved in fraudulent activity was
more compelling than the inference that he acted with scienter. Moreover, the Section 20(a)
claim against the former president of a subsidiary of defendant corporation failed because
plaintiff did not plead adequate control and because the role as a subsidiary’s president is
insufficient alone to indicate control for Section 20(a).
Aubrey v. Barlin, 2011 U.S. Dist. LEXIS 15332 (W.D. Tex. Feb. 16, 2011).
Plaintiffs brought suit after suffering financial losses stemming from real estate-backed
investments that were created, packaged, marketed, and sold to plaintiffs by defendants.
Plaintiffs brought numerous federal and state securities claims. One individual defendant moved
to dismiss. She argued that plaintiffs had failed to state a claim that she was liable as a “control
person” under Section 20 of the Securities Exchange Act of 1934. Specifically, the defendant
argued that plaintiffs’ claims were merely conclusory allegations of control. However, the court
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held that, in taking plaintiffs’ allegations as true, the defendant was the “incorporator, registered
agent, active owner, director, president, and employee” and, therefore, the court found such
allegations sufficient to state a plausible claim for control person liability. Thus, the motion to
dismiss was denied.
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).
Plaintiff filed suit against a securities firm and related individual defendants to recover
damages for allegedly wrongful trading of securities in plaintiff’s investment accounts. Plaintiff
brought numerous claims, including violations of Section 20(a) of the Securities Exchange Act
of 1934. The court found that because the plaintiff had failed to make any allegations of control
as to one of the individual defendants, the motion to dismiss with respect to that defendant was
granted.
Cumberland & Ohio Co. of Tex. v. Goff, 2011 U.S. Dist. LEXIS 52897 (M.D. Tenn. May 17,
2011).
Investors filed suit against a corporation and its affiliates alleging that it fraudulently sold
unregistered securities based on certain memoranda issued by defendants that contained material
misstatements and omissions in violation of federal and Tennessee securities laws, and based on
control person liability under the Tennessee Securities Act. Defendant moved for summary
judgment. The court found that plaintiffs provided evidence that individual defendant was in
charge of sales, directed the “cold calling” operations, supervised the sales staff, and set
commission levels. The court found sufficient evidence to overcome defendant’s summary
judgment motion on the claim of control person liability under the Tennessee Securities Act.
Silverman v. Motorola, Inc., 772 F. Supp. 2d 923 (N.D. Ill. 2011).
Plaintiffs brought a securities fraud class action against a large corporation and certain of
its officers alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 against all defendants, as well as Section 20(a) of the Exchange Act against the
individual defendants. Defendants moved for summary judgment. The court found that two
corporate executives who had authority only as to their particular divisions were entitled to
summary judgment on the control person claims brought against them under Section 20(a)
because the alleged wrongdoing was in another division and the evidence did not show general
control of operations. The court noted that had the plaintiffs provided evidence supporting their
contentions that the other executives collaborated with each other to solve general problems of
the company, and that earnings releases were reviewed together as a group, this may have raised
an issue of material fact as to the general control of those executives. The chief strategy officer,
however, whose responsibilities were not limited to a particular business segment, was not
entitled to summary judgment on the Section 20(a) claim.
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Elipas v. Jedynak, 2011 WL 1706059 (N.D. Ill. May 5, 2011).
Plaintiff brought suit against registered representatives of a company under Rule 10b-5 of
the Securities Exchange Act of 1934 and for violations of Illinois securities law Sections 12(G)
and 13(A) for control person liability. Plaintiff alleged defendants made false statements
concerning the company’s performance . The court granted plaintiff’s summary judgment
motion on the federal securities claims. The court found that plaintiff established that defendants
committed Section 12(G) violations. The court then turned to the issue of control person liability
under Section 13(A). The court noted that for the purposes of Illinois securities laws, one is
subject to control person liability if he directly or indirectly controls the activities of the issuer.
Because there was no evidence of an individual’s actual participation in the securities sale,
liability turned on whether a defendant was part of the “group of persons acting in concert” to
sell such securities. The court noted that there must be some showing of assent, approval, or
concurrence, albeit tacit approval, in an action of the group selling securities before an individual
will be liable for the actions of the controlling group. Unlike under federal securities law,
however, the court noted that there is no defense based on a defendant’s lack of knowledge of the
facts giving rise to the underlying securities fraud. As such, the court found that defendant was
liable under Illinois securities law Section 13(A) for the fraudulent sales of securities to which he
was connected.
Puskala v. Koss Corporation, 799 F. Supp.2d 941(E.D. Wis. July 28, 2011).
Plaintiff filed a class action against a corporation and its officers for violations of
securities fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
based on the embezzlement of over $30 million by an officer of the corporation. Plaintiff also
brought claims under Section 20(a) for control person liability. Defendants filed a motion to
dismiss. The court found that the corporation was liable for securities fraud and then turned to
the issue of control person liability. Defendant did not deny that he exerted control over the
corporation, but asserted that he acted in good faith and that plaintiff’s pleadings established that
good faith, granting him the protection of the good faith defense. The court held, however, that
the good faith defense is an affirmative defense, and only when a plaintiff pleads elements
constituting an impenetrable defense may a complaint that otherwise states a claim be dismissed
because of the existence of a defense. Therefore, the court denied the motion to dismiss the
Section 20(a) claim.
In re Meta Financial Group Inc., 2011 WL 2893625 (N.D. Iowa July 18, 2011).
Plaintiff shareholders filed a class action suit against a broker-dealer and its individual
employees alleging that defendants issued a number of misleading statements regarding the
operations and finances of the broker-dealer with knowledge or recklessness of their falsity in
violation of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act of
1934. Defendants filed a motion to dismiss. The court found that plaintiffs’ Section 10(b) and
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Rule 10b-5 claims were pleaded with sufficient particularity to survive a motion to dismiss.
Defendants alleged that the Section 20(a) control person claims should be dismissed for two
reasons: (1) failure to adequately plead an underlying violation; and (2) failure to offer more
than conclusory allegations of the individual defendants’ control over the broker-dealer. The
court found that the underlying Section 10(b) and Rule 10b-5 claim was adequately pleaded. In
addition, the court held that the plaintiffs properly pleaded that the particular positions that the
individual defendants held and the specific Securities and Exchange Commission disclosures
signed and certified by them substantiated a Section 20(a) claim. As such, the court denied the
motion to dismiss the Section 20(a) control person claims.
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011
Plaintiff pension trust fund filed a class action suit against a medical center and four of its
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
Section 10(b) claim was based on the allegedly misleading forecasted revenues and earnings of
defendant medical center. When the actual revenue and earnings were disclosed, stock values
declined 12.7% in one day. Plaintiff also brought a Section 20(a) claim for control person
liability against four named officers and directors. Defendants moved to dismiss all claims. The
court granted the motion to dismiss the Section 10(b) claim against two individual defendants
and denied the motion to dismiss against the other defendants. The court then turned to the
Section 20(a) claim. Because the remaining defendants’ only defense to the Section 20(a) claim
was that plaintiff failed to adequately plead a primary violation, and because the court found the
plaintiff did adequately plead a primary violation under Section 10(b) as to certain defendants,
the court denied the motion to dismiss the Section 20(a) claim for control person liability.
Yary v. Voight, 2011 WL 6781003 (D. Minn. Dec. 27, 2011).
Asserting claims under the Securities Exchange Act of 1934 and the Minnesota Securities
Act, Minn. Stat. § 80A.01 et seq., plaintiff investors brought suit against an individual. Plaintiffs
specifically asserted claims under Sections 10(b) and 20(a) of the Exchange Act and the
equivalent provisions under the Minnesota Securities Act. Defendant moved to dismiss. The
court granted the motion to dismiss the Section 10(b) claims for which the statute of limitations
had lapsed, but found that the remainder of the claims were sufficiently pleaded. Turning to the
control person claim, the court ruled that because plaintiffs did not respond to defendant’s
argument that plaintiffs failed to properly plead Section 20(a) control person liability, those
claims must be dismissed. The court further ruled that because the exact same arguments were
made by both parties under the Minnesota Securities Act as under federal law, the motion to
dismiss the state securities claims was granted and denied to the same extent as it was for the
claims under federal law.
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Facciola v. Greenberg Traurig, 781 F. Supp. 2d 913 (N.D. Ariz. 2011).
In a case arising from the collapse of a real estate lender, investors alleged securities
fraud under Arizona securities statutes against the managers at a private mortgage lender
company and a related company. The Arizona securities statutes impose presumptive liability
for every person who directly or indirectly controls any person liable for a primary violation
under the statute. A.R.S. § 44.1997(B). Arizona courts have held that the controlling person
need not have actually participated in the specific action upon which the securities violation is
based. Eastern Vanguard Forex Ltd., 206 Ariz. 399, 411 (2003). The court noted that titles can
be sufficient to allege control person liability under the Arizona statutes since “control liability
may be premised on the power to control and does not require actual participation in the
wrongful conduct.” Moreover, the court found that the defendants were incorrect in stating that
the plaintiffs had only alleged in a conclusory fashion that they controlled the primary violators.
Thus, the court found that the allegations were sufficient to support a claim for control person
liability under the Arizona statutes because the plaintiffs had shown that the defendants
controlled, reviewed, and had the ability to prevent the publication of materially misleading
information. The motions to dismiss were denied.
Petrie v. Elec. Game Card Inc., 2011 U.S. Dist. LEXIS 6203 (C.D. Cal. Jan. 12, 2011).
Plaintiffs filed a class action alleging that a small company and its officers engaged in
fraud to conceal from and misstate to the company’s investors the true financial condition and
performance of the company. The individual defendants filed motions to dismiss, arguing that
plaintiffs failed to state viable claims against them for violations of Section 10(b), Rule 10b-5,
and Section 20(a) of the Securities Exchange Act of 1934. The court first found that the
plaintiffs had adequately pleaded a primary violation, a prerequisite to defining defendants’
status as control persons. The court then applied the pleading standards of F.R.C.P. 8(a) to
plaintiffs’ control person allegations, as opposed to the more demanding standard of
F.R.C.P. 9(b). Under the relatively lenient standards of Rule 8(a), the court held that the
plaintiffs successfully alleged each individual defendant’s status as a control person as each
defendant served as either an officer or director of the company. That, in conjunction with the
allegations that the company was small in size, with no more than 10 employees, and that each
moving defendant participated in the company’s day-to-day operations, allowed the court to find
plaintiffs’ control person allegations sufficiently plausible to survive a motion to dismiss.
Homestore.com, Inc. Sec. Litig., 2011 U.S. Dist. LEXIS 46552 (C.D. Cal. Apr. 22, 2011).
Plaintiffs filed consolidated securities class actions on behalf of common stock
purchasers against an internet-based company that provided links to various services related to
home ownership, including real estate sales, home renovation, and relocation services. Plaintiffs
brought two claims against all defendant for violations of Section 10(b), Rule 10b-5, and
Section 20(a) of the Securities Exchange Act of 1934. Defendant contended that he was entitled
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to judgment as a matter of law because the evidence at trial failed to establish that the defendant
made false or misleading statements to the public with the requisite scienter and that he was a
control person with respect to plaintiffs’ claim under Section 20(a). The court found that
sufficient evidence was presented at trial to support the jury’s finding regarding defendant’s
control person liability under Section 20(a). Specifically, the court found that the plaintiffs
presented testimony at trial regarding defendant’s power to direct or cause the direction of
management, as well as his power to direct or cause the direction of the policies of persons that
prepared the relevant financial statements at issue. Thus, the court denied defendant’s motion for
judgment as a matter of law.
In re Toyota Motor Corp. Securities Litigation, 2011 WL 2675395 (C.D. Cal. July 7, 2011).
Plaintiff shareholders brought suit against a corporation and its officers for material
misrepresentations regarding the quality and safety of its products in violation of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss. After
finding that there were violations of Section 10(b), the court found that the complaint failed to
plead facts that sufficiently established that the individual defendants had actual control or power
over the individuals who made the misrepresentations. As such, the Section 20(a) claims were
dismissed.
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 80 F. Supp.2d 1125 (C.D. Cal. 2011).
Plaintiff sued a corporation, its affiliates, and certain individuals based on Sections 11,
12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. Defendants moved to dismiss on multiple grounds. The court found that
because Section 13 of the Securities Act provides a one-year statute of limitations and a threeyear
statute of repose on claims under Sections 11 and 12(a)(2), and because the statute of repose
had run, the claims under Sections 11 and 12(a)(2) must be dismissed. Further, because a claim
under Section 15 for control person liability requires an adequately pled claim under Sections 11
or 12(a)(2), it was dismissed as well. The court found that the Section 10(b) claims were also
precluded either by the statute of repose or the statute of limitations, and because Section 20(a)
control person liability requires a predicate violation, those claims were dismissed as well.
Nguyen v. Radient Pharms. Corp., 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011).
Plaintiffs brought a federal securities class action against a pharmaceutical corporation
and its officers on behalf of all persons and entities who purchased the common stock of
defendant during a particular time period. Plaintiffs argued that defendants issued a materially
false and misleading press release stating that the corporation had combined with a prestigious
medical organization to conduct a clinical trial together. Plaintiffs alleged that the individual
defendants acted as “control persons” of the corporation within the meaning of Section 20(a) of
the Securities Exchange Act of 1934. Plaintiffs alleged that the individual defendants:
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(1) directly participated in the corporation’s management and had the power to influence and
control; (2) were directly involved in the corporation’s day-to-day operations at the highest level;
(3) were privy to confidential proprietary information concerning the corporation’s business and
operations; (4) were involved in the drafting, producing, reviewing, and/or dissemination of the
allegedly false and misleading statements; and (5) approved or ratified the allegedly false and
misleading statements. Defendants moved to dismiss. The court found the allegations to be
sufficient to support an inference that the individual defendants controlled the corporation and its
operations. Finally, the court held that a plaintiff need not show that a defendant was a culpable
participant in the wrongful conduct or exercised actual power to be derivatively liable under
Section 20(a). Thus, the court denied the individual defendants’ motion to dismiss plaintiffs’
Section 20(a) claim.
Dean v. China Agritech, Inc., 2011 U.S. Dist. LEXIS 124264 (C.D. Cal. Oct. 27, 2011).
Investors brought suit against a corporation and members of its executive management
team and board of directors for violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 against the company and the individual defendants, Section 20(a) of the
Exchange Act against the individual defendants, Section 11 of the Securities Act of 1933 against
all defendants, and Section 15 of the Securities Act against the individual defendants. Based on
the allegations of each individual’s title and position with the company, the court found that the
individual defendants were actively involved in the day-to-day operations of the company such
that there was a reasonable inference that they were controlling persons involved with the
creation and approval of the fraudulent financial statements at issue. Therefore, the court found
that the plaintiffs had adequately pleaded that the individual defendants had control over the
company for purposes of liability under Section 20(a). Thus, the individual defendants’ motion
to dismiss was denied.
Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).
Plaintiff shareholders brought a securities fraud class action against a corporation and a
number of its senior officers alleging that defendants serially misrepresented to investors facts
relating to the existence and likelihood of FDA approval for a new drug. Defendants moved to
dismiss. Plaintiff shareholders alleged that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making various untrue statements of material facts and by
omitting to state material facts with the intent to deceive the investing public and artificially
inflate and maintain the market price of stock. The court found that the Section 10(b) claim was
adequately pleaded and therefore denied the motion to dismiss. The court further found that
plaintiffs adequately pleaded a Section 20(a) cause of action because plaintiffs pleaded a primary
violation of federal securities laws under Section 10(b) and alleged that defendants were
controlling persons within the meaning of the Exchange Act. Further, because defendants made
no showing of good faith to rebut the prima facie case of control person liability, defendants’
motion to dismiss plaintiffs’ cause of action under Section 20(a) was denied.
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Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).
Plaintiff investors brought a putative class action against a mutual fund. Defendants
included entities and officers responsible for issuing, managing, and distributing shares of the
fund, and also individuals that were independent trustees of the fund. Plaintiffs alleged that the
defendants violated Sections 11, 12, and 15 of the Securities Act of 1933, by alleging misleading
disclosures by entities and officers of the fund as to who was an appropriate investor and other
potential risks associated with the fund. Section 15 of the Securities Act makes any person who
controls a person who violates certain sections of the Securities Act (11 or 12), liable jointly and
severally “with and to the same extent as the controlled person.” To state a claim under
Section 15, plaintiffs must establish: (1) a primary violation of the pertinent federal securities
laws; and (2) that defendants exercised actual power or control over the primary violator. The
defendants brought a motion to dismiss the claims against them. The court noted that “whether
the defendant is a controlling person is an intensely factual question, involving the scrutiny of the
defendant’s participation in the day-to-day affairs of the corporations and the defendant’s power
to control corporate actions.” The court found that the plaintiff satisfied the first prong by
establishing an underlying Section 11 and Section 12(a)(2) violation. Plaintiffs alleged that
defendants exercised control by virtue of their positions as high-level officers and the existence
of their signing registration statements. The court found that it was “plausible” that high-level
officers, such as the independent trust defendants who signed registration statements, would be
in a position to exercise control over the fund and its disclosures. Accordingly, the court denied
the independent trustee defendants’ motion to dismiss the Section 15 claim.
In re Verifone Holdings Inc. Securities Litigation, 2011 WL 1045120 (N.D. Cal. Mar. 8, 2011).
Plaintiffs filed a securities fraud class action against a major corporation and certain of its
officers and directors on behalf of purchasers of the corporation’s common stock. The company
released financial statements that were subsequently found to be incorrect, due to errors in
accounting. These accounting errors were caused by manual adjustments made by an individual
who was the company’s supply chain controller. Plaintiffs’ alleged a violation of Section 20(a)
of the Securities Exchange Act of 1934 for control person liability against the company’s officers
and directors. Defendants moved to dismiss on grounds that the allegations that they exercised
control over the controller were insufficient. The court noted that merely holding an executive
position within a company is insufficient for control person liability. Further, the court noted
that plaintiffs’ allegations relied upon a Securities and Exchange Commission complaint which
specifically stated that management did not review or approve the controller’s adjustments, and
that there was a lack of particularity in the pleading. In sum, the court found that the
Section 20(a) claims failed because the claims were meager and conclusory, and therefore,
insufficient to survive a motion to dismiss.
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SEC v. Daifotis, 2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011).
In an enforcement action, the Securities and Exchange Commission brought numerous
claims alleging securities law violations by defendant executives of a registered broker-dealer in
their management of a particular fund. The SEC sought to amend their complaint to include
control person liability claims under Section 20(a) of the Securities Exchange Act of 1934
against one of the individual defendants. The defendant objected, claiming that the SEC did not
qualify as a “person” under the statute. The court noted that federal securities laws should be
construed “not technically and restrictively, but flexibly to effectuate [their] remedial purposes.”
Thus, the court found that to hold that the SEC, the very agency charged with enforcing federal
securities laws, could not allege control person liability contradicted the purpose of securities
laws. Further, a plain reading of the statute as it existed at the time of the misconduct—and as it
is interpreted by a majority of the circuits—was that the SEC was considered a “person” under
Section 20(a). Accordingly, the SEC’s motion to add this claim was granted.
Shepard v. S3 Partners, LLC, 2011 U.S. Dist. LEXIS 117957 (N.D. Cal. Oct. 12, 2011).
Plaintiffs claimed defendants were liable for federal securities fraud under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 as well as securities fraud under several
California statutes. Defendants moved for summary judgment. With respect to the control
person allegations, the court found that several defendants could be proven liable for securities
fraud as direct violators or controlling entities. The court noted that the plaintiffs need not show
that a defendant was a culpable participant in the violation or that there was an exercise of actual
power, but also that the defendant may assert a good faith defense if he can show no scienter and
an effective lack of participation. The court found ample evidence that the moving defendants
were the principals and primary decision-makers of the company. The defendants each had an
equal ownership stake in the company and partook in numerous discussions about the
investments. Thus, the motion for summary judgment was denied.
Meram v. Citizens Title & Trust, Inc., 2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011).
Plaintiffs alleged that defendant and two non-parties ran a Ponzi scheme that caused
losses to plaintiffs. Plaintiffs alleged that two non-parties would not have been successful but for
the role defendant, an Arizona escrow company, played in the scheme. Plaintiffs alleged, inter
alia, causes of action against defendant for violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The court found there were no allegations that the defendant
exercised control over the two individual non-parties or any person or entity in an effort to
induce them to engage in acts that violated securities laws. Further, the allegations lacked the
times, dates, and places that such control allegedly occurred. The court held that the plaintiffs
failed to make any allegation regarding the defendant’s management responsibilities or direct or
indirect control over the outside parties to cause them to engage in the alleged conduct. For
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those reasons, the court granted the defendant’s motion to dismiss the plaintiffs’ Section 20(a)
claim.
King County v. Merrill Lynch & Co., 2011 U.S. Dist. LEXIS 16483 (W.D. Wash. Feb. 18, 2011).
Plaintiff was an investor for a municipality, charged with the task of investing the cash
reserves of the municipality. Plaintiff brought claims against a financial institution and its
subsidiaries under the Washington State Securities Act (“WSSA”), alleging that defendants had
violated RCW 21.20.010 and RCW 21.20.430 of the WSSA. To establish liability under the
WSSA, the purchaser of a security must prove that the seller and/or others made material
misrepresentations or omissions about the security, and that the purchaser relied on those
misrepresentations or omissions. Plaintiff alleged defendants “played an integral role in the
transactions and breaches at issue.” The court noted that the relationship between a corporation
and its wholly-owned subsidiaries created a greater likelihood of control and authority than do
other forms of associations for which Washington courts had refused to dismiss claims brought
on the theory of control person liability. Further, Washington courts have held associates of
sellers to be control persons who could be liable for a seller’s actions under the WSSA, even
though the company in which the associate participated was not the company through which the
fraudulent notes were sold, and even though there was no evidence that the associate actually
controlled the sellers’ companies or that he had authority over the sale of notes by the sellers’
other companies. As such, the court found that plaintiff’s allegations were sufficient to state a
claim against defendants under the theory of control person or participant liability.
Richard v. Nw. Pipe Co., 2011 U.S. Dist. LEXIS 96200 (W.D. Wash. Aug. 26, 2011).
Plaintiff, on behalf of itself and other similarly situated shareholders, brought a
consolidated class action suit against a corporation and its officers alleging accounting
improprieties which inflated the corporation’s financial results, violated generally accepted
accounting principles and Securities and Exchange Commission disclosure rules, and made
contradictory representations. Specifically, plaintiff alleged that the corporation violated
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and that the officers were
subject to Section 20(a) control person liability. Defendants filed a motion to dismiss. The court
found that plaintiff had adequately pleaded primary securities violations. Next, the court
analyzed the control person claim under Section 20(a). The chief financial officer joined the
company seven months after the alleged impropriety began. The court held that she could not be
liable as a control person for the time period prior to her employment. Subsequent to the
commencement of her employment, the court found that although she could not control her boss
who made many of the statements at issue, her daily control of the company and control over its
financial disclosures allowed the Section 20(a) claim against her to survive a motion to dismiss.
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In re Oppenheimer Rochester Funds Group Sec. Litig., 2011 WL 5042066 (D. Colo. Oct. 24,
2011).
Shareholders in seven different municipal bond funds brought a total of 32 putative
securities fraud class actions in federal courts throughout the country naming the individual
funds, fund managers, and trustees as defendants. The principal claims were asserted under
Sections 11, 12, and 15 of the Securities Act of 1933 and were based on allegations that the
funds were falsely marketed as stable investments when in fact they employed extremely risky
investment strategies. Plaintiffs contended that their factual allegations were sufficient to
demonstrate that each of the moving defendants possessed the requisite power to direct or cause
the direction of management necessary to survive dismissal. As “senior officers” of the funds,
the officer defendants controlled the funds’ operations and disclosures made by the funds in
registration statements. In addition, plaintiffs alleged that documents filed with the Securities
and Exchange Commission by the defendants stated the company “has the power to direct or
cause the direction of the management or policies of the manager, whether through ownership of
securities, by contract or otherwise.” The court held these allegations to be sufficient to support
an inference that the officer defendants had the direct or indirect means of influencing the
content of the registration statements at issue in the litigation. With regard to the trustee
defendants, under Section 15 of the Securities Act the trustee defendants’ authority to sign or not
sign the registration statements at issue were sufficient indicia of “control” over the
representations and disclosures that went out to potential investors to support “control person”
liability at the pleading stage of the litigation. Thus, defendants’ joint motion to dismiss
plaintiffs’ “control person” claims against the officer and trustee defendants was denied.
In re Thornburg Mort., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).
Plaintiff shareholders filed suit against a corporation, its officers and directors, and its
underwriters for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on
misrepresentations and omissions regarding the financial condition of the corporation. Plaintiffs
filed an Omnibus Motion requesting, among other things, that the court reconsider ruling on the
dismissal of the issue of control person liability under Section 20(a) against certain directors and
officers. The court ruled that it would reconsider the ruling on dismissal of certain directors and
officers because the second amended complaint cured deficiencies in the plaintiffs’ allegations
against those individual defendants. However, the court refused to reconsider ruling on the
dismissal of the control person claims against other individual defendants because even in the
second amended complaint, plaintiffs failed to plead that those defendants had control over any
primary violations.
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Genesee County Employees Ret. Sys. v. Thornburg Mortgage Sec. Trust 2006-3, 2011 U.S. Dist.
LEXIS 133462 (D.N.M. Nov. 12, 2011).
In a securities class action suit involving mortgage-backed securities, defendants’ motion
to dismiss was denied because plaintiffs met the requirements to plead their standing under
Section 12(a)(2) of the Securities Act of 1933 and 15 U.S.C.S. § 77l(a), by sufficiently alleging
that they purchased the certificates pursuant to the offering documents in question, that
defendants sold the certificates to them by the use of communication in interstate commerce
and/or the United States mails, and that defendants orchestrated all activities necessary to effect
the sale of the certificates. With regards to the control person claims, the court held that the
plaintiffs had adequately pleaded their claims as to the individual defendants/officers as well as
to the corporate owner of a finance subsidiary that was organized for the limited purpose of
acquiring, owning, and transferring mortgage assets and selling interests in those assets or bonds
secured by those assets. With respect to the individual defendants, the plaintiffs alleged that they
all: (1) made the decision to offer the certificates for sale to investors; (2) drafted, revised,
and/or approved the offering documents; (3) finalized the offering documents and caused them to
become effective; (4) conceived and planned the sale of the certificates and orchestrated all
activities necessary to effect the sale of the certificates to the investing company, by issuing the
certificates, promoting the certificates, and supervising their distribution and ultimate sale to
investors; (5) participated in the preparation and dissemination of the false and misleading
offering documents for their own benefit; (6) by virtue of their positions were privy to and were
provided with actual knowledge of the material facts concealed from the plaintiffs and members
of the class; and (7) had the power and authority to cause, and did in fact cause, the primary
violators to engage in the alleged wrongful conduct. The court concluded that the plaintiffs had
adequately and sufficiently pleaded a Section 15 claim against the individual defendants. With
respect to the control person claim against the corporate owner of the finance subsidiary, the
court held that allegations that an entity was the parent corporation of a primary violator standing
alone is insufficient for a claim of control. Additionally, simply that an entity’s name appears
prominently on offering documents, lending credibility of the larger corporation is not sufficient
to establish control person liability. Here, however, the court held that the plaintiffs had
specifically pleaded facts that demonstrated the corporate owner had the practical ability to direct
the actions of the primary violator. The plaintiffs pointed to significant overlap in the controlling
executives and directors of each entity. The plaintiffs alleged that the corporate owner created
the subsidiary and received basically all of its revenue from securitizations. They also pointed
out that various Securities and Exchange Commission filings demonstrated that the corporate
owner exercised significant control over the subsidiary. These allegations were sufficient to state
a control person claim under Section 15. Thus, the defendants’ motions to dismiss were denied.
Wirth v. Taylor, 2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).
Plaintiff customer brought suit against a (1) financial company, (2) a firm with which the
financial company had a consulting agreement, and (3) an individual with whom the financial
company had a sub-advisor agreement. Plaintiff alleged fraud, breach of contract, breach of
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fiduciary duty, conversion, accounting, unjust enrichment, negligence, federal and Utah state
securities violations, and control person liability, Utah Code Ann. § 61-1-22(4)(a). The matter
before the court was a motion for summary judgment by all defendants, a cross-motion for
summary judgment by plaintiff, and a motion to strike. The court found that there was no
evidence that the corporation made any misrepresentations or omissions to plaintiff, or that
plaintiff suffered any damages as a result of those alleged misrepresentations. The court further
found that there was insufficient evidence that the corporation had control over the individual
who made false representations to plaintiff for the purposes of either federal securities law or
Utah securities law. As such, the court granted the corporation’s motion for summary judgment
in full. The court found that the evidence of primary securities violations against the firm was
not supported by evidence, and therefore granted summary judgment on that claim. However,
the court found that the evidence against the firm for control person liability was largely in
dispute, because there were issues of material fact regarding the sub-advisor’s actions.
Therefore, summary judgment was not appropriate on the control person liability claim.
Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enters., 2011 WL 4591541 (S.D. Fla. Sept. 30, 2011).
Plaintiff shareholders filed suit against a corporation and its officers alleging that
defendants made material misrepresentations and omissions in Securities and Exchange
Commission filings, press releases, and other public statements violating Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs also alleged that two individuals
were liable as control persons under Section 20(a). The court found that plaintiffs failed to
adequately allege that defendants made false or misleading material statements or plead facts that
presented a strong inference that defendants made statements they knew were false. As such, the
Section 10(b) and Rule 10b-5 claims failed. The court further held that because plaintiffs had
not adequately pleaded a primary securities fraud claim under Section 10(b) or Rule 10b-5, the
control person claim under Section 20(a) also failed.
Darocy v. Abildtrup, 345 S.W.3d 129 (Tex. App. 2011).
Plaintiff shareholders brought suit against an officer and director of a corporation for
control person liability under the Texas Security Act. Tex. Rev. Civ. Stat. art. 581-33. The trial
court ruled against defendant. Defendant appealed, alleging that the evidence did not support the
trial court’s finding. The court of appeals held that defendant’s role as an officer and director
combined with the evidence that defendant had general control over the corporation was
sufficient to subject defendant to control person liability and thus affirmed the lower court’s
judgment.
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Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A registered representative owned two corporations that were unrelated to his
employment at a broker-dealer. The registered representative disclosed his ownership of the two
corporations to the broker-dealer and later mentioned selling them. The investor who bought the
corporations alleged that the registered representative fraudulently induced him to purchase
unregistered stock in the corporations and brought suit against the registered representative and
broker-dealer alleging control person liability under the Texas Securities Act. Tex. Rev. Civ.
Stat. art. 581-33. The broker-dealer moved for summary judgment, and the trial court granted
the broker-dealer’s motion. The investor appealed the trial court’s grant of summary judgment.
To prove control person liability, the plaintiff must prove that the alleged control person: (1) had
actual power or influence over the controlled person; and (2) had the power to control or
influence the specific transaction or activity that gave rise to the underlying violation. The court
of appeals concluded that the evidence presented established a question of fact regarding the
element of control. First, the policies required that the registered representative obtain
permission to own and participate in his outside business. Second, it prohibited the registered
representative “from engaging in any private securities transaction without full disclosure to and
prior written approval from [the broker-dealer].” Thus, as a condition of the registered
representative’s employment, he agreed not to enter into any outside securities transactions
without the broker-dealer’s permission. In sum, the court of appeals held that the broker-dealer
had neither conclusively negated one of the elements of the control person claims, nor
conclusively established both elements of the relevant affirmative defense. Accordingly, the
summary judgment on the claim alleging control person liability was reversed and remanded.
Narnia Investments Ltd. v. Harvestons Sec. Inc., 2011 Tex. App. LEXIS 6182 (Tex. Civ. App.
Aug. 9, 2011).
Plaintiff investment company brought suit against a broker-dealer and its individual
employees for violations of Texas securities laws, including deceptive trade practices, fraud, and
control person liability. Tex. Rev. Civ. Stat. Ann. Art. 581-33(F)(1). Defendants moved for
summary judgment asserting, among other things, that the individual defendants alleged to be
control persons were not acting within the course and scope of employment and therefore could
not be control persons. The trial court granted defendants’ motion for summary judgment.
Plaintiff appealed. The appellate court held that plaintiff need not prove culpability of the
alleged control person or that he acted within the course and scope of his employment in order to
be liable as a control person. As such, the court reversed the trial court’s granting of summary
judgment.
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Hellum v. Breyer, 194 Cal. App. 4th 1300 (2011).
Investors bought unregistered securities and sustained losses. They then brought a class
action lawsuit against the company and its corporate officers based on alleged violations of
California and federal securities laws. The trial court sustained a demurrer and dismissed claims
of securities violations brought against the outside directors. In their complaint, the investors
alleged that the outside directors had the power to influence and control the corporation with
regard to the issuance and sale of unregistered securities. The trial court found that the investors
had not stated a claim against the outside directors because they had not alleged sufficient facts
to show control. The Court of Appeal reversed, holding that director liability under California
Corporations Code Section 25504, does not require pleading and then proving that the director
controlled the primary violator. Rather, the statute expressly subjects outside directors to
collateral liability based solely on their status as directors. As to controlling person liability, the
court found the investors’ allegations of control to be sufficient because the actual exercise of
power did not have to be pleaded because the definitions of “control” focused on the power to
direct, not to exercise. The court found that plaintiffs’ allegations of outside directors’
ownership interests in the company, the responsibility under the company’s bylaws for managing
the company, their presumptive authority to sign key corporate documents (such as regulatory
filings), their significant voting power by virtue of their stock holdings and voting agreement,
and their affiliation with venture capital firms upon which the company relied for its continuing
financing, all supported the inference that they possessed the power to directly or indirectly
influence corporate policies and decision making. Therefore, the court found that the control
person causes of action were sufficient to withstand the defendants’ demurrer.
Moss v. Kroner, 197 Cal. App. 4th 860 (2011).
Plaintiff brought claims against insurance agents under California Corporations Code
Section 25401 and Sections 25504 and 25504.1 for control person liability, based on six
misrepresentations of material fact. The trial court sustained defendants’ demurrer and
dismissed plaintiff’s claims. Plaintiff appealed the trial court’s dismissal. Plaintiff alleged that
defendants materially assisted in the transaction as the issuer’s agents and that they possessed
knowledge of the true facts. In evaluating the control person claims, the court held that
Sections 25504 and 25504.1 expressly extended liability from the original, direct violator of
Section 25401 to specific secondary actors who share equal liability with the original actor.
Specifically, Section 25504 provided that control persons, partners in liable firms, directors, and
principal executive officers of liable corporations, employees of liable actors, broker-dealers, and
agents who materially aid in the violation of Section 25401 are all liable jointly and severally
with and to the same extent as the person who directly violated Section 25401. Accordingly, the
court held that plaintiff stated a viable cause of action for control person liability and reversed
the lower court’s ruling.
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3. Aiding & Abetting
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Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).
Investors filed a private action under Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder against a mutual fund advisor and its parent fund
creator. The investors alleged that the mutual fund advisor and mutual fund parent aided and
abetted violations of Rule 10b-5 for alleged false statements in the mutual fund prospectuses
filed by the mutual fund. At issue was the meaning of the word “make” in Rule 10b-5. In
holding that the “maker” of a statement for Rule 10b-5 purposes is the person or entity with
ultimate authority and control over the statement, the court relied on its previous ruling that a
private right of action under Rule 10b-5 does not include suits against aiders and abettors who
contribute substantial assistance to the making of a statement, but do not actually make it. Thus,
the court held that the mutual fund advisor and the mutual fund parent were not liable for aiding
and abetting a violation of Rule 10b-5 because the mutual fund itself “made” the false statements
in the prospectuses.
MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011).
Plaintiff investors sued defendants, a broker-dealer and its subsidiary bank, alleging
conspiracy to violate RICO. The investors claimed that defendants conspired with Bernard L.
Madoff to perpetuate a Ponzi scheme by failing to freeze Madoff’s accounts after defendants
allegedly become aware of the fraud as a result of a “due diligence” investigation conducted by
defendants. Plaintiffs argued that an exception should be created to Section 1964(c) of the
Private Securities Litigation Reform Act of 1995 (“PSLRA”), which bars civil RICO claims
predicated on allegations of securities fraud, because securities fraud laws do not create private
cause of action for aiding and abetting, thus foreclosing plaintiffs’ avenue for relief. Defendants
moved to dismiss the complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure, arguing that the plaintiffs did not adequately plead the required elements of
their claims. The district court dismissed plaintiffs’ claims in their entirety. The Court of
Appeals affirmed the dismissal of plaintiffs’ claims, but on different grounds for plaintiffs’ civil
RICO claim. The Court of Appeals held that Section 1964(c) of the PSLRA bars civil RICO
claims predicated on acts of securities fraud even where a plaintiff cannot itself pursue a private
cause of action for aiding and abetting securities fraud against a defendant.
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).
The Securities and Exchange Commission filed a complaint against defendants, a fund
portfolio manager and a fund advisor’s chief operating officer (“COO”), alleging violations of
the Securities Exchange Act of 1934, Rule 10b-5, the Securities Act of 1933, and the Investment
Advisors Act of 1940. The SEC alleged that a mutual fund’s Registered Investment Advisor
secretly permitted one investor to “market time” the fund in exchange for an investment in a
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hedge fund managed by the portfolio manager. The SEC sought civil penalties under the
Advisors Act for aiding and abetting. The district court granted the defendants’ motion to
dismiss the civil penalties for aiding and abetting. The Second Circuit overturned the district
court, holding that civil penalties may be assessed under the Advisors Act for aiding and abetting
violations because a “violation” includes the aiding and abetting of principal violations. Thus,
the civil penalty provision encompasses both primary and secondary violators.
VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011).
Petitioner, a former registered representative, sought review of an order of the Securities
and Exchange Commission, which found that he willfully violated the antifraud and
recordkeeping provisions of the Securities Exchange Act of 1934 by orchestrating a scheme that
allowed favored customers to engage in late trading of future funds, and by aiding and abetting
his firm to keep inaccurate books and records. Rule 17a-3(a)(6), promulgated under
Section 17(a)(1) of the Exchange Act, provides that covered brokers and dealers shall make and
keep a memorandum of each brokerage order for the purchase or sale of securities. In
October 2001 an amendment was added to the rule, requiring the order memo to include the time
the order was received. It was uncontested that the firm failed to timestamp or otherwise record
the times it received final trading decisions. The registered representative argued, however, that
he could not be held liable for aiding or abetting the firm’s recordkeeping violations because he
lacked the requisite scienter due to the fact that it was someone else’s job to keep current with
the requirements of technical rules such as recordkeeping. The court held that there was ample
evidence in the record that supported the SEC finding that the registered representative had
actual knowledge that the firm’s records were inaccurate because he himself had designed a
scheme to make them so, and that he therefore deliberately aided and abetted the firm’s
violations of Rule 17a-3(a)(6) and Section 17(a)(1).
Amacker v. Renaissance Asset Mgmt. LLC, 657 F.3d 252 (5th Cir. 2011).
Appellants, investors in a commodity pool, filed suit against appellees, futures
commission merchants, alleging violations of the Commodity Exchange Act (“CEA”) for
willfully aiding and abetting an investment pool operator in his scheme to defraud investors. The
investors alleged that the merchants willfully aided and abetted the fraud by not conducting
background investigations into the investment pool operator and his company as required by the
Patriot Act amendments to the Bank Secrecy Act. The investors acknowledged that the
merchants had no actual knowledge of the fraud, but rather argued that the failure to investigate
demonstrated extreme recklessness sufficient to satisfy the “willful” requirement under the CEA,
a lower standard than knowledge or intent. Investors relied on the court’s prior holding in Abbot
v. Equity Group, Inc., 2 F.3d 613 (5th Cir. 1993). In that case, the court held that “extreme
recklessness” could serve as the proper scienter if: (1) the defendant had some special duty of
disclosure; or (2) if the assistance provided to the primary violator was unusual in character and
degree. The court held that, assuming extreme recklessness could serve as the proper scienter,
plaintiffs failed to establish that either of the two exceptions applied. Thus, the routine execution
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of trades by defendants did not amount to substantial assistance sufficient to trigger aider and
abettor liability. The Court of Appeals affirmed the district court’s granting of the merchants’
motion to dismiss.
SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011).
Plaintiff brought a civil action against defendant director for, among other claims, aiding
and abetting under Section 20(e) of the Securities Exchange Act of 1934 for his participation in
the granting of backdated stock options to corporate officials. Defendant filed a motion to
dismiss. To establish aiding and abetting liability, plaintiff must prove: (1) a primary violation
of the securities laws; (2) ”knowledge” of the primary violation on the part of the alleged aider
and abettor; and (3) ”substantial assistance” by the alleged aider and abettor in achieving the
primary violation. The court held that even assuming a primary violation of Section 13(a) of the
Exchange Act and Rules 12b-20 and 13a-1 by the corporation occurred, plaintiff’s failure to
prove that the director was severely reckless or negligent regarding the secondary violations
alleged against him was a failure to prove “knowledge” of the corporation’s primary violations.
Thus, the court affirmed the dismissal of the Section 20(e) claim.
SEC v. Locke Capital Mgmt. Inc., 794 F. Supp. 2d 355 (D.R.I. 2011).
The Securities and Exchange Commission brought suit against defendant, the founder
and sole owner of an investment advisory firm, asserting claims including aiding and abetting
fraud in violation of Section 206 of the Investment Advisors Act of 1940, aiding and abetting in
the making of false statements and filings with the SEC in violation of Section 207 of the
Advisors Act, aiding and abetting in the making of false statements in advertising materials in
violation of Section 206(4) of the Advisors Act, and aiding and abetting in the falsification of
records in violation of Section 204 of the Advisors Act. The court found that the undisputed
facts revealed that defendant fabricated a Swiss client to create business among potential
advisors. Defendant then included the fictitious client and its fictitious assets in her investment
advisory firm’s records, SEC filings, and marketing materials, inflating the firm’s apparent
assets. The court found these established facts all constituted Advisors Act violations. The court
denied defendant’s motion for summary judgment and granted the SEC’s motion for summary
judgment for all claims set forth in its complaint. The court also enjoined defendant from
committing future securities violations and, upon finding that the firm’s and defendant’s
violations were closely intertwined, held defendant jointly and severally liable with the firm for
disgorgement of profits. Finally, the court ordered defendant to pay civil penalties.
SEC v. Sponge Tech. Delivery Sys. Inc., 2011 Fed. Sec. L. Rep. (CCH) 96,246 (E.D.N.Y.
Mar. 14, 2011).
The Securities and Exchange Commission brought a motion for preliminary injunctive
relief seeking to enjoin defendants from aiding and abetting violations of various statutory and
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egulatory provisions. The SEC alleged that defendants “pumped” the value of a publicly-traded
company’s shares and “dumped” the shares into the public market in unregistered transactions.
Defendants included an individual acting as the company’s president and CEO, an individual
acting as the company’s COO, CFO, and CAO, and an individual acting as a self-employed
consultant associated with the company. The company, defendant president, and defendant COO
allegedly made material false or misleading statements in press releases and public SEC filings
with respect to the company’s reduction in the number of its outstanding shares, business with
five customers, and a company’s revenue. The president and COO reviewed and authorized the
press releases and signed and certified the public filings before they were issued. Defendant
consultant allegedly created Internet sites and virtual office space for the fictitious customers.
He maintained the Internet sites and forwarded all e-mails sent to the Internet sites to his own
e-mail account. He also arranged for physical space for the fictitious customers. Based upon
these facts, the court found that the SEC had sufficiently shown that defendant president and
defendant COO knowingly provided substantial assistance to the company in its commission of
violations of Securities Exchange Act of 1934 Sections 13(a), 13(b)(2)A, 13(b)(2)B, and 15(d),
and Exchange Act Rules 12b-20, 13a-13, 15d-1, 15d-11, and 15d-13. The court also found that
the SEC had shown a reasonable likelihood of future violations absent the injunction given that
the parties’ conduct involved a high degree of scienter, as demonstrated by the substantial efforts
taken to hide the fraudulent scheme. The court found that the SEC did not provide sufficient
evidence or explanation in support of its contention that the defendant consultant provided
substantial assistance in violating Section 10(b) or Rule 10b-5. It therefore declined to issue an
injunction prohibiting the aiding and abetting violations of these sections. The court noted,
however, that the absence of an injunction against these provisions should not be interpreted as
an endorsement of the alleged violation. Preliminary injunctions were issued according to the
court’s findings.
In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).
Investors filed a class action suit against an asset management corporation and an
investment advisory firm for losses arising from a Ponzi scheme. Plaintiffs alleged that the
investment advisor aided and abetted violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 in its role as secondary actor for brokering or facilitating the asset
management corporation’s ability to place funds into the Ponzi scheme. In its motion to dismiss,
defendants argued that plaintiffs’ claims were barred because “aiders and abettors” cannot be
held liable under Section 10(b), and Rule 10b-5, for statements made to the investing public by
the issuing firm, even if the secondary actor helped craft those statements. The court held that
holding such a person liable for misstatements by another is plainly barred. Defendants’ motion
to dismiss was granted.
SEC v. Espuelas, 767 F. Supp. 2d 467 (S.D.N.Y. 2011).
The Securities and Exchange Commission brought an enforcement action against
defendants, former executives of a company, for aiding and abetting accounting fraud in
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violation of securities laws. To state a claim for aiding and abetting violations of the Securities
Exchange Act of 1934, the SEC must allege: (1) a primary violation of the Exchange Act;
(2) actual knowledge of the violation by the aider and abettor; and (3) that the aider and abettor
substantially assisted the primary violation. One of the former executives moved to dismiss on
grounds that the SEC failed to allege sufficient facts that the former executive had knowledge of
the precise accounting treatment which constituted the accounting fraud. In denying the former
executive’s motion to dismiss, the court held that the SEC need not allege that a defendant know
the precise accounting treatment triggering the Exchange Act violation, but rather need only
demonstrate that a defendant knew enough to be cognizant that a violation has occurred.
Horvath v. Banco Comercial Portuges, S.A., 2011 U.S. Dist. LEXIS 15865 (S.D.N.Y. Feb. 15,
2011).
Plaintiff investor brought suit against a Portuguese bank and its U.S. subsidiary,
including aiding and abetting breach of fiduciary duty. Plaintiff was a customer of the U.S.
bank, and sought a recommendation for a European bank at which he could open an account.
The U.S. bank recommended the Portuguese bank, and plaintiff opened an account at the
Portuguese bank. Plaintiff alleged that thereafter the Portuguese bank engaged in various
securities violations. The court, however, found that a forum selection clause contained in
plaintiff’s new account document with the Portuguese bank was operative and required plaintiff
to pursue the claims in Portugal. The court also found that plaintiff’s common law claims for
aiding and abetting breach of fiduciary duty against the U.S. bank were precluded by the New
York Martin Act, N.Y. Gen. Bus. Law § 352 et seq. It noted that the Martin Act’s purpose is to
create a statutory mechanism by which the attorney general would have exclusive authority to
investigate and intervene in possible securities fraud on the public. Although the Martin Act
applies only if underlying transactions occur “within or from” New York, courts have interpreted
this as requiring “a substantial portion of the event” giving rise to the claim occurring in New
York. This was satisfied as plaintiff had meetings with the U.S. bank in New York. Further, the
court noted that even if the claims were not precluded by the Act, plaintiff had failed to properly
plead an aiding and abetting claim for breach of fiduciary duty as he pleaded no non-conclusory
facts indicating the U.S. bank had actual knowledge of the Portuguese bank’s breach of fiduciary
duty, or that the U.S. bank provided substantial assistance to the Portuguese bank. Accordingly,
plaintiff’s complaint was dismissed in its entirety.
Berman v. Morgan Keegan & Co., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).
Plaintiff investors brought suit against defendant broker-dealer alleging it aided and
abetted companies in conducting a fraudulent Ponzi scheme. Specifically, plaintiffs brought
claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and aiding and
abetting conversion. Defendant brought a motion to dismiss the complaint on the grounds that
plaintiffs failed to state a claim for relief as fraud was not pleaded with particularity and the
claims were barred by the statute of limitations. The court noted that the heightened pleading
requirements of F.R.C.P. Rule 9b apply to all three claims asserted by the plaintiffs. Further, it
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noted that plaintiffs’ aiding and abetting claims founded in fraud must also plead the elements of
aiding and abetting with particularity. The court dismissed the aiding and abetting fraud claim as
plaintiffs failed to plead facts reflecting defendant’s actual knowledge of the fraud. The fact that
defendant managed and monitored the companies’ accounts was not enough. The court rejected
plaintiffs’ contention that defendant knew of the alleged fraud based on “know your customer”
rules and other various stock exchange rules and monitoring requirements, as these rules spoke
only to whether defendant should have known of the fraud, they did not reflect actual
knowledge. Plaintiffs’ aiding and abetting breach of fiduciary duty claim was likewise dismissed
as plaintiffs did not sufficiently allege defendant was aware of the companies’ fraudulent
conduct, and asserted no additional facts indicating how defendant knew of the breach of
fiduciary duty. Plaintiffs’ claims for aiding and abetting conversion, premised on fraud, failed to
plead knowledge of fraud with sufficient particularity; thus, the aiding and abetting conversion
claim failed. Further, the court noted that even if it were to assume that a conversion
independent of the fraud was alleged, plaintiffs had not provided facts to support a reasonable
inference that defendant knew of any underlying conversion. The court granted defendant’s
motion to dismiss the complaint and denied leave to amend as plaintiffs had already been
afforded an opportunity to amend and failed to set forth any additional facts indicating how the
pleading deficiencies would be cured.
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011).
The Securities and Exchange Commission brought an action against defendants, a father
and his two sons, allegedly engaged in an insider trading scheme. The SEC alleged that the
father, an employee of a publicly-traded pharmaceutical company, opened a brokerage account
in the names of his sons, and traded the pharmaceutical company’s securities in these accounts
while he possessed non-public, material information about the company. The SEC further
alleged that the sons knew about the trading; however, they did not take any steps to stop the
illegal use of their accounts. The SEC charged the sons with violating Section 20(e) of the
Securities Exchange Act of 1934 by aiding and abetting their father’s trades in the accounts held
under their names. Defendants filed a motion to dismiss. In order to make out a prima facie
case for aiding and abetting, the SEC must prove: (1) the existence of a securities law violation
by the primary party; (2) knowledge of this violation on the part of the aider and abettor; and
(3) substantial assistance by the aider and abettor in the achievement of the primary violation.
To properly allege “substantial assistance,” the complaint must contain allegations that the aider
and abettor’s conduct was a substantial causal factor in the perpetuation of the underlying
violation. In denying the defendants’ motion to dismiss, the court held that the SEC’s allegation
that the sons did not take any action to prevent the insider trading in their named accounts was
sufficient “substantial assistance” because it was at a minimum “plausible” that the sons’
inaction was designed intentionally to aid the father’s primary violations of the securities laws.
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Merkin v. Gabriel Capital, L.P., 2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011).
Investors in three different hedge funds brought suit against defendants, the investment
advisor to the funds and the auditors of the funds, for fraud, perpetuated by Bernard L. Madoff
through his investment firm. Plaintiffs asserted, among other claims, common law claims for
aiding and abetting breach of fiduciary duty. Defendants moved to dismiss arguing that New
York Blue Sky law, commonly known as the Martin Act, provides for the attorney general to
regulate and enforce New York’s securities laws, and thus precludes private causes of action.
The court held that the Martin Act preempts plaintiffs’ claim for aiding and abetting breach of
fiduciary duty, and thus granted defendants’ motion to dismiss.
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).
Plaintiff investors claimed that defendants operated a Ponzi-like scheme targeting
members of the Chinese-American community to obtain direct and indirect investments in the
Overseas Chinese Fund (“OCF”). Defendants raised capital for OCF from U.S. investors by
selling interests in a partnership managed by a limited liability company. The limited liability
company was never registered with the Securities and Exchange Commission but was registered
with the Texas Securities Board. Plaintiffs and other investors were told that the limited liability
company was managing their investments, but were never informed that the responsibilities for
managing their investments were transferred to a third-party individual. Plaintiffs alleged that
the limited liability company was aware of the third-party individual’s Ponzi scheme and,
therefore, defrauded investors through their actions in promoting the underlying partnership
investment. Plaintiffs brought claims against the third-party individual for violations of the
Texas Securities Act under Articles 581-33 and 581-33-1. Article 581-33 contains a provision
for finding liability under Section 33(A) for aiding and abetting a seller or issuer of a security. In
their motion to dismiss, defendants argued that Article 581-33 applies specifically to investment
advisors, and because plaintiffs and the third-party individual lacked an investment advisor
relationship, the claim should be dismissed. The court held that although plaintiffs do not
explicitly state in the complaint that the third-party individual acted as investment advisor, they
nonetheless found enough facts to show that the third-party individual may have been asking for
compensation in advising the plaintiffs to invest. Thus, the court denied defendants’ motion to
dismiss claims under the Texas Securities Act.
Newby v. Enron Corp. (In re Enron Corp. Sec. Derivative & ERISA Litig.), 761 F. Supp. 2d 504
(S.D. Tex. 2011).
Investors alleged in 1999 and 2000 that a defendant bank fraudulently induced plaintiffs
to purchase beneficial ownership interests in a special purpose entity (“SPE”), allegedly secured
by worthless or nearly worthless assets purchased from Enron Corporation purportedly through
“arm’s-length” transactions and dumped into the SPE as a part of a larger conspiracy with Enron
to manipulate Enron’s financial statements and defraud investors. Specifically, the plaintiff
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investors allege that defendant bank engaged in common law aiding and abetting, fraud, and civil
conspiracy with Enron as part of a larger scheme to hide liabilities and improve Enron’s financial
statements. Common law aiding and abetting of fraud under New York law requires pleading
facts showing (1) the existence of fraud; (2) defendant’s actual knowledge of the fraud; and
(3) that defendant provided substantial assistance to advance the fraud’s commission. Anzerill v.
Am. Tobacco Co., 2000 WL 34016364 (N.Y. Sup. Ct. Oct. 27, 2000). Allegations of
constructive knowledge or recklessness are insufficient to allege the required state of mind of
actual and concrete knowledge of the underlying fraud. An allegation that a defendant “should
have known” about the fraud is also insufficient. In the complaint, plaintiffs alleged that the
bank structured certain tax transactions to help Enron achieve its fraudulent account objectives.
However, the complaint does not plead facts that establish that anyone at the bank knew at the
time of entering into the transactions how Enron would disclose them, that they were improper,
or that Enron was entering into them to commit fraud. The court held that absent such details,
the aiding and abetting claim must be dismissed for failure to plead actual knowledge of the
underlying fraud. Allegations of an intention to realize accounting income benefits do not
translate into knowledge of improper benefits or knowledge of fraud. The court granted
defendant’s motion to dismiss as to all claims.
HMV Props., LLC v. IDC Ohio Mgmt., LLC, 2011 U.S. Dist. LEXIS 1161 (S.D. Ohio Jan. 4,
2011).
Purchasers of various investment properties sued sellers of the properties, alleging that
the collective defendants participated in a conspiracy and perpetuated a scheme to dupe plaintiffs
into purchasing overvalued real estate in Ohio, violating RICO. Plaintiffs claimed defendants
aided and abetted the advancement of this scheme in connection with their RICO claim.
Defendants brought a motion to dismiss. The court held that there is no provision within RICO
that permits a private right of action for aiding and abetting. Furthermore, the court noted that in
Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994), the Supreme Court ruled
that private aiding and abetting suits were not authorized under Section 10(b) of the Securities
Exchange Act of 1934. Additionally, even if such a right exists, plaintiffs failed to state a claim
because they failed to allege all elements of the underlying substantive RICO claim. Therefore,
the court dismissed the aiding and abetting claim with prejudice as to all defendants.
Facciola v. Greenberg Traurig, LLP, 781 F. Supp. 2d 913 (D. Ariz. 2011).
Plaintiff investors brought suit arising from the collapse of a real estate lender.
Specifically, among other claims, plaintiffs asserted that management at both a private mortgage
lender and a related company aided and abetted statutory securities fraud and breach of fiduciary
duty. Defendant private mortgage lender was engaged in making high interest secured loans to
real estate developers. It formed a relationship with defendant company where the company
brought together investors to invest in various real estate projects, including pass-through
interests in loans originated by defendant mortgage lender. Plaintiffs alleged that management of
the private mortgage lender was aware of financial excess at the mortgage lender and the
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allegedly illegal fundraising at defendant company, but did nothing to warn investors. It further
alleged these defendants assisted in preparing private offering memoranda which they knew were
false and misleading. Plaintiffs alleged that managers at the company made false and misleading
statements in soliciting investors. The management defendants each brought motions to dismiss,
asserting that aiding and abetting securities fraud is not a cognizable claim under A.R.S.
§ 44-1991. The court rejected this claim as the Arizona Supreme Court in State v. Superior
Court, 123 Ariz. 324 (1979), previously ruled that there is a private right of action for aiding and
abetting securities fraud under the state statute. Next, defendants argued that plaintiffs failed to
adequately plead that defendant mortgage broker and defendant company owed fiduciary duties
to their investors. The court rejected this contention as plaintiffs alleged that defendants were
agents of their investors, managers of their investments, and engaging in a joint venture. The
court found these allegations were sufficiently pleaded. The court also found that plaintiffs
alleged sufficient facts from which knowledge and substantial assistance may be inferred, as they
alleged that the mortgage company disseminated false and misleading information of which they
were aware and that the company managers were aware of the real estate broker’s insolvency,
yet arranged financing that allowed the company to appear solvent. Accordingly, the court
denied both motions to dismiss.
Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).
Alleged fraud victims brought a class action lawsuit against financial institutions alleging
defendants aided and abetted one of their customers in perpetrating a “Madoff-style” Ponzi
scheme. Plaintiffs asserted claims under California state law. Defendants brought a
Rule 12(b)(6) motion to dismiss on the ground that the claim was preempted by the Federal
Securities Litigation Uniform Standards Act of 1998 (“FSLUSA”). Although the court agreed
with plaintiffs that FSLUSA does not require dismissal of aiding and abetting claims, it found
that dismissal was required based upon the facts alleged in this case, as the complaint, on its face,
alleged misrepresentations and omissions occurring “in connection with” the purchase or sale of
covered securities. Here, defendants were aware of its customer’s prior fraud conviction, yet
allowed this customer to open multiple accounts. In so doing, defendants did not request
appropriate identification, thereby violating its own policies and federal banking regulations. As
this conduct could be actionable by the SEC (i.e., it was not “tangential” to a securities action),
the court found plaintiffs’ aiding and abetting claim preempted by FSLUSA. Defendants’
Rule 12(b)(6) motion to dismiss was granted without prejudice.
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).
The Securities and Exchange Commission brought an enforcement action against two
executives at a registered investment advisor, arising from their management of an ultra-short
term bond fund. One defendant, an executive vice president and the lead portfolio manager of
the fund, reported to the other defendant who oversaw the head of the product development and
management group responsible for the fund. The complaint alleged a series of misleading
statements and fraudulent acts were made in connection with the fund, by both defendants. The
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complaint stated eight claims for relief against the defendants, including: aiding and abetting
violations of Section 10(b) of the Securities Exchange Act of 1934, aiding and abetting
violations of Section 206(4) of the Investment Advisors Act of 1940, and Rule 2064-8, aiding
and abetting violations of Section 34(b) of the Investment Company Act, aiding and abetting
violations of Section 13(a) of the Investment Company Act, and aiding and abetting violations of
Sections 206(1) and (2) of the Advisors Act against the executive vice president. Defendants
separately filed motions to dismiss and strike portions of the complaint. They argued the claims
against them for aiding and abetting must be dismissed as the complaint failed to plead fraud
with particularity under F.R.C.P. Rule 9(b), as it failed to allege factual allegations of primary
violations and that they aided and abetted or that they substantially assisted in the primary
violations. The court found that the complaint contained multiple direct statements by both
defendants that could serve as a basis for the direct liability claims against them and that the
misrepresentations by one defendant could serve as a primary violation underlying the aiding and
abetting by the other defendant and vice versa. Alternatively, the complaint alleged
misstatements attributable to other entities, which could also serve as a primary violation. The
court found the complaint sufficiently stated that the defendants substantially assisted each
other’s alleged misstatements, noting that the complaint alleged that where one defendant made a
misleading statement in a filing, the other defendant reviewed the filing and failed to remedy the
misstatement. The court rejected the executive vice president’s assertion that the complaint did
not adequately allege aiding and abetting liability under Section 206 of the Advisors Act. The
court noted that the Advisors Act did not require the SEC to allege a personal benefit to the
defendant in order to state a claim. Further, the court found that defendants cited no authority
that would require the SEC to comply with the heightened pleading requirements of the Private
Securities Litigation Reform Act of 1995 when asserting claims under the Advisors Act. The
court noted that although the Dodd-Frank Act gave the SEC standing to bring a claim in federal
court for aiding and abetting violations of the Investment Company Act of 1940, because the
alleged misconduct occurred before passage of the Dodd-Frank Act and in light of considerations
of fairness, dictated that individuals should have an opportunity to know what the law is and
conform their conduct and, accordingly, the SEC did not have authority to retroactively bring
claims for aiding and abetting Investment Company Act violations. With the exception of the
claims for aiding and abetting Investment Company Act violations, defendants’ motions to
dismiss were denied.
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).
The Securities and Exchange Commission brought an enforcement action against two
executives of a registered investment advisor arising from their conduct in managing an ultrashort
term bond fund. Before the court were defendants’ motions to reconsider a prior order
granting in part and denying in part defendants’ motions to dismiss and strike portions of the
complaint, in light of the subsequent Supreme Court decision Janus Capital Group, Inc. v. First
Derivative Traders, 131 S. Ct. 2296 (2011). In Janus, the Supreme Court held that a mutual
fund investment advisor could not be held liable in a private action under Securities Exchange
Act of 1934 Section 10(b) and Rule 10b-5 for false statements included in its client’s mutual
funds prospectuses, because the advisor did not “make” the statements therein. The court noted
that, as an initial matter, defendants were not granted leave to file a motion for reconsideration as
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to any of the claims except the “primary liability” claims. The court nevertheless noted that
modification as to the denial of defendants’ motion to dismiss aiding and abetting Rule 10b-5
violations under Janus was inappropriate. The court noted that the complaint contained direct
statements by both defendants that could serve as a basis for direct liability claims against them
and underlie the aiding and abetting claim against the other. The court recognized that the
complaint alleged various misstatements made by the investment advisor, which, under Janus,
were insufficient for a Rule 10b-5 violation. It found this unsurprising, however, as the
complaint had been filed prior to Janus. The court suggested that the SEC may choose to move
for leave to file an amended complaint where it could more clearly attribute misstatements to
specific entities or persons. Accordingly, the court did not modify the ruling on the motion to
dismiss as to aiding and abetting liability.
SEC v. Retail Pro, Inc., 2011 U.S. Dist. LEXIS 68863 (S.D. Cal. June 23, 2011)._
The Securities and Exchange Commission sought a permanent injunction prohibiting a
CFO from future violations of Section 10(b), and from aiding and abetting violations of
Section 13(a) of the Securities Exchange Act of 1934. In order to obtain a permanent injunction,
the SEC had the burden of showing that there was a reasonable likelihood of future violations of
the securities laws. The factors considered include: (1) the degree of scienter involved; (2) the
isolated or recurrent nature of the infraction; (3) defendant’s recognition of the wrongful nature
of his conduct; (4) the likelihood of future violations given defendant’s occupation; and (5) the
sincerity of assurances against future violations. On balance, the court found that an injunction
was appropriate because the CFO had a high degree of scienter as established by evidence
presented at summary judgment and at trial, the nature of the infractions were connected with
two related transactions over a nine-month period, and because of the CFO’s position presented
ongoing opportunities to violate the securities laws at issue.
Wirth v. Taylor, 2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).
Plaintiff investors sued defendants, an investment fund manager and the investment
recruiters, for violations of federal securities laws, 15 U.S.C. §§ 78j(b) and 78t(a), and Utah state
securities laws, Utah Code Ann. Sections 61-1-1 and 61-1-22(4)(a). Defendants brought a
motion for summary judgment. Plaintiffs argued that their claims under the Utah Uniform
Securities Act remain because Utah law allows for a private right of action against aiders and
abettors. In denying defendants’ motion for summary judgment on the Utah aider and abettor
liability claim, the court held that a private right of action for aider and abettor liability did exist
under Utah securities law, and that there were disputed issues of fact concerning defendants’
alleged federal securities violations.
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SEC v. Big Apple Consulting U.S.A., Inc., 2011 U.S. Dist. LEXIS 95292 (M.D. Fla. Aug. 25,
2011).
The Securities and Exchange Commission brought an action alleging violations of the
Securities Act of 1933 and Securities Exchange Act of 1934 against defendant, an investment
consulting firm. The SEC alleged that officers of the investment consulting firm aided and
abetted the consulting firm’s violations of Section 15(a) of the Securities Act and Section 20(e)
of the Exchange Act. Aider and Abettor liability is established: (1) if another party has
committed a securities law violation; (2) if the accused party has general awareness that his role
was part of an overall activity that is improper; and (3) if the accused aider and abettor
knowingly and substantially assisted the violation. In determining whether a defendant has
general awareness, the surrounding circumstances and expectations of the parties are critical.
Knowledge can be shown by circumstantial evidence or by reckless conduct. Defendant argued
that only actual knowledge, not severe recklessness, satisfies the scienter requirement, noting the
trend in recent years for courts to require actual knowledge, not just recklessness. The court, in
denying defendant’s motion to dismiss, held that none of the cases cited by defendant were from
the Eleventh Circuit; thus, defendant provided no authority that would enable the court to
disregard the binding precedent set forth in prior cases which allows severe recklessness to
satisfy the scienter requirement. Furthermore, the court noted that Congress has put an end to
such a trend argued by the defendant, by amending the Exchange Act to specifically include
recklessness.
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A purchaser of a company sued a broker-dealer asserting various causes of action arising
from its alleged failure to adequately supervise its employee in the sale of a portion of the
employee’s outside business to the purchaser. The broker-dealer moved for summary judgment
which was granted by the trial court. The purchaser appealed. The employee was a licensed
registered representative who also owned two direct marketing corporations that were unrelated
to his employment at the broker-dealer. The underlying action involved the registered
representative soliciting the purchaser to purchase shares in the two direct marketing
corporations. The purchaser filed suit against the registered representative and the broker-dealer
seeking damage and rescission of the transaction, and, among other allegations, filed suit against
the broker-dealer for violation of Section 33 of the Texas Securities Act, the “aider and abettor”
liability provision. Under the Texas Securities Act, to prove aider and abettor liability, the
plaintiff must demonstrate: (1) that a primary violation of the securities law occurred; (2) that
the alleged aider had general awareness of its role in this violation; (3) that the actor rendered
substantial assistance in this violation; and (4) the alleged aider either: (a) intended to deceive
plaintiff; or (b) acted with reckless disregard for the truth of the representations made by the
primary violator. Upon review of the testimony, the court determined that while the evidence
could lead a reasonable fact finder to conclude that the broker-dealer had a general awareness
that the registered representative was trying to sell his companies, it does not create more than a
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mere suspicion that the broker-dealer knew of the specific transaction with the purchaser. The
court concluded that because the purchaser presented no more than a scintilla of evidence as to
the general awareness element of the aider and abettor test, the trial court did not err in granting
summary judgment in favor of the broker-dealer on this claim.
Narnia Investments, Ltd. v. Harvestons Sec., Inc., 2011 Tex. App. LEXIS 6182 (Tex. App.
Aug. 9, 2011).
Investment company sued registered representatives and their broker-dealer for violations
of the Texas Securities Act. Specifically, the company alleged that the broker-dealer was the
control person for the registered representatives who had allegedly defrauded the investment
company through numerous securities transactions and, thus, were liable under aider and abettor
liability. The broker-dealer moved for summary judgment which was granted by the trial court.
The investment company appealed. In reversing the trial court’s decision, the appellate court
held that proof that the registered representatives acted outside the course and scope of their
employment did not eliminate a cause of action for aiding and abetting. The broker-dealer’s
motion for summary judgment neither conclusively disproved any element of the investment
company’s causes of action for aider and abettor liability nor challenged the existence of
evidence of any element supporting the investment company’s aider and abettor liability claim.
Murphy v. Reynolds, 2011 WL 4502523 (Tex. App. Sept. 29, 2011).
An investor sued a technology sector stock analyst and author of a newsletter, book, and
telephone hotline for losses incurred from investments made based on the stock analyst’s
newsletter. The investor claimed, among other things, that the analyst violated Texas Business
and Commerce Code Section 27.01, Articles 581-33 and 581-33-1 of the Texas Securities Act,
and FINRA Rules. The stock analyst moved for summary judgment, which was denied. The
analyst appealed, arguing that the trial court erred because he was not an investment advisor, a
primary violator, or aider and abettor in the purchase or sale of a security, thus, he did not violate
the relevant statutes or FINRA Rules. In overturning the trial court’s decision on aider and
abettor liability, the appellate court noted that appellee provided no evidence that appellant or
another party “offered or sold” appellee the stock in question by means of an untrue statement or
omission of a material fact, as required to invoke the protection of the Texas Securities Act.
Howard Family Charitable Found., Inc. v. Trimble, 259 P.3d 850 (Okla. Ct. App. 2011).
Investors in a hedge fund sued defendants, a commodities pool operator, its manager, the
distributor, and the distributor of a Web-based software application for fund managers. Plaintiffs
sought damages against defendants pursuant to Oklahoma statute Title 71, § 1-509(G) as aiders
and abettors of a fraudulent commodities transaction. The trial court held that the various
allegations were preempted under federal law. The investors appealed. The futures commission
merchant and the Web-based software application distributor claimed that preemption applies to
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plaintiffs’ causes of action against them. However, plaintiffs argued that federal preemption
does not extend to their private causes of action, but rather, only extends to state’s statutory
measures embodying administrative agency regulatory functions. As a prerequisite for the
liability of an aider or abettor, the one who allegedly is aided or abetted must be liable under one
of the specified statutory grounds in the act. The futures commission merchant argued that it had
no liability because Oklahoma’s Act arose from the Uniform Securities Act from the National
Conference of Commissioners on Uniform State Laws which provides that performance by
clearing broker of the clearing broker’s contractual functions, even though necessary for the
processing of the transaction, without more, would not constitute material aid. The court
concluded that plaintiffs’ causes of action against the futures commission merchant based upon
aiding and abetting fraudulent commodities transactions were preempted under federal law and
no amendments to the pleadings could cure this defect and, thus, the claims against the futures
commission merchant were properly dismissed. However, the software distributor argued that it
merely recorded information provided by defendants. Under Section 1-509, the software
designer must meet the burden of proof that it did not know and, in the exercise of reasonable
care, could not have known, of the existence of the conduct by reason of which liability is
alleged to exist. Plaintiffs produced e-mails raising facts about which reasonable minds could
differ whether the software distributor exceeded the highly restricted role it claims to have
undertaken when performing accounting services. The court held that the question whether aid
is “material” presents a factual determination which is dependent upon the development of
evidence and not appropriate for determination on a motion to dismiss. Thus, the court held that
the dismissal of the software distributor’s secondary liability due to aiding and abetting based
upon federal preemption should be reversed.
4. Conspiracy
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U.S. v. Skilling, 638 F.3d 480 (5th Cir. 2011).
In 2006, defendant was convicted of twelve counts of securities fraud, five counts of
making false representations to auditors, one count of insider trader, and one count of
conspiracy. The indictment alleged several possible objects of the conspiracy, including
securities fraud and honest-services fraud. The district court’s jury instructions permitted the
jury to convict based on any of the alleged theories of guilt and the jury found the defendant
guilty of conspiracy without identifying the specific object of the conspiracy. The appellate
court affirmed the convictions. The United States Supreme Court then invalidated the
government’s honest-services theory of liability and remanded the case to the appellate court to
determine whether the jury instruction was harmless error. On remand, the appellate court
reasoned that the jury had overwhelming evidence at trial that defendant and his co-conspirators
under-reported and shifted losses to make struggling business divisions look profitable, falsely
portrayed a business division as a low risk investment, and manipulated accounting reserves to
achieve earnings targets. Accordingly, the court held that the honest-services instruction was
harmless error beyond reasonable doubt.
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U.S. v. Speer, 419 F. App’x 562 (6th Cir. 2011).
In 2006, defendant was convicted of one count of conspiracy to commit securities and
wire fraud, three counts of securities fraud, one count of wire fraud, one count of conspiracy to
commit money laundering, and five counts of money laundering in connection with improper
advances to health care providers. Many of the health care providers had no reasonable
possibility of ever repaying the advance. Defendant challenged his conspiracy to commit
securities and wire fraud conviction asserting that there was a lack of evidence relating both to
his direct involvement and his knowledge that the advances to health care providers were
improper. Defendant was the chief financial officer and executive vice president at the company
and witnesses testified that he was the most knowledgeable person regarding the advances.
Additionally, a witness testified that she had falsified the monthly investor reports so that the
reports would comply with program requirements. Testimony also showed that defendant met
with employees to discuss problems and how to move money around between the programs to
satisfy monthly reporting requirements. The appellate court held that combined with the proof of
fraud at the company, the testimony provided sufficient evidence for a rational trier of fact to
conclude that defendant knowingly participated in the conspiracy to commit securities and wire
fraud. Defendant also challenged his conviction for conspiracy to commit money laundering in
violation of 18 U.S.C. § 1956, arguing that the evidence was insufficient to support the
conviction. The government made no attempt to argue that the evidence was sufficient.
Accordingly, the appellate court reversed defendant’s conspiracy to commit money laundering
conviction.
U.S. v. Sumeru, 2011 U.S. App. LEXIS 18713 (9th Cir. Sept. 7, 2011).
The defendant was convicted by a jury of seven counts of securities fraud, aiding and
abetting securities fraud, seven counts of wire fraud, aiding and abetting wire fraud, and
conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h). Defendant argued
on appeal that the money laundering conspiracy merged with the other convictions. The other
convictions were premised on encouraging investment in a Ponzi scheme, whereas the money
laundering conspiracy conviction was premised on defendant’s agreement to transfer proceeds
from the illegal activity to defendant’s offshore accounts to fund personal purchases. In
affirming the trial court conviction, the appellate court held that because the money laundering
conspiracy conviction was not premised on a “central component of the scheme to defraud” there
was no merger. The court noted, “We will not endorse the merger rule that would reward
criminals for increasingly nefarious behavior by taking additional steps to avoid justice.”
U.S. v. Bachynsky, 415 F. App’x 167 (11th Cir. 2011).
In 1989, defendant was convicted for racketeering and defrauding the IRS and
subsequently lost his medical license. Defendant later established a company with a partner
purportedly intended to develop and obtain government approval for an experimental cancer
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treatment. The partner had felony convictions and was permanently barred by the SEC from
trading securities or raising investment capital. Defendant’s research had proven that the cancer
treatment was ineffective. Nevertheless, defendant and his partner marketed the cancer treatment
as effective. Defendant was convicted of conspiracy to commit securities fraud, three counts of
wire fraud, and one count of securities fraud. On appeal, defendant challenged the district
court’s denial of his motion for judgment of acquittal due to insufficient evidence for his
conspiracy conviction. The appellate court reasoned that defendant’s relations with one investor
were sufficient to prove his conviction. Defendant falsely represented to the potential investor
that he was a doctor and a medical director for the company marketing the cancer treatment,
falsely represented to the investor that drug trials in Mexico with the cancer treatment had been
successful, misrepresented the success of the cancer treatments in the company’s business plan,
and did not disclose that his partner had been convicted of securities fraud and was barred from
selling securities. The appellate court reasoned that defendant knew none of this information
was correct, but succeeded in obtaining $10,000 from the investor. Accordingly, the appellate
court held there was sufficient evidence for a rational jury to find, beyond reasonable doubt, that
defendant knowingly entered into a conspiracy with his partner to make false material
representations and omissions in order to solicit money from would-be investors.
U.S. v. Rajaratnam, 2011 U.S. Dist. LEXIS 91365 (S.D.N.Y. Aug. 16, 2011).
On May 11, 2011, a jury found defendant guilty on five counts of conspiracy to commit
securities fraud and nine counts of securities fraud. Defendant moved for acquittal on all counts
pursuant to Federal Rule of Criminal Procedure 29 arguing that there was insufficient evidence
to sustain his convictions. The evidence at trial included testimony from various witnesses,
numerous e-mail and telephone communications with tippers, and trading records all tending to
establish that defendant made the trades after receiving material, non-public information.
Accordingly, the court held that there was sufficient evidence to convict defendant of all five
counts of conspiracy to commit securities fraud.
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).
Plaintiff investors claimed that defendants operated a Ponzi-like scheme targeting
members of the Chinese-American community to obtain direct and indirect investments in the
Overseas Chinese Fund (“OCF”). Defendants allegedly raised capital for the OCF from U.S.
investors by selling interests in a partnership managed by a limited liability company that was
not registered with the Securities and Exchange Commission. The limited liability company was
registered with the Texas Securities Board. Plaintiffs and other investors were told that the
limited liability company was managing their investments when, in fact, the investment
management duties were transferred to a third-party individual. Plaintiffs alleged that the limited
liability company was aware of the third-party individual’s Ponzi-scheme and, therefore,
defrauded investors through their actions in promoting the underlying partnership investment.
Among the plaintiffs’ fraud-based claims was a claim for civil conspiracy. As to two codefendants,
the court found that the plaintiffs failed to meet the heightened pleading
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equirements of Federal Rule of Civil Procedure 9(b) to sustain a claim for civil conspiracy. As
to the third co-defendant, the court reasoned that the plaintiffs’ allegation that “[t]he defendants
and the non-parties conspired with each other . . .” and that “Each defendant is liable for the
wrongful acts of the other defendants . . .” was insufficient to sustain a claim for civil conspiracy.
Specifically, the court noted that it was not clear from the complaint whether the plaintiffs
intended to state a claim for civil conspiracy. In addition, the court reasoned that the plaintiffs
did not allege facts going to each element of civil conspiracy. In particular, nowhere in the
complaint did the plaintiffs allege facts which established a meeting of the minds between
defendants and any other party. Accordingly, the court granted defendants’ motion to dismiss
plaintiffs’ conspiracy claim against the third co-defendant.
5. Failure to Supervise
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Busacca v. SEC, No. 10-15918, 2011 U.S. App. LEXIS 25933 (11th Cir. Dec. 28, 2011).
The Eleventh Circuit upheld a final order of the Securities and Exchange Commission
sustaining a disciplinary action against the former president of a broker-dealer which resulted in
a total fine of $30,000 and six months’ suspension from serving in any principal securities
capacity. FINRA found that the former president failed to exercise reasonable supervision over
the broker-dealer’s operations and compliance functions in violation of NASD Conduct
Rules 3010 and 2110. Specifically, the president knew that the broker-dealer’s conversion to a
new computer program for preparing required books and records created widespread errors in the
firm’s fundamental operations, yet failed to take reasonable steps to solve the problems. The
court found that substantial evidence supported the finding that the president failed to act with
the requisite vigor, decisiveness, and vigilance to address known operational deficiencies, as well
as to prevent the occurrence of future regulatory violations. The president was not denied any
due process rights during the FINRA proceeding. Assuming, without deciding, that FINRA
constitutes a governmental entity subject to the due process clause, the court found that the
president was afforded a meaningful opportunity to be heard during the disciplinary proceedings.
The court also found that the president failed to show that he was improperly singled out for
prosecution and punishment based on his criticisms of FINRA and the securities industry. The
president had not shown any evidence that FINRA’s prosecution of him was based on a
constitutionally impermissible motive. Rather, the prosecution was based on the numerous
customer complaints and operational violations uncovered during FINRA’s investigation of the
broker-dealer. The president also failed to provide evidence that similarly situated individuals in
the securities industry were not targeted by FINRA. Finally, the court rejected the president’s
argument that the sanctions imposed against him by FINRA were impermissibly punitive. The
disciplinary sanctions imposed by FINRA, which were upheld by the SEC, fell within the
recommended guidelines for failure to supervise. In upholding the sanctions, the SEC
appropriately gave appropriate weight to the president’s failures to adequately respond to known
operational problems at the firm.
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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
A district court granted a motion to dismiss filed by a group of investment banks
(“defendants”) against an investor’s negligent supervision claim. The plaintiff-investor
purchased almost two dozen structured notes from defendants for a face value of over
$130 million. Most, if not all, of these notes were equity-linked notes, which are typically
considered conservative investments. However, some of the particular notes plaintiff purchased
contained additional features that made them riskier than ordinary equity-linked notes. At first,
plaintiff obtained positive returns on the notes. However, in 2007 and 2008, plaintiff suffered a
series of losses resulting from the global financial crisis. As the value of the notes declined,
plaintiff borrowed tens of millions of dollars from defendants to purchase additional notes in an
attempt to cover his losses. Nonetheless, as the financial crisis deepened, the value of the notes
continued to decline. Eventually, defendants liquidated plaintiff’s entire investment portfolio of
notes in order to satisfy one of plaintiff’s debts. Plaintiff brought suit in the Southern District of
New York asserting multiple claims, including a tort claim for negligent supervision.
Defendants moved to dismiss the negligent supervision claim on the grounds that they owed
plaintiff no ongoing due to supervise and monitor his investments. The district court rejected
this argument. Even if defendants did not owe plaintiff an ongoing duty to supervise and
monitor his investments, employers can still be held liable for negligence supervision whenever
an employee acts negligently on the employer’s premises and his or her employer knew or
should have known about the employee’s propensity for the conduct. Nevertheless, plaintiff
failed to allege any facts to support a claim for negligent supervision. Plaintiff did not allege any
facts demonstrating that any of the named defendants knew or should have known of their
stockbrokers’ propensity for tortious conduct prior to the wrongdoing alleged in the complaint.
Nor did plaintiff establish which individual employee committed the tortious conduct. While the
court disagreed with defendants’ reasoning, it still granted their motion to dismiss the negligent
supervision claim. The court granted plaintiff leave to amend the complaint to correct the
deficiencies in the complaint with respect to the negligent supervision claim.
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A purchaser of a company sued a broker-dealer asserting various causes of action arising
from its alleged failure to supervise its employee who engaged in an outside business activity,
namely, selling a company to the plaintiff. The trial court granted the broker-dealer’s motion for
summary judgment and plaintiff appealed. The appellate court held that the trial court did not err
in granting summary judgment in favor of the broker-dealer against the plaintiff’s claim for
negligent supervision. The broker-dealer conclusively established that it did not receive
sufficient notice of the registered representative’s outside business transaction with plaintiff to
trigger its supervisory duty under NASD Conduct Rule 3040. The broker-dealer presented the
affidavit of its local compliance officer who declared that the registered representative never
gave the broker-dealer written notice that he intended to sell his shares in two businesses he
owned to plaintiff. The affidavit was not deficient for lack of personal knowledge because the
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compliance officer testified as a representative of the broker-dealer. A corporate employee is
generally presumed to possess knowledge of facts that she would learn in the usual course of her
employment. Because the plaintiff could not prove that the broker-dealer received written notice
of the transaction, he could not establish the duty element of a claim for negligent supervision.
Summary judgment was affirmed.
In re BNY Mellon Sec. LLC, Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).
Without admitting or denying the allegations, a broker-dealer settled charges brought by
the Securities and Exchange Commission arising out of the broker-dealer’s alleged failure to
reasonably supervise an order desk manager on its institutional order desk and traders under his
supervision over a nine-year period. The order desk manager failed to meet his duty of best
execution on orders for certain plan customers by executing cross-trades for the benefit of a
favored handful of accounts held by hedge funds and select individuals. The broker-dealer’s
supervisory procedures failed to establish adequate procedures on how to follow-up on red flags
raised in exception reports. In addition, the broker-dealer never conducted a thorough review to
determine whether the order desk manager was fulfilling his best execution responsibilities to
provide the best price a customer could likely obtain on the open market. If the broker-dealer
had such procedures in place, it likely would have prevented and detected the violations by the
order desk manager and traders. Pursuant to the settlement, the broker-dealer was censured and
agreed to pay disgorgement of $19,297,016, prejudgment interest of $3,748,431, and a civil
monetary penalty of $1 million.
In re Merrill Lynch, Release No. 63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).
The Securities and Exchange Commission instituted administrative proceedings against a
broker-dealer pursuant to Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934.
The SEC alleged the broker-dealer operated a proprietary trading desk which traded securities
solely for the firm’s benefit and had no role in executing customer orders. The broker-dealer
represented to customers that their order information would be maintained on a strictly
confidential basis. However, traders from the proprietary trading desk obtained information
about institutional customer orders from traders on the market making desk and used it to place
trades in the broker-dealer’s proprietary accounts. In doing so, the broker-dealer misused the
institutional customers’ information and acted contrary to its representations to the customers. In
addition, the broker-dealer had agreements with certain institutional and high net worth
customers that it would charge only a commission equivalent for executing riskless principal
trades. However, in certain instances, the broker-dealer also charged customers, in addition to
the riskless commission equivalent, undisclosed markups and markdowns by filling customer
orders at prices less favorable to the customer than the prices at which the broker-dealer
purchased or sold the securities in the market. As a result of this conduct, the broker-dealer
failed to reasonably supervise traders associated with the proprietary trading desk and its market
making operations, with a view to detecting and preventing violations of the Exchange Act. The
broker-dealer, without admitting or denying the allegations, consented to a censure, a cease and
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desist order from committing or causing any further securities violations, and a fine in the
amount of $10 million.
In re Smith, Release Nos. 63834 & 3152, 2011 SEC LEXIS 390 (Feb. 3, 2011).
The Securities and Exchange Commission instituted administrative proceedings against
the president of a broker-dealer. In anticipation of the institution of those proceedings, the
president submitted an offer of settlement, which the SEC agreed to accept. The SEC alleged
that one of the broker-dealer’s registered representatives acted as an unregistered broker-dealer
in violation of Section 15(a) of the Securities Exchange Act of 1934, when he conducted a
private, unregistered offering of securities outside the scope of his employment with the brokerdealer.
The president failed to establish reasonable policies and procedures to assign
responsibility for supervising the registered representative. No one reviewed the registered
representative’s daily correspondence or telephone calls, other than in cursory annual audits.
The president’s delegation of most of the office’s daily responsibilities to the registered
representative resulted in the registered representative supervising himself. If the registered
representative had not been left to supervise himself, his outside sales activities likely would
have been detected and prevented. Without admitting or denying the allegations, the president
consented to a censure, a suspension from supervision of any broker or dealer or investment
advisor for a period of nine months, and a civil money penalty in the amount of $25,000.
In re TD Ameritrade, Inc., Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011).
The Securities and Exchange Commission instituted administrative proceedings against a
broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. In anticipation
of the institution of those proceedings, the broker-dealer submitted an offer of settlement which
the SEC agreed to accept. The SEC alleged that the broker-dealer offered and sold shares in a
diversified mutual fund, even though its registered representatives marketed the fund as though it
was a money market fund that generated higher returns. The fund-specific training materials
accurately characterized the fund and described the various risks associated with investing in the
fund. Nevertheless, registered representatives at times mischaracterized the fund as a “money
market fund”, “enhanced money market fund” or a “higher yielding money market.” They also
at times equated the fund to a money market fund in terms of “safety and liquidity” or offered the
fund in response to a customer’s specific request for a money market fund or an instrument with
similar risk, without discussing the nature or riss of the fund. As a result, the registered
representatives violated securities laws by disseminating false or misleading information about
the funds. The broker-dealer, in turn, failed to have a system to implement procedures for the
training and education of its representatives regarding the fund which would reasonably be
expected to prevent and detect the improper conduct by its representatives. For instance, the
broker-dealer did not take adequate steps, such as providing additional training, refresher
courses, or continuing education about the fund to ensure that its representatives actually
understood the product. Without admitting or denying the allegations, the broker-dealer
accepted a censure. No monetary penalty was imposed.
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In re Torrey Pines Sec. Inc., Release Nos. 63835 & 3153, 2011 SEC LEXIS 391 (Feb. 3, 2011).
The Securities and Exchange Commission initiated administrative proceedings against a
broker-dealer. After an investigation, the SEC alleged that a registered representative and part
owner of the broker-dealer raised over $17 million from friends, family, and customers of the
broker-dealer in a private, unregistered offering of securities. In doing so, the representative
acted as an unregistered broker-dealer in violation of Section 15(a) of the Securities Exchange
Act of 1934, as he conducted the offering outside the scope of his employment with the brokerdealer.
The broker-dealer failed to establish reasonable policies and procedures to assign
responsibility for supervising the representative. No one reviewed the registered representative’s
daily correspondence or telephone calls, other than in cursory annual audits. The broker-dealer
delegated the daily responsibilities of the office to the registered representative. If the registered
representative had not been left to supervise himself, his outside sales activities likely would
have been detected. Although the broker-dealer had a policy prohibiting selling securities
outside the firm, and a policy for registered representatives to report outside business activities,
the firm failed to develop systems for supervisors and the compliance department to monitor
adherence to these policies. A number of suspicious events concerning the representative’s
outside business activities came to the attention of supervisors and compliance staff, but the
broker-dealer did not have procedures and systems in place requiring them to follow up on these
events. The SEC ordered that a public hearing be convened before an administrative law judge
at a time and place to be fixed.
In re Clifton, Release Nos. 9188 & 63926, 2011 SEC LEXIS 644 (Feb. 17, 2011).
The Securities and Exchange Commission instituted public administrative and cease and
desist proceedings against the principal and president of a registered broker-dealer. The brokerdealer,
on behalf of an oil and gas exploration business, offered limited partnership interests in
an oil and gas drilling project. The project encountered numerous problems, including excessive
amounts of water in some of the wells, which ultimately caused the company to shut down the
entire project. The company timely informed the broker-dealer’s president of these
developments. The president, however, failed to ensure that all the broker-dealer’s registered
representatives were informed of these developments. As a result, investors were not adequately
informed about the project before investing. In addition, the president failed to reasonably
supervise the broker-dealer’s registered representatives, who violated Section 17(a) of the
Securities Act by transmitting the misrepresentations in the sale and offer of the project. The
broker-dealer’s written supervisory procedures, which were drafted by the president, failed to
establish a formal correspondence review system to prevent and detect materially misleading
statements in the sales representatives’ outgoing correspondence to investors in connection with
the limited partnership interests. The procedures also failed to establish a mechanism to follow
up with investors after the sale to confirm that the investors had received adequate, updated
information about the project at the time of their investment. Finally, the president failed to
implement day-to-day supervision over the registered representatives. At a minimum, the
president failed to ensure that all representatives were informed about the status of the projects.
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As a result of this conduct, the president violated multiple securities laws prohibiting fraudulent
conduct in the offer and sale of securities. The SEC ordered that a hearing take place within 30–
60 days.
In re Pagliarini, Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011).
The Securities and Exchange Commission instituted public administrative cease-anddesist
proceedings against the compliance officer of a broker-dealer. The compliance officer
submitted an offer of settlement in anticipation of the institution of the proceedings, which the
SEC agreed to accept. The SEC alleged that the compliance officer failed to reasonably
supervise a registered representative who helped manipulate the prices of stocks of several
microcap issuers. The compliance officer failed to comply with the firm’s procedures for
following up on suspicious transactions, such as those where the customer engages in
transactions that lacked business sense or exhibited a lack of concern regarding risks,
commissions, or other transaction costs. In addition, the compliance officer failed to file
suspicious activity reports (“SARs”) on behalf of the broker-dealer in response to some of the
questionable transactions. The compliance officer knew of her obligation to assist the brokerdealer
in fulfilling its requirements to file SARs and knew or should have known that significant
suspicious activity was not being reported by the broker-dealer as a result of her actions.
Without admitting or denying the allegations, the compliance officer consented to cease and
desist from committing or causing any violations of Section 17(a) of the Exchange Act, a
suspension from acting in a supervisory capacity with any broker or dealer for 12 months and a
fine in the amount of $20,000.
In re Divine Capital Mkts., LLC, Release No. 63980, 2011 SEC LEXIS 722 (Feb. 25, 2011).
The Securities and Exchange Commission instituted public administrative and cease and
desist proceedings against a broker-dealer, its chief executive officer, and one of its registered
representatives. After an investigation, the Division of Enforcement alleged that the chief
executive officer was responsible for the supervision of the broker-dealer’s equities, institutional,
and retail sales. The chief executive officer failed to reasonably supervise the representative by
ignoring red flags that a large volume of his sales constituted an unregistered distribution. The
broker-dealer’s supervisory policies were inadequate to provide guidance to supervisors
regarding the appropriate inquiry to determine whether the public sale of shares acquired from an
issuer was prohibited by Section 5 of the Securities Act of 1933. If the chief executive officer
and the broker-dealer had developed reasonable policies and procedures requiring appropriate
diligence in these situations, the firm likely would have prevented and detected the registered
representative’s violations of the Securities Act. The SEC ordered that a hearing take place
within 30–60 days before an administrative law judge.
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In re Torrey Pines Sec. Inc., Release Nos. 64317 & 3188, 2011 SEC LEXIS 1394 (Apr. 20,
2011).
Following the institution of administrative proceedings against a broker-dealer, the
broker-dealer submitted an offer of settlement which the Securities and Exchange Commission
accepted. The SEC alleged that the broker-dealer failed to reasonably supervise a registered
representative and part-owner of the firm. The representative acted as an unregistered brokerdealer
in violation of Section 15(a) of the Securities Exchange Act of 1934, as he conducted an
unregistered, private offering outside the scope of his employment with the broker-dealer. The
broker-dealer failed to establish reasonable policies and procedures to assign responsibility for
supervising the representative. No one oversaw the daily activities of the office in which the
representative worked. No one reviewed the representative’s daily correspondence or telephone
calls, other than in cursory annual audits. Although the broker-dealer had a policy prohibiting
the selling of securities outside of the firm, the firm failed to develop systems for supervisors and
the compliance department to monitor for adherence to these provisions. If the broker-dealer had
established systems providing for better monitoring, a supervisor or the compliance officer
would reasonably have been expected to detect the representative’s outside business activities. A
number of suspicious events concerning the representative’s outside business activities came to
the attention of supervisors and compliance staff, but the broker-dealer did not have procedures
that required supervisors or the compliance officer to follow up on these events. Without
admitting or denying the allegations, the broker-dealer consented to a censure. No monetary
penalty was imposed.
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)
The Securities and Exchange Commission brought public administrative and cease-anddesist
proceedings against a broker-dealer and the broker-dealer’s head of institutional trading
(collectively, “respondents”). In anticipation of the institution of those proceedings, the
respondents submitted an offer of settlement, which the SEC accepted. The SEC alleged that the
respondents failed to reasonably supervise a registered representative who was engaged in
“marking the close,” which involves placing orders at or near the close of the market to
artificially effect the closing price of a stock. The respondents failed to establish procedures or
to have a system to implement existing policies and procedures reasonably designed to prevent
and detect the representative’s marking the close trading. The broker-dealer’s procedures did not
call for certain daily trading exception reports to be directed to compliance personnel. While its
written procedures directed daily review of trade tickets, such daily review was suspended. Had
there been daily review of trading exception reports and of trade tickets, the representative’s
illegal trading could have been prevented and detected. Without admitting or denying the
allegations, the broker-dealer consented to a censure and undertaking to adopt and implement
procedures requiring daily review of trade execution blotters and exception reports by
compliance personnel. The head of institutional trading consented to a bar from association with
any broker or dealer or participating in the offering of any penny stock for one year. He also
agreed to a fine of $15,000.
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In re Bloomfield, Release No. 416-A, 2011 SEC LEXIS 1457 (Apr. 26, 2011).
An administrative law judge held that a chief compliance officer failed to reasonably
supervise registered representatives in violation of the Securities Exchange Act of 1934. The
registered representatives participated in a market manipulation scheme which involved the
acquisition of large quantities of penny stocks, inflating the stock price, and then selling the
shares at artificially inflated prices. The chief compliance officer could not establish an
affirmative defense under the Exchange Act that there were established procedures and a system
for applying those procedures, which would reasonably be expected to prevent and detect
securities violations. The broker-dealer’s supervisory procedures manual did not contain any
operational procedures for transactions involving low-priced securities like the ones at issue in
the case. The supervisory procedures also did not specify how reviews were to be conducted or
how the chief compliance officer’s quarterly audits would occur. The chief compliance officer
argued that he was not in the direct supervisory chain, that he did not have the ability to control
the actions of the representatives, and that he made tremendous efforts over time to address the
relevant issues. He argued that he ultimately had no choice but to leave the firm when it became
apparent that none of his demands or suggestions would be implemented. The administrative
law judge did not find this testimony credible as it was contradicted by the evidence and the
testimony of other witnesses. Nothing in the record indicated that the registered representatives
attempted to hide their illegal conduct from the chief compliance officer or anyone else at the
firm. The chief compliance officer should have been aware of the red flags and failed to remedy
them. He was also ordered to pay a third tier civil penalty.
In re Divine Capital Mkts., LLC, Release Nos. 9247 & 64998, 2011 SEC LEXIS 2609 (Aug. 1,
2011).
After the initiation of public administrative proceedings against them, a broker-dealer and
its chief executive officer submitted an offer of settlement which the Securities and Exchange
Commission accepted. The chief executive officer acted as the broker-dealer’s chief compliance
officer and was responsible for the supervision of equities, institutional, and retail sales. The
SEC alleged that the chief executive officer failed to reasonably supervise one of the brokerdealer’s
registered representatives by ignoring red flags that a large volume of the registered
representative’s sales constituted an unregistered distribution. The chief executive officer failed
to take appropriate steps to ensure that the sales were either registered or exempt from
registration after being alerted to the registered representative’s activities. In addition, the
broker-dealer’s supervisory policies were inadequate to provide guidance to supervisors
regarding the appropriate inquiry to determine whether the public sale of shares acquired directly
or indirectly from an issuer was prohibited by the Securities Act of 1933. Without admitting or
denying the allegations, the broker-dealer accepted the terms of the settlement, including a
censure, suspension from participating, directly or indirectly, in any offering of a penny stock,
and disgorgement of $33,762, prejudgment interest of $6,921, and a fine of $60,000. The chief
executive officer consented to suspension from association in a supervisory capacity with any
broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent,
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or nationally-recognized statistical rating organization for a period of four months. He was also
ordered to pay a fine in the amount of $25,000.
In re Gautney, Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011).
The Securities and Exchange Commission agreed to settle proceedings, brought pursuant
to Section 15(b)(6) of the Securities Exchange Act of 1934, against R.A.B., a branch manager
(“respondent”) of a broker-dealer. The SEC alleged that the respondent failed to supervise two
registered representatives under his supervision who were allegedly engaged in “churning” or the
excessive buying and selling of securities in a customer’s account for the purpose of generating
commissions and without regard to the customer’s investment objectives. The level of trading
activity in the accounts of the two customers was highly indicative of potential churning. The
turnover ratios in these accounts were far in excess of the standard turnover ratio and warranted
immediate attention and review by a supervisor. Pursuant to the broker-dealer’s written
supervisory procedures, the respondent was required to send active account letters to all
customers with accounts that exceeded a certain turnover ratio, but he was unable to provide
proof that he followed this procedure. The respondent did not keep a log or otherwise track
whether the letters were returned. The respondent failed to take any steps to modify his practice
in face of repeated red flags of excessive trading in the customer accounts. Moreover, one of the
registered representatives was on heightened supervision due to his prior disciplinary history;
thus, the respondent was required to follow the firm’s heightened supervisory procedures for that
registered representative, such as reviewing all of the incoming and outgoing correspondence,
reviewing all of the trade tickets, and checking the registered representative’s orders for
suitability. It was not clear if the respondent actually performed these extra procedures. Had he
done so, additional red flags of the representative’s churning would have been apparent. Without
admitting or denying the allegations, the respondent consented to pay disgorgement of $5,959.00
and prejudgment interest of $901.40. He also agreed to a bar from participating in any offering
of a penny stock and from association in any capacity with any broker, dealer, investment
advisor, municipal securities dealer, municipal advisor, transfer agent, or nationally-recognized
statistical rating organization.
In re Gautney, Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011).
The Securities and Exchange Commission agreed to settle administrative proceedings
that were brought pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 against
E.S.B., a branch manager of a broker-dealer. The branch manager was responsible for
supervising a registered representative who engaged in churning and selling of securities in
customers’ accounts. The high levels of trading within the registered representative’s customer
accounts was repeatedly brought to the branch manager’s attention. The branch manager sent
out active account letters to the customers in response to the quarterly compliance reports.
However, he conceded that sometimes the letters were returned with missing information. The
branch manager expected the letter to be returned only if the customer had a problem with the
account. If the letters were not returned or were missing information, his practice was not to
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contact the customers himself. Instead, the branch manager left it to the registered representative
to follow up with the customers. The branch manager failed to take any steps to modify his
practice in the face of repeated red flags. The representative supervised by the branch manager
was the subject of complaints that would have reinforced the need to contact customers where
unusual trading was apparent. If the branch manager had reasonably followed up, it is likely that
he would have prevented or detected the registered representative’s violations of securities laws.
As a result of this conduct, the branch manager failed to reasonably supervise the representative
within the meaning of the Exchange Act. Pursuant to the settlement, the branch manager was
barred from association in any supervisory capacity with any broker, dealer, investment advisor,
municipal securities dealer, or transfer agent with the right to reapply for association after two
years. He was also ordered to pay disgorgement of $4,753.00, prejudgment interest of $355.47,
and a civil penalty of $10,000.00.
In re Application of Kamiski, Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).
The Securities and Exchange Commission upheld a FINRA enforcement decision which
included an 18-month suspension and $50,000 fine against a senior executive officer for
violating NASD Conduct Rules 3010 and 2110 by failing to supervise the firm’s review of its
variable annuity trading. The SEC agreed with FINRA that the officer ignored staffing
shortages, failed to diligently inform senior management of compliance needs, placed individuals
from other departments in compliance positions for which they were not qualified, failed to
effectively communicate the need for increased supervision to senior management, and failed to
limit the firm’s activities when resources were not made available. The officer received
numerous red flags from members of his staff that the firm’s compliance department was having
difficulty meeting its responsibilities in the face of increased regulatory requirements and rapid
expansion of the firm’s business, but he did not adequately address those concerns. By failing to
devote adequate attention and resources to the compliance department, the officer demonstrated
a significant failure of supervision. In affirming the NASD’s sanctions, the SEC noted the
officer’s conduct was egregious and supported by the record. The officer’s lack of disciplinary
history and the absence of a finding of customer harm were not considered to be mitigating
factors.
In re Lopez-Tarre, Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011).
The Securities and Exchange Commission instituted administrative proceedings against a
chief compliance officer of a registered broker-dealer pursuant to Section 15(b) of the Securities
Exchange Act of 1934. In anticipation of the institution of these proceedings, the chief
compliance officer submitted an offer of settlement which the SEC accepted. The SEC alleged
that the chief compliance officer failed to reasonably supervise the president and an employee of
the broker-dealer. The president, with the assistance of an employee, engaged in tens of millions
of dollars of unauthorized trades in a customer’s accounts. The president and employee
attempted to hide the fraud by providing false account statements to the customer. The chief
compliance officer had sole responsibility for all supervisory reviews of customer account
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activity, including activity in the accounts of the president’s customers. The chief compliance
officer was also responsible for reviewing correspondence, including reviewing e-mail and other
electronic correspondence on a regular basis. The chief compliance officer did not adequately
review electronic correspondence or activity in the president’s customer accounts. The president
sent the false trade confirmations and account statements to the customer by e-mail which was
not customary and should have raised a red flag. If the chief compliance officer had reviewed
the transactions in the customer’s accounts for suitability in accordance with the supervisory
guidelines, he likely would have discovered the discrepancy between the actual activity in the
accounts and the activity that was being reported to the customer. The chief compliance officer
also failed to follow up on red flags including insufficient funds in the customer’s accounts and
shortfalls being paid from another account. As a result of this conduct, the chief compliance
officer failed to reasonably supervise within the meaning of Section 15(b)(4)(E) of the Exchange
Act, with a view to preventing and detecting violations of the federal securities laws. Without
admitting or denying the allegations, the chief compliance officer accepted a bar from
association with any broker, dealer, or investment advisor with the right to reapply for
association after one year. No monetary penalty was imposed.
In re Gilford Sec., Inc., Release Nos. 9264 & 65450, 2011 SEC LEXIS 3419 (Sept. 30, 2011).
The Securities and Exchange Commission instituted public administrative cease-anddesist
proceedings against a broker-dealer and several of its corporate officers (collectively,
“respondents”). In anticipation of the institution of the proceedings, the respondents submitted
an offer of settlement which the SEC accepted. The SEC alleged that respondents failed to
reasonably supervise a registered representative who was making unregistered sales of millions
of shares in connection with international pump-and-dump schemes. The registered
representative, along with individuals unconnected with the broker-dealer, perpetuated the fraud
by paying for false spam e-mail campaigns that often caused sudden spikes in both price and
volume of certain mid-cap stocks. The registered representative and his cohorts then sold
millions of shares of these securities into the hyped market through the customer accounts at the
broker-dealer and another firm, reaping millions of dollars in profits. The broker-dealer
allegedly did not have a system to implement policies and procedures regarding the prevention
and detection of violations of Section 5 of the Securities Act of 1933. The broker-dealer
allegedly ignored obvious red flags concerning the unregistered re-sales and did not implement
its policies with respect to reviewing order tickets to detect unusual trading patterns. The CEO
failed to ensure that the broker-dealer had systems to implement its policies and procedures
regarding sales of securities through customer accounts in potential violation of the Securities
Act. He also failed to reasonably supervise the registered representative because he failed to
respond to red flags that should have alerted him to the illegal sales. The sales manager failed to
follow the broker-dealer’s policies and procedures relating to the review of internal e-mail
correspondence and failed to respond to red flags that should have alerted him to the
representative’s misconduct. The research and compliance officer knew or should have known
that the registered representative’s suspicious activity would trigger the broker-dealer’s
obligation to file a suspicious activity report. Without admitting or denying the allegations, the
broker-dealer consented to a censure and disgorgement of $275,000, prejudgment interest of
$77,113, and a fine of $260,000. The corporate officers accepted varying penalties, some
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including censure, suspension from association in a supervisory capacity, and orders to pay
disgorgement, prejudgment interest, and civil monetary penalties.
In re Gallardo, Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011).
The Securities and Exchange Commission instituted public administrative proceedings
against a broker-dealer and its president (“respondents”). In anticipation of the institution of the
proceedings, the respondents submitted an offer of settlement which the SEC accepted. The SEC
alleged the respondents failed to reasonably supervise a registered representative within the
meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934. A registered
representative in a New York branch office convinced a group of Bolivian investors to name him
as their registered representative. The registered representative promised the investors that he
would invest their funds in a separate investment company that the registered representative
operated, which would guarantee a 9% to 15% monthly return. In fact, the registered
representative’s investment company was a complete sham, and the registered representative
misappropriated most of the funds by transferring the money into his personal checking account.
The broker-dealer and its president allegedly failed to reasonably supervise the representative,
because they hired him knowing that he had little to no previous supervisory experience and had
never run a branch office before. The president also hired the registered representative knowing
that he never took the examination to become a licensed branch manager. The president failed to
follow up on the series of red flags which would have put him on notice as to suspicious activity
between the registered representative and the Bolivian investors. For example, the president
failed to follow up on e-mails showing that the registered representative was considering a profitsharing
arrangement with a firm customer and may have promised a firm customer exorbitant
returns on investments. The president and the broker-dealer also allegedly failed to develop
reasonable systems to implement written standards and procedures with respect to prohibited
transactions. Pursuant to the terms of the settlement, without admitting or denying the
allegations, the president consented to a bar from association in a supervisor capacity with any
broker, dealer, or investment advisor for three years. He also agreed to pay a fine of $35,000.
The broker-dealer was censured and ordered to pay a fine of $50,000.
In re Clifton, Release No. 443, 2011 SEC LEXIS 4185 (Nov. 29, 2011).
An administrative law judge found that the president of a broker-dealer willfully violated
Section 17(a) of the Securities Act of 1933 and Section 15(b)(6) of the Securities Exchange Act
of 1934. The broker-dealer, on behalf of an oil and gas exploration business, offered limited
partnership interests in an oil and gas drilling project. The president of the broker-dealer was
responsible for supervising sales representatives and, if necessary, taking disciplinary action
against them. He was also the person primarily responsible for providing information updates on
the project to the sales representatives. The president violated the broker-dealer’s written
standards and procedures by failing to review the outgoing written and electronic correspondence
of the sales representatives to the investors. The evidence showed that the sales representatives
provided prospective investors with misleading information. The president also failed to provide
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timely and complete information updates about the project to the sales representatives. He
infrequently walked the floor listening to the sales representatives’ phone conversations with
investors, and on one occasion failed to correct inaccurate information provided by a sales
representative to a potential investor. Finally, the president made his own misrepresentations to
investors by, among other things, misrepresenting the production potential of the wells and
omitting material information from them. The judge found that the president’s conduct was
egregious. The president was barred from associating with any broker, dealer, investment
advisor, municipal securities dealer, or transfer agent. He was also ordered to pay a civil
monetary penalty in the amount of $130,000.
In re Inv. Placement Group, Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011).
The Securities and Exchange Commission instituted public administrative proceedings
against a broker-dealer and the broker-dealer’s chief operating officer. In anticipation of the
institution of those proceedings, respondents submitted offers of settlement which the SEC
accepted. The SEC alleged that the respondents failed to reasonably supervise a former
registered representative and trader who engaged in a fraudulent interpositioning scheme.
During the interpositioning scheme, the registered representative violated Section 17(a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5
by needlessly interposing a Mexican brokerage firm into certain securities transactions. As a
result of the representative’s misconduct, certain institutional clients, including four Mexican
pension funds, paid approximately $65 million more for certain credit-linked notes than they
would have paid had the Mexican brokerage firm not been interposed as a “middle man.” The
representative’s fraudulent scheme went undetected by the broker-dealer due to its failure to
establish adequate policies and procedures and a system for implementing those procedures
which would reasonably be expected to prevent and detect interpositioning by its traders. During
the relevant period, the chief operating officer was directly responsible for supervising the
registered representative and overseeing the trading room. The chief operating officer, however,
delegated supervisory oversight of the trading to the registered representative, which effectively
allowed the registered representative to supervise himself. Further, the chief operating officer
failed to respond to red flags regarding the registered representative’s fraudulent scheme,
including a dramatic rise in revenue resulting from the interpositioned transactions. Without
admitting or denying the allegations, the broker-dealer consented to a censure and fine of
$260,000. The broker-dealer also paid disgorgement of over $3.5 million and prejudgment
interest of $240,000. The chief operating officer accepted suspension from association in a
supervisory capacity with any broker, dealer, or investment advisor for a period of three months.
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I. Private Rights of Action for Violations of SRO Rules
I.
Fiero v. Fin. Ind. Reg. Auth., Inc., 660 F.3d 569 (2d Cir. 2011).
A brokerage firm brought an action in federal court against FINRA seeking declaratory
judgment that the SRO did not have authority to bring a court action to collect disciplinary fines
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against its members. FINRA had previously imposed a $1 million fine, plus costs, against the
brokerage firm and had obtained a judgment for the amount of the fine in state court. The
District Court dismissed the brokerage firm’s complaint and granted FINRA summary judgment
on its counterclaim for the amount of the fine. The Second Circuit reversed and vacated the
judgment. Under the Securities Exchange Act of 1934, FINRA has the power to initiate a
disciplinary proceeding against any member or associated person for violating its rules, SEC
regulations, or securities laws, and it may impose any sanction, including fines and revocation of
the member’s registration. However, FINRA is not given authority to enforce the collection of
fines through the courts. Such authority is expressly granted to the SEC, but not to SROs.
Murphy v. Reynolds, 2011 WL 4502523 (Tex. App. Sept. 29, 2011).
Investor Reynolds brought an action against technology-sector stock analyst Murphy for,
inter alia, violating NASD and NYSE rules. Reynolds alleged that Murphy published a
newsletter and book and maintained a telephone hotline providing investment recommendations,
which Reynolds followed. After Reynolds incurred losses, he commenced suit claiming that
Murphy had made material misrepresentations in his recommendations on specific securities, as
such terms are defined in the NASD and NYSE rules. However, because Murphy was not an
investment advisor, he was not subject to NASD or NYSE rules. Even if he was subject to
NASD and NYSE rules, it is not clear that Reynolds would have a private right of action to
enforce those rules.
Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
Plaintiff sued Merrill Lynch for failure to supervise its employee, a licensed securities
broker, in connection with the broker’s sale of stock in his outside direct-marketing businesses to
plaintiff. Plaintiff alleged that the broker made several misrepresentations and omissions in
connection with the sale of the stock, which was unregistered, and that the broker failed to
deliver the shares to plaintiff. Plaintiff further alleged that Merrill Lynch violated NASD and
NYSE rules because it knew that the broker intended to sell shares of his outside businesses and
failed to adequately supervise the subject sale, its terms, and the registration of the securities.
Merrill Lynch moved to dismiss these claims, arguing that there is no private right of action for
violation of NASD and NYSE rules or internal company policies. The trial court agreed and
granted the portion of the motion seeking to dismiss claims for violation of these SRO rules. On
appeal, the Texas Court of Appeals affirmed, finding that although the Seventh Circuit had
previously recognized a private right of action for violation of NASD and NYSE rules, the great
weight of authority rejects the existence of a private right of action, and there is a serious
question as to whether the Seventh Circuit authority remains good law.
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J. RICO
J.
MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011).
In a suit brought by a Madoff investor, the Second Circuit ruled in a case of first
impression that the Private Securities Litigation Reform Act (“PSLRA”) bars a civil RICO
conspiracy claim predicated on allegations of aiding and abetting securities law violations. The
court ruled that the PSLRA prohibition at issue (18 U.S.C. § 1964(c)) – stating in relevant part
that “no person may rely upon any conduct that would have been actionable as fraud in the
purchase or sale of securities to establish a violation of section 1962” – applied even though the
defendant in this case could not have been sued under the securities laws for aiding and abetting
securities laws violations.
Ritchie Capital Mgmt., L.L.C. v. Jeffries, 653 F.3d 755 (8th Cir. 2011).
In a lawsuit claiming civil RICO violations arising out of an allegedly fraudulent
securities transaction against two individuals who worked for a bankrupt company in
receivership, the Eighth Circuit held that a federal receivership court’s injunction prohibiting
actions against the company did not apply to actions against the individuals who worked for the
company. The Eighth Circuit disagreed with the District Court – which had held that the
injunction applied to bar the suit – that the lawsuit would interfere with the possession of any
company documents, since the case would only involve the interpretation of those documents.
Milo v. Galante, 2011 WL 1214769 (D. Conn. Mar. 28, 2011).
Plaintiff brought civil RICO claims against defendant alleging that he misappropriated
funds in the trash companies that plaintiff and defendant co-owned (plaintiff was the minority
shareholder in the companies, defendant the majority shareholder). The court granted the
defendant’s motion to dismiss the RICO claims because they were time-barred, since plaintiff
did not bring them within four years after she should have known – from news reports – about
the conduct that gave rise to her claims. The court declined plaintiff’s request to toll the fouryear
limitations period based on defendant’s allegedly fraudulent concealment of the conduct,
because plaintiff did not offer any details about any supposed concealment; nor, the court found,
did she exercise diligence in seeking to discover her claim. The court also declined plaintiff’s
request to apply the “separate accrual rule,” which would allow the four-year RICO limitations
period to run afresh for each separate RICO act. In order for the limitations period to begin
anew, each act must be independent from one another; yet, plaintiff failed to alleged separate and
distinct fraudulent acts by defendant.
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J.
Marini v. Adamo, 2011 WL 4442710 (E.D.N.Y. Sept. 26, 2011).
The court denied defendants’ motion for summary judgment on plaintiffs’ RICO claim,
which alleged that defendants participated in a years-long scheme to induce plaintiffs to
fraudulently buy rare coins at inflated prices that resulted in millions of dollars in losses.
Rejecting defendants’ argument, the court found that plaintiffs had established the requisite
continuity of racketeering activity. Plaintiffs’ evidence supported a finding that the scheme
lasted about six years and involved several victims and dozens of fraudulent acts. The court also
rejected defendants’ argument that a RICO enterprise could not consist of a closed corporation
and a person who co-owned it because the co-owner and defendant were not sufficiently distinct.
The court found that the corporation and co-owner are distinct where the corporation was
incorporated under New York law, and as such was a distinct legal entity with rights, obligations
and powers different from those of the natural person who owned it.
Morris v. Zimmer, 2011 WL 5533339 (S.D.N.Y. Nov. 10, 2011).
Defendant Zimmer was an attorney who represented plaintiffs in a National Association
of Securities Dealers (“NASD”) arbitration in 2004. The arbitration settled prior to hearing for
about $80,000. Defendant did not pay over the settlement to plaintiffs, however, and told
plaintiffs that he had invested some of the money in his business. Plaintiffs said they did not
agree to such an investment, and demanded the return of their money. Defendant eventually
pleaded guilty to petit larceny misdemeanor in New York, and was disbarred in Maryland. In
this action, plaintiffs brought a variety of state-law claims against defendants, and sought leave
to amend to add a civil RICO claim alleging that defendant Zimmer’s conversion of the NASD
settlement money, and consequent misrepresentations, indicated a pattern of racketeering activity
in violation of RICO. The court denied plaintiffs’ motion, finding that the proposed additional
claim failed as a matter of law, because defendant Zimmer’s conduct all related to a single event,
and so did not amount to the requisite pattern of racketeering activity.
Picard v. Kohn, 2011 U.S. Dist. LEXIS 101261 (S.D.N.Y. Sept. 6, 2011).
The Trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC
filed suit against Sonja Kohn, UniCredit Bank and others alleging their participation in the
Madoff Ponzi scheme. The District Court stated its reasons for withdrawing the bankruptcy
reference with respect to the Trustee’s RICO claims. Among the reasons stated was the fact that
the issues raised by defendants would require significant interpretation of RICO, including the
“RICO Amendment” that prevents securities law violations from being the predicate act for
RICO claims.
J.
J.
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J.
In re Refco Inc. Sec. Litig., 2011 WL 1219265 (S.D.N.Y. Mar. 30, 2011).
Investment manager of hedge fund and hedge fund brought suit against hedge fund
administrator, as well as the CEO and president of the administrator, alleging various claims
under New Jersey’s RICO Act arising out of the transfer of excess cash to the broker’s
unprotected offshore accounts. Although plaintiffs were entitled to name the enterprise and the
various individuals who constitute the “enterprise” as defendants under New Jersey’s RICO Act
(which is broader than its federal counterpart), plaintiffs failed to plead sufficient “organization”
because the amended complaint did not show how the members of the “enterprise” were
associated with each other, whether the participants performed discrete roles, the level of
planning involved, how decisions were made, or the coordination involved in implementing
those decisions. Nor did it describe the division of labor or separation of functions among the
enterprise members. Thus, no inference could be made that defendants collectively engaged in a
high degree of planning, cooperation and coordination, as required under New Jersey law. Thus,
even though plaintiffs adequately demonstrated a pattern of racketeering and proximate cause,
and adequately pleaded their allegations of mail and wire fraud under the heightened pleading
standards, the court affirmed the Special Master’s recommendation that the New Jersey RICO
count be dismissed with prejudice.
Indus. Enters. of Am., Inc. v. Brandywine Consultants, 2011 Bankr. LEXIS 3560 (Bankr. Del.
Sept. 16, 2011).
In this Chapter 11 bankruptcy proceeding, plaintiff commenced an adversarial proceeding
alleging that two former executives of the bankrupt corporation defrauded the corporation and its
shareholders by inflating the value of the corporation’s stock, illegally issuing shares of stock,
and wrongfully retaining proceeds of stock sales. Defendants moved to dismiss plaintiff’s civil
RICO claims, arguing that they were barred by the statute of limitations and improperly
predicated on securities law violations. The court accepted plaintiff’s argument that the fouryear
statute of limitations had not expired and began to run only in April 2009, when the former
executives who were accused of wrongdoing left the corporation and their actions could have
first been discovered. The court also rejected defendants’ argument that plaintiff’s RICO claims
were improperly based on securities law violations, finding that plaintiff had properly alleged
mail fraud and stock transfers without value as RICO predicates.
Leibholz v. Hariri, 2011 WL 1466139 (D.N.J. Apr. 15, 2011).
Plaintiff asserted violations of the New Jersey RICO Act arising out of an alleged
contract between defendant and plaintiff, whereby defendant agreed to give equity in his
company to plaintiff in exchange for plaintiff’s consulting services. Plaintiff alleged that
defendant (1) executed a scheme to obtain and/or retain for himself stock promised to employees
and consultants of his company in exchange for their services, and (2) fraudulently valued
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equipment he contributed to the company in order to increase his equity in the company. Despite
the fact that plaintiff adequately pleaded “enterprise” under New Jersey’s broad definition, there
was no evidence in the record that defendant engaged in a pattern of racketeering activity.
Accordingly, the court granted defendant’s motion for summary judgment.
In re Jamuna Real Estate, LLC, 460 B.R. 661 (Bankr. E.D. Pa. 2011).
In denying defendant’s motion for summary judgment on a civil RICO claim, the
Bankruptcy Court held that the claim was not predicated on a securities sale, and therefore the
bar on predicating RICO claims on securities law violations (at 18 U.S.C. § 1964(c)) did not
apply. The court found that the transactions that formed the basis for the claim were mortgage
and equipment loans for defendants’ fast-food businesses. The plaintiff was therefore not an
investor in the businesses, but rather an ordinary commercial lender.
McCoy-McMahon v. Godlove, 2011 WL 4820185 (E.D. Pa. Sept. 30, 2011).
The court granted defendants’ motion to dismiss plaintiff’s RICO claim, arising from her
“squeeze-out” as a minority shareholder of a corporation. The court, while finding that plaintiff
alleged the requisite two or more RICO predicate acts of mail and wire fraud, said that the acts
nonetheless did not constitute a pattern of related activity. The court found that defendants’ acts,
as alleged, were part of two separate schemes, as the purpose of each scheme, as well as its
respective victims, were different.
Amos v. Franklin Fin. Servs. Corp., 2011 WL 2111991 (M.D. Pa. May 26, 2011).
Former shareholders of CFI, a company that was merged into defendant corporation, sued
defendant corporation and other former shareholders and officers of CFI, alleging among other
things, violations of RICO for operating CFI in a way that diluted the value of the payment to
plaintiff shareholders upon the merger relative to the payments received by defendant
shareholders. The court dismissed the action, finding that plaintiffs failed to state RICO claims
because of the statutory exception for fraud in the sale of securities. Here, the allegations in the
complaint constituted actionable securities fraud claims under Rule 10b-5, as plaintiffs alleged
that defendants made misrepresentations as to the value of CFI in connection with the sale of
securities during the merger. Accordingly, they were barred by the Private Securities Litigation
Reform Act.
J.
J.
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Beaman v. Barth, 2011 Bankr. LEXIS 819 (E.D.N.C. Mar. 2, 2011).
J.
In this Chapter 7 bankruptcy proceeding, the trustee filed suit alleging that individuals
who controlled the bankrupt corporation engaged in a scheme to loot its assets, in violation of
RICO (among other laws). The court, however, granted defendants’ motion to dismiss, finding
that the fraudulent acts amounted to a single scheme with one victim and one goal, and not the
requisite pattern of racketeering activity.
In re Amerlink, Ltd., 2011 WL 802794 (Bankr. E.D.N.C. Mar. 2, 2011).
Bankruptcy trustee brought an adversary proceeding alleging violations of RICO and
North Carolina’s RICO statute arising out of defendants’ alleged scheme to deplete Amerlink’s
resources for personal gain. Although the alleged facts highlighted instances of separate conduct
over a course of several years, the conduct was in furtherance of one intended goal.
Furthermore, Amerlink was the sole victim. The court, following jurisprudence in the Fourth
Circuit, held that a solitary scheme aimed at a single victim does not fit within the scope of a
RICO pattern and allowed the motion to dismiss the trustee’s RICO claims.
Alack v. Jaybar, LLC, 2011 WL 3626687 (E.D. La. Aug. 17, 2011).
Plaintiffs alleged fraudulent sales of securities by defendants. Intervenor-Plaintiff moved
to alter the court’s order that dismissed with prejudice her RICO claims as asserted against
defendants. The court dismissed the RICO claims because they were barred by the Private
Securities Litigation Reform Act of 1995, which precludes securities fraud from serving as a
predicate for a private cause of action under RICO. The court declined to alter its order
dismissing the RICO claims for two reasons. First, Intervenor-Plaintiff alleged that the bank
fraud was undertaken in connection with the purchase of a security, even though a plaintiff
cannot avoid the RICO amendment’s bar by pleading bank fraud as a predicate offense in a civil
RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud.
Second, the court found that the argument now made by Intervenor-Plaintiff – that the predicate
act for her RICO claims was bank fraud – is one that could and should have been raised in her
opposition to defendants’ motion for partial dismissal, and Intervenor-Plaintiff’s failure to do so
also justified the denial of her motion.
Abene v. Jaybar, LLC, 2011 WL 2847436 (E.D. La. July 14, 2011).
Plaintiffs alleged fraudulent sales of securities by defendants. Intervenor-Plaintiff
adopted most of plaintiffs’ allegations and asserted, among others, additional RICO claims. The
court dismissed the RICO claims because they were barred by the Private Securities Litigation
Reform Act of 1995, which precludes securities fraud from serving as a predicate for a private
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cause of action under RICO. Though civil RICO claims may proceed if they are specifically
asserted against a defendant who had been criminally convicted in connection with the alleged
securities fraud, Intervenor-Plaintiff made no such allegations in her complaint.
Conwill v. Greenberg Traurig, LLP, 2011 WL 1103728 (E.D. La. Mar. 22, 2011).
Plaintiff claimed that defendants made false and misleading statements promising that
plaintiff would legally be able to take tax deductions based on the losses generated in the subject
transaction, which misled him into entering into the transaction in the first instance. Although
plaintiff identified mail and wire fraud as the predicate acts supporting his RICO claim, those
predicate acts were actually allegations of fraud in connection with the sale of securities. Thus,
as the alleged fraud coincided with a purchase of securities and that purchase of securities was
made to further a fraudulent scheme, the claims were actionable as securities fraud and plaintiff
could not rely on them as the basis for a RICO claim.
Baldwin v. Cavett, 2011 U.S. Dist. LEXIS 117755 (E.D. Tex. Sept. 12, 2011).
Plaintiffs filed suit against defendants and their investment advisors asserting a bevy of
claims, including RICO claims, based on poor investment advice that defendants allegedly gave
plaintiffs with the aim of generating greater fees. On defendants’ motion to dismiss, the court
ordered plaintiffs to file a RICO case statement within 14 days, and permitted defendants to
renew their motion to dismiss after plaintiffs’ filing of the case statement.
In re ClassicStar Mare Lease Litigation, 2011 WL 4591927 (E.D. Ky. Sept. 30, 2011).
In this civil suit, the court granted plaintiffs’ motion for summary judgment on their
RICO claims, finding that defendants used the mails and wires over the course of three years to
fraudulently sell investments in a horse-breeding operation that did not have sufficient horses to
breed. Defendants’ main defense was that plaintiffs could not succeed because of the in pari
delicto doctrine, which counsels courts to avoid finding in favor of a plaintiff where both parties
are at roughly equal fault. The court, assuming in pari delicto to be applicable to a civil RICO
claim, found the doctrine to be inapplicable here because defendants did not present evidence
that plaintiffs knew about the problems with the horse-breeding operation when they made their
investments or even well into their participation as investors.
J.
J.
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General Retirement System of City of Detroit v. Onyx Capital Advisors, LLC, 2011 WL 4528304
(E.D. Mich. Sept. 29, 2011).
On defendants’ motion to dismiss, the court dismissed plaintiffs’ RICO claims, finding
them to be predicated on securities law violations and, therefore, barred by 18 U.S.C. § 1964(c).
Plaintiffs claimed that their RICO claims did not relate to the purchase or sale of securities, but
to misappropriation and poor post-investment management. However, the court found that the
securities laws (and specifically Section 10(b) of the Securities Exchange Act of 1934) covered
fraudulent conduct beyond an initial purchase or sale, and that “[a] surgical presentation of the
cause of action cannot avoid the determination that the conduct giving rise to the predicate
offenses amount to securities fraud.” Here, the court found that since plaintiffs purchased
securities over a period of several years and alleged that defendants’ misappropriation and bad
management occurred during the same time, the actions alleged as predicates for the RICO
claims could not be separated from the purchases and sales of securities.
Moorehead v. Deutsche Bank AG, 2011 WL 4496221 (N.D. Ill. Sept. 26, 2011).
On defendants’ motion to dismiss, the court dismissed plaintiffs’ RICO claims, finding
that while the claims were not barred by the statute of limitations, they were prohibited under the
Private Securities Litigation Reform Act (“PSLRA”). Plaintiffs alleged that defendants induced
them into pursuing faulty tax-reducing investment strategies. As to the statute of limitations, the
court found that while the four-year limitation period for plaintiffs’ RICO claims had passed, it
had been adequately tolled by a class-action lawsuit, in which plaintiffs participated, that
included a RICO claim. As for the PSLRA, which bars RICO claims predicated on securities
law violations (18 U.S.C. § 1864(c)), the court found the bar to be applicable even though
plaintiffs contended that their claims were predicated on purportedly faulty tax-planning
strategies, not securities transactions. The court concluded that the tax strategies at issue
involved “significant securities transactions” in which defendants repeatedly made
misrepresentations about their tax effects and profitability. Accordingly, the RICO claims could
not be brought.
Bobrowski v. Red Door Group, 2011 WL 3555712 (D. Ariz. Aug. 11, 2011).
Plaintiff investor sued defendant entities alleging, among others, securities fraud and
RICO claims. The court dismissed plaintiff’s securities fraud claims on defendants’ motion for
summary judgment, finding that the Purchase Agreement coupled with the Asset Management
Agreement, though an investment contract, was not a security under SEC v. W.J. Howey Co., 328
U.S. 293 (1946). The court found that there was no horizontal commonality here because
plaintiff purchased fee simple title to eight units and was entitled to a fixed monthly rent and a
set repurchase price for his units alone. The court also found that there was no vertical
commonality because payment under the lease was not conditioned upon the successful rental of
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the units, and rental of the units beyond what is necessary to pay the lease amount results in
greater revenue for defendants only. Because the court found that defendants did not commit
any violations of securities laws, the court also dismissed the plaintiff’s RICO claims since no
other predicate act remained.
Negrete v. Allianz Life Ins. Co. of N. America, 2011 WL 4852314 (C.D. Cal. Oct. 13, 2011).
In this class action lawsuit brought on behalf of about 200,000 senior citizens, defendant
life insurance company filed a motion for summary judgment seeking dismissal of plaintiffs’
RICO claims, which alleged that defendant conspired with its network of Field Marketing
Organizations (FMOs) to make misleading statements and omissions in order to induce plaintiffs
to purchase erroneously priced annuities. Defendant argued that plaintiffs could not prove a
RICO enterprise among it and its FMOs, which sell its annuity products, because the FMOs were
independent and competed with one another in the marketplace, and as such could not be said to
belong to a common enterprise. Defendant also argued that the FMOs could not share a common
purpose, another prerequisite for finding a RICO enterprise. The court denied defendant’s
motion and found that enough material facts existed for a jury to find that (1) the Marketing
Advisory Committee served as an intermediary for communications among the FMOs, (2) the
FMOs had a common purpose because FMOs are not required to share every purpose, just one
common purpose (here, to sell defendant’s annuities), and (3) defendant participated in the
management of a RICO enterprise, since it had considerable control over the FMOs.
Coquina Investments v. Rothstein, 2011 WL 4971923 (S.D. Fla. Oct. 19, 2011).
A now-disbarred attorney ran a Ponzi scheme whereby he convinced investors to
purchase legal settlements that did not actually exist. As part of the scheme, the attorney
maintained accounts at a major national bank, held meetings at a Florida branch of that bank
(where the attorney’s co-conspirators would impersonate bank employees), and falsified bank
statements. In a lawsuit naming the bank as one of the defendants, the court granted the bank’s
motion to dismiss plaintiff’s civil RICO claim, holding that the bank was an unwitting conduit
for criminal activity, and not a participant in the criminal enterprise or any pattern of
racketeering activity. Even assuming that acts by a bank employee could be imputed to the bank,
plaintiff failed to show that the bank derived any benefit from the Ponzi scheme (a requirement
for vicarious liability), such as high balances in the law firm’s bank accounts that led to
improved cash flow and interest earnings. In fact, the court found that the bank may have
actually suffered because the accounts had low monthly balances and the bank was owed
uncollected funds.
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K. Damages and Other Relief in Private Actions
1. Damages as Element of Claim
K.1
Moriarty v. Equisearch Services, Inc., 2011 WL 4485176 (6th Cir. Sept. 29, 2011).
Plaintiff sued for fraud, breach of contract, and violation of Delaware securities statutes
based on defendants’ failure to notify the plaintiff of the issuance of stock to plaintiff in
connection with the demutualization of an insurance company. Plaintiff was issued stock in
2001 that was valued at $167,573 at that time. In May 2007, plaintiff was contacted by
Equisearch, a search company, and informed of its ownership of the stock, which by then had
appreciated to $573,000. Plaintiff authorized Equisearch to recover and sell the stock, which it
did in August 2007. Equisearch charged plaintiff a 25% search fee. Plaintiff received $398,908
net after deduction of the search fee and the stock’s price decline from May 2007 to August
2007. Plaintiff sued to recover the difference between $398,908 and $573,000. The court
rejected plaintiff’s argument that the alleged breach had left plaintiff worse off, finding that
plaintiff had failed to provide evidence that the total return to plaintiff would have exceeded
$398,908 if plaintiff had received the stock worth $167,573 in 2001.
Baxi v. Ennis Krupp & Assocs., Inc., 2011 WL 3898034 (N.D. Ill. Sept. 2, 2011).
Plaintiff brought claims for violations of section 10(b), breach of fiduciary duty,
negligent misrepresentation, and breach of contract (among others), based on plaintiff’s
allegations that the defendants defrauded him by inducing him to sell his shares at $100 per share
when the defendants knew that the shares would be worth far more than that in a few months
because of a pending, undisclosed merger. The court dismissed plaintiff’s claims (with leave to
replead) on the grounds that plaintiff was contractually obligated to sell his shares for no more
than $100 per share regardless of the market price of the stock, and thus could not have suffered
any damages.
K.1
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D. Cal. 2011).
Plaintiffs brought suit under Section 12 of the Securities Act of 1933 and for breach of
fiduciary duty (among other claims) based on their ownership of tenancy-in-common interests in
a real estate investment (which there was a disputed issue of fact as to whether they were
“securities”). Defendants argued that any damages were speculative, because foreclosure on the
underlying properties had not taken place, and plaintiffs therefore still held their interests.
Defendants further argued that until the interests were sold, plaintiffs had not suffered a
quantifiable loss. Plaintiffs countered that they had also been promised coupon income on their
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investment, that the coupons had not been paid, and that this constituted a quantifiable loss. The
court held that the loss of the coupons was a quantifiable damage, even if relatively small
compared with the total amount plaintiffs hoped to recover, and denied defendants’ motion for
summary judgment on this basis.
Emposimato v. CIFC Acquisition Corp., 932 N.Y.S.2d 33 (App. Div. 2011).
CIFC sought damages based on alleged violations of a stock purchase agreement.
Defendants sought summary judgment, arguing (among other things) that the fair market value
of the stock to be sold was equal to the contract price for the stock at the time of the purported
breach, and thus that there were no damages. The court of appeals held that the motion court
properly denied summary judgment, because there was a difference of opinion regarding fair
market value, even though the contract price constitutes evidence of fair market value that is
entitled to significant weight. The court of appeals further held that the damages sought by CIFC
were not consequential damages (which would have been precluded by the agreement). Rather,
CIFC sought expectation damages, and expectation damages in the case of a breach of a contract
to sell securities are calculated as the difference between the agreed price of the shares and the
fair market value at the time of the breach. This formulation awards expectation damages to the
extent of putting plaintiff in the same economic position he would have occupied had the
breaching party performed the contract.
K.1
2. Measure of Damages
K.2
Probate Court of Warwick v. Bank of America, N.A., 2011 WL 3740478 (D.R.I. Aug. 24, 2011).
Plaintiffs, who were beneficiaries named in a will, brought suit against an executor of the
will for breach of fiduciary duty. The court found that the executor breached its duties in its
handling of the sale of stock of a closely-held corporation, by allowing the stock to be sold at
$145.36 or $200 per share when shares of the same stock sold for $1,667.38 per share shortly
thereafter. In determining damages, the court noted the general principle that tort damages
should restore the aggrieved party to the position he would have occupied had the tort not
occurred. The court rejected the argument that the measure of damages should be the difference
between the sale price and fair value at the time of the sale, because the effect would be to give
the executor (or broker) control of the stock, subject only to nominal damages. The court found
that the real injury was not merely the sale for less than fair value, but the sale at an unfavorable
time. The court held that the proper measure of damages for those plaintiffs who would have
held on to their stock until the time of the $1,667.38 per share offer was the difference between
that price and the price they received, plus interest. However, the court also held that those
plaintiffs who would not have held their stock until that time were not entitled to any damages,
and then made individualized factual determinations as to whether each plaintiff would have held
their stock.
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K.2
U.S. v. Gushlak, 2011 WL 3159170 (E.D.N.Y. July 26, 2011).
Defendant pleaded guilty to conspiracy to commit securities fraud and conspiracy to
commit money laundering in relation to a scheme to manipulate the price of GlobalNet common
stock. After sentencing, the court received submissions from the government regarding
restitution to victims pursuant to the Mandatory Victim Restitution Act. The government
initially submitted a letter indicating that victims lost approximately $20 million, but did not
provide its methodology or a list of the victims. Based on that submission, the court found that
the government had yet to prove any victim losses and ordered the government to explain its
methodology, provide the trading records on which it relied for in camera review, and provide a
list of victims and the amount each had lost. The government then submitted additional
evidence, but the court found that it still failed to establish that the full amount of losses suffered
by the victims were attributable to Gushlak’s offense. The government’s third submission
analyzed the S&P 500, Nasdaq Composite, and Russell 2000 indices, found that these indices
declined by 20% during the relevant period, and thus discounted the victim loss calculations by
20% to reflect the portion of the victims’ losses that were caused by market movement rather
than fraud. The court again rejected the government’s analysis, finding that while index
performance may be of some relevance in a case where fraud is publicly revealed and a stock’s
price subsequently declines, it was not relevant here, where the public remained unaware of the
fraud. The court found that Gushlak’s expert’s comparisons of GlobalNet’s performance to
telecommunications stocks such as Level 3 were more useful than the government’s comparison
to broad indices. The court allowed the government to provide additional submissions as to the
amount of restitution, and provided several examples of potentially relevant evidence, including
evidence showing the percentage of the daily trading volume for GlobalNet shares that was
attributable to the conspiracy, a detailed factual explanation of how the conspiracy was carried
out, evidence related to the value of GlobalNet shares in the absence of manipulation (such as
prices of the shares when the conspirators initially acquired them), and evidence of the
performance of comparable companies.
New Jersey Carpenters Health Fund v. Novastar Mortgage, Inc., 2011 WL 1338195 (S.D.N.Y.
Mar. 31, 2011).
Plaintiff brought a putative class action based on defendant’s lending practices in
originating subprime home mortgages and sale of securities backed by the mortgages. Plaintiff
alleged that its injury was a 93% loss of market value in the securities since its initial value in the
offering. Defendant sought to dismiss plaintiff’s claim on the grounds that market value loss
should not apply in the mortgage-backed securities context, because the purchasers could not
have reasonably relied on the opportunity to sell the securities in the market, and instead could
only reasonably expect to receive the cash flow from the securities. The court held that
defendant’s position was without support under Section 11(e) of the Securities Act of 1933. The
text of Section 11(e) itself did not support defendant’s argument or single out fixed-income debt
securities for special treatment. Furthermore, the lack of a secondary market for the securities
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was, according to plaintiff’s allegations, due in part to the defendant’s own actions. The court
further found that purchasers of mortgage-backed securities did in fact have an expectation that
they would be able to utilize a secondary market. Finally, accepting defendant’s argument would
place severe limits on the application of the ‘33 Act to securities such as bonds.
Elton v. McClain, 2011 WL 6934812 (W.D. Tex. Dec. 29, 2011).
The court entered default judgment for plaintiffs on claims under the Securities Exchange
Act of 1934 and RICO, and under Texas law for breach of contract and fraud, among others. On
the issue of damages, the court noted that out-of-pocket losses are the appropriate measure of
damages under Rule 10b-5. Because one plaintiff had suffered out of pocket losses of $10,000,
the court found he was entitled to trebling of damages under RICO and awarded $30,000.
Another plaintiff sought lost profits (as an alternative to treble damages). The plaintiff’s wellpleaded
allegations showed he had purchased 100,000 shares of the stock for $25,000, and that
the stock had traded for several months at $5.00 per share. The court found that the appropriate
measure for lost profits was the actual price of the stock, and awarded lost profits of $500,000.
Wehrs v. Benson York Group, Inc., 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).
After entering default judgment against defendant Wells on the issue of liability, the court
considered arguments on the issue of damages. The allegations in the complaint established that
Wells breached a duty to the plaintiff by failing to faithfully execute a stock purchase order,
failing to execute a stop loss order, and repurchasing the stock without plaintiff’s authorization.
The court found that the proper measure of damages was the amount needed to restore plaintiff
to the position he would have been in had the breach not occurred. Because neither party had
presented any cases addressing damages in an analogous factual situation, the court noted that it
was in an awkward position and would consider motions under Rule 59(e) to alter or amend the
judgment if appropriate. On the claim of failure to faithfully execute the purchase order, the
court found Wells liable for $17,659, which was the difference between the price at which
plaintiff had authorized the purchase and the price at which it was actually made. On the failure
to execute a stop loss order, the court found that Wells was only liable for the amount of losses
that exceeded the stop loss amount. Wells was not liable for the commission on that trade,
because the sale would have happened in any event. On the unauthorized purchase claim, Wells
was liable for the difference between the total purchase price and the total sale price. Although
Wells argued that he was not liable for losses that occurred after the unauthorized purchase,
because of a failure to mitigate, the court held that failure to mitigate was an affirmative defense
and Wells had waived it by failing to answer the complaint.
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Elipas v. Jedynak, 2011 WL 1706059 (N.D. Ill. May 5, 2011).
Plaintiffs moved for summary judgment against defendant Howard under Rule 10b-5 and
Illinois securities law. Plaintiffs had invested in UWT, and the court had previously found that
Howard had taken part in a scheme to divert funds from UWT that had been a significant factor
in UWT’s demise. The court noted that if UWT had been as profitable as Howard represented it
to be, it was reasonable to infer that plaintiffs would have received some return on their
investments. Howard was not participating in the litigation in any meaningful way. The court
held that, although it is ordinarily the plaintiff’s burden to isolate the effects of fraud from other
effects that may have contributed to his loss, under these circumstances the burden shifted to
Howard to show that other factors besides her fraud contributed to UWT’s demise. Because
there was no such evidence in the record, the court concluded that Howard’s fraud was the sole
cause of the loss. Accordingly, the appropriate measure of damages against Howard was the
amount of plaintiffs’ investments in UWT less any distributions they may have received.
Benincasa v. Lafayette Life Ins. Co., 2011 WL 5967300 (D. Minn. Nov. 29, 2011).
Plaintiffs brought claims alleging (among other things) breach of fiduciary duty based on
the unsuitability of an insurance investment. The court found that the appropriate measure of
damages for breach of fiduciary duty based on an unsuitable investment is the difference
between the value of the plaintiff’s current investment and the value of the plaintiff’s investment
had it been suitably invested. Plaintiffs presented a damages calculation that related only to
rescission damages and not to unsuitability damages. Because plaintiffs failed to present
evidence as to a required element of a breach of fiduciary duty claim, the court granted
defendants’ motion for summary judgment.
Genesee County Employees’ Retirement System v. Thornburg Mortgage Securities Trust 2006-3,
2011 WL 5840482 (D.N.M. Nov. 12, 2011).
Plaintiffs brought a class action asserting federal and state securities claims relating to
mortgage-backed securities. Defendants argued under Section 11 of the Securities Act of 1933
(which requires plaintiffs to plead a decline in market value) that plaintiffs’ claims could not
succeed because the offering documents for the securities warned that there may be no secondary
market for the securities. The court disagreed, finding that Section 11 prescribes a particular
measure of damages and that statements in a prospectus cannot limit the purchaser’s remedies
under federal law.
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Emposimato v. CIFC Acquisition Corp., 932 N.Y.S.2d 33 (App. Div. 2011).
CIFC sought damages based on alleged violations of a stock purchase agreement.
Defendants sought summary judgment, arguing (among other things) that the fair market value
of the stock to be sold was equal to the contract price for the stock at the time of the purported
breach, and thus that there were no damages. The court of appeals held that the motion court
properly denied summary judgment, because there was a difference of opinion regarding fair
market value, even though the contract price constitutes evidence of fair market value that is
entitled to significant weight. The court of appeals further held that the damages sought by CIFC
were not consequential damages (which would have been precluded by the agreement). Rather,
CIFC sought expectation damages, and expectation damages in the case of a breach of a contract
to sell securities are calculated as the difference between the agreed price of the shares and the
fair market value at the time of the breach. This formulation awards expectation damages to the
extent of putting plaintiff in the same economic position he would have occupied had the
breaching party performed the contract.
Allen v. Devon Energy Holdings, L.L.C., 2011 WL 3208234 (Tex. App. Hous. (1st Dist.) July 28,
2011).
The trial court granted summary judgment in favor of defendants on securities fraud
claims under the Texas Securities Act (TSA) and other state law. Defendants argued that
summary judgment was proper because plaintiff had not suffered damages as a matter of law and
because any damages would be speculative. The court of appeals noted that disgorgement of
profits was an equitable remedy for fraud and violations of securities law, and should have been
available as a remedy in this case. The court further found that “income” under the TSA could
include capital appreciation. The court found that whether plaintiff’s damages were speculative
was a factual question that should not have been resolved on summary judgment under the facts
presented.
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3. Punitive Damages
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Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 458 B.R. 87 (Bankr. S.D.N.Y. 2011).
A trustee appointed under the Securities Investor Protection Act to liquidate assets
belonging to a business operated as a Ponzi scheme filed an adversary proceeding against four
individuals who worked for the business. The trustee claimed that the four individuals breached
their fiduciary duties when they did not discover and report the fact that the business was a Ponzi
scheme and accepted millions of dollars from the business. The court found that the defendants
were unjustly enriched. Under New York law, a defendant is liable for punitive damages if the
defendant’s actions “constitute willful or wanton negligence or recklessness.” Furthermore, acts
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are wanton and reckless when done in a manner “showing heedlessness and an utter disregard for
the rights and safety of others.” The court found that the trustee sufficiently alleged
“heedlessness and utter disregard” because defendants ignored numerous red flags and
irregularities in order to enrich themselves at the expense of customers.
Hosier v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 146670 (D. Colo. Dec. 21, 2011).
Petitioners filed a Statement of Claim with FINRA seeking to recover losses from
investments they made with Citigroup. Petitioners requested $48.1 million in compensatory
damages, along with punitive damages, attorneys’ fees and costs. The FINRA panel awarded
compensatory damages in the amount of $33.9 million, punitive damages in the amount of $17
million, and attorneys’ fees in the amount of $3 million. Petitioners asked the court to affirm the
award, while Citigroup filed a motion to vacate the award. Although Citigroup argued that the
panel provided no basis for the punitive damages award, the court found that the panel did not
exceed its authority by awarding punitive damages because the Arbitrator’s Guide does not
obligate arbitrators to include the basis for punitive damages in an award. Additionally, the court
observed that the panel had no obligation to request that the parties brief the issue of punitive
damages as the Arbitrator’s Guide recommends additional briefing only if the “panel needs
additional information.”
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 927 N.Y.S.2d 517 (N.Y. Sup. Ct. 2011).
Insurer filed suit against financial services group and affiliated entities claiming that it
had been fraudulently induced to enter financial guaranty insurance policy, guaranteeing
payments on $900 million in securitized residential second mortgages held in trust that issued
mortgage-backed securities. The insurer sought damages - including punitive damages -
incurred from alleged breach of contractual representations and warranties, as well as other
breaches of contract. The court held that the insurer’s claim for punitive damages due to the
alleged fraudulent inducement was not actionable, where the insured’s alleged
misrepresentations were either puffery, duplicative of breach of contract claims, or not
sufficiently alleged.
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4. Attorneys’ Fees and Costs
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Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).
The Sixth Circuit held that the district court committed plain error by awarding costs and
attorneys’ fees based on conduct not raised in one of the defendants’ motions for sanctions. The
plaintiffs brought an action asserting security claims and other claims against the defendants
relating to the alleged conversion of Indonesian mines. The Sixth Circuit found that the lower
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court’s crucial finding for purposes of its sanctions award was that plaintiffs failed to conduct a
reasonable inquiry before filing suit. The Sixth Circuit determined that this finding went far
beyond the basis for the defendant’s sanctions motion, which was that the plaintiffs’ proposed
third amended complaint completely failed to address the fatal absence of personal jurisdiction.
The Sixth Circuit also held that the district court did not ensure that the plaintiffs had sufficient
notice of the basis for sanctions before making its sanctions finding.
In re United Health Gr. Shareholder Derivative Litig., 631 F.3d 913 (8th Cir. 2011).
The Eighth Circuit offered the district court’s award of online research costs. The district
court approved the settlement of a derivative action involving the granting of backdated stock
options and awarded $175,000 for online legal research costs. A shareholder appealed the
award, arguing that counsel was not entitled to recover such costs.
The Eighth Circuit affirmed the award, holding that online research costs may be
recovered as part of litigation expenses in a settlement proceeding. The court distinguished prior
cases that had denied recovery of such costs on the grounds that those cases involved fee shifting
statutes, not settlement.
Lynch v. Whitney, 419 F. App’x 826 (10th Cir. 2011).
The Tenth Circuit affirmed the district court’s affirmation of a FINRA arbitration panel’s
award of attorneys’ fees. The court noted that the defendant’s submission of an affidavit that
listed its attorneys’ fees, though not preferable to submitting detailed fee records, did not provide
a basis for reversal. The court further concluded that the appellants’ challenge to attorneys’ fees
was meritless and warranted sanctions.
Suess v. FDIC, 770 F. Supp. 2d 32 (D.D.C. 2011).
The court granted the FDIC’s summary judgment motion, finding that the plaintiff, a
shareholder of an insolvent thrift, was not entitled to recover the attorneys’ fees and costs that he
incurred unsuccessfully defending an appeal. The court held that absent an express agreement,
the fact that the FDIC reimbursed the plaintiff’s attorneys’ fees and costs for his efforts in the
trial court as a part of a settlement agreement did not mean that he had an automatic right to
claim fees and costs for the appeal. The court further found that the FDIC did not breach its
statutory responsibility to the shareholders of the thrift, including the plaintiff, as it did in fact
represent their interests on appeal.
The court held that none of the exceptions to the American Rule was applicable The court
also rejected the plaintiff’s argument that the FDIC’s payment of fees and costs pursuant to the
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settlement agreement constituted an implied in fact contract to reimburse him for his efforts on
appeal. Finally, the court determined that the plaintiff was not entitled to fees based on unjust
enrichment because his efforts did not confer a benefit on the FDIC and because he had as much,
if not more, to gain from defending the appeal than the FDIC.
In re Access Cardiosystems, Inc., 460 B.R. 67 (Bankr. D. Mass. 2011).
The court denied plaintiffs’ request for attorneys’ fees. The plaintiff corporation and the
plaintiff shareholders moved for summary judgment on damages and attorneys’ fees after
prevailing on their breach of fiduciary duty and Massachusetts securities law claims. The court
determined that plaintiffs had waived their request for attorneys’ fees because no evidence
relative to attorneys’ fees was presented during the proceedings.
SEC v. Smith, 798 F. Supp. 2d 412 (N.D.N.Y. 2011).
The court permitted the SEC to recover reasonable attorneys’ fees against a responsible
party in connection with a motion for reconsideration of a preliminary injunction. The SEC
brought an action against various individuals and a company, alleging that they had defrauded
investors and committed various securities violations. It sought a preliminary injunction to
freeze a trust account held by one of the defendants and his wife; the trust sought to lift the TRO
that had been imposed. Because the court found that the defendant and his wife no longer held
any interest in the trust, it dissolved the TRO and denied the SEC’s request for a preliminary
injunction.
The SEC later discovered evidence that the defendant and his wife had retained interests
in the trust and that this information had been withheld during the preliminary injunction
proceeding. The SEC therefore moved for reconsideration of its motion. It also sought sanctions
against various parties under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the
court’s inherent power for the costs incurred in bringing the motion for reconsideration. While
the court awarded the SEC fees, it reduced the SEC’s lodestar calculation based on what a
reasonable client would pay for the services at issue in the relevant geographical area. The court
also reduced the number of hours for which the SEC could be reimbursed. The court permitted
reimbursement of the costs the SEC incurred engaging a tax law expert. It did not, however,
award attorneys’ fees and costs against those parties for whom there was no demonstrated
connection between their misconduct and harm to the SEC.
In re Sadia S.A. Secs. Litig., 2011 WL 6825235 (S.D.N.Y. Dec. 28, 2011).
As part of its approval of the settlement of a class action, the court awarded plaintiffs’
counsel attorneys’ fees of $8.1 million representing 30% of the settlement amount. Plaintiffs’
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counsel had requested an award of $9 million representing 33 1/3% of the settlement amount.
The court lowered the rates for support staff and eliminated the fees for investigatory work
performed by non-lawyers. Using the lodestar method as a “cross-check”, the court determined
that $7,797,961.50 was a reasonable lodestar. After assessing the factors set forth in Goldberger
v. Integrated Res., Inc., 209 F.3d 43 (2d Cir. 2000) and found that they required only a minimal
multiplier of the lodestar.
Kingsley Capital Mgmt., LLC v. Sly, 2011 WL 5008520 (D. Ariz. Sept. 30, 2011).
In response to the plaintiffs’ securities fraud and other fraud claims, the defendants
moved to compel arbitration pursuant to an LLC operating agreement. With one exception, the
court held that the defendants were not subject to the arbitration clause and refused to stay the
instant litigation as to them. One defendant, however, was an agent of the LLC and the claims
against him were therefore subject to arbitration. That defendant requested attorneys’ fees as a
prevailing party since he had successfully enforced the arbitration clause.
The court declined to award fees because the LLC agreement was governed by Kentucky
law, not Arizona law, such that Arizona’s attorneys’ fees statute might not apply. Further, the
Arizona fee statute gave the court discretion to determine the appropriate circumstances for
awarding fees. The court exercised its discretion and determined that an award of fees was not
appropriate.
Pub. Emps.’ Ret. Ass’n of N.M. v. Clearlend Secs., 798 F. Supp. 2d 1265 (D.N.M. 2011).
The court denied the plaintiff’s request for attorneys’ fees and costs incurred in
connection with its motion to remand its action against the defendant investment firm. The
plaintiff asserted that removal was improper on its face because, as a state pension program, the
plaintiff was not a citizen of any state for purposes of diversity jurisdiction. Although the court
determined that the case should be remanded, it was not willing to conclude that the defendants
had no objectively reasonable basis for concluding that removal was proper under the
circumstances. The plaintiff did not state in the complaint that it was an arm of the state (and
therefore not a citizen). The court therefore refused to shift fees under 28 U.S.C. § 1447(c).
Durden v. Citicorp Trust Bank, FSB, 763 F. Supp. 2d 1299 (M.D. Fla. 2011).
The court granted in part a trustee’s motion for attorneys’ fees. A beneficiary sued the
trustee for fraud and mismanagement and asserted claims under the Florida Securities and
Investor Protection Act (FSIPA) and common law. The trustee moved for attorneys’ fees
following his successful defense of the lawsuit.
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The court held that the trustee was entitled to an award of fees under the FSIPA which
specifically provides for an award of attorneys’ fees to the prevailing party. The court
determined that the award should include the fees the trustee incurred defending against the
FSIPA claim and also the fees he incurred defending against the beneficiary’s other fraud claims
to the extent the claims were interrelated. Utilizing the lodestar method, the court held that the
hourly rates sought were reasonable for the area. The court also determined that some of defense
counsel’s bills were excessive. To account for this, the court reduced the base number and hours
of the request by 20%. The court then discounted the base figure by 50%, since the billing
records did not permit an easy division between compensable and non-compensable hours.
U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011).
The minority shareholders in a corporation sued when a reverse stock split forced them to
take cash in exchange for their shares. The Minnesota Supreme Court upheld the lower courts’
holding dismissing all of the plaintiffs’ claims. The court held that because the plaintiffs were
not entitled to dissenter’s rights, they were not entitled to interest, costs, or fees under Minnesota
Statute 302A.473. Additionally, they were not entitled to attorneys’ fees or expenses under
Minnesota Statute 302A.467 since they were not prevailing parties.
Taylor v. AIA Servs. Corp., 261 P.3d 829 (Idaho 2011).
The court held that recovery of attorneys’ fees is not appropriate where the commercial
transaction at issue is illegal. The defendant corporation entered into a stock redemption
agreement with the plaintiff – the corporation’s majority shareholder – to purchase all of his
shares. When the corporation ultimately defaulted on payments under the agreement, the
plaintiff sued. The lower court found the redemption agreement illegal and unenforceable
because of Idaho statutory provisions that restrict the funds a corporation can use to redeem its
shares.
On appeal, the Idaho Supreme Court declined to consider whether the lower court erred
in refusing to consider the corporation’s promises to release the plaintiff and indemnify him.
The court noted that the illegality of the redemption agreement was a defense to this argument.
Because the redemption agreement was illegal, the defendants were not entitled to attorneys’ fees
under Idaho Code § 12-120(3), which permits a prevailing party in a civil action on any
commercial transaction to recover reasonable attorneys’ fees. The plaintiff was not entitled to
fees because he was not a prevailing party.
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Doucet v. First Fed. Guar., 72 So.3d 478 (La. Ct. App.), cert. denied, 76 So.3d 1207 (La. 2011).
On appeal in a suit for breach of fiduciary duty under Louisiana securities law, the court
reduced the plaintiff’s damages award, which had been improperly calculated by the trial court,
but held that the award of attorneys’ fees of 33.33% of the total amount of damages was not
excessive. The court noted that the trial court has discretion in awarding attorneys’ fees and the
amount would not be modified on appeal absent an abuse of discretion.
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Bachman v. A.G. Edwards, Inc., 344 S.W.3d 260 (Mo. Ct. App. 2011).
The Missouri Court of Appeals affirmed the lower court’s award of attorneys’ fees,
finding that the award was neither unreasonable nor an abuse of discretion. In the settlement of a
class action involving the defendants’ receipt of payments from affiliates of mutual fund
companies, the class received $26 million in cash and $34 million in vouchers. Class counsel
was awarded $21.6 million in attorneys’ fees and expenses.
Certain class members argued that the fee award was excessive in light of the amount
recovered and that vouchers should not be valued at face value for purposes of calculating
attorneys’ fees. In affirming the fee award, the court noted that fee awards are reviewed under
an abuse of discretion standard, and the party challenging the award must show that the “trial
court’s decision was against the logic of the circumstances and so arbitrary and unreasonable as
to shock one’s sense of justice.” The court found no abuse of discretion, noting that: (1) there
was no evidence (or allegation) of fraud or collusion behind the settlement, (2) the litigation
lasted five years and was substantively and procedurally complex; (3) the settlement was reached
weeks before trial after extensive discovery; and (4) given the weakness in plaintiffs’ claims, no
recovery was a possibility. The court further noted that in complex litigation and class actions, a
one-third contingent fee award was not unreasonable.
Bear Stearns & Co., Inc. v. Int’l Capital & Mgmt. Co., LLC, 926 N.Y.S.2d 826 (N.Y. Sup. Ct.
2011).
The court affirmed a FINRA arbitration panel’s award of attorneys’ fees to the claimant,
finding that the panel did not exceed its authority in making the award. The respondent argued
that the panel exceeded its authority as neither the parties’ contract nor FINRA rules provided for
such an award. The court rejected this argument and held that the parties, including the
respondent, acquiesced to the arbitration panel determining the issue of fees by making
reciprocal fee demands in their submissions. The court noted that the arbitration panel might
have also found that the parties’ agreement to arbitrate “controversies arising under or relating to
this agreement” was broad enough to encompass an agreement to arbitrate the issue of attorneys’
fees.
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L. Contribution, Indemnification
L.
Loumiet v. Office of Comptroller of Currency, 650 F.3d 796 (D.C. Cir. 2011).
The D.C. Circuit held that outside counsel that was retained by a bank’s audit committee
to investigate alleged fraud was entitled to attorneys’ fees under the Equal Access to Justice Act,
5 U.S.C. § 504. Outside counsel prevailed in an administrative proceeding the Office of
Comptroller brought against him under to the Financial Institutions Reform, Recovery, and
Enforcement Act. The D.C. Circuit concluded that the government was not substantially
justified in bringing the administrative proceedings and awarded attorneys’ fees to outside
counsel.
MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152 (2d Cir. 2011).
The Second Circuit held that, under Connecticut law, costs incurred by a special litigation
committee were covered as “defense costs” or expenses incurred in defending or investigating
claims. The court concluded that a New York Attorney General’s subpoena regarding the
insured’s purchase of reinsurance for its guarantee of bonds transaction and an SEC oral request
for documents constituted “Securities Claims” and were covered under the policies at issue.
IAC/InterActiveCorp v. O’Brien, 26 A.3d 174 (Del. 2011).
The Delaware Supreme Court affirmed the trial court’s holding that, given the unusual
circumstances of the case, an indemnification claim was not controlled by the statute of
limitations. The appellee brought an indemnification claim against his former employer for fees
incurred in a shareholder-initiated arbitration. The former employer went bankrupt before the
litigation concluded. The appellee then sued the former employer’s parent company, seeking the
same indemnification.
While acknowledging that the claim would likely be time barred by the applicable
limitations period, the lower court held that due to the exceptional circumstances of the case, the
statute of limitations did not apply to the claim. The lower court held that the claim was timely
under the doctrine of laches. The Delaware Supreme Court affirmed, noting that: (1) appellant
timely pursued his claim against both the former employer and its parent; (2) according to the
parent, it controlled the former employer’s defense in the indemnification action; (3) the
bankruptcy was unexpected; and (4) appellant’s indemnification claim was meritorious. The
Delaware Supreme Court also rejected the appellant’s challenge to the amount of fees awarded.
The court reviewed the trial court’s award for abuse of discretion and found none, noting that the
trial court carefully analyzed the amounts charged and the work performed.
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L.
Banco Indus. De Venezuela C.A., Miami Agency v. De Saad, 68 So.3d 895 (Fla. 2011).
The Supreme Court of Florida held that the respondent, the director of a Venezuelan bank
doing business in Florida, was not entitled to statutory indemnification pursuant to Fla. Stat. §
607.0850 because Florida’s indemnification statute does not apply to foreign corporations. The
respondent sued her former employer, seeking indemnification pursuant to Fla. Stat. § 607.0850
to recover attorneys’ fees and costs incurred in defending herself against criminal charges. The
court held that while the choice-of-law clause in the respondent’s employment contract subjected
her employer to Florida law, it did not change the fact that a foreign corporation is not subject to
the indemnification statute.
The court noted that even if the statute applied to foreign banks, the respondent would not
be entitled to statutory indemnification because she did not satisfy the statutory requirements.
She was prosecuted for her conduct, not on account of her corporate position. The court
determined that even assuming the respondent was prosecuted “by reason of the fact” of being a
corporate officer, she did not “act in good faith” in a manner she reasonably believed to be in the
best interest of the corporation.
Ridley v. Sullivan, 2011 WL 1900156 (Ky. Ct. App. May 20, 2011).
The court held that the appellant had waived his claim for indemnification by his former
employer of damages imposed against him as part of an arbitration proceeding because the issue
was not raised during the arbitration. The appellant had entered into a separation agreement with
the employer (an NASD member). The agreement contained an indemnification provision that
the employer would indemnify against any claim made for conduct in the course of the
appellant’s employment. The appellant’s ex-wife later brought an arbitration claim against him
and the employer, alleging the appellant mismanaged her brokerage accounts among other
things. During the arbitration, the employer asserted that the appellant’s conduct had not been
within the scope of his employment. The arbitration panel awarded judgment in favor of the exwife,
against both the appellant and the employer separately.
The appellant then brought suit to enforce the indemnification provision against the
employer. The trial court denied his motion to compel indemnification. On appeal, he asserted
that his indemnification claim had not yet accrued at the time of the arbitration and that the
agreement was not subject to any arbitration clause. The Court of Appeals rejected these
arguments, finding that the appellant was not permitted to re-litigate the same facts that had been
presented to the arbitration panel.
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L.
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 927 N.Y.S.2d 517 (N.Y. Sup. 2011).
The court denied the defendants’ motion to dismiss the plaintiff’s indemnification and
reimbursement claims in a case involving issues with mortgage-backed securities. The
defendants’ sole argument for dismissal was that the claims were dependent on two breach of
contract claims, both of which defendants argued should also be dismissed. As the court did not
dismiss the breach of contract claims, the court also declined to dismiss the indemnification and
reimbursement claims. The court further noted that the plaintiff had a contractual right to
indemnification and reimbursement for some of the alleged conduct. On reconsideration, 2011
WL 4865133 (N.Y. Sup. Oct. 7, 2011), the court reinstated plaintiff’s fraudulent inducement
claims and demands for punitive and consequential damages without revisiting the
indemnification and reimbursement claims.
M. Statute of Limitations
1. Federal Securities Claims
M.1
First Bank P.R., Inc. v. La Vida Merger Sub, Inc., 638 F.3d 37 (1st Cir. 2011).
The First Circuit affirmed the dismissal of a securities fraud action. The district court
held that plaintiff’s claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b–5 were time barred under the two-year statute of limitations in 28 U.S.C. § 1658(b)(1). The
First Circuit held that the Supreme Court’s recent decision in Merck & Co. v. Reynolds, 130 S.
Ct. 1784 (2010), did not require reversal because the plaintiff had actual notice of the allegedly
fraudulent merger at issue more than two years prior to filing suit.
City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011).
M.1
The Second Circuit reversed the dismissal of a proposed securities fraud class action
arising out of the defendant corporation’s accounting for a transaction as income rather than a
loan. The district court had concluded that the plaintiffs’ claims under the Securities Exchange
Act of 1934 were barred by the applicable two-year statute of limitations because the proposed
class was on inquiry notice of the alleged fraud more than two years before the suit was filed.
Applying the Supreme Court’s decision in Merck & Co. v. Reynolds, 130 S. Ct. 1784
(2010), the Second Circuit held that a plaintiff is deemed to have discovered one of the facts
constituting a securities fraud violation, thereby triggering the statute of limitations, when the
plaintiff can plead that fact with sufficient detail to withstand a motion to dismiss. The court also
held that even though it had previously affirmed the district court’s ruling regarding inquiry
notice, the law of the case doctrine did not preclude re-litigation of this issue because Merck
changed the law. The court further held that since a securities fraud claim cannot accrue until the
plaintiff purchases or sells the relevant security, the two-year limitations period did not begin to
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un prior to the beginning of the class period. The court remanded with instructions that the
district court assess the timeliness of plaintiffs’ claims under the Merck standard and that it also
consider whether the statute of repose barred the claims.
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).
The Second Circuit held that the SEC’s claim for civil penalties under the anti-fraud
provisions of the Investment Advisors Act, 15 U.S.C. § 80b.6(1) and (2) was not time barred
under the applicable five-year limitations period of 28 U.S.C. § 2462. The court noted that since
the SEC’s claims sounded in fraud, a discovery rule was read into the statute of limitations. The
court concluded that the claim was not time barred because it first accrued when the SEC
discovered the alleged fraud.
McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011).
The Seventh Circuit affirmed the dismissal of plaintiff’s claims under Section 10(b) of
the Securities Exchange Act of 1934 and the Rule 10b–5. The court held that the five-year
period set forth in 28 U.S.C. § 1658(b) was a statute of repose rather than a statute of limitation.
Because the alleged misrepresentation occurred more than five years before plaintiff filed suit,
the suit was untimely.
Goldenson v. Steffens, 802 F. Supp. 2d 240 (D. Me. 2011).
The court denied the defendants’ motion to dismiss plaintiffs’ claims under the Securities
Exchange Act of 1934 and Rule 10-b5. The court held that because the alleged
misrepresentations in this case came from a common group of defendants in pursuit of a
common scheme, none of the misrepresentations were time barred if any of them occurred within
the five-year period of repose.
SEC v. Tambone, 802 F. Supp. 2d. 299 (D. Mass. 2011).
The court held in this civil enforcement action that the five-year statute of limitations for
SEC civil enforcement actions under 28 U.S.C. § 2462 was tolled until September 2003 because
defendants’ alleged securities fraud remained concealed until then. The court determined that
although the SEC may have had a “general awareness” that investors engaged in market timing
activities with impunity and that some companies were adopting prospectus language restricting
the practice, there was no evidence that the SEC had information before September 2003 that
would have alerted it to the defendants’ alleged fraud. The court held that equitable tolling was
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warranted under these circumstances because of the self-concealing nature of the defendants’
conduct.
Special Situations Fund III, L.P. v. Am. Dental Partners, Inc., 775 F. Supp. 2d 227 (D. Mass.
2011).
The court granted defendants’ motion to dismiss in part, holding that the plaintiffs’
claims under Section 18(a) of the Securities Exchange Act of 1934 were barred by the one-year
statute of limitations. The court rejected plaintiffs’ argument that their claims were tolled under
American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held
that the filing of a class-action lawsuit tolls the statute of limitations for putative class members.
The court determined that because the class action on which the plaintiffs relied for tolling
involved a claim under Section 10(b) of the Exchange Act and not a claim under Section 18(a),
American Pipe tolling did not apply. The court held that the legal standards for proving Section
18 and Section 10(b) claims are “sufficiently distinct” that filing a class action alleging a
violation of Section 10(b) did not toll the statute of limitations for plaintiffs’ Section 18 claim.
Mass. Bricklayers & Mason Funds v. Deutsche Alt-A Secs., 273 F.R.D. 363 (E.D.N.Y. 2011).
The court denied a bank’s motion to intervene as a plaintiff in a class action because its
claim was time barred. The bank purchased securities, which were offered in 2006, in December
2007. It sought to intervene in the class action on January 11, 2011, more than three years after
the offering. The applicable three-year statute of repose for claims under the Securities Act of
1933 barred the claim, unless tolling applied.
The court held that the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S.
538 (1974) (where under certain circumstances, the commencement of a class action tolls the
running of the applicable statute of limitations for all class members, even where class status is
later denied) did not apply because the bank was not a member of the originally named class,
which included only those who purchased securities between May 2006 and May 2007. The
bank did not purchase its securities until December 2007, therefore the tolling rule was
inapplicable.
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan v. J.P. Morgan Acceptance Corp. I,
2011 WL 6182121 (E.D.N.Y. Dec. 13, 2011).
The court denied, in part, the defendants’ motion to dismiss because plaintiffs’ claims
under Sections 11 and 12(a)(2) of the Securities Act of 1933 were timely filed and because
additional claims under Section 12(a)(2) of the Securities Act that were added later related back
to the filing of the original complaint. Defendants argued that plaintiffs had constructive notice,
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ased on a number of public documents, more than one year before filing their claim and that
their claims were therefore time barred under 15 U.S.C. § 77m. The court found that the news
stories on which defendants relied would not give a reasonable plaintiff notice that the offering
documents at issue contained material misstatements and omissions. Because the evidence did
not establish that plaintiffs should have discovered the violation more than a year before filing
the complaint, the action was timely.
The court also rejected the defendants’ argument that the additional Section 12(a)(2)
claims asserted by plaintiffs after the filing of the complaint did not relate back to the original
complaint. The court held that the claims related back to the original filing for statute of
limitations purposes because the claims relied on the same core factual allegations contained in
the initial complaint.
In re IndyMac Mortg.-Backed Secs. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011).
In this putative class action, the court held that although tolling may be invoked to avoid
the one-year statute of limitations applicable to certain claims under the Securities Act of 1933,
the three-year statute of repose could not be tolled. After consolidating two cases brought by the
state and municipal retirement systems against the defendant, the court appointed a lead plaintiff
who, without objection, filed a consolidated complaint that named itself as the only plaintiff.
The court later held that this plaintiff lacked standing to sue with respect to certain mortgage
pass-through certificates, and the other retirement systems moved to intervene in order to cure
the standing deficiency.
The court determined that the statute of repose had expired on most of the claims that the
proposed intervenors sought to assert. All the claims were timely when the initial suits were
filed, but the proposed intervenors abandoned their own claims by allowing the lead plaintiff to
proceed as the only plaintiff. Since the statute of repose by its terms allows no exceptions, the
court denied leave to intervene to assert claims based on offerings that took place more than
three years before the relevant motion to intervene.
For claims not barred by the statute of repose, the court determined that the applicable
statute of limitations should be tolled. The court held that the tolling doctrine of American Pipe
& Constr. Co. v. Utah, 414 U.S. 538 (1974) (where under certain circumstances, the
commencement of a class action tolls the running of the applicable statute of limitations for all
class members) applied even where the putative class plaintiff had no standing to assert the
claims at issue.
In re Lehman Bros. Secs. & ERISA Litig., 800 F. Supp. 2d 477 (S.D.N.Y. 2011).
The court denied in part motions by two putative intervenors who sought to intervene as
plaintiffs in a class action to assert claims under Sections 11 and 15 of the Securities Act of
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1933. In opposition to the motions, the defendants argued that the putative intervenors’ claims
fell outside the applicable three-year statute of repose. The putative intervenors responded by
relying on American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme
Court held that the filing of a class-action lawsuit tolls the statute of limitations for putative class
members. The court denied the putative intervenors’ motions, holding that American Pipe
tolling does not apply to statutes of repose.
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.
Sept. 15, 2011).
The court dismissed, without prejudice, plaintiffs’ claims under the Securities Act of
1933 due to the plaintiffs’ failure to specify how and when they discovered the alleged
misconduct giving rise to the claims. The court concluded that plaintiffs’ allegation regarding
discovery in “late 2008” was vague and inconsistent with positions they took in other
proceedings. The court rejected the defendants’ argument that the Securities Act claims of one
plaintiff pension fund were barred by the one-year statute of limitations under 15 U.S.C. § 77m,
concluding that downgrades of security certificates and public news articles and reports were
insufficient to put the pension fund on inquiry notice of the claims.
The court also held that the Securities Act claims asserted by newly-added plaintiffs were
timely under the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974)
(where under certain circumstances, the commencement of a class action tolls the running of the
applicable statute of limitations for all class members, even where class status is later denied)
and were not barred by 15 U.S.C. § 77m’s three-year statute of repose. The court followed the
majority rule and concluded that the tolling principal articulated in American Pipe is legal in
nature, as it is derived from Federal Rule of Civil Procedure 23, and thus applies to statutes of
repose. In addition, the court held that American Pipe tolling was applicable even where the
original plaintiff who brought the class action lacked standing, reasoning that such a rule furthers
the policies of economy and efficiency that underpin the American Pipe doctrine and is
consistent with the purposes of the statute of repose.
Int’l Fund Mgmt. S.A. v. Citigroup, Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,
2011).
The court denied the defendant’s motion to dismiss plaintiffs’ claims as time-barred
under the Securities Act of 1933. Prior to bringing their individual actions, plaintiffs were
members of the putative classes in two pending class actions alleging the same claims. The
defendants moved to dismiss, arguing that plaintiffs’ claims were barred by the one-year statute
of limitations and three-year statute of repose. The court denied the motion, holding that, under
American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), the statutes of limitations and repose
applicable to plaintiffs’ claims were both tolled during the pendency of the class actions and
thus, plaintiffs’ claims were timely.
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M.1
In re Smith Barney Transfer Agent Litig., 765 F. Supp. 2d 391 (S.D.N.Y. 2011).
The district court granted in part and denied in part the defendants’ motion to dismiss
plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934. The defendants
asserted that a reasonably diligent plaintiff would have discovered the alleged scheme related to
charging excessive fees for transfer agent services more than two years before the complaint was
filed because it was reported in news articles and disclosed in public filings. The court, however,
found that a reasonably diligent investor would not necessarily have discovered facts showing
that the defendants acted intentionally or with reckless disregard. The plaintiffs’ claims were
therefore not time barred.
In re Wachovia Equity Sec. Litig., 753 F. Supp.2d 326 (S.D.N.Y. 2011).
The court denied the defendants’ motion to dismiss plaintiffs claims under Sections 11
and 12(a)(2) of the Securities Act of 1933. The court held that the tolling doctrine of American
Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held that the
filing of a class-action lawsuit tolls the statute of limitations for putative class members, applied
even when the class-action complaint on which the tolling is based had been dismissed because
the putative class representatives lacked standing. The court held that the failure to apply
American Pipe tolling to this case would undermine the policies of efficiency and economy of
litigation that underlie Federal Rule of Civil Procedure 23.
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F. Supp. 2d 618 (S.D.N.Y. 2011).
The court granted defendants’ motion for summary judgment on the basis that plaintiffs’
claims were barred by the statute of repose. Plaintiffs originally filed a class action in California
state court in 2007 and filed this federal action on January 15, 2010, alleging violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933 for registration statements filed and
securities purchased in 2006. Because plaintiffs’ claim was filed more than three years after
defendants filed the registration statements and plaintiffs purchased the securities, the claims
were barred by Section 13 of the Securities Act’s three-year statute of repose. The court also
held that the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974),
under which commencement of a class action suspends the applicable statute of limitations as to
all asserted members of the class who would have been parties had the suit been allowed to
continue, did not apply to Section 13’s statute of repose.
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M.1
SEC v. Wyly, 788 F. Supp. 2d 92 (S.D.N.Y. 2011).
The court denied the defendants’ motion to dismiss, holding that the SEC’s claims were
not time barred. The SEC sued the defendants under Section 21A of the Securities Exchange
Act of 1934. The defendants argued that the SEC’s claims were time barred because the fiveyear
limitations period for claims under Section 21A is a statute of repose, not a statute of
limitations. The court rejected this argument, holding that it was a statute of limitations because
it “is clearly a limitation on one of several ‘remedies’ the SEC may seek for insider trading,” not
a limitation on the SEC’s right to sue.
In re Franklin Bank Corp. Secs. Litig., 782 F. Supp. 2d 364 (S.D. Tex. 2011).
The court denied, in part, a defendant’s motion to dismiss plaintiffs’ claims under the
Securities Act of 1933 on statute of limitations grounds. The plaintiffs alleged that the defendant
made untrue statement or material omissions in a May 2006 registration statement for the
offering of bank stock. The defendant argued that plaintiffs had constructive notice of the claims
more than a year before filing the action.
The court found that plaintiffs did not have constructive notice of the claim until August
2008, when the bank whose stock was at issue in the dispute first reported the need to file
restatements covering the 2006 time period. Because plaintiffs brought their claim within one
year of this notice, the action was timely.
La. Mun. Police Emps.’ Ret. Sys. v. KPMG LLP, 2011 WL 4629299 (N.D. Ohio Sept. 30, 2011).
The court held that the two-year limitations period under 28 U.S.C. § 1658 (b)(1) did not
bar the plaintiff’s claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b–5. Applying Merck & Co. v. Reynolds, __ US __, 130 S. Ct. 1784 (2010), the
court held that neither the filing of a prior lawsuit nor the public record triggered the statute of
limitations because they did not reveal “facts constituting the violation” (in this case, facts
indicating scienter) under Merck. The court also held, however, that any allegations that a
defendant participated in the alleged fraud that preceded June 30, 2005 (five years prior to the
filing of the complaint) were barred by the five-year statute of repose under 28 U.S.C. § 1658
(b)(2).
Antelis v. Freeman, 799 F. Supp. 2d 854 (N.D. Ill. 2011).
The court denied the defendant’s motion to dismiss the plaintiff’s claim on statute of
limitation grounds. The plaintiff alleged that his former business partner violated the Securities
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Exchange Act of 1934 and Rule 10-b5. The defendant argued that the Exchange Act and 10b-5
claim was barred by the two-year period contained in 28 U.S.C. § 1658(b)(1) because plaintiff
should have discovered the facts constituting the violation at the time the allegedly fraudulent
loan was made. The court noted that under Merck & Co. v. Reynolds, __ U.S. __, 130 S. Ct.
1784 (2010), the statutory period did not begin until a reasonable investor would have actually
uncovered the facts constituting the fraud. Applying Merck, the court held that plaintiff’s claim
was not time-barred because nothing in the complaint indicated that the plaintiff should have
suspected fraud more than two years before the date of the lawsuit or that he would have had
access to the relevant information if he had tried to seek it out.
Stone v. Chicago Inv. Grp., LLC, 2011 WL 6841817 (N.D. Ill. Dec. 29, 2011).
The court held that the plaintiffs’ Rule 10b-5 claim was timely. Applying the standard
set forth in Merck & Co. v. Reynolds, __ U.S. __, 130 S. Ct. 1784 (2010), the court held that
there was nothing in the facts, as pleaded, to show that plaintiffs should have discovered the
alleged fraud more than two years prior to the date of filing suit.
Yary v. Voigt, 2011 WL 6781003 (D. Minn. Dec. 27, 2011).
The court dismissed in part as untimely the plaintiffs’ claims under section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b–5. The court noted that the statute of repose
under 28 U.S.C. § 1658(b)(2) sets forth an unqualified bar on actions commenced more than five
years past the alleged violation. The court held that to the extent plaintiffs’ claims were based on
alleged misrepresentations or omissions made in connection with the purchase of securities
outside the five-year period, the claims were untimely.
Stiching Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125 (C.D. Cal. 2011).
The court dismissed as time-barred a pension fund’s claims for violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934 arising out of the fund’s
purchase of residential mortgage backed securities. The court held that plaintiff’s Securities Act
claims were barred by the three-year statute of repose under 15 U.S.C. § 77m, but granted leave
to amend to allege facts showing that the claims were based on purchases that were the subject of
pending putative class action and therefore subject to tolling under American Pipe & Constr. Co.
v. Utah, 414 U.S. 538 (1974).
The court further held that the plaintiff’s Exchange Act claims, which had been alleged
for the first time in an amended complaint, did not relate back to the original complaint because
the plaintiff had waived this argument and because the original complaint did not put defendants
on notice of an impending fraud claim. The court dismissed plaintiff’s Exchange Act claims that
were based on certificates purchased five years prior to the filing of the first amended complaint
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as barred by the statute of repose under 28 U.S.C. § 1685(b)(2). The court dismissed the
remaining Exchange Act claims under 28 U.S.C. § 1685(b)’s two-year statute of limitations,
finding that numerous lawsuits and public press reports should have put the plaintiff on notice of
the alleged omissions and misrepresentations.
Anschutz Corp. v. Merrill Lynch & Co., 785 F. Supp. 2d 799 (N.D. Cal. 2011).
The court denied the defendant’s motion to dismiss as time barred the plaintiff’s marketmanipulation
claims under the Securities Exchange Act of 1934. The defendant argued that
when the SEC issued a cease-and-desist order in 2006, it put the plaintiff on inquiry notice of
potential problems in the market for auction rate securities and of the defendant’s possible
involvement in those problems, even though the defendant was not a party to the SEC’s order.
The court rejected this argument, holding that “at this stage of the litigation plaintiff has
adequately alleged that it did not have notice of [defendant’s] conduct sufficient to trigger the
statutes of limitations.”
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2. State Securities Claims
M.2
Metz v. Unizan Bank, 649 F.3d 492 (6th Cir. 2011).
The Sixth Circuit affirmed the dismissal of plaintiffs’ state law fraud claims as time
barred. The court held that since plaintiffs’ fraud claims arose out of the sale of securities,
Ohio’s blue sky statute of limitations period, rather than the statute of limitations for common
law fraud, applied to plaintiffs’ claims.
Stone v. Chicago Inv. Grp., 2011 WL 6841817 (N.D. Ill. Dec. 29, 2011).
The court held that the plaintiffs’ claim under the Illinois Securities Law was timely
under the applicable three-year statute of limitations. Plaintiffs filed suit on January 4, 2011.
The court noted that plaintiffs were on notice that their investments were not performing as
expected by late 2007, but it was not clear that they should have been on the alert for fraud,
particularly in light of their broker’s alleged reassurances and the fact that when the original
notes at issue could not be paid, the broker offered new notes payable in December 2008. The
court held that, as alleged in the complaint, the circumstances were not sufficiently probative of
fraud by January 4, 2008, three years prior to the date of filing of the complaint. Thus, plaintiffs’
state law securities fraud claims were timely.
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Stiching Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125 (C.D. Cal. 2011).
The court applied California’s three-year statute of limitations to dismiss the plaintiff’s
California state-law fraud and aiding and abetting claims arising out of the plaintiff’s purchase of
residential mortgage backed securities. The court concluded that public press coverage and the
filing of similar lawsuits more than three years prior to the filing of the first amended complaint
were sufficient to put the plaintiff on inquiry notice of the alleged wrongdoing.
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Anschutz Corp. v. Merrill Lynch & Co., 785 F. Supp. 2d 799 (N.D. Cal. 2011).
The court denied the defendant’s motion to dismiss as time-barred the plaintiff’s marketmanipulation
claims under two-year statute of limitations applicable to the California Corporate
Securities Law of 1968. The defendant argued that when the SEC issued a cease-and-desist
order in 2006, it put the plaintiff on inquiry notice of potential problems in the market for auction
rate securities and of the defendant’s possible involvement in those problems, even though the
defendant was not a party to the SEC’s order. The court rejected this argument, holding that “at
this stage of the litigation plaintiff has adequately alleged that it did not have notice of
[defendant’s] conduct sufficient to trigger the statutes of limitations.”
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Carbon Capital Mgmt., LLC v. Am. Express Co., 932 N.Y.S.2d 488 (N.Y. App. Div. 2011).
The court affirmed the trial court’s finding that the plaintiff’s claim for breach of
fiduciary duty was partially barred by the statute of limitations. The court noted that the
limitations period applicable to a breach of fiduciary duty claim depends on the substantive
remedy sought. The plaintiff’s breach of fiduciary duty claims that were based on an actual
fraud were timely under the six-year limitations period for fraud-based claims. However, the
plaintiff’s other breach of fiduciary duty claims were untimely under the applicable three-year
limitations period. The court also held that the plaintiff’s fraud claim was timely under the
applicable six-year limitations period.
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Ingham v. Thompson, 931 N.Y.S.2d 306 (N.Y. App. Div. 2011).
The court reversed the trial court’s denial of one of the defendant’s motions to dismiss,
finding that plaintiff’s aiding and abetting breach of fiduciary duty and unjust enrichment claims
were time barred. The court found that because the fraud claim was not merely incidental to the
breach of fiduciary duty claim, the limitations period for the aiding and abetting was six years.
As the complaint did not allege any conduct by the moving defendant after 1995, the claim was
barred by the limitations period. The court noted that the limitations period was not tolled as (1)
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equitable estoppel did not apply as there was no allegation that the defendant made any
affirmative representations or had a fiduciary duty to plaintiff; (2) the discovery accrual rule does
not apply to constructive frauds; and (3) repudiation applies only to claims seeking an accounting
or other equitable relief.
Orr v. Calvert, 2011 WL 6130799 (N.C. Dec. 9, 2011).
The Supreme Court of North Carolina held that a ten-year limitations period applied to an
investor action against an unlicensed securities advisor for breach of fiduciary duty. The
Supreme Court’s opinion incorporated the reasoning set forth in the dissenting opinion in the
Court of Appeals (713 S.E.2d 29 (2011)). The dissenting judge at the Court of Appeals asserted
that the plaintiffs’ claim rose to the level of constructive fraud and was therefore subject to a tenyear
rather than a three-year statute of limitations. The dissenting judge found that the defendant
received a benefit in the form of commissions, that the benefit was illegal because the defendant
was unlicensed, and that the agent–principal relationship between plaintiffs and defendant was
sufficient to show a confidential relationship of trust.
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3. RICO
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Milo v. Galante, 2011 WL 1214769 (D. Conn. Mar. 28, 2011).
The court held that the four-year statute of limitations had run on the plaintiff’s RICO
claims against the defendant. The court noted that such claims begin to run when a plaintiff has
actual or inquiry notice of the injury. The plaintiff did not plead with particularity that the
limitations period should have been tolled because of the defendant’s wrongful concealment nor
did she indicate what due diligence she had conducted to show that tolling should be applied.
Further, the court held that the separate accrual rule – where an expired RICO claim can be
revived by new and independent violations that fall outside the limitations period – did not apply
because the plaintiff did not allege separate and distinct fraudulent acts by the defendant.
4. SRO Rules
Asensio v. SEC, 2011 WL 6032933 (11th Cir. Dec. 5, 2011).
The Eleventh Circuit affirmed the SEC’s dismissal of the petitioner’s appeal of two
NASD and FINRA decisions because the petitioner neither filed his appeal within thirty days of
receiving notice of the decision (as required under 15 U.S.C. § 782(d)(2)) nor made a showing of
extraordinary circumstances for the delay. The petitioner acknowledged that he waited three
years to file an application for review of the NASD decision and sixteen months to file an
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application for review of the FINRA decision but argued that extraordinary circumstances caused
the delay. The Eleventh Circuit held that the petitioner did not make a showing of extraordinary
circumstances because the facts underlying his claims of extraordinary circumstances were
discoverable either during the challenged proceedings or shortly thereafter.
Raymond James Fin. Servs., Inc. v. Phillips, 2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16,
2011).
The court held that Florida’s statutes of limitations did not apply to an NASD arbitration
where the arbitration agreement did not expressly provide for their application. The court noted
that the firm did not expressly include the Florida statutes of limitations in its contract with its
account holders and that the Florida limitations statute does not expressly state that it applies to
arbitrations. Because the court considered this issue to be of great public importance, it certified
the question to the Florida Supreme Court which has granted review (2012 WL 285100).
M.4
N. Arbitration
1. Scope
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AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
The United States Supreme Court considered the viability of California’s Discover Bank
rule, which provided that class action waivers in arbitration agreements were unconscionable and
thus unenforceable. The contract at issue provided that the customers and the provider arbitrate
all disputes, but precluded class arbitration. The Supreme Court held that the Federal Arbitration
Act (“FAA”) preempted the Discover Bank rule on the basis that the FAA was enacted to ensure
enforcement of arbitration agreements. The Supreme Court noted that class arbitration sacrifices
many of arbitration’s advantages, including informality, and greatly increases risks to
defendants. More generally, arbitration is not an effective dispute resolution vehicle for highly
complex, high stakes class action suits. As a result, California’s rule requiring the availability of
class arbitration conflicted with the principal purpose of the FAA and was therefore pre-empted.
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011).
The Firm appealed the dismissal of its action to enjoin the FINRA arbitration claims filed
by defendant. The original claim arose as a result of three separate offerings in which defendant
issued $329 million of bonds, structured as auction rate securities. For each of these offerings,
the Firm served as the lead underwriter and main-broker dealer, and contracts were executed
between the parties detailing their rights and obligations under both relationships. The Firm
contended that these relationships did not give rise to a “customer” relationship sufficient to
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support the FINRA arbitration as proper, specifically arguing that FINRA rules do not include
arbitration for sophisticated parties, that FINRA has a narrow “investor protection” mandate, and
that a customer relationship requires a fiduciary relationship and cannot be found in an armslength
transaction. The Second Circuit held that the FINRA rules did not support these
contentions and rejected each of them, concluding that defendant was a customer of the Firm’s.
The Second Circuit affirmed the district court’s order denying the Firm’s motion for a
preliminary injunction restraining defendant from proceeding with the FINRA arbitration.
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164 (2d Cir.
2011).
This appeal stemmed from a judgment entered by the district court dismissing a
complaint that sought an injunction against a FINRA arbitration and simultaneously granted
Defendant’s motion to compel arbitration on the ground that defendant, in a credit default swap
agreement, was a customer of the entity with which it negotiated part of the agreement but which
was a nonparty to the agreement. The crux of the district court action centered upon an
arbitration proceeding brought by defendant, a hedge fund, against a broker-dealer that initiated
negotiations for a credit default swap between plaintiff and defendant. The district court held
that the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”) provided
for arbitration of disputes between a FINRA member and its customers, and that the brokerdealer
was a member and defendant was a customer, and granted the order compelling
arbitration. Plaintiff and the broker-dealer continued to contest that the arbitration would be
duplicative of a separate action defendant brought against the broker-dealer that was still pending
in the district court, and that the FINRA arbitration could not proceed because defendant did not
have an arbitration agreement with the broker-dealer and that defendant was not a customer of
the broker-dealer within the meaning of the FINRA Code. The appellate court reversed this
decision, holding that defendant was not a “customer” of the broker-dealer. The court reasoned
that Defendant did not have a brokerage agreement with the broker-dealer and the parties’
agreements expressly disclaimed any sort of advisory, brokerage, or other fiduciary relationship.
Indeed, the parties had acknowledged in their agreement that this was an “arm’s length”
relationship. As a result, the Second Circuit concluded that there was no reason for it to further
analyze the boundaries of the FINRA meaning of “customer,” as defendant did not fall within
that definition. The Second Circuit thus reversed the district court’s decision and enjoined
Defendant from continuing with the FINRA arbitration.
Anderson v. Beland, 2011 U.S. App. LEXIS 22209 (2d Cir. Nov. 3, 2011).
Plaintiffs filed claims in a FINRA arbitration for breach of fiduciary duty, breach of
contract, fraud, and negligent misrepresentation stemming from a decline in the value of assets
managed by defendant. Defendant moved the district court (which retained exclusive
jurisdiction over a related 2007 class-action settlement) to enforce that settlement agreement
against plaintiffs, resulting in a withdrawal of their claims before FINRA as they were members
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of the class action suit. The district court granted defendant’s motion, ruling that plaintiffs had
expressly released all of their arbitration claims as a result of failing to timely opt-out of the class
action settlement. In determining the scope of the arbitration agreement on appeal, the Second
Circuit agreed with the district court’s decision that defendant is liberated from its requirement to
arbitrate released claims as defined in the class action settlement agreement. However, the
Second Circuit noted that defendant still agreed to arbitrate both non-released claims and claims
expressly excluded from the release, pursuant to the original arbitration agreement. Such claims
were included in the FINRA action. Therefore, the Second Circuit vacated this portion of the
district court’s ruling, holding that the district court may not enjoin plaintiff from arbitrating
these claims before FINRA.
Filho v. Safra Nat’l Bank, 797 F. Supp. 2d 289 (S.D.N.Y. 2011).
Plaintiff alleged that representatives of defendant invested his money inappropriately in
risky securities without his approval. defendant responded with a motion to compel arbitration
pursuant to the arbitration agreement between the parties. Plaintiff contended that defendant
modified the terms and conditions of the account agreement after Plaintiff agreed thereto, and
that he never received nor read the original contract terms and conditions or the terms and
conditions as later modified. The court held that there was a valid “change of terms” clause in
the original agreement and that, if properly implemented and agreed upon, the change was not a
contract modification as contemplated by New York’s General Obligation Law. Therefore, no
additional consideration was required to support the modification to the agreement. The court
further concluded that plaintiff’s allegation that he did not receive or read the contract was
contradicted by the acknowledgement above plaintiff’s signature on the original account
agreement that he received, understood, and agreed to the contract. The court further held that
the issues plaintiff raised were within the scope of the arbitration agreement, and thus granted
defendant’s motion to compel arbitration.
Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp. 2d 445 (S.D.N.Y. 2011).
Plaintiff brought an action against Defendants based on alleged violations of the Fair
Labor Standards Act (“FLSA”). The parties did not dispute that Plaintiff signed an employment
agreement providing that all disputes shall be settled and determined by arbitration. Plaintiff
sought designation of this case as a collective action pursuant to FLSA Section 216. Defendants
then moved to dismiss the complaint or, in the alternative, compel arbitration. The trial court
considered the issue of whether these claims were eligible for arbitration based on FINRA Rule
13024, which precludes arbitration of class action claims. The court held that collective actions
are separate and distinct from class actions because they are “opt-in” actions, whereas class
actions require participants to “opt-out.” The court granted defendants’ motion to compel
arbitration on the basis that the FLSA “collective action” is not encompassed within the term
“class action” and therefore was eligible for arbitration under the FINRA rules.
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Citibank, N.A. v. Franco, 2011 U.S. Dist. LEXIS 150741 (S.D.N.Y. Dec. 29, 2011).
Defendants initiated a FINRA arbitration, alleging fraud by Plaintiff with respect to
Defendants’ non-discretionary accounts. Plaintiff filed a petition with the district court to stay
the arbitration, arguing that there was no agreement requiring the parties to arbitrate the
underlying claims since the dispute was outside the scope of the agreement because the
transactions at issue were banking transactions under an International Swap Dealers Association
agreement, not brokerage trades under the arbitration agreement. Defendants contended that
their claim included both brokerage and banking accounts and was therefore arbitrable.
Reaffirming the general rule that doubts concerning the scope of arbitrable issues should be
decided in favor of arbitration, the district court held that this particular arbitration agreement’s
broad scope encompassed the dispute. The arbitration agreement explicitly covered “all claims
and controversies” arising in “any and all accounts.” The district court thus compelled
arbitration pursuant to the arbitration agreement.
Hook v. UBS Fin. Servs., Inc., 2011 WL 1741997 (D. Conn. May 4, 2011).
Plaintiff brought this action to enjoin defendant from enforcing a promissory note
executed when plaintiff commenced his employment at the Firm. Defendant moved to compel
arbitration and for dismissal or a stay of the litigation pending arbitration. Plaintiff objected,
contending that a number of the claims he raised were outside the scope of the arbitration
provision in the Promissory Note, which he contended only applied to his employment at the
Firm and not thereafter as he was no longer an employee. The court rejected this argument.
Plaintiff also pointed to the carve-out provision for injunctive relief in the arbitration clause. The
Court, however, held that it did not need to consider whether the carve-out provision for
injunctive relief exempted that claim from arbitration because plaintiff failed to establish that he
was entitled to injunctive relief. The court concluded that the broad arbitration clause
necessitated that plaintiff’s claims be arbitrated, and granted defendant’s motion to dismiss and
compel arbitration.
Spaz Bev. Co. Defined Benefit Pension Plan v. Douglas, 2011 U.S. Dist. LEXIS 86019 (E.D. Pa.
Aug. 4, 2011).
This was an action for breach of fiduciary duty stemming from losses in plaintiffs’
benefit pension plan allegedly caused by defendants’ alleged mismanagement of the assets.
defendants moved to stay the action and compel arbitration, citing two separate arbitration
provisions in their agreements with respect to plaintiffs. Plaintiffs alleged that their claims for
breach of fiduciary duty did not fall within the scope of either arbitration provision. The court
disagreed, holding that courts within the Third Circuit have consistently found that claims for
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each of fiduciary duty fall within the scope of similar provisions. Citing the proposition that
an order compelling arbitration “should not be denied unless it may be said with positive
assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted
dispute[,]” the court found that plaintiffs’ claims fell within the scope of the arbitration
provisions and compelled the matter to arbitration.
Waterford Inv. Servs. v. Bosco, 2011 U.S. Dist. LEXIS 96046 (E.D. Va. July 29, 2011).
Plaintiff sought a declaratory judgment that it had no duty to arbitrate any claim with
defendants, as well as an injunction enjoining the FINRA arbitration already filed by defendants.
The arbitration claims stemmed from defendants’ investment relationship with an investment
advisor who was employed by Community Bankers Securities (“CBS”). Both CBS and plaintiff
were majority-owned by a third entity, AIC, Inc. Plaintiff alleged that it was not subject to
FINRA arbitration because it did not have adequate association with CBS or the investment
advisor at issue. The court disagreed with that contention and held that the investment advisor
was an “associated person” under FINRA Rule 12100 because plaintiff had indirect control over
him. Since FINRA Rule 12200 requires a member to arbitrate with the customer of an
associated person, plaintiff had a duty to submit to arbitration with defendants as customers of
the investment advisor.
Hussain v. Garson, 783 F. Supp. 2d 846 (W.D. La. 2011).
Plaintiff brought this action against defendant, his former broker, arising out of an alleged
“pump and dump” investment fraud scheme. The account applications signed by plaintiff
included a customer agreement containing a pre-dispute arbitration clause. The court held that
even though plaintiff’s complaint centered upon being fraudulently induced into stock purchases
– and thus fraudulently induced into the investment contract – the arbitration clause was
enforceable unless plaintiff was fraudulently induced into signing the arbitration clause itself,
which plaintiff did not allege. Thus, the court held that the arbitration clause was valid and that
the claims brought by plaintiff were reasonably within the broad scope of the arbitration
agreement as they related to defendant’s use of his credential as an investment advisor in the
alleged scheme. Defendant’s motion to stay litigation pending arbitration was granted.
Gordon v. Royal Palm Real Estate Inv. Fund I, LLP, 2011 U.S. Dist. LEXIS 22911 (E.D. Mich.
Mar. 8, 2011).
Plaintiff alleged that defendants committed a variety of violations with respect to
investments in securities recommended and/or managed by defendants. At the time of this
lawsuit, plaintiff had already initiated a FINRA arbitration against defendants. Defendants
argued that the claims in both actions were virtually identical and moved to dismiss this action
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ecause it overlapped with and was precluded by the FINRA arbitration, or, in the alternative, to
stay the litigation pending the arbitration. The court agreed, holding that the claims in the instant
action were within the scope of the arbitration agreement contained in the Uniform Submission
Agreement, which plaintiff signed when initiating the FINRA arbitration. The court based its
reasoning in large part on FINRA Rule 12209, which states that “[d]uring an arbitration, no party
may bring any suit, legal action, or proceeding against any other party that concerns or that
would resolve any of the matters raised in the arbitration.” The court ruled that the claims in
both the FINRA arbitration and this action “concern and relate” to one another, and that the
factual allegations in both actions are “essentially identical.” The court granted defendants’
motion to dismiss.
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).
Defendants provided plaintiff with investment advice and managed his assets. Plaintiff
alleged wrongful trading of securities in his investment accounts. The court held that it was
clear, however, that plaintiff agreed to arbitrate such disputes with defendants as the arbitration
agreement plaintiff signed referred broadly to “controversies,” and that the case at bar fell within
that scope. The court therefore ordered a stay of the proceedings as to one defendant, and
dismissed as to others.
Morgan Keegan & Co. v. Jindra, 2011 U.S. Dist LEXIS 135464 (W.D. Wash. Nov. 22, 2011).
Defendants attempted to arbitrate claims against plaintiff before FINRA. Plaintiff
brought this action for a temporary restraining order and preliminary injunction preventing the
arbitration on the basis that it had no agreement with defendants, and defendants were not its
customers. Defendants utilized a broker who was not associated with plaintiff, but the broker
alleged that he relied heavily on communications distributed by plaintiff. The court held that it
was clear that there was no arbitration agreement between defendants and plaintiff, and therefore
defendants’ ability to arbitrate rested on whether or not they were a “customer” under applicable
FINRA rules. The court held that neither defendants nor their broker had such a relationship
with plaintiff as to infer a customer status, and therefore plaintiff was not subject to arbitration.
The court concluded that a preliminary injunction enjoining defendants from arbitration was
warranted.
Branch v. Sicker, 2011 U.S. Dist. LEXIS 19392 (N.D. Ga. Feb. 28, 2011).
Plaintiffs purchased securities in business entities that were created by defendants. One
of these entities later filed for bankruptcy, which plaintiffs alleged was a result of defendants’
risky business deals that ran contrary to the safe investments defendants had represented.
Plaintiffs brought this suit as a result and defendants moved to dismiss for improper jurisdiction
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and venue, citing the arbitration clause in the New Account Forms that plaintiffs signed.
Plaintiffs challenged the extent to which their claims fell within the scope of the arbitration
clause, contending that defendants could only produce copies of New Account Forms dated as
early as 2004 and 2006, and the investment relationship began with plaintiffs in 1999 and 2000,
respectively. The court, however, read the “arising out of or relating to” language in the
arbitration agreement to relate the 2004 and 2006 purchases back to the 1999 and 2000
purchases, and held that they were within the scope of the arbitration agreement as a result. The
court further reiterated that “any doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration.” Consequently, the court granted defendants’ motion and
directed the parties to arbitrate their claims.
Feller v. Wells Fargo Advisors, LLC, 2011 WL 3331265 (M.D. Fla. Aug. 3, 2011).
Defendant initiated an arbitration proceeding with FINRA to recover the balance
remaining on a promissory note from plaintiff. Plaintiff moved to stay the arbitration, but the
arbitrators denied the motion. Plaintiff then filed this lawsuit in state court, which defendant
removed to federal court and requested that the federal court compel arbitration and dismiss the
action. Plaintiff contended that her claims were not within the scope of the arbitration clause.
The court disagreed, holding that there were multiple potential agreements to arbitrate that had
been executed between plaintiff and defendant and that plaintiff’s claims fell within the scope of
more than one of these agreements.
M & B Assocs., Inc. v. Wells Fargo Bank, N.A., 2011 Tex. App. LEXIS 2873 (Tex. App.
Amarillo Apr. 15, 2011).
In a suit involving a promissory note executed by plaintiffs, summary judgment was
granted in favor of defendant by the trial court. An appeal ensued, in which the only issue raised
was that the promissory note and guaranty contained arbitration clauses that should have
prevented summary judgment. The court held that this argument failed because, “to compel
arbitration, a party must apply to the court for it,” and the record contained neither a motion to
stay nor a motion to compel arbitration. The court further stated that a party who has a right to
arbitration was not required to invoke it, and the mere presence of an arbitration clause in an
agreement subject to litigation did not require the court to send the dispute to arbitration. This
was especially true when a particular clause required a party to demand arbitration, as was the
case in this instance. Finally, the court concluded that an affidavit by plaintiff’s attorney stating
that arbitration had been requested failed to disclose a particular dispute to be arbitrated and,
without such a specific disclosure, the court could not conclude whether or not such a dispute
was within the scope of the arbitration agreement. As such, summary judgment was affirmed.
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2. Eligibility/Limitations
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Yuan v. Getco, LLC, 2011 U.S. Dist. LEXIS 89991 (N.D. Ill. August 12, 2011).
A former employee brought the action against defendant under the Illinois Wage
Payment and Collection Act for failure to pay several million dollars of bonuses and
commissions owed from plaintiff’s position as a securities trader. In granting defendants’
motion to compel arbitration, the court rejected plaintiff’s argument that because FINRA Rule
13206 precludes claims over six years old, those portions of his wage-payment claim that are
over six years should be considered by the court. The court determined that the issue of whether
a claim is timely is specifically reserved for the arbitrator.
Mid-Ohio Sec. Corp. v. Estate of Burns, 790 F. Supp. 2d 1263 (D. Nev. 2011).
Lawrence Burns opened a traditional IRA account with the Firm that designated his wife
as the primary beneficiary and instructed that the funds be invested with Cumberland Enterprise
Holding, LLC. Three years later Burns discovered that Cumberland was a fraud and the
investment was worthless. Burns passed away on July 7, 2007. In September 2009, Burns’ wife
filed a Statement of Claim with FINRA alleging negligence and breach of contract. The Firm
filed an Answer and motion to dismiss asserting that the claims were ineligible because the
claims were brought more than six years after the date the securities were purchased. The panel
denied with motion to dismiss and subsequently awarded Burns’ wife $280.683.50 in
compensatory damages. The Firm moved the court to vacate the award because the arbitrators’
decision was in manifest disregard for the law, specifically FINRA Rule 12206. The court found
that the arbitrators did not manifestly disregard the law because the United States Supreme
Court’s holding in Howsam v. Dean Witter, 537 U.S. 79, 85 (2002), solidified that the FINRA
eligibility time limit was not a question of arbitrability for the court, but rather a procedural
matter for the arbitrators akin to a statute of limitations. Thus, the arbitrators were free to
interpret the rule and apply the discovery rule or other tolling provisions. Therefore, the panel’s
use of a tolling principle delaying the trigger event of FINRA Rule 12206 until Burns’ discovery
in 2005 could not be considered a manifest disregard for the law and the Firm’s motion to vacate
was denied.
Reynolds v. Parklane Inv., Inc., 2011 Mich. App. LEXIS 1610 (Sept. 20, 2011).
Plaintiffs hired defendants to manage six accounts with an online broker, but allegedly
charged higher fees than agreed upon without written authorization. Defendants asserted that
they were entitled to a set off due to amounts due from another related account and filed a thirdparty
complaint on the owner of the deficient account, E. Wagner, LLC (the “LLC”). The parties
ultimately agreed to arbitration and the arbitration award included damages for claims made by
the LLC. Defendants challenged the award on the ground that the LLC was not a named plaintiff
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and therefore did not file any claims. Further, because the LLC did not file a claim, the statute of
limitations was never tolled for the claim as the arbitrator had perceived. The appellate court
denied defendants any relief on the ground that the arbitrator incorrectly awarded damages.
First, the court found that the award to the LLC was valid because the award was made to the
LLC as a real party in interest to the claim advanced by plaintiff. Second, the arbitrator’s
handling of the statute of limitations issue was appropriate because the arbitrator limited the
damages to the six years prior to the filing of the complaint. The court found that this decision
was consistent with the relation-back doctrine. Accordingly, the appellate court affirmed the
decision of the circuit court in confirming the arbitration award.
Citigroup Smith Barney v. Henderson, 241 Ore. App. 65 (Or. Ct. App. 2011).
Henderson opened an IRA account with plaintiff. In doing so, he entered into an
agreement that required arbitration of all claims and controversies between the parties. The
agreement also included a choice of law provision selecting New York law to govern and
construe its terms. Upon his death, two conflicting forms were discovered; one form designated
his second wife, Madge Henderson, as beneficiary while the other designated his children from a
prior marriage. Madge and the children were unable to resolve the dispute by themselves, and
Plaintiff filed an interpleader action to determine the rightful owner of the IRA. After Madge and
the children filed answers and counterclaims, Plaintiff filed a motion to compel arbitration. In
response, Madge and the children argued that plaintiff had waived its right to arbitrate by filing
the interpleader action. The trial court denied plaintiff’s motion to compel on the basis of
waiver, and plaintiff appealed. On appeal, the court considered whether the issue of waiver was
a procedural question for the arbitrator or a question of arbitrability for judicial determination.
The court first determined that although New York law provided that the court decides issues of
waiver, the choice of law provision did not expressly require New York law to govern the
enforcement of the agreement. As such, the court applied the default presumption that the
parties intended an arbitrator to decide procedural issues such as statute of limitations and
waiver. Although the court limited its holding to the waiver issue, its reliance on statute of
limitations doctrine suggested that choice of law provisions would be treated similarly in those
instances.
Raymond James Fin. Servs. Inc. v. Phillips, 2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16,
2011).
In November 2005, the account holders filed a Statement of Claim with the NASD
based on allegations of negligence, misconduct, breaches of fiduciary duty, and state and federal
securities violations. In response, the Firm filed a motion to dismiss arguing that the claims were
barred by the applicable statute of limitations. Because the arbitration agreement provided that
timeliness issues would be decided by the court, the account holders filed an action in the circuit
court seeking a declaratory judgment. The circuit court found that the statute of limitations was
not applicable to arbitration claims as a matter of law. On appeal, the appellate court found that
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the legislature did not intend the “civil action or proceeding” language in the statute to include
arbitrations based on its exclusion from the definition and the fact that the Arbitration Code was
enacted prior to the statute at issue. Furthermore, the vast majority of state case law interpreted
“proceeding” in the traditional sense, which did not generally include “arbitration.” Thus, the
court affirmed the trial court’s decision on different grounds and held that the Florida statute of
limitations does not apply to arbitrations when the parties have not expressly included a
provision in the arbitration agreement stating it applies. The appellate court also certified the
question to the Florida Supreme Court.
3. Jurisdiction/Estoppel
N.3
UBS Fin. Servs. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011).
The Firm appealed the denial of its motion for a preliminary injunction enjoining the
defendants from proceeding with an arbitration before FINRA, and alternatively requiring that
the arbitration proceed in New York County. The underlying dispute involved defendants’
claims relating to the Firm’s alleged fraud in connection with defendants’ issuances of auction
rate securities. The trial court denied the requested injunction, held that a forum selection clause
in one of the parties’ agreements was unenforceable because it conflicted with FINRA rules, and
ordered that the arbitration proceed in West Virginia. On appeal, the Second Circuit held that
defendants were entitled to arbitration because they became the Firm’s “customers” under
FINRA rules when they undertook to purchase auction rate services from the Firm. Further, the
appellate court concluded that the enforceability of the forum selection clause was a procedural
issue for FINRA arbitrators to address and that the district court lacked jurisdiction over that
issue. In reaching these conclusions, the appellate court declined provide a comprehensive
definition of “customer” under Rule 12200, and found that it includes at least a non-broker or
non-dealer who purchases, or undertakes to purchase, a good or service from a FINRA member.
Sacks v. Dietrich, 663 F.3d 1065 (9th Cir. 2011).
Plaintiff appealed the district court’s dismissal of his claims against two arbitrators who
disqualified him from representing a client in a FINRA arbitration. The Ninth Circuit affirmed
the district court’s decision, finding that the lower court correctly held that Plaintiff’s claims
were barred by arbitral immunity. The defendant arbitrators disqualified Plaintiff from the
representation pursuant to FINRA Rule 13208, which provided that “[p]arties may be
represented in an arbitration by a person who is not an attorney, unless…the person is currently
suspended or barred from the securities industry in any capacity.” As it was undisputed that
plaintiff was not an attorney, and also that he was barred from the securities industry in 1991, the
panel disqualified plaintiff from the representation. In reaching this conclusion, the panel based
its authority on Rule 13413, which provided that a “panel has the authority to interpret and
determine the applicability of all provisions under the Code.” In challenging this determination,
plaintiff contended that the arbitrators exceeded the scope of their authority under the Uniform
Submission Agreement, FINRA rules, and California law because FINRA Rule 13208 does not
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give arbitrators the authority to issue such a prohibition. The district court found that, although
arbitral immunity extends only to those acts taken by arbitrators that are within the scope of their
duties and within their jurisdiction, the arbitrators in this case were acting within their
jurisdiction. The Ninth Circuit agreed, adding that “the fact that courts or other agencies ‘may’
resolve such an issue does not preclude the arbitral panel from doing so.”
Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011).
The district court addressed whether Section 922 of the Dodd-Frank Act, which amends
the whistleblower protection set forth in the Sarbanes-Oxley Corporate and Criminal Fraud
Accountability Act of 2002, should be applied retroactively. Specifically, the court addressed
the question of whether the ban on pre-dispute arbitration agreements imposed by the Dodd-
Frank Act applies retroactively. In conducting its analysis, the court first found that nothing in
Section 922 displays an express congressional intent regarding retroactivity. Next, the court
again found that the statute was unclear regarding retroactivity, and as a result of this
uncertainty, moved to the second step in the analysis of addressing the consequence of
retroactivity. Accordingly, the court held that, in the absence of clear legislative intent to limit
the temporal reach of Section 922 of the Act, and because of the procedural character of that
provision, the court and not a FINRA arbitration panel had subject matter jurisdiction over the
whistleblower claim.
The Ayco Company, L.P v. Becker, 2011 U.S. Dist. LEXIS 92380 (N.D.N.Y. Aug. 18, 2011).
Plaintiff filed this breach of employment contract action against its former employee
alleging that the employee breached the Trade Secrets and Confidentiality Agreement (the
“Agreement”) he signed upon beginning his employment. Plaintiff contended that Defendant
violated that agreement when he: (1) used its confidential client and business information
without the company’s permission; (2) removed from Plaintiff’s premises records of names and
addresses of the firm’s clients; and (3) solicited or performed services for Plaintiff’s clients
during the two year period following his departure from Plaintiff. Additionally, under the
Agreement, Defendant agreed that the Northern District of New York would have jurisdiction
over any disputes arising between the parties. Defendant offered various arguments in support of
his motion to stay the federal court action and compel arbitration of the dispute. First, Defendant
contended that FINRA Rule 13200(a) should apply, notwithstanding the fact that Plaintiff’s
affiliate, and not Plaintiff, signed Defendant’s Form U-4 Agreement. According to Defendant,
Plaintiff was the true party of interest with regard to the arbitration clause found in the Form U-4,
and therefore should be estopped from avoiding arbitration. The court explained that, absent an
express agreement to arbitrate, the Second Circuit has recognized only five theories upon which
it is willing to enforce an arbitration agreement against a non-signatory: 1) incorporation by
reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. Regarding
estoppel, Defendant argued that Plaintiff should be bound by the arbitration agreement under a
“direct benefits” theory. The court, however, disagreed, finding that it was unclear whether
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Plaintiff in fact derived a direct benefit from Defendant’s signing of the Form U-4 Agreement.
The court noted that Defendant did not establish that Plaintiff participated in negotiating the
Form U-4 Agreement, is mentioned in that agreement, received fees as a result of the agreement,
or sought to enforce that agreement against him. Therefore, and because each of Defendant’s
remaining arguments failed, the court determined that the parties were not required to arbitrate
the claims.
Sanders v. Forex Capital Mkts., LLC, 2011 U.S. Dist. LEXIS 137961 (S.D.N.Y. Nov. 29, 2011).
Plaintiff brought a putative class action alleging that the Firm engaged in unlawful and
deceptive practices with regard to its online foreign-exchange trading service in violation of state
and federal law. The Firm moved for an order compelling plaintiff to arbitrate the claims
pursuant to a Client Agreement he entered into when he began using the Firm’s service. During
the course of completing the online application, plaintiff checked a box which provided that any
dispute arising out of or relating to the account shall be resolved by arbitration. Further, the
agreement provided that traders who did not elect to be bound by arbitration were not precluded
from opening an account with the Firm. In reaching the conclusion that the parties were
compelled to arbitrate the claims, the court found that the trader’s affirmative assent to the
arbitration clause, as evidenced by his checking of the box, made the dispute arbitrable so long as
the clause was not unenforceable as a matter of law. Because the court found that the electronic
assent to arbitrate was not unconscionable, either procedurally or substantively, the parties were
compelled to arbitrate the dispute.
McCafferty v. A.G. Edwards & Sons, Inc., 2011 U.S. Dist. LEXIS 89437 (D.N.J. Aug. 11, 2011).
Following an adverse award against him, plaintiff, a former branch manager, filed a
complaint in state court seeking to vacate that award on the grounds that the panel lacked
jurisdiction because there was a “non-public” arbitrator on the panel. According to plaintiff, his
claims required an all public panel because his allegations included a statutory employment
discrimination claim. Under FINRA Rule 13802(c)(2), claims involving a statutory employment
discrimination claim require a panel constituted entirely of public arbitrators unless the parties
agree in writing otherwise. Defendant, the manager’s former employer, contended that
plaintiff’s statement of claim did not include such a discrimination claim, or in the alternative,
that plaintiff did in fact agree in writing to permit the panel to proceed with the non-public
member. The court found that although plaintiff was correct in asserting that his New Jersey
Conscientious Employee Protection Act (“CEPA”) was a civil rights claim, it does not
automatically follow that CEPA is a discrimination statute. The court reasoned that CEPA
protects employee conduct, rather than an employee’s “immutable characteristics” like
employment discrimination statutes. As a result, the court held that Rule 13802(c)(2) did not
apply to plaintiff’s claims, and it was proper to confirm the arbitration award entered against
him.
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PFS Invs., Inc. v. Imhoff, 2011 U.S. Dist. LEXIS 31417 (E.D. Mich. Mar. 25, 2011).
At issue was whether a registered representative was required to arbitrate his state court
claims against his former employer, its affiliates, and various company personnel. The dispute
arose following the representative’s decision to leave his longtime employer and begin selling
securities with a close competitor. After this fact came to light, the parent company’s counsel
contacted the competitor’s largest insurance provider and allegedly defamed the representative
by creating doubt as to whether the insurance provider should allow him to sell its products.
After buy-out negotiations relating to the representative’s book of business were frustrated, the
representative filed a thirty-two count complaint in Michigan state court, alleging that his former
employer was liable for conversion, tortious interference, unjust enrichment, and various other
claims. In his complaint, the representative maintained that Defendants committed acts
inconsistent with the right to arbitrate and so prejudiced his rights that they lost their right to
compel arbitration. Additionally, the representative argued that FINRA rules permit a court to
hear claims for injunctive relief. In determining that the representative was required to arbitrate
his claims, in light of his agreement to do so in his Form U-4, the court explained that, under
some circumstances, a non-party to an arbitration agreement may compel a party that signed to
agreement. Likewise, the court found that the theory of equitable estoppel was appropriate in
this case because it would be inequitable to allow the representative to avoid arbitrating his
claims simply by naming non-FINRA member affiliated companies as defendants.
Yuan v. Getco, LLC, 2011 U.S. Dist. LEXIS 89991 (N.D. Ill. Aug. 12, 2011).
N.3.
A securities trader filed a claim in state court alleging claims under the Illinois Wage
Payment and Collection Act. In his complaint, the trader alleged that Defendants violated the
Act by failing to pay him several million dollars worth of bonuses and commissions owing from
his work for Defendants. Based on federal subject matter jurisdiction, Defendants removed the
action to federal court and sought an order directing the parties to arbitrate the claims. In support
of their position, Defendants argued that Plaintiff’s Form U-4 incorporates the mandatory
arbitration provisions of the security exchanges with which Plaintiff was registered, including
NYSE Arca, NASDAQ and NYSE. Given that NYSE Arca was the primary regulator of both
parties, the court focused its attention to that SRO’s arbitration provisions. First, the court found
that both parties were in fact “associated persons” under NYSE Arca rules as Plaintiff was an
employee of an Equity Trading Permit (“ETP”) Holder and the parent companies and their
members and directors satisfied NYSE Arca Rule 1.1(f) as “any person directly or indirectly
controlling, controlled by or under common control with an ETP Holder.” Next, the court
rejected Plaintiff’s argument that by filing a Form U-5 he was not subject to arbitration, stating
that such a filing would have no impact on the employee’s prior agreement to arbitrate his
claims. Citing one of its earlier opinions, the court added that, absent clear evidence that the
parties intended to override this presumption of arbitration, an employee’s agreement to arbitrate
survives his termination. Finally, the court rejected Plaintiff’s remaining argument that FINRA’s
six year eligibility rule prohibited the panel from addressing wage-payment claims that occurred
before that period. The court made clear that FINRA Rule 13206 specifically reserves for the
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arbitrator the right to determine whether a claim is timely, and, as such, Plaintiff’s claims were
required to be arbitrated.
Mid-Ohio Sec. Corp. v. Estate of Burns, 790 F. Supp. 2d 1263 (D. Nev. 2011).
Following her husband’s death in 2005, a widow filed a statement of claim against Mid-
Ohio Securities alleging that her husband’s IRA incurred losses resulting from Defendant’s
failure to perform basic due diligence. The unique issue presented by the action was that the
statement of claim identified the claimant as “The Estate of Lawrence D. Burns, By its Executor,
Epifania B. Burns,” when, in reality, the widow had not filed anything in probate court, there
was not a will, and no estate was created. Further, the widow was not appointed by any court to
be the executor or legal representative of her husband’s estate. However, the widow was the sole
beneficiary of the IRA, and the panel was aware of that fact. Ultimately, the panel found in the
widow’s favor, awarding her approximately $280,000, and defendant thereafter asked the court
to vacate that award based on a lack of standing. Defendant argued that because the claimant, as
depicted by the caption in the statement of claim, did not actually exist, the panel manifestly
disregarded the law when it refused to dismiss the action. The court rejected this and other
arguments offered by defendant and held that the “panel declined to elevate form over substance
to find a lack of standing based on a mistake in the caption.” Similarly, the court held that
defendant failed to meet its burden of establishing manifest disregard of the law because
defendant did not provide the panel with the law cited in its brief. As such, the court could not
conclude that the panel recognized the applicable law and then elected to ignore it. The court
confirmed the award.
Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 WL 855354 (D. Nev. Mar. 9,
2011).
Plaintiff, a registered financial advisor, filed suit in the state of Nevada alleging breach of
contract, breach of the covenant of good faith and fair dealing, and declaratory relief, among
other things, following his termination from employment at the Firm. According to the advisor,
he was terminated without cause in violation of the parties’ employment agreement dated August
4, 2009. After removing the action to the district court, the Firm sought to compel arbitration
pursuant to the arbitration agreement found in the advisor’s Form U-4. In opposition to this
motion to compel, the advisor contended that his employment agreement, which was executed on
the same day as his Form U-4, did not contain an arbitration clause and also did contain a merger
clause. Despite recognizing that both contentions were true, the court found that the advisor’s
Form U-4 was sufficient to compel the advisor to arbitrate the dispute. Additionally, attached to
the advisor’s Form U-4 was a disclosure statement informing the advisor of the parties’
agreement to arbitrate, which stated: “This means you are giving up the right to sue a member,
customer or another associated person in court.” Further, the court noted that the unique
regulatory requirements in the investment industry permit the court to infer that the Form U-4
ordinarily provides for dispute resolution rather than an employment agreement doing so.
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Gilmore v. Brandt, 2011 U.S. Dist. LEXIS 125812 (D. Colo. Oct. 31, 2011).
Following the complete decimation of his investment in what turned out to be a Ponzi
scheme, an investor submitted claims that a FINRA arbitration panel found in his favor. Upon
the investor’s motion to enforce the award, Defendant securities representative moved to vacate
the award maintaining that the FINRA arbitrators lacked jurisdiction over the dispute as
defendant never agreed to submit any dispute with the investor to arbitration. While noting that
the representative should have sought an order to stay the arbitration, the court nonetheless found
that the representative did preserve his objection to the panel’s jurisdiction. Particularly, the
representative appended a statement to his FINRA Arbitration Submission Agreement reserving
all rights to challenge the jurisdiction of FINRA at a later date, and also raised the jurisdictional
objection in both his answer and pre-hearing brief. The court concluded that, despite these
objections, the representative was subject to the panel’s jurisdiction pursuant to his Uniform
Application for Securities Industry Regulation or Transfer (“Form U-4”) that the representative
executed when first seeking licensure to sell securities. Accordingly, the court found that the
representative would be required to arbitrate the dispute if required to do so under FINRA rules.
After concluding that the investor was a customer within the meaning of Rule 12200, and also
that the recommendation fell within the class of disputes wherein the issues are reasonably
related to FINRA regulated activity, the court held that the panel’s implicit recognition of its
jurisdiction was proper and denied the representative’s motion to vacate the award.
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2011 U.S. Dist. LEXIS 113172 (S.D. Fla. Sep.
30, 2011).
Plaintiff, a FINRA member, brought claims against affiliated companies and their
officers and directors seeking damages following an alleged pattern of egregious
misrepresentations and fraud. The claims were submitted to FINRA arbitration. The panel
entered an award in favor of the respondents and denied plaintiff’s claims in their entirety.
However, approximately two weeks before that award was rendered, plaintiff filed a complaint
in court. Thereafter, the respondents asserted affirmative defenses to every count in the court
complaint, contending that the claims were barred in whole or in part by the doctrines of
collateral estoppel and res judicata. Having concluded that the issues adjudicated were identical,
fully, and fairly litigated, and, further, were necessary to the binding judgment of the panel, the
court found that the doctrine of collateral estoppel barred the claims.
Hantz Group, Inc. v. Van Duyn, 2011 Mich. App. LEXIS 1212 (Mich. Ct. App. June 30, 2011).
Plaintiffs, financial services affiliates, appealed a trial court’s grant of defendants’ motion
to set aside defaults entered against them, and also the court’s order dismissing plaintiffs’ claims
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and ordering of all parties into arbitration. Plaintiffs’ claims arose out of alleged violations of
non-solicitation and confidentiality agreements that defendants signed while in plaintiffs’
employ. Defendants contended that the default judgment would result in manifest injustice given
the amount of damages sought, the minimal delay in filing their answer, and also that the parties
were involved in ongoing settlement discussions. Following a hearing on such arguments, the
court agreed to set aside the default, dismissed plaintiffs’ claims, and ordered the case into
arbitration. The appellate court addressed whether various parties, who the parties agreed were
not “members” or “associated persons,” were required to adjudicate the claims in FINRA
arbitration. Citing the Sixth Circuit, the court noted that five theories exist to bind
nonsignatories to arbitration agreements, those being incorporation by reference, assumption,
agency, viel-piercing/alter ego, and estoppel. The appellate court held that the trial court erred in
ordering the parties to arbitrate the claims because certain plaintiffs did not agree in writing or
otherwise to arbitrate the dispute, the agreements did not incorporate the FINRA membership
contract arbitration clauses, the claims were not inextricably intertwined with plaintiffs’ claims
under the agreements, there was no evidence that plaintiffs sought the benefit of the FINRA
membership agreements in any way related to the dispute, and the third-party beneficiary theory
did not apply.
Morgan Keegan & Co., Inc. v. Smythe, 2011 Tenn. App. LEXIS 613 (Tenn. Ct. App. Jan. 19,
2011).
Following an adverse award by a FINRA panel, the Firm filed a petition to vacate the
award alleging partiality and bias on the part of two members of the panel. The Firm argued that
the two panel members were no longer “independent and neutral” as those members participated
in prior arbitrations in which unfavorable awards were rendered against it. The trial court entered
an order vacating the award and remanded the matter to FINRA for rehearing before another
panel of arbitrators. On appeal, the parties addressed whether the trial court’s order was
appealable under the Tennessee Uniform Arbitration Act (“TUAA”) or the FAA. The appellate
court concluded that, although the FAA applies to the substantive issues in the case, the TUAA
governs the appealability of the trial court’s order. The appellate court reasoned that Section 29-
5-319(a)(3) of the TUAA did not authorize the appeal of the trial court’s order because there was
no motion to confirm and the trial court did not address confirmation of the arbitration award in
its order. Moreover, the appellate court added that Section 29-5-319(a)(5) was the applicable
provision, and that it was procedural in nature and not preempted by federal law. After declining
to exercise its discretion under Rule 2 to suspend the Rules of Appellate Procedure or otherwise
seek to avoid the effect of the plain language of Section 29-5-319(a), the appellate court
dismissed the appeal for lack of subject matter jurisdiction.
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4. Motions to Vacate or to Enjoin
a. Punitive Damages
N.4.a
Hosier v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 146670 (D. Colo. Dec. 21, 2011).
Defendant moved to vacate an arbitration award on the grounds that the panel manifestly
disregarded the law and exceeded its powers by failing to follow FINRA procedures and
Colorado law for awarding punitive damages and attorneys’ fees. The district court held that the
panel did not manifestly disregard the law where defendant did not show that the panel knew
about and ignored the cited case law. The district court found that it could not review the panel’s
decision based on whether there was sufficient evidence to prove wanton conduct. On punitive
damages, the Arbitrator’s Manual does not obligate the panel to provide a basis for punitive
damages, but rather recommends that the panel do so. Defendant did not provide a case, nor did
the district court find a case, which held that the failure to follow a recommended, but not
mandatory, FINRA procedural rule justified vacating an arbitration award. Lastly, defendant
argued that the panel exceeded its authority by granting attorneys’ fees under the Colorado
Securities Act (“CSA”) when plaintiff did not allege claims against defendant under the CSA.
The district court held that defendant’s contention that it had no advance warning or opportunity
to respond to the CSA claims was disingenuous since the elements of common law and statutory
fraud claims are almost identical and defendant referenced the CSA at the hearing. Additionally,
the district court held that by failing to object to the request for attorneys’ fees at the hearing,
defendant waived its right to later contest the attorneys’ fees.
b. Attorneys’ Fees
N.4.b
Wells Fargo Bank, N.A. v. WMR e-Pin, LLC, 653 F.3d 702 (8th Cir. 2011).
Plaintiff brought claims for breach of contract and for misappropriation of trade secrets
against a corporation with which it entered into agreements to provide plaintiff consulting
services and software products. The Consulting Agreement governing the software at issue
reserved certain intellectual property rights for plaintiff. The panel found in plaintiff’s favor for
breach of the Agreement and for misappropriation of the software trade secrets, and also
awarded attorneys’ fees and costs and permanently enjoined the corporation from using or
disclosing the software trade secrets. Defendant moved to vacate the arbitration award on the
grounds that: (1) the district court, which confirmed the award, lacked subject matter
jurisdiction; and (2) the panel lacked authority to grant injunctive relief, determine the inventor
of the software, and award attorneys’ fees. The Eighth Circuit noted a circuit split on
determining jurisdiction for national banks and concluded that a national bank is a citizen only of
the state in which its main office is located. Therefore, on the facts of this case, diversity
jurisdiction was established. The Eighth Circuit held that defendant waived its right to argue that
the panel lacked authority where defendant itself argued for injunctive relief, that it was the
rightful owner of the software, and sought an award of attorneys’ fees. The Circuit Court also
held that, under Federal Rule of Civil Procedure 60(b)(5), an injunction is only subject to
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impeachment upon proof of changed circumstances that shift the equitable balance in the
challenging party’s favor. Defendant failed to prove any changed circumstances. The Eighth
Circuit therefore affirmed the district court’s denial of defendant’s motion to vacate the
arbitration award.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Whitney, 419 Fed. App’x. 826, (10th Cir. 2011).
N.4.b
Whitney alleged she was improperly denied assets held in beneficiary-controlled
accounts at the Firm Lynch based on her alleged status as beneficiary. The panel dismissed her
claims and granted the Firm’s request for attorneys’ fees. The district court denied Whitney’s
motion to vacate the arbitration award and Whitney appealed to the Tenth Circuit on the grounds
that the panel exceeded its power by (1) disregarding the terms of the contractual relationship
between the account holder and the Firm; (2) failing to recognize that the account holder lacked
legal authority to name a beneficiary; and (3) awarding attorneys’ fees and costs in favor of the
Firm without evidence to support the award. Whitney argued that, under Oklahoma case law, the
Firm was required to submit detailed records to back up their requested attorneys’ fees and the
Firm’s failure to do so precluded the panel from awarding attorneys’ fees. The Tenth Circuit
affirmed the district court’s decision. The circuit court found that the first two grounds lacked
merit and there was sufficient evidence for the determinations made. Importantly, the circuit
court also found that the arbitration award for the Firm’s attorneys’ fees was valid under
Oklahoma case law because the documentation guidelines for attorneys’ fees were guidelines
and not absolute. Therefore, the Tenth Circuit affirmed the district court’s denial of Whitney’s
motion to vacate the arbitration award.
Sheedy v. Lehman Bros. Holdings Inc., 2011 U.S. Dist. LEXIS 131003 (D. Mass. 2011).
N.4.b
A former employee sought to vacate an arbitration award requiring her to return the balance on a
“forgivable loan” given to her by the Firm in conjunction with her employment and to pay
interest and attorneys’ fees. On appeal, employee argued the award violated the Weekly Wage
Act and violated Massachusetts public policy against unlawful restraint of trade and competition.
The district court denied the motion to vacate the arbitration award and found that incentive or
bonus compensation is outside the Weekly Wage Act unless it qualified as commissions. The
district court also held that a forgivable loan had no relationship to a noncompetition agreement
where the employee was free to leave at any time and work for a competitor as long as she was
willing to forgo the loan. On attorneys’ fees, the district court found that attorneys’ fees were
properly awarded pursuant to a contractual fee provision entered into between the parties.
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c. Other
N.4.c
STMicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 648 F.3d 68 (2d Cir. 2011).
The Firm moved to vacate arbitration award on the ground that one of the arbitrators
failed to disclose his prior experience as Claimant’s expert. The Firm based its argument on
Federal Arbitration Act (“FAA”), 9 U.S.C. section 10(a)(3), which states, in pertinent part, that
an award can be vacated for “other misbehavior by which the rights of any party have been
prejudiced.” The district court denied the Firm’s motion to vacate and, on appeal, the Second
Circuit affirmed the district court’s holding but vacated the arbitration award in part based on the
district court’s improper implementation of fees. In affirming the district court’s findings, the
Second Circuit noted the arbitrator’s disclosures that he worked as an expert for both customers
and brokerage firms, although he did not estimate the number of times he represented each side.
The Second Circuit held that FINRA rules do not require exhaustive arbitrator disclosures and
that, although an arbitrator may estimate the number of times he’s appeared as an expert, he is
not mandated to do so. Further, there was no indication that the arbitrator had any prior
knowledge or misconception about the facts of the case. The Second Circuit also noted that the
Firm did not cite to, nor was the court aware of, any cases which addressed insufficient
disclosure as the basis to satisfying the “other misbehavior” prong of the FAA. The Firm also
argued that the arbitrators manifestly disregarded the law. However, the Second Circuit found
that, since the panel did not specify under which claim the award rested, the Firm had to
demonstrate manifest disregard of the law under all the claims because an arbitration award that
is conceivable under any alleged claim should not be vacated. Lastly, the Second Circuit agreed
with the Firm that the award should have been reduced based on the amount of money
Stmicroelectronics received from its sale of the securities at issue with a corresponding reduction
in interest due.
Rai v. Barclays Capital, Inc., 2011 U.S. App. LEXIS 22365 (2d Cir., Nov. 2, 2011).
N.4.c
Pro se plaintiff, Rai, appealed the Southern District Court of New York’s denial of his
motion to vacate the arbitration award. Rai argued the arbitration award should be vacated
because of the arbitrator’s misconduct in excluding one of Rai’s witnesses. The misconduct
alleged was a failure to adjourn the hearing when Rai’s witness could not appear on the
scheduled day and that the panel would not accept an affidavit by Rai’s witness in lieu of his
appearance at the hearing. The Second Circuit affirmed the denial of the motion to vacate where
the plaintiff failed to request an adjournment and found that (1) refusal to postpone a hearing to
permit witness testimony and (2) refusal to receive a witness’ affidavit in place of live testimony
do not rise to the level of unfairness required to vacate an arbitration award under the Federal
Arbitration Act, 9 U.S.C. section 10(a)(1).
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N.4.c
Aviles v. Charles Schwab & Co., Inc., 435 Fed. Appx. 824 (11th Cir. 2011).
The Firm sought and won an arbitration award against a former employee, Aviles, on
claims of improper solicitation of the Firm’s clients. Aviles moved to vacate the arbitration
award on the grounds that the arbitrators refused to hear material evidence when a witness
became unavailable; refused to postpone the hearing; rendered an award contrary to public
policy and were biased. The district court denied Aviles’ motion to vacate. On the issue of
material evidence, the Eleventh Circuit found that the chairperson was accommodating with
unavailable witnesses and reminded Aviles he could use telephonic testimony or file a motion for
the chairperson to issue subpoenas to acquire the evidence. On the allegation of arbitrator bias,
in order to establish “evident partiality,” the challenging party had to provide evidence of an
actual conflict of interest or identify a business or other connection that might suggest bias which
the arbitrator failed to disclose. The Eleventh Circuit held that an affidavit by another arbitrator
concerning statements made by the chairperson did not demonstrate evident partiality, but did
provide evidence of the chairperson’s misunderstanding of the law at the time of the hearing.
However, an incorrect understanding of a legal issue doesn’t demonstrate bias or hostility toward
a party and, therefore, the district court properly denied the motion to vacate the arbitration
award.
N.4.c
Murray v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 131197 (N.D. Ohio, Nov. 14,
2011).
A former employee of the Firm received a loan pursuant to a promissory note and, upon
leaving the Firm did not pay off the outstanding loan. The employee’s motion to vacate the
arbitration award was based on the grounds that the award was irrational; didn’t conform to the
party’s contract; violated public policy; and manifestly disregarded the law. The district court
stated that purported irrationality was an insufficient basis for vacating an award. The motion to
vacate was also denied because the former employee simply contested the panel’s determinations
of the facts and the court lacked the authority to re-litigate the facts of the case.
N.4.c
Finkelstein v. UBS Global Asset Management (US) Inc., 2011 U.S. Dist. LEXIS 89800
(S.D.N.Y. August 9, 2011).
A former employee of the Firm filed a claim in arbitration arguing his entitlement to a
“special payment” of $6.25 million pursuant to the Firm’s ERISA-governed Separation Program.
The panel denied the employee’s claim without an explanation. The district court noted that it
was procedurally deficient of the employee to seek to vacate the arbitration award by filing a
petition, but never making a motion to vacate. On the substantive law, the employee argued that
the panel manifestly disregarded ERISA law; the award was procured through fraudulent
concealment of material evidence; and the arbitrators refused to hear material evidence. The
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district court held that the panel had a colorable justification to determine that the oral
modifications requirement under ERISA did not apply; that there was ample evidence to
conclude that the employee was not entitled to the special payment; and noted that the
arbitrator’s factual findings are not subject to any review if the ground for the decision can be
inferred from the facts of the case. The employee’s fraudulent concealment argument is based
on its contention that the Firm intentionally withheld a particular month of data on profit and
losses of a similarly situated employee. The district court found that the Firm could not be held
liable for fraudulently concealing information where it was under no obligation to disclose that
information and did voluntarily disclose appropriate data. The panel also denied the employee’s
request for the production of evidence concerning the value of any parallel investments held by
the Firm’s investment bank. The district court confirmed that the employee lacked a good faith
basis for the information and did not prove that it would have altered the outcome of the
arbitration. The employee’s motion to vacate the arbitration award was therefore denied.
Salzman v. KCD Financial, Inc., 2011 U.S. Dist. LEXIS 147170 (S.D.N.Y. Dec. 21, 2011).
N.4.c
Salzman, a former employee and majority shareholder of the Firm (a FINRA member), entered
into Stock Purchase Agreement to sell his Firm stock to another FINRA member. The Firm filed
claims of breach of fiduciary duty and breach of contract against Salzman and others. The panel
found Salzman jointly and severally liable for compensatory damages plus 5% interest, but did
not specify under which claim his liability was based. Salzman sought to vacate the arbitration
award on the grounds that (1) the award was procured by fraud or undue means because the
Consulting Agreement was withheld from the panel and (2) another defendant gave false
testimony at the hearing. The court noted that, although the Second Circuit has not articulated a
test for vacating an arbitration award on the ground of fraud, district courts have found that a
party challenging the arbitration award must show (1) engagement in fraudulent activity; (2) that
challenger, using due diligence, could not have discovered the alleged fraud prior to the award;
and (3) the alleged fraud was materially related to an issue in the arbitration. Salzman failed to
provide evidence for prongs 1 and 2 and also failed to provide evidence that the other defendant,
who was also found liable to KCD, provided fraudulent testimony. The district court denied
Salzman’s motion to vacate the arbitration award.
O. Practice and Procedure
1. Rule 9(b) of the Fed. R. Civ. P.
City of Pontiac Gen. Emp. Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011).
In a proposed class-action brought by a pair of retirement funds that purchased stock in
MBIA, Inc., the district court dismissed the suit as barred by the statute of limitations. The
Second Circuit vacated the district court’s dismissal and remand for reconsideration of the statute
of limitations analysis in light of the Supreme Court’s decision in Merck & Co. v. Reynolds, 130
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S.Ct. 1784 (2010). Prior to Merck, Second Circuit precedent provided that a plaintiff was on
“inquiry notice” when public information would lead a reasonable investor to investigate the
possibility of fraud; the statute of limitations period starts to run the day the plaintiff should have
begun investigating. Merck held that the limitations period begins to run only after “a reasonably
diligent plaintiff would have discovered the facts constituting the violation, including scienter—
irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.”
Because the district court decision relied on the now-overruled “inquiry notice” rule, the
appellate court reversed.
New Orleans Emps. Ret. Sys. v. Celestica, Inc., 2011 WL 6823204 (2d Cir. Dec. 29, 2011).
After the district court dismissed the plaintiffs’ securities fraud claims under the
Securities Exchange Act of 1934 for failure to plead the requisite scienter, the plaintiffs
appealed. The Second Circuit reversed and remanded, finding that the plaintiffs adequately
alleged that the defendants made knowing or reckless misrepresentations concerning the
company’s financial performance. To support their scienter allegations, the plaintiffs’ complaint
used statements from confidential witnesses indicating that they informed the defendants about
the company’s financial problems. Although the complaint did not identify these witnesses by
name, the court found the pleadings sufficient to comply with the heightened pleading standards
of Rule 9(b) and the Private Securities Litigation Reform Act of 1995, which the court found did
not require the pleading of detailed evidentiary matter.
Barnard v. Verizon Commc’n, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).
Former shareholders in bankrupt corporation spun-off from Verizon Communications
sued Verizon and the administrative agent responsible for a debt exchange that took place in
connection with the spin-off, alleging securities fraud, common law fraud, and other state and
federal claims. The district court dismissed the case, plaintiffs appealed, and the Third Circuit
affirmed. The court of appeals held that the plaintiffs’ federal securities fraud allegations fell far
short of the particularized pleading required by the Private Securities Litigation Reform Act of
1995, and their common law fraud allegations likewise failed to meet the particularity
requirements of Rule 9(b).
Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462 (4th Cir. 2011).
Plaintiffs appealed the district court’s denial of their motion to amend the dismissal with
prejudice of their complaint. The Fourth Circuit held that the district court did not abuse its
discretion in concluding that allowing the plaintiffs to file the proposed third amended complaint
would have been futile, for even the proposed complaint inadequately pleaded loss causation.
The appellate court held that although the market disclosures at issue provided information
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suggesting that the company’s initial statements regarding a planned leveraged buyout were
overly optimistic, they did not disclose that Penn had perpetrated a fraud on the market by
omitting in its eight prior press releases related to state regulatory approvals any mention that the
leveraged buyout would not close as written, and thus did not sufficiently “relate back” to the
alleged fraud.
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).
A class of investors who purchased securities in defendant Dana Corporation alleged that
the CEO’s and CFO’s continually optimistic statements misrepresented the company’s dire
financial straits, constituting securities fraud under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5. The district court dismissed the plaintiffs’ complaint for
failing to adequately plead scienter under Rule 9(b). Plaintiffs appealed, arguing that the
defendant’s receipt of internal reports demonstrating financial distress, their cover-up of
malfunctioning accounting systems, the magnitude of false statements and temporal proximity of
false statements and corrective statements, their motivation to earn bonuses, the retirement of
one of the fraud participants just after the accounting errors were revealed, their signing false
Sarbanes-Oxley certifications, and the fact that the SEC investigated the company’s accounting
practices demonstrated scienter. The Sixth Circuit agreed. Following the Supreme Court’s lead
in Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011), which provided a post-Tellabs
example of how to consider scienter pleadings “holistically” in section 10(b) cases, the Sixth
Circuit held that the inference that the defendants recklessly disregarded the falsity of their
extremely optimistic statements was at least as compelling as their excuse of failed accounting
systems. The Sixth Circuit also held that the district court erred when it required Plaintiffs to
plead as part of their section 20(a) claim that the defendants did not act in good faith; it joined
the First, Fourth, Fifth, Seventh, and Eleventh Circuits in concluding that good faith is an
affirmative defense.
AnchorBank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).
A bank and the trustee for the bank’s investment fund filed suit against a bank employee
alleging that he engaged in a collusive trading scheme in violation of sections 9(a) and 10(b) of
the Securities Exchange Act of 1934. The complaint explained the scheme as a conspiracy
between the defendant and other fund participants to cyclically cause drastic swings in the fund
price, which allowed the conspirators to increase the value of their fund holdings by more than
200%, even though the value of the fund units plummeted 95%. The employee successfully
moved to dismiss the case on the grounds that the complaint inadequately pled reliance, scienter,
and loss causation; but the Seventh Circuit reversed. The complaint stated that trustee himself
relied on the distorted stock prices and the facts pleaded demonstrated that scienter was as
plausible an explanation as any other, as required by Tellabs. As for loss causation, neither the
fact that the trustee’s discretionary behavior might also have altered stock price nor the general
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market sector downturn rendered the complaint’s stated facts insufficient under Rule 9(b)’s
particularity requirement.
Hill v. State Street Corp., 2011 WL 3420439 (D. Mass. Aug. 3, 2011).
In consolidated class actions alleging violations of both the federal securities laws and the
Employee Retirement Income Security Act (“ERISA”) brought against State Street Corporation
and several other defendants, the defendants moved to dismiss claiming that, among other
reasons, the plaintiffs failed to state claims with sufficient particularity. After finding that the
federal securities law claims complied with the heightened pleading standards of both the Private
Securities Litigation Reform Act of 1995 and Rule 9(b), the court turned to whether Rule 9(b)
also applied to the ERISA claims. Recognizing uncertainty in the law on the issue, the court
rejected the defendants’ arguments and held that Rule 9(b) did not apply. The court explained
that while the complaint alleged that State Street’s foreign exchange practices were fraudulent,
the fraud allegations were simply further proof that State Street stock was an imprudent
investment. Thus, the court held, the plaintiffs might ultimately be unable to prove the alleged
fraud, but nonetheless succeed on their claim that the defendants breached their fiduciary duty
under ERISA by imprudently offering State Street stock as a plan investment.
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC, 792 F. Supp. 2d 328 (D. Conn. 2011).
The plaintiff brought securities fraud claims against a fund and related entities in which it
invested, along with the executive who allegedly controlled the defendant-entities. The
executive moved to dismiss the Section 20(a) claim against him alleging control person liability,
but the court denied the motion, finding that the complaint sufficiently alleged that the executive
possessed control over the alleged primary violators and that he was a culpable participant in the
alleged primary violations. Addressing the defendant’s argument that the pleading standards of
Rule 9(b) and the Private Securities Litigation Reform Act of 1995 applied to all the elements of
the Section 20(a) claim, the court disagreed. The court found that the heightened pleading
standards applied to the culpable participation element of the claim, but that the control element
was subject only to the lower standard of Rule 8. Because the complaint contained sufficient
allegations to satisfy the pleading standard applicable to each element, the court denied the
motion to dismiss.
Prime Mover Capital Partners, L.P. v. Elixir Gaming Techs., Inc., 793 F. Supp. 2d 651
(S.D.N.Y. 2011).
Hedge funds brought a securities fraud action against an issuer of securities, its individual
directors and officers, a Hong Kong corporation that later gained control of the issuer, and the
Hong Kong corporation’s chairman, a citizen of Canada residing in Hong Kong. After the court
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dismissed the latter two defendants for lack of personal jurisdiction, the remaining defendants
moved to dismiss under Rule 12(b)(6). The court granted the motion in part and denied it in part.
With respect to the securities law claims, the court found that one of the plaintiffs failed to plead
transaction causation adequately, while the other largely failed to plead loss causation adequately
and, to the extent its causation allegations were adequate, the alleged misrepresentations were
nevertheless protected as forward-looking statements. Turning to the plaintiffs’ claims that the
defendants breached certain warranties in the transaction documents, the court held that Rule
9(b) applied to these breach of contract claims because the warranty claims were closely related
to the securities fraud claims, and thus the question of breach turned on whether the fraudulent
conduct adequately had been pleaded. According to the court, Rule 9(b)’s relaxed standard for
averments of intent should not be mistaken as a license to base claims of fraud on speculation
and conclusory allegations, and still required the plaintiff to allege facts giving rise to a strong
inference of fraudulent intent. Because the complaint failed to contain allegations giving rise to
a strong inference that the issuer or any of its agents had a concrete personal motive to
manipulate the price of the company’s stock and warrants, the breach of warranty claims failed.
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011).
In an action brought by the SEC accusing a father and his sons of insider trading where
the father allegedly disclosed material non-public information regarding his employer to his
sons, the defendants moved to dismiss, claiming that the SEC’s allegations failed to comply with
the pleading requirements of Rule 9(b) because they did not allege whether the father directly or
indirectly provided the sons with the information. The court rejected this argument, holding that
the allegations were sufficient to put the defendants on notice of the claims, and to require the
SEC to allege the specific details of the tips, including the manner in which they were disclosed,
would place too heavy a burden on the SEC at the pleading stage. The court also rejected the
defendants’ contention that the fact that the SEC had conducted discovery and deposed several
defendants obligated it to plead with greater particularity, finding no basis for raising the
pleading standard based upon the procedural posture of the case.
PT Bank Negara Indonesia (Persero) Tbk v. Barclays Bank PLC, 2011 WL 4717360 (S.D.N.Y.
Sept. 28, 2011).
Plaintiff sued the defendants alleging that they defrauded the plaintiff into buying a
credit-linked note that lost more than half of its value due to the bankruptcy of one of the
corporate entities to which it was linked. The plaintiff asserted claims for violations of the
Securities Exchange Act of 1934, along with numerous other state law claims. The defendants
moved to dismiss on the grounds that the federal securities claim failed to plead an active
misrepresentation or willful omission of material information about the credit-linked note with
the particularity required by Rule 9(b). The court agreed, finding a general statement by the
defendants that the note would be linked to “Verizon,” a large company known to have good
credit, and the fact that the note carried a low rate of interest, were insufficient to show that the
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defendants had misrepresented the note as investment grade, given that the sale documents made
clear that Verizon was not necessarily the only reference entity on the note and that the note was
unrated.
Anwar v. Fairfield Greenwich, Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).
Investors brought suit against a securities broker and its corporate affiliates alleging
securities fraud under Florida law based upon the broker’s recommendation to invest in a feeder
fund that in turn invested in a Ponzi scheme. The defendants moved to dismiss for failure to
plead the elements of fraud with particularity as required by Rule 9(b). The court found the
plaintiffs’ claims based upon the riskiness of the feeder fund and the lack of due diligence were
defectively pleaded due to the failure to allege where the misstatements were made and, with one
exception, when they were made. The plaintiffs’ fraud claims were also deemed defective
because they failed to specifically plead facts indicating what the defendants obtained through
the fraud, or that the defendants had a motive to commit fraud. In addition, the court dismissed
the negligent misrepresentation claims due to the failure to comply with Rule 9(b)’s
requirements, as those claims were essentially identical to the defective fraud claims.
Sawabeh Info. Servs. Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).
The plaintiff and its wholly-owned subsidiary brought suit against the subsidiary’s former
officers and shareholders arising out of the defendants’ sale of all of the outstanding shares of the
subsidiary to the plaintiff. The plaintiff asserted federal securities fraud and assorted state law
claims against the defendants, accusing them of failing to disclose certain significant potential
liabilities stemming from the transaction, including an agreement that transferred all of the
subsidiary’s intellectual property to one of the former officers and an employment agreement
that entitled the same officer to a large severance package. The defendants moved to dismiss,
and the district court granted the motion in part and denied it in part. With respect to the
securities fraud claims, the court held the allegations sufficiently specific and plausible to survive
the motion to dismiss under the heightened pleading requirements of the Private Securities
Litigation Reform Act of 1995 and Rule 9(b). In particular, the court found that the complaint
adequately alleged that the failure to disclose the agreements with the former officer constituted
material misrepresentations or omissions, that it was at least reckless not to do so, that the
defendants relied on these misrepresentations, and that this caused their losses, as the plaintiffs
specifically stated that neither they nor any reasonable purchaser would have entered into the
transaction had they known the true facts. In addition, the court found that Rule 9(b) does not
require the plaintiffs to plead damages with specificity.
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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
Over a two-year period, plaintiff purchased almost two dozen structured notes from
defendants. As the declining value of the notes triggered margin calls, defendants liquidated
portions of the plaintiff’s note investments, causing him to lose millions of dollars. He brought
suit against them under § 10(b) of the Securities Exchange Act of 1934 alleging that he had been
misled by defendants into significantly underestimating the risk of purchasing the notes,
including the risk of forced liquidation. Defendants moved to dismiss the suit, claiming that the
plaintiff failed to allege that the misstatements were material, scienter, reasonable reliance, and
loss causation. Defendants also claimed that U.S. courts lacked jurisdiction because the notes
were purchased outside of the U.S. and were not listed on a domestic exchange, and that
plaintiff’s suit was time-barred. The district court rejected nearly all of defendants’ arguments
and allowed the complaint to stand. It held that (1) the “bespeaks caution” doctrine did not apply
because the warnings provided did not cover all of the risks that plaintiff complains defendants
did not disclose; (2) the defendants’ failure to provide the plaintiff with prospectuses or other
detailed written information about the complex debt instruments was an extreme departure from
ordinary standards of care, supporting the inference of scienter; (3) the defendants’ active efforts
to circumvent federal regulations designed to protect investors also supported the inference of
scienter; (4) the plaintiff’s negligence in failing to ask for additional information did not entirely
undermine the reliance element of his claim, finding that failing to read documents in one’s
possession, which can affect the reliance prong, and failing to ask for information are sufficiently
distinct; (5) the fact that the financial harm suffered by the plaintiff occurred during a period of
financial market decline did not prevent him from pleading loss causation; (6) the case was not
time-barred because the plaintiff was not a sophisticated investor, and thus he fulfilled his
responsibility of reasonable diligence to investigate potential fraud notwithstanding the various
warning signs that a sophisticated investor would have noticed; and (7) although the notes
themselves were not listed on a domestic exchange, they were all linked to securities listed on a
domestic exchange, and this was enough to give the court jurisdiction under § 10(b).
In re Anadigics, Inc., Sec. Litig., 2011 WL 4594845 (D.N.J. Sept. 30, 2011).
The plaintiffs brought securities fraud claims against the defendants claiming that they
misled investors about Anadigics’s capacity to meet demand for its products. The defendants
sought dismissal for failure to satisfy the pleading demands of Rule 9(b) and the Private
Securities Litigation Reform Act of 1995, and the district court granted the motion. The court
found that most of the allegedly misleading statements were forward-looking and accompanied
by meaningful cautionary language and while the plaintiffs had identified two potentially false or
misleading statements with the requisite particularity, they nevertheless failed to plead facts
supporting an inference that the defendants were under a duty to disclose alleged over-ordering
and dual-sourcing being done by the company’s customers. In addition, the plaintiffs failed to
adequately allege scienter because the confidential witness allegations used in an attempt to
support an inference of knowledge lacked particularity. The complaint’s confidential witness
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allegations did not reference particular dates on which material information was discovered and
allegedly conveyed to management that would permit a strong inference of scienter.
Monk v. Johnson and Johnson, 2011 WL 6339824 (D.N.J. Dec. 19, 2011).
Plaintiffs brought securities fraud claims against corporation, its wholly-owned
subsidiary, and current and former officers and directors, alleging that they misrepresented
material information about systemic quality control failures at certain drug manufacturing plants.
Certain individual defendants moved to dismiss for failure to meet the applicable pleading
standards imposed by Rule 9(b) and the Private Securities Litigation Reform Act of 1995. The
court found the scienter allegations sufficient with respect to some defendants but lacking as to
others, and thus granted the motion in part and denied it in part. Commenting on the demands of
Rule 9(b), the court found that the plaintiffs’ citations to press releases did not satisfy the
pleading standards because they did not identify the dates of the press releases or the precise
statements attributable to particular defendants. In addition, the court found allegations that a
defendant should have known about quality control problems simply by virtue of her position
defective because a corporate officer’s knowledge of day-to-day operations could not be
presumed.
Chau v. Aviva Life and Annuity Co., 2011 WL 1990446 (N.D. Tex. May 20, 2011).
The plaintiffs, a group of physicians and dentists and their professional corporations, sued
the defendant based on its advertising, marketing and sale of tax shelters, accusing the defendant
of common law fraud, negligent misrepresentation, violating Washington state securities laws,
and other state common law and statutory claims. The defendant moved to dismiss, and the
court granted dismissal of all claims except the breach of contract cause of action. The court
found that while the common law fraud claim adequately alleged the “who, what, when, where,
and how” of the alleged fraud, it failed to allege why the purported misrepresentations were false
when made. Specifically, the court found that allegations that the defendant was aware that the
IRS had questioned the propriety of similar plans failed to show that the defendant knew that its
statements regarding the benefits and legality of the tax shelters were false when made and since
the plaintiffs’ Washington state securities law claims were premised on the same allegations of
fraudulent misstatements, they also failed to state a claim with the particularity required by Rule
9(b). With respect to the plaintiffs’ contract claims, however, the court found it generally
inappropriate to apply Rule 9(b) to contract actions under Fifth Circuit law and, in any event, the
claimed breach was not based on the allegedly fraudulent misrepresentations, but the failure to
provide the promised benefits. Accordingly, the contract claims survived the motion to dismiss.
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SEC v. Carroll, 2011 WL 5880875 (W.D. Ky. Nov. 23, 2011).
The SEC accused several defendants of insider trading, and they responded by filing
individual motions to dismiss. One of the defendants argued that the SEC failed to supply a
specific description of the alleged inside information, but the court rejected this argument,
finding that Rule 9(b)’s particularity requirements were relaxed where facts are peculiarly within
the knowledge of defendants. Another defendant argued that the SEC’s scienter allegations were
insufficient, but the court held that Rule 9(b) permitted general allegations as to state of mind,
finding that the SEC should not be held to the higher standard imposed on private litigants by the
Private Securities Litigation Reform Act of 1995.
SEC v. Steffes, 2011 WL 3418305 (N.D. Ill. Aug. 3, 2011).
The SEC brought an enforcement action against employees, alleging that they engaged in
insider trading by disseminating non-public information to family members regarding the
company’s pending acquisition. The defendants moved to dismiss, and the court denied the
motion, holding that the SEC sufficiently alleged misappropriation of material non-public
information, breach of fiduciary duty, and scienter, all with the particularity required by Rule
9(b). Though the defendants admittedly were not involved in the merger negotiations, the SEC
claimed that they pieced the situation together for themselves based on information that was
available to them as employees, and the complaint identified with the requisite particularity what
information the employees used to reach the conclusion that the company was being sold. The
employees also pointed to the complaint’s failure to identify the dates and times of the phone
calls they allegedly made to family members to discuss the misappropriated information, or the
specific contents of the conversations, but the court found that the SEC’s allegation that the
suspicious trading immediately followed such phone calls sufficed to support a reasonable
inference that the calls involved misappropriation. The court also concluded that several prior
decisions involving the SEC and referencing the “strong inference” standard with respect to
scienter did not mean that the Private Securities Litigation Reform Act of 1995 standard applied
to the SEC, and instead held that Rule 9(b) allows scienter to be alleged generally.
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 2011 WL 1253250 (D.
Ariz. Mar. 31, 2011).
Plaintiffs brought a securities fraud action against defendant Apollo Group, Inc., and a
group of its officers and directors, accusing the defendants of improperly backdating stock option
grants. The district court had previously dismissed with leave to amend, and after the plaintiffs
filed their Second Amended Complaint, the defendants again moved to dismiss, arguing that the
complaint failed to plead backdating with the particularity required by Rule 9(b). The court
agreed, finding that no reasonable inference of backdating could be drawn as to those grants that
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were disclosed by the timely filing of Form 4s with the SEC. With respect to grants for which
Form 4s were not necessarily timely filed, the court credited the defendants’ arguments that the
plaintiffs used inconsistent standards to measure the gains that accrued after options were
granted, thus undercutting the force of their backdating allegations. The defendants also
convinced the court that the plaintiffs had improperly cherry-picked a small subset of option
grants to allege circumstantial backdating, ignoring the larger number of grants that bore no
indicia that they were backdated. With respect to the plaintiffs’ claims that Apollo overstated its
net income and understated its compensation expenses as a result of granting stock options below
their fair market value, the court similarly held that these allegations failed to meet the applicable
pleading standards.
Nguyen v. Radient Pharms. Corp., 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011).
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Plaintiffs filed a complaint alleging federal securities law violations against a small
pharmaceutical company and related individuals. The defendants moved to dismiss, arguing that
the complaint failed to comply with the applicable pleading requirements and, in particular,
failed to identify the allegedly material misrepresentations with the particularity required by Rule
9(b) and the Private Securities Litigation Reform Act of 1995. The court disagreed and denied
the motion, holding that the plaintiffs adequately specified which statements were misleading
and stated the reasons why those statements were misleading. Specifically, the plaintiffs
properly accused the defendants of misstating that that the company was conducting a drug study
with the Mayo Clinic and referring to that study as the “Mayo study” when, in fact, the company
had only entered into a collaboration agreement with a separate laboratory division of the Mayo
Clinic known as Mayo Validation Support Services.
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Anschutz Corp. v. Merrill Lynch & Co., Inc., 785 F. Supp. 2d 799 (N.D. Cal. 2011)
The plaintiff, an investor in auction rate securities (“ARS”) brought suit against sellers of
ARS and securities ratings agencies, accusing the sellers of market manipulation in violation of
the Securities Exchange Act of 1934 and California state securities laws, and accusing the ratings
agencies of negligent misrepresentation. The defendants moved to dismiss, and with one limited
exception, the court denied the motion. With respect to the market manipulation claims against
the sellers, the court found that the allegations were pleaded with sufficient particularity to
satisfy Rule 9(b), rejecting the defendants’ argument that their disclosure of the fact that they
“may” place support bids in auctions precluded claims of manipulation. The defendants’
disclosure was not sufficient to cover the allegation made by plaintiffs that in the auctions at
issue, the defendants had participated in every auction and bid for 100% of the issue at every
auction. With respect to the negligent misrepresentation claims against the ratings agencies, the
court noted that district courts within the Ninth Circuit held Rule 9(b) applicable to such claims
and therefore, although the Ninth Circuit had not decided the question, the court assumed that the
heightened pleading standard applied. The court found the plaintiff’s allegations against the
rating agencies sufficient to meet the heightened standard, particularly in light of the rating
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needed to achieve an investment-grade rating to be marketed as intended, and that a defined
group of buyers would be the only entities allowed to purchase the securities.
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).
In an enforcement action brought by the SEC against two Charles Schwab executives
responsible for the firm’s YieldPlus Fund, the executives moved to dismiss and strike portions of
the complaint. The court denied the motion in large measure, rejecting the defendants’
arguments that the complaint failed to allege their substantial participation in misrepresentations
attributable to others. The court found that these alleged misstatements all concerned the Fund
managed by Daifotis, who reported directly to Merk, who was the President of Charles Schwab
Investment Management and also a trustee for the entity that issued the YieldPlus Fund. The
complaint adequately set forth allegations that Merk oversaw Daifotis and the Fund, and also
substantially participated in the creation of various alleged misstatements made by others. Thus,
the court found, the SEC had pleaded misrepresentations with the particularity demanded by
Rule 9(b).
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2. Rule 11 of the Fed. R. Civ. P.
Fishoff v. Coty, Inc., 634 F.3d 647 (2d Cir. 2011).
Former CFO brought suit against his former employer that included claims under the
Securities Exchange Act of 1934 based upon options he received. The district court rejected the
securities fraud claims as a matter of law for failure to plead the requisite scienter, but concluded
that the plaintiff had complied with Rule 11 in asserting the claims. The employer appealed, and
the Second Circuit affirmed, finding that the district court did not abuse its discretion. Although
unlikely to succeed, the plaintiff’s securities fraud claims were not foreclosed by binding
precedent and the plaintiff’s position was not unsupported by case law even though the cases he
cited were not binding on the court adjudicating his claims. Accordingly, the claims were nonfrivolous
and Rule 11 sanctions were not warranted.
Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).
Plaintiffs appealed the district court’s imposition of Rule 11 sanctions based upon
conclusions that plaintiffs’ attempted filing of a Third Amended Complaint was not warranted by
existing law and was presented only for the improper purpose of harassing the defendant, and
that the plaintiffs failed to conduct a reasonable inquiry into the facts before filing suit. The
district court’s sanctions award required the plaintiffs to reimburse the defendants for all
attorney’s fees and costs incurred in the defense. The Sixth Circuit reversed, finding that the
district court’s sanctions award went beyond the conduct identified by the defendant--the
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improper attempt to file the Third Amended Complaint---as the basis for its motion for sanctions.
The court found that the sanctions award violated Rule 11’s clear requirement that the motion
describe the specific conduct that allegedly violates Rule 11(b), and thus the plaintiffs lacked the
requisite notice that the initial filing of the lawsuit could form the basis for sanctions.
SEC v. Smith, 798 F. Supp. 2d 412 (N.D.N.Y. 2011).
Sanctions were warranted against wife of the target of an SEC investigation and the
attorney for a trust in which she and her husband had an interest based upon their subjective bad
faith. When the SEC moved for a preliminary injunction freezing assets of the trust based upon
its contention that the target held an interest in the trust assets, the wife deliberately concealed
the existence of an annuity agreement pursuant to which she and her husband were to receive
$500,000 annually from the trust, warranting sanctions. Likewise, the attorney for the trust acted
with subjective bad faith by submitting a declaration denying that she informed the SEC of the
existence of the annuity agreement because she had no knowledge of it at the time, where she
had received an email referring to the annuity agreement one day before her conversation with
the SEC.
Stevens v. Sembcorp Utilities PTE Ltd., 2011 WL 3296063 (S.D.N.Y. Aug. 1, 2011).
In a suit brought by a shareholder against a defendant claiming that the defendant omitted
material information from its tender offer to purchase the shares of the firm in which the plaintiff
was a shareholder, the defendant moved to recover its attorney’s fees under Rule 11. The district
court rejected the defendant’s argument that the plaintiff’s amended complaint was moot before
it was filed, holding that while the release of certain documents mooted the primary concerns of
the original complaint, those disclosures did not address the claims asserted in the amended
complaint. The court found that the plaintiff’s claims were not so patently meritless as to render
the amended complaint sanctionable, and thus refused to award attorney’s fees to the defendant.
Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL 4389689 (C.D. Cal. May 5, 2011).
District court granted defendant’s motion to strike allegations from plaintiffs’ complaint
referring to untested allegations from pleadings in other cases as if they were facts. Unlike other
cases in which this practice was deemed appropriate, the plaintiffs’ counsel did not investigate
the grounds for the allegations in the other complaints and did not contact the attorneys in the
other cases to discuss the basis for the claims. The court concluded that lifting allegations from
other complaints without performing any dud diligence did not constitute a reasonable
investigation as required by Rule 11(b), and thus granted the motion to strike.
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3. Rule 23 of the Fed. R. Civ. P.
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Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179 (2011).
The Supreme Court held that a plaintiff in a private securities fraud class action need not
prove loss causation in order to obtain class certification under Rule 23, reversing the Fifth
Circuit’s decision affirming the denial of class certification on that basis. In doing so, the Court
reaffirmed its decision in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which outlined the
“fraud-on-the-market” theory, pursuant to which investors are understood to rely generally upon
the pricing information generated by an efficient stock market when they buy and sell securities.
The decision overturned opinions by the Fifth Circuit and the Second Circuit limiting investors’
ability to use the theory by holding that the investors needed to demonstrate loss causation prior
to obtaining class certification.
In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011).
The Third Circuit affirmed class certification in a securities fraud action against a
company’s auditor. On appeal, the auditor challenged the district court’s predominance findings,
arguing that the court improperly applied the fraud-on-the-market presumption of reliance, that
the plaintiff must establish loss causation prior to invoking the presumption and, in any event,
the auditor had rebutted the presumption by showing that individual issues of loss causation
predominated over common ones. The Third Circuit rejected the auditor’s arguments, holding
that invocation of the fraud-on-the-market presumption was proper to satisfy the predominance
requirement, that the plaintiff need not establish loss causation at the class certification stage, and
that the defendant’s evidence failed to rebut the presumption of reliance.
Conn. Ret. Plans and Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. 2011).
After the district court certified a securities fraud class action against a company and its
individual officers and directors, the Ninth Circuit granted the defendant’s request for permission
to bring an interlocutory appeal. On appeal, the Ninth Circuit affirmed the class certification
decision, finding that the plaintiff did not need to prove materiality in order to invoke the fraudon-the-market
presumption of reliance at the class certification stage because proof of materiality
was not necessary to ensure that the question of reliance was common among all prospective
class members’ securities fraud claims; rather, the plaintiff’s needed only to allege materiality
with sufficient plausibility. The court of appeals also held that the district court properly refused
to consider the defendant’s truth-on-the-market defense at the class certification stage since the
defense was a method of refuting materiality, which the plaintiff was not required to prove.
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In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 275 F.R.D. 382 (D. Mass. 2011)
Plaintiffs, mutual fund shareholders, brought putative class actions against companies
that marketed, managed, and advised the fund, alleging that they violated federal securities law
by registering, marketing, and selling the fund as a safe, liquid, and stable investment when in
fact it was comprised of illiquid, risky, and volatile securities. Plaintiffs sought class certification
and defendants opposed by arguing that plaintiffs lacked standing because no lead plaintiff
purchased shares in the fund until 15 months after the beginning of the proposed class period, the
interests of the lead plaintiffs conflicted with those of absent class members, and four of the five
lead plaintiffs acquired their shares as a result of a merger between funds, rendering their claims
atypical. The district court rejected these arguments and certified the class. The court held that
the plaintiffs had standing despite not purchasing shares at the beginning of the class period
because the offering materials in effect at the beginning of the class period were allegedly part of
a common, fraudulent scheme. The court also held that the potential for conflict between
plaintiffs that purchased and those that sold securities is present in every securities case and does
not impede class certification. Finally, the court found that the plaintiffs’ acquisition of stock via
merger and their differing purchase dates were not sufficient to defeat the typicality requirement.
N.J. Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011).
Investors sued issuers, underwriters, and rating agencies for securities fraud, alleging that
the offering documents for mortgage-backed securities they purchased were materially
misleading. On the plaintiffs’ motion for class certification, the district court found that although
the plaintiffs met all of the elements of the Rule 23(a) analysis, they failed to show that common
issues predominated or that a class action provided the superior method of adjudication, and thus
denied class certification for failure to meet the requirements of Rule 23(b)(3). In particular, the
court credited the defendants’ assertion that certain purchasers had varying levels of knowledge
that the loan originators had lowered their standards, which would necessitate individual
inquiries sufficient to defeat the predominance of common issues. The court also found that the
proposed class consisted of large, institutional and sophisticated investors with the financial
resources and incentive to pursue their own claims, such that treatment as a class action was not
superior.
In re Moody’s Corp. Sec. Litig., 274 F.R.D. 480 (S.D.N.Y. 2011).
Plaintiffs in a putative securities fraud class action against a credit rating agency alleged
that the defendant’s wholly owned subsidiary made material misrepresentations and omissions
concerning conflicts of interest in its business model and about how the agency considered
originator standards in its rating methodologies moved for class certification. The district court
denied class certification because the defendants successfully rebutted the fraud-on-the-market
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presumption by severing the link between misrepresentation and price, and plaintiffs were unable
to prove that common questions predominated. In addition, the court found that a pension trust
fund and individual plaintiff were unable to adequately represent the class because they were inand-out
traders who could not serve as class representative (though one plaintiff was an adequate
representative, satisfying the Rule 23(a) adequacy requirement).
In re Dynex Capital, Inc. Sec. Litig., 2011 WL 781215 (S.D.N.Y. Mar. 7, 2011).
In a suit brought by purchasers of mortgage backed securities collateralized by mobile
home loans originated by the defendants, the plaintiff sought class certification. The court
certified the class, rejecting arguments from the defendants that the plaintiff was not an adequate
class representative because it lacked knowledge of the facts and the case was driven by counsel,
and that typicality was lacking because the lead plaintiff’s claim was subject to an atypical
defense. The court also spurned the defendants’ attempt to show that the fraud-on-the-market
presumption could not be invoked because the relevant bond market was not efficient, as the
plaintiff had shown that reliable tools existed for assessing price reactions to downgrade events.
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N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2011 WL 3874821 (S.D.N.Y. Aug. 16,
2011).
Plaintiffs brought a putative class action under the Securities Act of 1933, claiming that
offering documents issued by the defendants in connection with plaintiffs’ private placement
purchase of mortgage-backed securities issued by trusts as pass-through certificates contained
materially misleading misstatements and omissions. In granting class certification, the district
court rejected the defendants’ arguments that differences between class members with respect to
damages and timing of purchases precluded finding typicality, concluding that the supposed
differences were merely speculative. The court also concluded that any potential individualized
issues regarding the plaintiffs’ knowledge of the alleged misrepresentations and omissions did
not predominate over the common issues presented by the case.
Public Emps. Ret. Sys. of Miss. v. Merrill Lynch & Co., 2011 WL 3652477 (S.D.N.Y. Aug. 22,
2011).
Plaintiff-investors moved for class certification in action against investment firm,
alleging securities fraud in connection with firm’s sale of mortgage pass-through certificates.
The district court granted class certification, rejecting the defendants’ arguments that issues
regarding the existence and materiality of the alleged misstatements, loss causation, the
expiration of the limitations period, and the plaintiffs’ knowledge of the alleged misstatements
were not susceptible to class-wide proof. In doing so, the district court held that the action
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would primarily focus on establishing that certain statements and omissions common to all the
securities offerings constituted material misrepresentations, which is a classic basis for a class
action.
Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., 2011 WL 6962826 (D. Minn. Dec. 12,
2011).
In a putative securities fraud class action, defendant opposed class certification
exclusively on the grounds that the plaintiffs’ counsel were inadequate because they had made
misrepresentations in the amended complaint regarding the testimony of certain confidential
witnesses. The district court rejected the defendant’s argument and certified the class,
concluding that the defendant failed to establish that the amended complaint contained relevant
and substantial misrepresentations. The court deemed the declarations submitted by the
defendant disputing the implications plaintiffs drew from the confidential witness statements
insufficient to warrant finding plaintiffs’ counsel inadequate.
Hodges v. Akeena Solar, Inc., 274 F.R.D. 259 (N.D. Cal. 2011).
Plaintiff-investors filed securities fraud class action and moved for class certification.
The district court granted the motion, holding that all the elements of the Rule 23 analysis were
satisfied. With respect to the predominance prong of Rule 23(b)(3), the court rejected the
defendants’ contention that the fraud-on-the-market presumption could not be used to support
class certification. Though the defendants argued that they could show, using the plaintiffs’ own
expert testimony, that the alleged misrepresentation did not distort the stock price, the court
found that the plaintiffs’ expert did not offer any opinion on the subject of loss causation, and
therefore defendants had not met their burden of eliminating the possibility that a rational jury
could find that the alleged misrepresentations and omissions misled the market.
In re Wash. Mut. Mortg. Backed Sec. Litig., 2011 WL 5027725 (W.D. Wash. Oct. 21, 2011).
In a putative class action under the Securities Act of 1933 brought by investors against
entities that created and sold mortgage-backed securities (“MBS”) alleging that residential
mortgage loans backing the MBS were fundamentally impaired and that investors were mislead
as to the quality of the underwriting of the loans, the plaintiffs moved for class certification. The
district court certified the class, concluding that the proposed plaintiff class of 701 investors was
sufficiently numerous that joinder was impractical, that the named plaintiffs’ claims were typical
of those of the class, that the named plaintiffs were adequate representatives, that common legal
issues existed and predominated over individual questions, and that class action was superior
method of adjudicating the controversy, thus satisfying the requirements of Rule 23(a) and Rule
23(b)(3).
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Lane v. Page, 272 F.R.D. 558 (D.N.M. 2011).
The shareholders of an acquired company brought a putative class action challenging the
merger under federal securities law by alleging that a proxy statement issued in connection with
the merger contained material misrepresentations and omissions. The defendants conceded all
elements of Rule 23 except the named plaintiff’s adequacy as a class representative. The
defendants maintained that the named plaintiff was a convicted felon, financially irresponsible,
and lacked credibility and candor, and therefore could not adequately protect the interests of
absent class members. The court found, however, that while the defendants had voiced some
legitimate concerns about the plaintiff’s ability to act as a fiduciary, most of the cited
transgressions were old, and his conduct in prosecuting the case demonstrated his ability to
vigorously and faithfully protect the interests of the class. Accordingly, the court granted class
certification.
Bacon v. Stiefel Labs., Inc., 275 F.R.D. 681 (S.D. Fla. 2011).
Participants in ERISA plan and holders of shares in a closely-held corporation brought a
putative class action alleging a fraudulent scheme on the part of the corporation’s board members
to conceal the value of the participants’ shares and to benefit improperly from the participants’
premature sale of those shares. The district court denied the plaintiffs’ motion for class
certification, holding that the plaintiffs failed to meet either the predominance or superiority
requirements of Rule 23. The court concluded that individualized proof of reliance was
necessary, and therefore common issues did not predominate. The court also found superiority
lacking, as several would-be class members had an interest in controlling the separate, personal
litigation they brought raising the same claims.
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4. Venue, Pendent Jurisdiction Removal and Other Issues
McIntyre Mach., Ltd. v. Nicastro, 131 S.Ct. 2780 (2011).
In a suit brought by a New Jersey worker injured while using a metal-shearing machine
against the British manufacturer of the machine, which had been sold to the plaintiff’s employer
through a United States distributor, the New Jersey Supreme Court had held that personal
jurisdiction existed over the manufacturer because it knew or reasonably should have known that
its products were distributed nationwide and might reach any of the fifty states, where they could
cause injury. In splintered opinions, six Justices voted to reverse. Framing the issue as whether
the court had jurisdiction over an entity that was not present in the forum and had not consented
to jurisdiction, Justice Kennedy’s plurality opinion (joined by Chief Justice Roberts and Justices
Scalia and Thomas) asked whether the defendant’s activities “manifest an intention to submit to
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the power of a sovereign.” It was not enough that the defendant might have predicted that its
goods would reach the forum. The inquiry required a forum-by-forum analysis, and under the
facts of the case, while the manufacturer targeted the United States market as a whole, New
Jersey’s courts nevertheless lacked jurisdiction because the manufacturer had not purposefully
availed itself of the New Jersey market. Justices Breyer and Alito concurred in the result, but
suggested that the case could be resolved based on prior precedents, none of which held that a
single isolated sale, even if accompanied by the kind of sales effort that occurred in this case,
sufficed to establish personal jurisdiction.
Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).
In an action brought by putative owners of Indonesian mines against a mining company,
the SEC and others, the mining company moved to dismiss for lack of personal jurisdiction, and
the district court granted the motion. On appeal, the plaintiffs argued that the nationwide service
of process provision in the Securities Exchange Act of 1934 permitted exercise of personal
jurisdiction based upon the mining company’s minimum contacts with the United States as a
whole, rather than any particular state. The court found that the district court correctly held that
the plaintiffs’ complaint failed to state a claim for violation of the Exchange Act, and therefore
its nationwide service of process provision could not be used to establish personal jurisdiction.
The Sixth Circuit also rejected the plaintiffs’ contention that the combined facts that (1) the
mining company formerly had a registered subsidiary in the forum state, (2) did substantial
business with a third-party company headquartered in the forum, and (3) sold stock to the general
public including residents of the forum state, were sufficient to establish personal jurisdiction.
The court of appeals therefore affirmed dismissal of the claims against the mining company for
lack of personal jurisdiction.
Toussie v. Smithtown Bancorp, Inc., 2011 WL 1155597 (E.D.N.Y. Feb. 7, 2011).
Plaintiff brought suit against a bank holding company and its president in New York state
court, alleging that they defrauded him by knowingly making materially false statements to
induce him to purchase shares in the bank. The defendants removed the case to federal court,
claiming that the suit necessarily raised substantial federal issues. The federal court remanded
the case, holding that the plaintiff could prove his claims by relying solely on state law, the
complaint did not contain a logically separate claim relating to violations of federal laws or
regulations, and that references to FDIC examinations related only to defenses, and therefore
federal question jurisdiction did not exist.
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 478 (S.D.N.Y. 2011).
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A hedge fund filed suit against international corporations, their executives and
subsidiaries, alleging violations of federal and state securities laws and various other state law
causes of action. All of the defendants moved to dismiss. With respect to defendant Credit
Suisse and its Swiss broker, the court found that advice given by the broker to the plaintiffs, on
behalf of Credit Suisse, had the unmistakably foreseeable effect within the United States that the
Plaintiffs would rely on the broker’s representations. The court found this sufficient to establish
personal jurisdiction over Credit Suisse and its broker. With respect to the German broker
purportedly involved in manipulating the market in certain securities in which the plaintiff
invested, the court found it lacked jurisdiction because there was no indication that the broker
had traveled to the United States in furtherance of the scheme, exerted any control over agents in
the United States involved in the scheme, or had any contacts with the plaintiff. Nor did the
court have personal jurisdiction over a British corporation and its South African principal
shareholder, because, though purportedly involved in the scheme, the plaintiff’s conclusory
allegations of market manipulation failed to establish that these defendants had sufficient
contacts with the United States. Finally, the court found that it did have jurisdiction over a
German limited liability company and its managing director, based on the fact that the managing
director directed the plaintiff to purchase shares in the allegedly manipulated stock.
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 761 F. Supp. 2d 103 (S.D.N.Y.
2011).
Hedge funds brought a securities fraud action against an issuer of securities, a Hong
Kong corporation that later gained control of the issuer, and the Hong Kong corporation’s
chairman, a citizen of Canada residing in Hong Kong. The latter two defendants moved to
dismiss for lack of personal jurisdiction. The plaintiffs asserted that specific personal
jurisdiction existed under the Securities Exchange Act of 1934. The court found that the
plaintiffs’ Exchange Act claim was based on allegations that they relied to their detriment on
false and misleading statements by the issuer. Because they claimed no injury as a consequence
of anything allegedly done by the Hong Kong corporation or its chairman, let alone any injury
arising out of or related to their contacts with the United States, the court lacked personal
jurisdiction over the foreign defendants.
SEC v. Compania Internacional Financiera S.A., 2011 WL 3251813 (S.D.N.Y. July 29, 2011).
The SEC brought an enforcement action against a United Kingdom-based investment
manager, in connection with its purchase in the U.K. of “contracts for difference” regarding the
shares of a United States company that were traded on the New York Stock Exchange. The SEC
accused the investment manager of trading in the contracts based on insider information, which
constituted trading in securities of a U.S. corporation that was inextricably linked to the purchase
or sale of that corporation’s common stock on the NYSE. The investment manager contended
that personal jurisdiction was improper because the trades were conducted entirely in London,
and any effects on the United States were indirect. But the court rejected this argument, citing
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the admission by the investment manager’s employee that he understood these transactions
would be matched by trades in U.S. securities in the normal course of business.
TAGC Mgmt. LLC v. Lehman, 2011 WL 3796350 (S.D.N.Y. Aug. 24, 2011).
A group of companies that attempted to start a business in China sued the Chinese law
firm that assisted them, as well as an associate at the law firm who performed a small amount of
work on the project, claiming violations of various state and federal laws, including Section
10(b) of the Securities Exchange Act of 1934. The defendant-law firm associate moved to
dismiss for lack of personal jurisdiction and the court granted the motion. The associate, a
Georgia resident licensed to practice in Georgia, lacked any connections to the state of New
York: he never transacted business there, had no clients in New York, never conducted business
through the firm’s New York office or visited that office, and had never set foot in the state.
Accordingly, the court concluded that the New York long-arm statute did not permit exercise of
personal jurisdiction over him.
In re Herald, Primeo & Thema Sec. Litig., 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).
Three foreign plaintiffs each purporting to represent a class of foreign investors in foreign
investment funds brought suit against the foreign funds and their directors, administrators,
custodians, investment managers, auditors, advisors, lawyers and financial intermediaries based
on the funds’ investments with Bernard L. Madoff Investment Securities LLC. After dismissing
certain of the plaintiffs’ claims as precluded by the Securities Litigation Uniform Standards Act
and preempted under New York’s Martin Act, the court turned to the defendants’ motion to
dismiss the remaining claims on the basis of forum non conveniens in favor of Ireland and
Luxembourg. Those nations, where closely related suits were already pending, permitted
litigation of the subject matter of the plaintiffs’ suit and served as adequate alternative fora.
Because the plaintiffs essentially admitted forum shopping, bringing suit in the U.S. to take
advantage of the class action device, avoid costly fee shifting, and to pursue RICO claims, the
court found their choice of forum deserving of little deference. Additionally, both the public and
private interest factors favored litigation in Ireland and Luxembourg, given the evidence and
witnesses located there and the fact that suits were already pending. Accordingly, the court
dismissed the remaining claims based upon the doctrine of forum non conveniens.
In re Optimal U.S. Litig., 2011 WL 6424988 (S.D.N.Y. Dec. 21, 2011).
Foreign plaintiffs, who were investors in a fund that invested 100% of its assets with
Bernard L. Madoff Investment Securities LLC, brought suit alleging that the defendants failed to
conduct adequate diligence regarding Madoff, ignored red flags, and made misstatements and
omissions regarding fund shares. The defendants moved to dismiss under the doctrine of forum
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non conveniens. The court denied the motion, finding that because the plaintiffs resided all over
the world, New York was as convenient a location as any, and the plaintiffs’ choice of forum
deserved deference. Witnesses and evidence were located in New York, suggesting that the
plaintiffs’ forum choice was motivated by convenience rather than forum shopping. Unlike other
similar cases where courts had granted dismissal based on forum non conveniens, the plaintiffs in
this case had not admitted that their decision to sue in the United States was motivated by factors
strongly indicative of forum shopping.
In re Heckmann Corp. Sec. Litig., 2011 WL 2413999 (D. Del. June 16, 2011).
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The plaintiff filed claims under the Securities Exchange Act of 1934 arising out of a
shareholder-approved merger involving two Delaware corporations. The individual defendants
moved to dismiss for lack of personal jurisdiction on grounds that they were not Delaware
residents and their only tie to the state owed to their status as officers and directors of a Delaware
corporation. The court found, however, that pursuant to the nationwide service of process
provision in 15 U.S.C. § 78aa, it was not constrained to the normal personal jurisdiction
requirement that the defendants have minimum contacts with certain districts or states. Rather,
the only question was whether the defendants had minimum contacts with the United States, and
that issue was not contested by the defendants. The court therefore held that the defendants were
subject to personal jurisdiction.
Commonwealth of Pa. Pub. Sch. Emp. Ret. Sys. v. Citigroup, Inc., 2011 WL 1937737 (E.D. Pa.
May 20, 2011).
The plaintiffs, who were investors in Citigroup securities, brought suit in state court
under state law and the Securities Act of 1933 to recover damages allegedly resulting from
Citigroup’s undisclosed exposure to mortgage-backed securities. The defendants removed,
asserting that neither plaintiff was an arm of the state for jurisdictional purposes. The plaintiffs
moved to remand, and the court granted the motion. The court determined that defendants failed
to demonstrate that the Pennsylvania Public School Employees’ Retirement System (“PSERS”),
a defined benefit pension fund that manages assets for public school employees, was not an arm
of the state where: the state guaranteed PSERS’ reserve fund and its payment of interest charges,
annuities and other benefits; PSERS lacked independent corporate existence and state officials
played a significant role in its operations; and it did not act autonomously, as the state exercised
some control over its investment discretion.
Szulik v. TAG Virgin Islands, Inc., 783 F. Supp. 2d 792 (E.D.N.C. 2011).
The plaintiffs sued the defendants, who served as the plaintiffs’ investment advisors, and
the advisors’ attorney, and sought expedited jurisdictional discovery. The court found that the
investment advisor-defendants lacked sufficiently meaningful contact with North Carolina to
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permit exercise of personal jurisdiction. The company was not a resident of the state, had no
office there, did not regularly conduct business there, and had no accounts or assets in the state.
Likewise, the individual defendants had never been North Carolina residents and had no assets in
the state. Their contacts with the forum were limited to correspondence, a few business
meetings, and trips to the state unrelated to the subject matter of the suit. The court found that
the plaintiffs had failed to make out a prima facie case of general personal jurisdiction, and their
proposed discovery would not alter the analysis of the issue.
Nexbank, SSB v. BAC Home Loan Servicing, LP, 2011 WL 5182118 (N.D. Tex. Oct. 28, 2011).
Plaintiff filed suit against the defendants in Texas state court asserting claims under state
common and statutory law and federal securities law arising out of the plaintiff’s purchase of
three mortgage-backed securities from the defendants. The defendants removed the case to
federal court based on both federal question and diversity jurisdiction. The plaintiff moved to
remand and the court granted the motion, concluding that the claim under the Securities Act of
1933 was not removable under 15 U.S.C. § 77v(a), and the claims under the Securities
Exchange Act of 1934 were not separate and independent, and therefore the court lacked subject
matter jurisdiction. Back in state court, the defendants moved for partial summary judgment as
to the Securities Act claim, which the state court granted. Thereafter, the defendants removed
the case to federal court a second time, and the plaintiff again moved to remand. The court
granted the motion, holding that the second removal violated the “voluntary-involuntary rule,”
which provides that a case that is not removable on the initial pleadings may only become
removable pursuant to a voluntary act of the plaintiff. Because the summary judgment on the
Securities Act claim granted by the state court, which erased the initial impediment to removal,
resulted from the defendants’ actions, not the plaintiff’s, the case remained non-removable and
remand was warranted.
KBR, Inc. v. Chevedden, 776 F. Supp. 2d 415 (S.D. Tex. 2011).
In a declaratory judgment action brought by a corporation seeking a declaration that it
could exclude a retail investor’s proposal in proxy materials for its annual shareholders meeting,
the defendant-investor moved to transfer venue from Houston to California. The court found
that the litigation arose out of letters the defendant sent to Houston asking for his proposal to be
included in the proxy materials, and therefore venue was proper in Houston. In denying the
motion to transfer, the court concluded that the defendant failed to show that a California venue
was clearly more convenient, as the case raised a legal issue that would be resolved on the papers
without the need for court appearances, rendering the parties’ relative financial burdens largely
irrelevant.
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In re BP S’holder Derivative Litig., 2011 WL 4345209 (S.D. Tex. Sept. 15, 2011).
Plaintiffs brought a derivative action on behalf of nominal defendant BP to recover
damages from current and former officers and directors of BP and its U.S. subsidiary for alleged
breaches of fiduciary duty relating to the Deepwater Horizon explosion and subsequent oil spill
in the Gulf of Mexico. The court granted the defendants’ motion to dismiss on forum non
conveniens grounds, concluding that the English high court was the far more appropriate forum
for the litigation. Due to the character of the litigation, as a derivative action challenging board
action, much of the relevant evidence was likely to be located at BP’s headquarters in London,
and therefore England was a more convenient forum in terms of access to proof. In addition,
non-party witnesses and a majority of party witnesses were likely to be found in England and
subject to compulsory process in English courts. The court also found that the public interest
factors weighed in favor of an English forum, given England’s greater interest in resolving a
dispute relating to the internal governance of an English company, and the need to apply a
recently-enacted English law on which there was little existing guidance.
SEC v. Carroll, 2011 WL 6141227 (W.D. Ky. Dec. 9, 2011).
In an action brought by the SEC against several defendants based on allegations of
insider trading, the court addressed whether venue was proper in Kentucky as to certain
defendants who lived in North Carolina and had almost no contact with Kentucky. The court
found that the unusually broad venue provisions of the Securities Exchange Act of 1934, which
provide for venue where “any act or transaction constituting the violation,” permitted venue in
Kentucky. The court found that the venue-conferring action need not itself be illegal, but where
it is not, it must at least be material to the alleged violation. The court held that the disclosure of
material, nonpublic information by one of the defendants to one of the North Carolina-based
defendants over telephone calls to and from Kentucky was sufficient to establish venue over the
North Carolina-based defendant. The court found that venue was also proper against the brother
of the North Carolina-based defendant (also a North Carolina resident), to whom his brother
relayed the insider information, based upon a co-conspirator theory and because both brothers
traded on the same inside information from the same Kentucky source, venue was proper.
Fed. Home Loan Bank of Chicago v. Bank of Am. Sec. LLC, 448 B.R. 517 (C.D. Cal. 2011).
A federally chartered bank that purchased residential mortgage-backed securities brought
an action in state court against the sellers for misrepresentations allegedly made in connection
with the securities offerings. The defendants removed, alleging federal jurisdiction based upon
the chapter 11 bankruptcy filing of a lender against which the sellers had contractual
indemnification rights. The plaintiff moved to remand, and the court granted the motion. The
court found that “related to” jurisdiction did exist, but it was appropriate to remand the case
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anyway because the connection to bankruptcy was attenuated and state law issues predominated.
The court also rejected the defendants’ contention that the plaintiff’s federal charter supplied an
independent basis for federal jurisdiction.
Kexuan Yao v. Crisnic Fund, S.A., 2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).
The plaintiff, a citizen of China, sued the defendants, a Costa Rican corporation and its
principal, a United States citizen and permanent resident of Costa Rica, asserting claims for
violations of federal securities laws and multiple state laws. The defendants moved to dismiss
for lack of personal jurisdiction, and the court denied the motion. With respect to the corporate
defendant, the court noted that its transaction with the plaintiff, which gave rise to the complaint,
was governed by a contract specifying the law of the State of Georgia as controlling, and
involved the shares of a corporation registered in Nevada. Under the nationwide service of
process provision in 15 U.S.C. § 78aa, the question was whether the United States, rather than
any particular state, was a proper forum. Based on these facts, the court found that the corporate
defendant had sufficient ties to the United States to satisfy due process. In addition, the court
found that the individual defendant, as a United States citizen with a Georgia driver’s license, a
mortgage on a home in Georgia, and business ties to a Georgia corporation, had sufficient
contacts with the United States to permit exercise of personal jurisdiction.
Anschutz Corp. v. Merrill Lynch and Co. Inc., 785 F. Supp. 2d 799 (N.D. Cal. 2011).
An investor in auction rate securities brought suit against the seller of the securities and
certain securities rating agencies, alleging market manipulation in violation of state and federal
securities laws. One of the rating agencies, Fitch Ratings, Ltd. (“FRL”), moved to dismiss for
lack of personal jurisdiction. FRL maintained that it did not rate the securities at issue, and that
it was a London-based entity organized under the laws of England and Wales, and primarily
rated securities in Europe, the Middle East, Africa, and Asia. Though the plaintiff produced
rating letters regarding the securities that defined “Fitch” to include FRL, the court found this
“slim reed” insufficient to find that FRL played a role in the ratings, particularly in the face of
FRL’s affidavit to the contrary. Accordingly, the court granted the motion and dismissed FRL as
a defendant.
Charles Schwab Corp. v. BNP Paribas Sec., 2011 WL 724696 (N.D. Cal. Feb. 23, 2011).
The plaintiff brought suit against the defendant in state court asserting various state law
claims as well as claims under the Securities Act stemming from the plaintiff’s purchase of
certificates in securitization trusts backed by residential mortgage loans. Defendants removed
the case, asserting that it was “related to” bankruptcy proceedings involving American Home
Mortgage Holdings (“AHM”), which originated loans included in one of the trusts and, pursuant
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to a contractual indemnity agreement, owed the defendants indemnity for claims relating to
alleged misstatements about those loans. The court refused to resolve the question of whether
“related to” jurisdiction existed, instead assuming that it did and holding that remand was
warranted in any event based upon equitable considerations. The court found that comity
concerns weighed in favor of remand, that the connection between the case and the bankruptcy
proceedings was very remote, and that the defendants had failed to explain how its claims against
AHM would be treated under the bankruptcy plan or how this action could impact the
administration of the plan.
Charles Schwab Corp. v. Bank of Am. Sec. LLC, 2011 WL 864978 (N.D. Cal. Mar. 11, 2011).
The plaintiff brought suit against the defendants in state court asserting various state law
claims as well as claims under the Securities Act of 1933 stemming from the plaintiff’s purchase
of certificates in securitization trusts backed by residential mortgage loans. Defendants removed
the case, asserting that it was “related to” several bankruptcy proceedings involving loan
originators, including American Home Mortgage and IndyMac Bancorp. While conceding that
diversity jurisdiction did not exist on the face of the pleadings, the defendants claimed that the
plaintiff had received its claims as a result of a collusive assignment from Schwab Bank, a
diverse entity which actually invested in the trusts at issue in the case, but assigned its claims to
the plaintiff, a non-diverse entity. The court found that although the assignment bore some
hallmarks of collusion, it constituted a complete assignment because no party besides the
plaintiff had standing to bring the claims, and therefore the court would not ignore the plaintiff’s
citizenship to determine diversity. The court concluded that it did possess federal subject matter
jurisdiction based on the relationship to the pending bankruptcy cases of the loan originators, but
that the equities nevertheless favored remand to state court.
Quail Cruises Ship Mgmt, Ltd. v. Agencia de Viagens CVC Tur Limitada, 2011 WL 5057203
(S.D. Fla. Oct. 24, 2011).
The plaintiff, a Bahamanian corporation that acquired a cruise ship by purchasing the
shares of a corporation whose primary asset was the ship, brought suit against, among others, the
corporate seller and its principal, for fraud under the Securities Exchange Act of 1934, along
with various maritime and state law torts. The corporate seller’s principal, a citizen of Brazil,
moved to dismiss for lack of personal jurisdiction. The district court denied the motion, holding
that the plaintiff successfully established a prima facie case that the principal had committed a
tortious act within the meaning of the Florida long-arm statute through his agents in Florida as
part of the civil conspiracy alleged by the plaintiff. The court also found that exercise of personal
jurisdiction comported with due process because the principal’s communications with his Florida
agents occurred in furtherance of the conspiracy and the conspirators had availed themselves of
the privilege of conducting business in Florida by consummating the sale of the ship in Florida.
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5. Discovery
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Mori v. Saito, 802 F. Supp. 2d 520 (S.D.N.Y. 2011).
The plaintiffs moved to lift the Private Securities Litigation Reform Act of 1995
discovery stay in order to serve three subpoenas upon third parties. The court denied the motion,
finding that the plaintiffs failed to satisfy any of the conditions for lifting the stay. The
subpoenas failed to identify the records sought, and thus were not sufficiently particularized.
Although the plaintiffs had shown that the named defendants may have been involved in
destroying records, they made no showing that the third-party banks targeted by the subpoenas
were doing the same, and thus lifting the stay was not necessary to preserve evidence. Finally,
the court rejected the plaintiffs’ attempts at justifying the requests with their alleged need to
identify other investors, what happened to their money, and to obtain evidence supporting
prejudgment attachment, finding these contentions insufficient to show the necessary undue
prejudice.
Litwin v. OceanFreight, Inc., 2011 WL 5223022 (S.D.N.Y. Nov. 2, 2011).
In connection with a request for a temporary restraining order and preliminary injunction
aimed at enjoining a special shareholder meeting scheduled by the defendant to consider a
merger proposal, the plaintiff moved for expedited discovery of a broad array of materials
relating to the proposed transaction. The court denied the request, holding that the plaintiff had
failed to show the necessary probability of success or injury. The discovery requests were
deemed unreasonable due to their sheer volume and breadth, and the defendant had represented
that it was taking appropriate steps to preserve all relevant materials, and therefore the materials
would be available to the plaintiff in the future if needed.
Plumbers and Pipefitters Local Union No. 630 Pension Annuity Trust Fund v. Arbitron, Inc.,
2011 WL 5519840 (S.D.N.Y. Nov. 14, 2011).
Resolving a discovery dispute, the district court granted the defendant’s motion to
compel the lead plaintiff to disclose the names of the eleven former employees designated in the
complaint as “confidential informants.” The court rejected the plaintiff’s argument that it had
complied with its discovery obligations by producing a list of 83 current or former employees
likely to have discoverable information, which included the names all 11 informants but did not
identify them as such. The court also held that these names were not protected by the work
product doctrine. Given the plaintiff’s expressed concern with retribution by the employer,
however, the court permitted the plaintiff time to submit an affidavit setting forth particularized
facts that might support this concern sufficiently to justify non-disclosure or entry of a protective
order.
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NECA-IBEW Pension Trust Fund v. Bank of Am. Corp., 2011 WL 6844456 (S.D.N.Y. Dec. 29,
2011).
The plaintiff sought to partially lift the discovery stay imposed by the Private Securities
Litigation Reform Act of 1995. The court found that there was no serious claim that discovery
was needed to preserve evidence, as the documents in issue had already been produced to the
SEC. The court also concluded that the plaintiff’s vague argument that it needed discovery to
plan litigation strategy and investigate the merits of early settlement discussions was insufficient
to meet the undue prejudice standard necessary to lift the stay. Finally, the court found that, even
if it was true (as the plaintiff contended) that the discovery sought was limited, had already been
produced in another action, and posed no substantial burden to the defendant, these
circumstances were insufficient to overcome the command of the PSLRA.
Botton v. Ness Techs., Inc., 2011 WL 3438705 (D.N.J. Aug. 4, 2011).
Plaintiff alleging violations of the Securities Exchange Act of 1934 in connection with a
proposed merger contemplated by the defendants sought expedited discovery to support its
anticipated filing of a motion to preliminarily enjoin the merger. The court denied the motion,
finding unpersuasive the plaintiff’s claims that without discovery the shareholders would be
forced to vote on the merger without adequate information. The court also found the plaintiff’s
discovery requests overbroad, and noted that other legal remedies existed for the plaintiff to
pursue if the merger was approved by the shareholders.
In re Massey Energy Co. Sec. Litig., 2011 WL 4528509 (S.D. W. Va. Sept. 28, 2011).
In securities litigation brought in the wake of an explosion that killed 29 coal miners, the
plaintiffs moved to partially lift the Private Securities Litigation Reform Act of 1995-imposed
discovery stay. After the United States moved to intervene and stay discovery to prevent
interference with its investigation and prosecution, the plaintiffs and the United States reached
agreement on a proposed order granting the plaintiffs’ discovery motion. Analyzing the
proposed order in light of the defendants’ opposition, the court concluded that the plaintiffs’
requests were sufficiently particularized, that the acquisition of the defendant by another
company demonstrated extraordinary circumstances that might lead to the inadvertent
destruction of documents, and that refusing the requests risked undue prejudice to the plaintiffs.
Accordingly, the court granted the plaintiffs’ motion and entered the proposed order.
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Davis v. Duncan Energy Partners L.P., 801 F. Supp. 2d 589 (S.D. Tex. 2011).
Limited partners in the defendant company sued the partnership, its general partner,
members of the firm’s board, and its potential acquirer, alleging violations of the Securities
Exchange Act of 1934. The plaintiffs filed a motion seeking expedited discovery, which the
court denied. The court found the plaintiffs’ discovery requests, which included requests for
extensive electronic discovery, burdensome and insufficiently particularized. The court also
rejected the plaintiffs’ argument that they would be prejudiced in their efforts to obtain injunctive
relief without discovery, finding that accepting this argument and granting discovery prior to
determining whether they met the heightened pleading standards of the Private Securities
Litigation Reform Act of 1995 would eviscerate those standards.
Hufnagle v. RINO Int’l Corp., 2011 WL 2650755 (C.D. Cal. July 6, 2011).
Lead plaintiff moved to partially lift the discovery stay to obtain addresses to serve
individual defendants based in the People’s Republic of China. The plaintiff sought to serve the
corporate defendant with special interrogatories asking for the Chinese Government Identity
Number and residential address of the individual defendants, who were former officers and
directors of the corporate defendant. The court granted the motion (with the exception of one
individual defendant who had already waived service and appeared in the action). The court
found that the discovery was necessary to avoid unduly prejudicing the plaintiff by substantially
delaying the lawsuit and potentially allowing a defendant to escape liability notwithstanding the
plaintiff’s ability to state a claim against the defendant even without discovery.
In re China Educ. Alliance, Inc. Sec. Litig., 2011 WL 3715969 (C.D. Cal. Aug. 22, 2011).
The plaintiffs brought claims alleging violations of the Securities Exchange Act of 1934
by a Chinese corporation and several of its officer and directors, all of whom lived outside the
United States. Unable to locate several of the defendants, the plaintiffs moved to authorize
service on defendants located abroad pursuant to Federal Rule of Civil Procedure 4(f)(3) or, in
the alternative, to partially lift the discovery stay to obtain addresses where they could serve the
unserved defendants with the summons and complaint. The court refused to grant relief under
Rule 4(f)(3) permitting service on the individual defendants, who apparently no longer worked
for the company, via the corporation’s agent, finding that this presented potential due process
problems. But the court granted the request to partially lift the discovery stay, finding that the
plaintiffs would suffer undue prejudice and their requests were highly limited. The court was
persuaded by the fact that the plaintiffs had tried to use a number of non-discovery tools to
obtain the information, and that the corporate defendant could easily provide this information to
the plaintiffs.
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Moomjy v. HQ Sustainable Maritime Indus., Inc., 2011 WL 4048792 (W.D. Wash. Sept. 12,
2011).
Corporate and individual defendants moved for a stay of discovery in a pending state
court derivative action, claiming that permitting such discovery would violate the Private
Securities Litigation Reform Act of 1995. The court granted the motions, holding that all three
pertinent factors--(1) the risk of federal plaintiffs obtaining the state plaintiff’s discovery; (2) the
extent of factual and legal overlap between the state and federal actions; and (3) the burden of
state court discovery on the defendants---weighed in favor of imposing a stay.
P. Failure to Supervise
1. SEC Enforcement Actions
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In re Investment Placement Group, Admin. Proc. File No. 3-14677, SEC Release No. 34-66055,
2011 SEC LEXIS 4547 (Dec. 23, 2011).
Respondent Gonzolez-Rubio, the Chief Operating Officer (“COO”) of IPG, the
respondent broker-dealer, was responsible for supervising the trading room, including overseeing
the activities of a trader who engaged in a fraudulent interpositioning scheme involving a
Mexican investment advisor and a separate Mexican brokerage firm. The trader was found to
have violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder, to the detriment of for Mexican pension funds that were institutional
clients of the Mexican brokerage firm. As a result of the trader’s fraud, the pension funds
overpaid for certain credit-linked notes by approximately $65 million. The firm and the trader
each earned more than $6 million as part of the scheme.
The SEC alleged that the scheme went undetected by the firm because the firm failed to
establish adequate policies and procedures and a system for implementation that would
reasonably be expected to prevent and detect interpositioning. The firms written procedures
merely listed interpositioning as a prohibited activity, but had no procedures for reviewing
transactions to monitory them for suspicious activity. The COO delegated supervisory
responsibility for the trading to the trader, which effectively resulted in the trader supervising
himself. In addition, the COO failed to respond to red flags regarding the scheme, including
what the SEC order referred to as a “dramatic” rise in revenue resulting from the interpositioned
transactions. The COO also failed to follow-up on his discovery that the Mexican brokerage
firm who played a part in the scheme had been receiving 78% of the markups in the firm’s
proprietary trading account generated from trades executed on behalf of the Mexican brokerage
firm’s clients.
The firm and the COO consented to findings that they failed reasonably to supervise the
trader with a view to detecting and preventing his violations. As a result, the firm consented to a
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censure, a civil money penalty of $260,000, disgorgement of over $3.8 million, including
prejudgment interest, and agreed to comply with an undertaking to review its policies,
procedures and systems regarding the detection and prevention of interpositioning violations, to
submit a report to the SEC regarding the review and conclusions and changes made as a result of
the review, and to certify that it has established procedures, and a system for applying the
procedures, which are reasonably expected to prevent and detect, insofar as practicable, the
violations described in the SEC’s order. The firm also agreed to provide cooperation in
connection with the SEC’s ongoing investigation and/or litigation relating to the underlying
conduct. The COO consented to a three-month suspension from association with a broker,
dealer, investment advisor, municipal securities dealer, municipal adviser, transfer agent, or
nationally recognized statistical rating organization.
Matter of Clifton, Admin. Proc. File No. 3-14266, SEC Init. Dec. Release No. 443, 2011 SEC
LEXIS 4185 (Nov. 29, 2011).
The SEC alleged that Clifton, the president and principal of MPG Financial, a registered
broker-dealer, made material misrepresentations and omissions relating to an oil-and-gas well
project while he possessed material and materially adverse information pertinent to potential
investors. The SEC also alleged that Clifton failed to implement day-to-day supervision over
MPG Financial sales representatives and sales practices, that he failed to draft and approve
written supervisory procedures, and otherwise failed to supervise the sales activity.
After a hearing, ALJ Mahony found that MPG Financial’s written supervisory procedures
(“WSPs”) clearly designated Clifton as the designated supervisor of the salesmen and gave him
responsibility for reviewing and approving written and electronic correspondence drafted by
them. Clifton contended, however, that despite the WSPs, he delegated the task of reviewing
electronic correspondence to the firm’s chief compliance officer (“CCO”). The CCO however,
testified that the responsibility for correspondence review was primarily Clifton’s and in any
event he was a part-time employee charged with numerous other compliance responsibilities.
Moreover, the CCO pointed out that his supervisory duties were limited to “associated persons
not involved in sales,” and had agreed with Clifton that he would only conduct keyword search
reviews of electronic communications, not a review of individual e-mails. The ALJ also found
Clifton did not implement any formal tracking system or procedure for documenting the
correspondence review process, noting that both Clifton and the CCO testified that there were
“no formal policies or procedures in place to ensure that electronic communications were being
regularly reviewed.” The ALJ found that Clifton failed to conduct regular and systematic
reviews of e-mail correspondence sent to investors or prospective investors, and concluded that
Clifton violated Section 15(b) of the Exchange Act by failing reasonably supervise the sales
representatives. The ALJ rejected Clifton’s attempt to establish an affirmative defense based on
compliance with the firm’s written supervisory procedures because he concluded that he did not
fulfill the duties charged to him thereunder.
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In assessing the appropriate sanctions, the ALJ found that Clifton’s conduct was
egregious, having placed himself in a supervisory position, and acted with scienter in both
making affirmative misrepresentations and omissions himself, and failing to adequately
supervise the sales representatives to ensure that the information they provided to customers was
accurate, complete, and truthful. He failed to acknowledge his wrongdoing. The ALJ noted that
because Clifton remained the owner and president of a registered broker-dealer, he had
opportunities to violate securities laws in the future.
As a result, the ALJ imposed a cease-and-desist order, collateral bar, and a third-tier civil
penalty of $130,000, as requested by the Division of Enforcement. As to the collateral bar, the
ALJ’s decision contained a discussion of the appropriateness of a full collateral bar from all
capacities provided under the Dodd-Frank Act. The ALJ considered the retroactive effect of
Dodd-Frank as a remedy for conduct that pre-dated its enactment., questioning whether Clifton
had a reasonable expectation that his misconduct would not affect his ability to associate with
industry segments other than brokers or dealers. He concluded that because recent amendments
to Section 15(b) of the Exchange Act also includes two new associational bars – municipal
advisors and NRSROs – which did not exist at the time of Clifton’s conduct, they were
impermissibly retroactive because they attached new legal consequences. As such, the ALJ
imposed only associational bars with respect to brokers, dealers, investment advisers, municipal
securities dealers, and transfer agents.
Matter of Gallardo, Admin. Proc. File No. 3-14139, SEC Release No. 34-65658, 2011 SEC
LEXIS 3848 (Oct. 31, 2011).
The SEC charged Zurita, the President of a broker-dealer and supervisory responsible for
the firm’s New York branch office, with failing reasonably to supervise a registered
representative who was engaged in a fraudulent profit-sharing arrangement with customers. The
SEC alleged that Zurita failed to follow-up on red flags by which he became aware that a
customer was communicating with the representative about the arrangement, which violated the
firm’s procedures, and also about stock market investments with exorbitant returns, yet he failed
to take sufficient steps to investigate the representative’s conduct. While made some initial
inquiries, he did not conduct sufficient follow-up to determine if disciplinary steps or other
actions were necessary. In other instances, after becoming aware of customer complaints, Zurita
did not visit the New York office to investigate. In addition, the SEC took the position that
Zurita, as President of the firm, was responsible for establishing, maintaining, and implementing
policies, procedures, and systems reasonably designed to detect violative activity by the firm’s
registered representatives. Thus, while the firm had procedures that discussed prohibited
transactions, the firm and Zurita failed to develop reasonable systems to implement the
procedures with respect to such transactions.
The SEC’s order noted that the firm and Zurita permitted an unlicensed foreign associate
to perform the functions of a registered representative at the firm’s New York branch office, and
that Zurita was physically located in Florida, even though he was responsible for the New York
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anch office, which did not have any other qualified supervisory personnel. Indeed, when
Zurita hired the representative in question, he did so with the intention that the representative
would become qualified as a principal and take over supervision of the New York office. The
representative never qualified, and as such, Zurita retained sole authority for supervision of the
office. The SEC also noted that Zurita failed to implement any form of inspection program for
the New York office, even though branch inspections were required under the firm’s written
supervisory procedures.
Zurita and the firm consented to the entry of an order that concluded that they failed
reasonably to supervise the representative within the meaning of Section 15(b)(4)(E) of the
Exchange Act. Moreover, the SEC concluded that the firm violated Section 15(b)(7) of the
Exchange Act and Rule 15b7-1 thereunder, which require registration of individuals effecting
securities transactions, and that Zurita willfully aided and abetted and caused the firm’s
violation.
In resolution of these charges, the firm agreed to an undertaking that it would hire an
individual with appropriate supervisory licenses and qualifications to assume supervisory
authority at the firm. The firm also consented to censure, a cease and desist order, and payment
of a civil money penalty of $50,000.
Zurita consented to the entry of a cease and desist order, an order barring him from
association in a supervisory capacity with any broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating
organization, with the right to apply for reentry after three years, and payment of a civil money
penalty of $35,000.
In re Gilford Securities Inc., Admin. Proc. File No. 3-14574, SEC Release No. 34-65450, 2011
SEC LEXIS 3419 (Sept. 30, 2011).
Respondent Gilford Securities, a broker-dealer firm, Worthington, the firm’s CEO and
trading desk supervisor, and Kaplan, the sales manager of the New York office of the firm, were
charged with failing reasonably to supervise Berger, a former registered representative engaged
in unregistered distributions of securities in connection with international pump-and-dump
schemes.
For a period of more than a year, Berger allegedly resold over 30 million shares of securities
through at least 20 customer accounts at Gilford without meeting registration requirements or
exemptions. These unregistered sales went undetected by Gilford, because the firm had failed to
develop reasonable systems to implement its policies and procedures regarding supervision of
registered representatives with regard to unregistered securities. The SEC alleged that
Worthington, as CEO, had ultimate authority and responsibility for the firm’s supervisory
policies and procedures, including their implementation. The SEC further alleged that Kaplan,
as Berger’s direct branch office supervisory, had ultimate responsibility for supervising Berger.
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The firm was also charged with other violations stemming from the sale of unregistered
securities, including failing to file Suspicious Activity Reports under the Bank Secrecy Act,
allowing unlicensed employees to execute orders, and violating Regulation S-P, among others.
Some of these violations were aided and abetted by Worthington and Kaplan.
To resolve all of these charges, the firm agreed to an undertaking to retain, at its own
expense, an independent consultant to review the firm’s written supervisory procedures, and the
firm’s implementation of same, and make recommendations for necessary improvements. In
addition, the firm consented to the entry of a cease and desist order, a censure, payment of
disgorgement of $275,000, prejudgment interest of $77,113, and a civil penalty of $260,000.
Worthington consented to a cease and desist order, a suspension from association in a
supervisory capacity with any broker or dealer for a period of twelve months, and payment of a
civil penalty of $45,000. Kaplan consented to a cease and desist order, a suspension from
association in a supervisory capacity with any broker or dealer for a period of twelve months,
and payment of disgorgement of $225,000, prejudgment interest of $63,092 and a civil penalty
of $ 30,000.
In re Lopez-Tarre, Admin. Proc. File No. 3-14562, SEC Release No. 34-65391, 2011 SEC
LEXIS 3311 (Sept. 23, 2011).
Respondent was the Chief Compliance Officer of a broker-dealer, but was also
specifically made responsible for supervising the handling of customer accounts and for
reviewing correspondence, including email correspondence, of Clamens, the sole owner of the
firm, and Lopez, an employee who assisted Clamens. During an eight month period, Clamens
allegedly engaged in a large volume of unauthorized trading in the brokerage accounts of two
customers of the firm, resulting in large losses. Lopez allegedly created and sent the customers
false account statements in an attempt to conceal the fraud, which included creating fabricated
rates of return on securities that the firm was not authorized to sell and showing holdings in
certificates of deposit and money market funds, instead of the unauthorized investments. The
SEC charged that respondent failed to follow procedures for reviewing Clamens’ customer
accounts and did not review email correspondence, as required by the firm’s supervisory
procedures. Moreover, he failed to respond to several “red flags” that should have alerted him to
Lopez’s participation in the fraud. For example, when the falsified rate of return prompted one
customer to begin depositing funds for overnight investment, expecting the funds to be wired
back to it the next morning, Lopez had to wire funds from another customer account to cover the
shortfall on numerous occasions. Respondent was responsible, under the firm’s procedures, for
reviewing wire transfers between customer accounts but failed to do so.
Respondent consented to a bar from association with any broker, dealer, investment
adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized
statistical rating organization in a supervisory capacity, with a right to reapply for association
after one year. Based on respondent’s demonstrated inability to pay, the SEC declined to impose
a penalty against respondent.
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In re Application of Kaminski, Admin. Proc. File No. 3-14054, SEC Release No. 34-65347, 2011
SEC LEXIS 3225 (Sept. 16, 2011).
Respondent Kaminski, formerly a general securities principal and senior executive officer
of Mutual Service Corporation (“MSC”), an NASD member firm, sought review of a NASD
disciplinary action, specifically a December 2008 hearing panel decision finding that he failed
reasonably to supervise MSC’s review of its variable annuity transactions for a three-month
period in 2004, resulting in a six month suspension in all principal capacities and a fine of
$50,000. The decision was reviewed by the National Adjudicatory Counsel (“NAC”) on its own
motion. The NAC affirmed the fine, but increased the principal suspension to an 18-month
suspension in all capacities, with a requirement to requalifiy before resuming his duties.
In a very detailed Order, the SEC reviewed the evidence of Kaminski’s misconduct and
the context in which it occurred, and responded to Kaminski’s arguments attacking the NAC’s
decision. The SEC agreed with the NAC’s conclusion that the conduct was egregious, based
largely on the fact that Kaminski was found to have suspended the firm’s use of a “red flag
blotter,” which was created as part of the resolution of a prior NASD disciplinary action
regarding supervision of variable annuity transactions. Kaminiski insisted that he did not make
the decision to suspend use of the blotter, but the SEC agreed with the NASD’s conclusion that
Kaminiski’s position was not credible, as it was rebutted by direct testimony and circumstantial
evidence that the trier of fact was in a better position to assess, and thus, would not be
overturned. The SEC also rejected Kaminski’s argument that his sanction was
disproportionately severe because other supervisors at MSC were treated less severely by the
NASD for their participation in variable annuity supervision at the firm. The SEC, however,
declined to give credence to Kaminski’s argument, relying on its long-standing position that the
appropriateness of sanctions is based on facts and circumstances and cannot be measured by
comparing one case to another.
The Commission affirmed the NAC’s decision in all respects.
In re Gautney, Admin. Proc. File No. 3-14069, SEC Release No. 34-65151, 2011 SEC LEXIS
2944 (Aug. 17, 2011) (as to Respondent Blum); In re Gautney, Admin. Proc. File No. 3-14069,
SEC Release No. 34-65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011(as to Respondent Bellia).
Two related settled administrative proceedings arise form allegations of churning by
registered representatives affiliated with Aura Financial Services, Inc. (“Aura”). Respondent
Blum was the manager of Aura’s Miami branch office. Blum was responsible for supervising a
representative charged with churning accounts of two of his customers. Blum received quarterly
reports showing turnover rations of between 6 and 54 and cost to equity ratios of 14% to 54%.
Moreover, the accounts were aggressively traded, inconsistent with the customers’ investment
objectives and risk tolerance.
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Aura’s Written Supervisory Procedures (“WSP”) required “immediate attention” to
customer accounts having turnover ratios greater than six, and “further review” of accounts
having such ratios greater than two and less than or equal to six.
Blum failed reasonably to supervise the representative based on a variety of findings,
including that the customer’s turnover rates and cost to equity ratios increased over time and
were reported in reports provided to Blum. Further, while Blum sent out active account letters
after receiving the quarterly compliance reports, evidence indicated that sometimes the letters
were returned signed but not completed. Moreover, Blum treated the letters as “negative
response letters,” such that if no response was received, he assumed that the customer approved
of the trading. He relied on the representative to follow-up with customers who did not return
the letter. In the face of these red-flags, and additional red-flags in the form of customer
complaints concerning the representative, the SEC found that Blum failed reasonably to
supervise the representative within the meaning of Section 15(b)(4)(E) of the Exchange Act.
As a result, Blum consented to a bar from association in a supervisory capacity with any
broker, dealer, investment adviser, municipal securities dealer, or transfer agent, with the right to
reapply for association after two (2) years. In addition, Blum agreed to pay disgorgement of $
4,753, plus prejudgment interest, and a civil penalty of $10,000.
Respondent Bellia was the owner of Aura’s branch office in Islandia, New York and
served as its branch manager. During his association with Aura, Bellia was under heightened
supervision due to a prior FINRA disciplinary action involving failing to supervise registered
representatives at another broker-dealer. Bellia was responsible for supervision of two
representatives, one of which was under heightened supervision. Bellia received quarterly
reports showing that certain customers of one of the representatives had annualized turnover
rations of between 20 and 94, and cost to equity rations of 87% to 2058%. Two customers of the
other representative had annualized turnover rates of 40 and 59 and cost to equity ratios of 144%
and 418%, respectively, according to reports that were reported to Bellia. In addition, to these
significant indications of churning, all these customers had their accounts aggressively traded by
the representatives, contrary to their risk tolerance and investment objectives.
The SEC found that despite Aura’s requirements for dealing with the extreme ratios
present in these accounts, Bellia and Aura were only able to produce a small number of Active
Account Letters. In addition, Bellia failed to track whether the letters were returned, and when
they were not, merely directed the representative to contact the customers. The SEC found that
the failure to contact the first representative’s customers was “particularly egregious” because he
was under heightened supervision, and had been subject to numerous current customer
complaints.
Bellia consented to findings that he failed reasonably to supervise the representatives
within the meaning of Section 15(b)(4)(E) of the Exchange Act. As a sanction, Bellia consented
to a bar from association in any capacity with any broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating
organization, as well as a penny stock bar, and agreed to pay disgorgement of $ 5,959 and
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prejudgment interest. The payment was waived, however, and a civil money penalty forgone,
however, due to Bellia’s demonstrated inability to pay.
Matter of Divine Capital Markets LLC, Admin. Proc. File No. 3-14274, SEC Release No. 34-
64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011).
Respondent, Divine Capital Markets, LLC, a broker-dealer, and respondent Hughes, the
firm’s CEO and principal responsible for supervision of equities, institutional and retail sales,
were charged with selling unregistered securities and failing reasonably to supervise a
representatives involved in selling such securities, respectively, in connection with a particular
securities offering. Specifically, the representative and Hughes knew that customers had
acquired the shares directly from the issuer, but neither the representative nor Hughes conducted
adequate due diligence to determine if the shares were registered. The SEC noted that Hughes
was responsible for reviewing the firm’s trade tickets to look for, among other things, “sizable
positions in a single security,” and for a period of time served as the firm’s Chief Compliance
Officer.
The SEC alleged that Hughes ignored red flags, in that she received notice that the
customer had received shares in certificate form and was planning on selling them. Thereafter,
the size of the trading also constituted a red flag, with the customer selling 45 million of the first
65 million-share certificate on the first day, with another certificate planned for deposit the next
day. When she inquired about the transactions with the representative, and asked for the stock
purchase agreement by which the shares were acquired directly from the issuer, she received a
copy of the agreement, but took no steps to determine whether the shares were registered.
The SEC also charged Hughes with failure to supervise based on the inadequacy of the
firm’s supervisory policies and procedures, which she was responsible for developing and
maintaining. The policies did not provide adequate guidance to supervisors and did not address
the issue of unregistered distributions through statutory underwriters, or more specifically,
situations in which certificates without restrictive legends were acquired by a customer from an
issuer with a view to distribution, as was present in the instant case.
For its underlying violations of Sections 5(a) and 5(c), and apparently not as a sanction
for failure to supervise (while the SEC’s order recites the firm’s supervisory failures, its violation
section neglects to list failure to supervise among the charged violations against the firm), the
firm consented to a censure, a cease and desist order from committing or causing violations of
Sections 5(a) or 5(c), a penny stock bar, and payment of disgorgement of $33,762 and
prejudgment interest of $ 6,921 and a civil money penalty of $60,000.
In resolution of her failure to supervise charges, Hughes consented to a four-month
suspension from association in a supervisory capacity with any broker, dealer, investment
adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized
statistical rating organization, and payment of a civil money penalty of $25,000.
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Matter of Bloomfield, Admin. Proc. File No. 3-13871, SEC Initial Dec. Release No. 416-A, 2011
SEC LEXIS 1457 (April 26, 2011).
Among the issues in this administrative proceeding, tried before ALJ Murray, was
whether respondent Gorgia failed reasonably to supervise certain registered representatives in
connection with the sale of unregistered securities. The ALJ summed up he lengthy and
exhaustive opinion by stating: “this large scale fraud with massive financial losses to members of
the investing public happened because a broker-dealer did not exercise safeguards when
accepting securities from customers where there were abundant red flags.”
Gorgia argued that he was not in the direct supervisory chain, that he did not have the
ability to control the actions of the representatives, and that he made attempts to address
compliance issues and left the firm when his demands and suggestions were not implemented.
The ALJ, however, did not find Gorgia’s arguments applicable, or his testimony credible. She
found that Gorgia was, in fact, a supervisor, having been assigned areas of supervision in the
firm’s written supervisory procedures, served as its Chief Compliance Officers, that he was in
charge of the firm’s supervisory system, and had the ability to fire at least one of the
representatives. The ALJ pointed to numerous red-flags, and indications of clear awareness on
the part of Gorgia, of problematic activities surrounding the firm’s and the representative’s
penny stock business, including information requests from the firm’s clearing broker. The ALJ
concluded that Gorgia failed reasonably to supervise the representatives within the meaning of
Sections 15(b)(4) and 15(b)(6) of the Exchange Act, with a view toward preventing and
detecting violations of Section 5 of the Securities Act.
As a result, Gorgia was barred from association with any broker or dealer and from
participating in any offering of penny stock, required to cease and desist from committing or
causing any violations or any future violations of Section 17(a) of the Exchange Act or Rule 17a-
8 thereunder, and required to pay a civil money penalty of $100,000.
In re Huntleigh Securities Corp., Admin. Proc. File No. 3-14354, SEC Release No. 34-64336,
2011 SEC LEXIS 1439 (April 25, 2011).
The SEC alleged that the firm failed reasonably to supervise a representative who
engaged in “marking the close” trades on behalf of an investment adviser customer. The adviser
sent orders in thinly-traded securities to the firm, directing that the orders be executed in the final
minutes of the last trading day of the month. The SEC alleged that the purpose of doing so was
to artificially inflate the closing prices of the securities. A firm’s supervisory failures centered
on its failure to establish procedures or a system for implementing existing procedures
reasonably designed to prevent and detect the trader’s violations of the securities laws, which
were separately charged as violations of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder.
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Specifically, the firm’s procedures did not require that certain daily trading exception
reports be transmitted to compliance personnel. In addition, which the firm’s written procedures
required that traded tickets be reviewed daily by the firm’s Compliance Director, the review was
suspended when the firm changed clearing brokers, and once the new clearing firm was on
board, the firm did not revise its procedures to provide for review of trade tickets.
In resolution of the charges, the firm agreed to a censure and an undertaking that it would
review and revise, as necessary, currently adopted and implemented procedures concerning
manipulative trading. At a minimum, the firm agreed to adopt and implement procedures
requiring daily review of trade execution blotters and daily exception reports by compliance
personnel. As a result of the firm’s demonstrated inability to pay, the SEC declined to require
the firm to pay a civil money penalty.
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In re Torrey Pines Securities, Inc., Admin. Proc. File No. 3-14230, SEC Release No. 34-64317,
2011 SEC LEXIS 1394 (April 20, 2011); Matter of Smith, Admin. Proc. File No. 3-14229, SEC
Release No. 34-63834, 2011 SEC LEXIS 390 (Feb. 3, 2011).
The SEC charged the firm and Smith, a part-owner of the firm who served as its
President and CEO, and who had overall supervisory responsibility for the firm, with failing
reasonably to supervise a registered representative, Dennis Lee Keating II (“Keating”), in
connection with an unregistered private securities offering from August 2006 to November 2008.
The SEC charged Keating with violating Section 15 (a) of the Exchange Act, the broker-dealer
registration provision of the federal securities laws, by conducting the unregistered private
securities offering outside the scope of his employment with Torrey Pines.
The firm failed reasonably to supervise Keating in that it did not establish reasonable
policies and procedures to assign responsibility for supervising Keating, who was in charge of
the firm’s Corona Office and a part-owner of the firm, such that Keating was permitted to
supervise himself. The firm also failed to develop systems to implement the firm’s procedures
regarding registered representatives’ outside business activities. The SEC noted that other than
annual audits, which it described as “cursory,” there was no review of Keating’s daily
correspondence or telephone calls. Further, although the firm had a policy prohibiting the sale of
securities away from the firm, and a policy requiring reporting of outside business activities,
there was no system for either supervisors or the compliance department to monitor activity to
ensure the prohibitions and reporting requirements were met. Smith shared responsibility for
lack of adequate procedures, as he had the power and responsibility to ensure that such
procedures were placed in effect.
The SEC noted the existence of suspicious events concerning Keating’s outside business
activities, which came to the attention of the firm and Smith, most notably multiple
communications from an individual who had invested in Keating’s private offering. Yet, the
firm did not have procedures in place requiring follow-up on such events by supervisors or
compliance officers, and Smith shared responsibility for the failure to enact such procedures.
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The firm and Smith consented to the entry of the SEC’s order, which concluded that the
firm and Smith failed reasonably to supervise Keating within the meaning of Section 15(b)(4)(E)
of the Exchange Act, and within the meaning of Section 203 (e) of the Advisers Act, when it
failed to supervise Keating with a view to detecting and preventing violations of Section 15 (a)
of the Exchange Act. As a result, the firm consented to an undertaking to retain an independent
consultant to review its policies, procedures and systems relating to supervision and outside
business activities, and make recommendations for improvements. The firm also agreed to
provide, at its own expense, a copy of the SEC’s order to all current customers and all
prospective customers for a period of two years. As a result of a demonstrated inability to pay,
the SEC declined to impose a civil money penalty against the firm.
Smith consented to a nine-month suspension from association with any broker or dealer
or investment adviser in a supervisory capacity for a period of nine (9) months, as well as a civil
money penalty of $25,000.
Matter of Ellis, Admin. Proc. File No. 3-14328, SEC Release No. 34-64220, 2011 SEC LEXIS
1199 (April 7, 2011).
Although not charged as a failure to supervise violation under Section 15(b) of the
Exchange Act, this settled administrative proceeding, arising out of violations by GunnAllen
Financial, Inc. (“GunnAllen”), have supervisory overtones. The SEC alleged that GunnAllen
violated Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)) (the “Safeguard Rule”), which,
according to the SEC order, “requires broker-dealers to, among other things, adopt written
policies and procedures reasonably designed to protect customer information against
unauthorized access and use.” The SEC found that although GunnAllen maintained written
supervisory procedures for safeguarding customer information, they were inadequate and failed
to instruct the firm’s supervisors and registered representatives how to comply with the
Safeguard Rule. Respondent Ellis, who served as GunnAllen’s Chief Compliance Officer, had
responsibility for maintaining and reviewing the adequacy of GunnAllen’s procedures for
protecting customer information. The SEC charged Ellis with failing to direct the firm to revise
or supplement is procedures for safeguarding customer information, after he became aware that
three laptop computers were stolen and a registered representative’s computer password
credentials were compromises, such that customer information collected by GunnAllen was
placed at risk of unauthorized access and use. Ellis consented to the entry of the SEC order,
which concluded that he aided and abetted and caused GunnAllen’s violations of the Safeguard
Rule.
As a result, Ellis consented to a cease and desist order from committing or causing any
violations and any future violations of Rule 30(a) of Regulation S-P under the Exchange Act, a
censure, and a civil money penalty of $15,000.
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In re Pagliarini, Admin. Proc.File No. 3-14273, SEC Release No. 34-63964, 2011 SEC LEXIS
682 (Feb. 24, 2011).
Respondent, the Chief Compliance Officer and AML Compliance Officer of a brokerdealer,
was charged with failing reasonably to supervise one of the firm’s traders, over whom she
had direct supervisory authority. The trader was charged with helping to manipulate the prices
of several microcap issuers’ stocks, in violation of Section 10(b) of the Exchange Act and Rule
10b-5 thereunder. The trader was also charged with aiding and abetting the firm’s violations of
Section 15(c)(1) of the Exchange Act, by executing trades, including wash trades, in an apparent
effort to manipulate the prices of microcap companies stocks and to generate over $ 600,000 in
sales credits (commission equivalents) to the firm.
Respondent’s supervisory failures centered on her failure to follow the firm’s procedures,
which required her to follow up on suspicious transactions, such as the wash trades, that lacked
business sense or exhibited a lack of concern regarding risks, commissions, or other transaction
costs. Her awareness of such transactions, particularly the wash trades, which moved stock
between accounts held by the same owner, constituted “red-flags” that she should have followedup
on, but did not. Respondent was also charged with aiding and abetting and causing books and
records violations by the firm, including the firm’s failure to file suspicious activity reports under
the Bank Secrecy Act, with respect to the traders various transactions and transfers of which she
became aware.
As a result, respondent consented to an ordered requiring that she cease and desist from
committing or causing any violations and any future violations of Section 17(a) of the Exchange
Act and Rule 17a-8 thereunder, be suspended from acting in a supervisory capacity with any
broker or dealer for a period of twelve months, and pay a civil money penalty of $20,000.
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In re TD Ameritrade, Inc., Admin. Proc. File No. 3-14225, SEC Release No. 34-63829, 2011
SEC LEXIS 389 (Feb. 3, 2011).
The SEC charged the firm with failure to supervise its representatives in connection with
their offer and sale of shares in a particular mutual fund. Although the firm created and
distributed to the representatives training materials accurately describing the mutual fund, the
representatives nevertheless at times mischaracterized the mutual fund “as a money market fund,
as safe as cash, or as an investment with guaranteed liquidity,” and otherwise failed to accurately
depict the nature or risks of the mutual fund.
The firm had in place policies and procedures, which required the representatives’ direct
managers to review solicited trades in the mutual fund and to review other documentation to
ensure suitability. The procedures, however, did not require the managers to ensure that the
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epresentatives provided complete and accurate disclosures to customers regarding the mutual
fund.
Later, the firm changed is supervisory structure, and in all but one branch, designated a
“centralized, independent branch supervision and controls group” to take the place of individual
direct OSJ managers for the branches. The group functioned through four Divisional Operations
Managers (“DOMs”), with responsibility for the branch offices within each of four regions. The
firm also revised its written supervisory procedures to place primary responsibility on the DOMs
for reviewing sales of the mutual fund, with such review focusing on suitability, without
inquiring as to whether the representatives had provided the proper disclosures to customers.
Additional improvements to the supervisory system that added exception reports still neglected
the need to ensure that the proper disclosures were made. As such, throughout the time period,
the evolving supervisory system was not reasonably designed to prevent and detect any
misrepresentations or omissions by firm’s representatives. The SEC’s order was also critical of
the supervision of other sales channels within the firm, for similar reasons, all centering on the
fact that the systems did not prevent or detect misrepresentation or omissions made by
representatives concerning the mutual fund.
The SEC concluded that the firm failed reasonably to supervise its representatives within
the meaning of Section 15(b)(4)(E) of the Exchange Act due to the representatives’ violations of
Section 17(a)(2) of the Securities Act, and the firm’s failure to implement adequate policies and
procedures and a system for applying established procedures reasonably designed to prevent or
detect such violations.
The SEC noted that the firm had undertaken to distribute, under an elaborate distribution
plan, the sum of $0.012 per share of the Fund, which is expected to total approximately $10
million. To resolve the charges, the firm consented to a censure. The SEC stated that it was not
imposing a penalty against the firm at this time, noting that in determining to accept the Offer of
Settlement by the firm, it had considered remedial acts voluntarily undertaken by the firm to
make improvements to its supervisory system, as well as the fact that the firm had undertaken the
distribution plan.
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., Admin. Proc. File No. 3-14204, SEC Release
No. 34-63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).
The firm settled charges that its proprietary traders misused institutional customer order
information which was shared with them by the firm’s market makers, and separately, that its
traders improperly charged mark-ups and mark-downs on certain riskless principal trades of
institutional and high net worth customers for which the firm had agreed to charge only a
commission equivalent. As a result of this conduct, the SEC found that the firm had violated
both Section 15(c)(1)(A) of the Exchange Act by effecting transactions in securities by means of
manipulative, deceptive or other fraudulent devices or contrivances, and Section 15(g) of the
Exchange Act by failing to establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the misuse of material, nonpublic information. In addition, the
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firm settled charges that it violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(6)
thereunder by failing to make records of price guarantees that were part of the terms and
conditions of institutional customer orders.
In addition, the SEC charged the firm with violating Section 15(b)(4)(E) of the Exchange
Act, in that the firm failed reasonably to supervise its traders with a view towards preventing
them from violating the federal securities laws. Specifically, the firm failed to establish policies
and procedures reasonably designed to prevent the proprietary traders from obtaining
institutional customer order information from the market making desk. The close proximity
between proprietary traders and market makers on the firm’s equity trading floor, allowed the
proprietary traders to see customer order information on the market makers’ computer screens
and hear market makers discuss customer orders. In addition, the SEC noted that the firm
encouraged the market makers to generate and share “trading ideas” with the proprietary traders
and compensated market makers for profitable ideas. The firm consented to the SEC’s finding
that, as a result of such conduct, it failed reasonably to supervise traders associated with the
proprietary trading desk and its NASDAQ market making operations, with a view toward
detecting and preventing violations of the Exchange Act.
As a result, the firm consented to cease and desist order from committing or causing any
violations and any future violations of Sections 15(c)(1)(A), 15(g) and 17(a) of the Exchange Act
and Rule 17a-3(a)(6) thereunder, a censure, and a civil money penalty of $10 million.
Matter of BNY Mellon Securities LLC, Admin. Proc. File No. 3-14191, SEC Release No. 34-
63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).
The SEC alleged that respondent failed reasonably to supervise the order desk manager
on its institutional order desk and traders under his supervision. The institutional order desk
executed orders to purchase and sell securities on behalf of one of the firm’s affiliates, which
administered various employee stock plans. The SEC found that the order desk manager failed
to provide best execution for orders on behalf of such plan customers, by executing trades at
prices that were sale or outside of the National Best Bid and Offer (“NBBO”). More
specifically, the orders were executed as part of cross trades with “a favored handful” of
accounts held by hedge funds and individuals. The SEC noted that the order desk manager not
only executed such trades himself, but directed traders under his supervision to do so as well.
In connection with the supervisory charges, the SEC noted that while the firm had written
supervisory procedures regarding best execution of customer orders, the procedures were
unreasonable because they failed to describe how the best execution committee should follow-up
on red flags raised in best execution reports (which among other things, tracked the frequency of
executions outside the NBBO), and lacked procedures to determine whether the order desk
manager was completing effectively his daily review of executions on regional exchanges, as
prescribed by the written supervisory procedures. In fact, the manager was not conducting the
required review; if such failure had been discovered by the firm, the manger and his
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subordinates’ practice of benefiting hedge fund and individual customers at the expense of the
employee plan customers would likely have been detected by the firm.
The SEC singled out cooperation and remedial efforts by the firm. When firm discovered
that the SEC had charged one of the hedge fund customers in an unrelated matter, within three
days the firm suspended cross-trading with that hedge fund and commenced an internal
investigation. In addition, the firm promptly terminated the order desk manager for cause and
reported the matter to the SEC.
As a result, the firm consented to a censure, payment of disgorgement in excess of
$23,000,000, including prejudgment interest, and a civil money penalty of $1,000,000. The firm
agreed to retain and bear the cost of an Independent Distribution Consultant to administer the
disgorgement fund under applicable “Fair Funds” provisions. Notably, the SEC expressed stated
that based on the firm’s cooperation, the Commission was declining to impose a civil money
penalty in excess of $1,000,000.
2. FINRA Enforcement Actions
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Department of Enforcement v. Murphy, Complaint No. 2005003610701, 2011 FINRA Discip.
LEXIS 42 (NAC, Oct. 20, 2011).
A FINRA hearing panel found a registered representative liable for disciplinary
violations stemming from discretionary trading he engaged in without written authorization from
his clients or firm. The trading included excessive and unsuitable options trading, churning,
unauthorized trading, and also occurred in conjunction with inaccurate, unbalanced and
misleading communications with customers. The panel also found that the representative’s
direct supervisor failed to supervise him in connection with such conduct. The panel barred the
representative and ordered $591,933.67 in disgorgement. The panel fined the supervisor $25,000
and ordered a six-month suspension from association as a general securities principal and as an
options principal, including a requirement that he re-qualify in those principal capacities.
The supervisor was responsible for approving options agreements, approving customers
to engage in various levels of options trading, and approval all options trades. He reviewed all
options trades daily for suitability, size and frequency. He reviewed “profit and loss” reports and
sales literature sent to customers. The supervisor was found to be aware of numerous “red flags”
concerning a representative’s trading of certain customers accounts, but the action he took in
response, if any, was insufficient. For example, he was aware that the trading in question, which
had been occurring over an extended period of time, had caused concern both to the firm’s
compliance officer, and regulators, but did not mount an adequate supervisory response, taking
definitive action only after state securities officials and FINRA became involved.
On appeal by the respondents, the National Adjudicatory Council affirmed the hearing
panel’s findings, but the sanctions imposed on the supervisor were found to be wholly
insufficient to remedy his failure to supervise, and was therefore increased to a bar in all
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capacities. The NAC cited the fact that there were “numerous aggravating factors,” and that the
number of “obvious red flag warnings” that the supervisory ignored indicated that his “failures
must have stemmed from some degree of intent.” The NAC concluded that the supervisor posed
“a serious risk to the investing public, in whatever capacity he would function, that his failure to
supervise was egregious, and that sanctions at the high end of the relevant range are warranted.”
Department of Enforcement v. Midas Securities, LLC, Complaint No. 2005000075703, 2011
FINRA LEXIS 71, (NAC, March 3, 2011).
A hearing panel found respondents Midas Securities, LLC, World Trade Financial
Corporation and Frank Edward Brickell responsible for violations stemming from the sale of
unregistered securities in violation of Section 5 of the Securities Act and NASD Rule 2110,
fining Midas $30,000, World Trade $15,000, and Brickell $15,000, with a 30 business-day
suspension in all capacities. The hearing panel also imposed sanctions for related supervisory
violations against Midas for $25,000 and World Trade for $15,000. The panel sanctioned
individual supervisors, fining Michel $15,000, with a 45-day principal suspension, and Lee
$20,000, with a two year suspension in all capacities, and Adams $10,000, with a 30-day
principal suspension.
The NAC reviewed the hearing panel’s findings that the firms lacked written policies and
procedures that were tailored to its business, a large proportion of which dealt with handling
transactions in unregistered securities. The firms’ procedures were found to be lacking in that
they did not require representatives to make any inquiry when they received large volumes of
thinly traded, unregistered shares for liquidation, and did not offer guidance as to what due
diligence was required when dealing with the unregistered stock that was deposited for sale by
the firms’ customers. In addition, there was significant evidence that the individual supervisors
were aware of, but did not follow-up on, situations that constituted red-flags as to possible
Section 5 violations.
The National Adjudicatory Council, on appeal by respondents, affirmed the findings of
the hearing panel, but modified the sanctions. The NAC found that the supervisory conduct was
egregious. The fine for World Trade was increase to $30,000; the fine for Midas increased to
$50,000; the fine for Michel was increased to $30,000; the fine for Lee was increased to
$50,000; and the fine for Adams was increased to $20,000. The suspensions for Michel, Lee and
Adams, however, were not modified. The hearing panel, as an additional sanction, prohibited
Midas and World Trade from receiver or selling unregistered securities until they complied with
an undertaking to engage an independent consultant to review their supervisory policies and
procedures relating to Section 5 and recommend necessary improvements.
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Department of Enforcement v. Thomas Weisel Partners, LLC, Disciplinary Proceeding No.
2008014621701, 2011 NASD Discip. LEXIS 59 (OHO, Nov. 8, 2011).
FINRA’s Department of Enforcement alleged that the firm and a registered representative
who worked on the firm’s Fixed Income Desk violated Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder, as well as NASD Conduct Rules 2120 and 2110, by “stuffing” auction
rate securities from the account of the firm’s corporate parent into the accounts of three of its
customers, prior to the freezing of the market for auction rate securities in 2008. The complaint
also included allegations that respondents provided false and misleading information to
customers in connection with attempting to secure their retroactive consent, and that respondents
provided false information to FINRA during the investigation in violation of Rule 8210.
Relevant to this summary, FINRA also alleged that the firm violated Conduct Rules 3010 and
2110 by failing to establish and maintain supervisory systems and procedures surrounding
principal transactions executed by the firm.
After a hearing, the hearing panel concluded that respondents did not commit the
“stuffing,” false information, to customers, or Rule 8210 violations. The panel did conclude,
however, that firm’s Fixed Income Desk procedures governing principal transactions were
inadequate. The firm did not believe that the Fixed Income Desk handled any principal
accounts, and therefore the procedures lacked those applicable provisions, including the
requirement for prior notice to and consent from customers. Such supervisory failures were
found to violate NASD Rules 3010 and 2110, and as a result, the firm was fined $200,000, plus
hearing costs.
Department of Enforcement v. Max International Broker-Dealer Corp., Disciplinary Proceeding
No. 20070072538-03, 2011 FINRA Discip. LEXIS 58 (OHO, Sept. 1, 2011).
FINRA charged respondent with charging fraudulent, excessive, undisclosed markups on
penny stock sales to more than 100 customers, in violation of Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder, and NASD Conduct Rules 2110, 2120, and 2440. In addition to
trade reporting and books and records violations stemming from such conduct, the firm was also
charged with certain supervisory violations. Specifically, the Department alleged that
respondent failed to enforce its written supervisory procedures, in violation of NASD Conduct
Rules 2110 and 3010, failed to maintain and enforce supervisory control procedures, in violation
of NASD Conduct Rules 2110 and 3012, and failed to timely update its Form BD and file a
required annual certification, in violation of NASD Conduct Rules 2110 and 3013.
The hearing panel concluded that the firm failed to maintain and enforce its written
supervisory control procedures regarding markups and proprietary customer trades. While the
procedures contained references to supervision of proprietary trading, prohibitions against
principal trades with customer, and cautions against mark-ups in excess of five percent, the
procedures were not applied or enforced. The panel also concluded that the firm failed to
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maintain and enforce a system of supervisory control procedures for testing and verification of
the supervisory procedures. Finally, the panel found that the firm failed to timely update its
Form BD to identify its new chief compliance officer, and failed to file timely an annual
certification.
For all these violations, the hearing panel imposed a censure, a fine of $335,000,
restitution of $482,111.27, plus accrued interest to customers, and hearing costs. The hearing
panel made clear in its decision, however, that the fines pertaining to the supervisory violations
were $25,000 for failing to maintain and enforce its supervisory system for mark-ups and
proprietary trades, $5,000 for its lack of testing and verification that its procedures were
adequate, and $5,000 for failing to timely update its Form BD and failing to file a timely annual
certification.
Department of Enforcement v. Otalvaro, Disciplinary Proceeding No. 2008011725901, 2011
FINRA Discip. LEXIS 39 (OHO, June 24, 2011).
Respondent was charged with failing to disclose on his Form U-4 information regarding
securities arbitrations filed against him. He was named as a respondent in seven arbitrations
filed by customers of his firm. All of the claims related to investments with the firm. All of the
arbitrations included claims against him for supervisory failures, and at least one charged him
with active participation in the alleged fraud. Five of the arbitrations were settled for sums in
excess of $15,000, triggering reporting obligations.
The panel found that “failure to supervise” allegations in arbitration complaints needed to
be reported. It cited the “Explanation of Terms” for the Form U4, which defines “involved” as
“doing an act or aiding, abetting, counseling, commanding, inducing, conspiring with or failing
reasonably to supervise another in doing an act.” The panel also noted that the failure to disclose
the arbitration was material, because the arbitrations filed against respondent and his firm “might
have alerted regulators to possible supervisory problems and sales practice problems.”
After a hearing, the panel suspended respondent from associating with any FINRA
member firm in any capacity for one year, barred him from acting as a principal for any FINRA
member firm, and fined him $15,000.
Department of Enforcement v. Gallagher, Disciplinary Proceeding No. 2008011701203, 2011
FINRA Discip. LEXIS 40 (OHO June 13, 2011).
Respondent Vision Securities was charged with violating FINRA rules pertaining to
allowing the President of the firm to act as an unregistered principal, failing to apply heightened
supervision over the President, failing to adopt a supervisory control system and failing to file
annual certifications, fail to file AML testing, and continuing educations violations, among other
things.
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The hearing panel found that for nearly a year, the President was required to adhere to
heightened supervisory requirements imposed by FINRA and various state securities regulators.
Because the President controlled the firm, however, we was able to “sidestep” the requirements
of heightened supervision. The firm, for its part, failed to ensure that the heightened supervision
requirements were being followed, and by failing to have a system to monitor same, the hearing
panel found the firm to be in violation of Rule 3010(a).
Moreover, the firm admitted that it did not comply with Rules 3012 and 3013, in part
because, as the President testified, he did not know what the rules were. Even so, as President,
he was responsible for the establishment, maintenance and enforcement of a system of
supervisory control policies and procedures, and was required to make the designations and
certifications required by Rules 3012 and 3013. He and the firm were both found to have
violated both Rules and Rule 2110.
For his personal violations pertaining to failing to answer questions during his OTR
examinations and circumvented his own heightened supervision requirements, the President was
barred. Because of the bars, the hearing panel did not sanction him for the supervisory
violations. The firm, however, was censured and fined a total of $60,000 for all violations.
Department of Enforcement v. ACAP Financial, Inc., Disciplinary Proceeding No.
2007008239001, 2011 FINRA Discip. LEXIS 32 (OHO, May 3, 2011).
Respondent ACAP Financial was charged with selling unregistered securities in violation
of Section 5 of the Securities Act. Respondent ACAP and respondent Hume, ACAP’s
compliance officer and head trader, were charged with violating Conduct Rules 3010 and 2110
by failing to reasonably supervise a registered representative in connection with the sale of
unregistered securities and by failing to establish, maintain, and enforce written supervisory
procedures reasonably designed to achieve compliance with the applicable securities laws and
regulations.
ACAP had stipulated to the supervisory violations alleged in the Department’s complaint.
The firm failed to ensure that the representative performed sufficient inquiry to determine
whether the customers’ unregistered shares could be sold in compliance with Section 5. The
firm also failed to make any reasonable inquiry into whether the customers were underwriters or
whether the transactions were a part of a distribution, instead relying on the lack of a restrictive
legend on the stock certificates and the clearance through transfer without restriction. Moreover,
the firm did not have any written or formal procedures regarding restricted stock transactions or
the receipt of certificates. As the firm’s Compliance Officer, the hearing panel found Hume to
be responsible for creating and maintaining its written supervisory procedures. They found that
he failed to take appropriate action to cause the firm to adopt and implement appropriate
procedures for handling the sale of stock deposited in certificate form without restricted legends.
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The hearing panel found respondents responsible for the supervisory violation and
imposed the following sanctions. ACAP was fined $50,000, required to revise its procedures to
ensure that they are reasonably designed to comply with the requirements of Section 5, including
but not limited to the deficiencies noted by the panel, required to retain an independent
consultant to review and approve the firm’s revised procedures, and suspended from receiving or
selling unregistered penny stocks, until it has implemented its revised procedures after approval
by the independent consultant. Respondent Hume was fined $10,000, suspended from
associating with any FINRA member firm in all principal capacities for one year, and required to
re-qualify before re-associating in a principal capacity.
Department of Enforcement v. AIS Financial, Inc., Disciplinary Proceeding No. 2008012169101,
2011 FINRA Discip. LEXIS 24, (OHO, March 3, 2011).
Respondent was charged with violating Conduct Rules 3011(a) and 2110 by failing to
implement and enforce an anti-money laundering program reasonably designed to achieve and
monitor compliance with applicable laws, rules, and regulations, which resulted in a failure to
identify, investigate, and report suspicious activity. A hearing panel found that respondent
committed the violation and that its conduct was egregious.
The hearing panel noted that the FINRA Sanction Guidelines did not specifically address
violations of Conduct Rule 3011. It noted, however, that the rules requiring firms to implement
AML programs are, in substance, supervisory requirements. As such, the panel considered the
guidelines for supervisory violations in determining the appropriate remedial sanction in this
case. For this violation, the Department Enforcement recommended a $150,000 fine and a oneyear
suspension from all penny stock activity. The hearing panel, however, found that the
conduct warranted a more significant sanction, finding that “[a]nything short of an expulsion of
[the firm] would be insufficient to remedy its misconduct and deter it from engaging in future
misconduct.”
Department of Enforcement v. Hedge Fund Capital Partners LLC, Disciplinary Proceeding No.
2006004122402, 2011 FINRA Discip. LEXIS 20 (OHO, Jan. 26, 2011).
Respondent firm and its Chief Executive Officer were charged with numerous underlying
violations of FINRA and SEC Rules stemming from a “hedge fund hotel” scheme, whereby the
firm rented office space to hedge fund clients at its Fifth Avenue offices, in exchange for soft
dollars, paid through trading commissions. The firm was also charged with failing to supervise
its email and instant message retention, annual compliance meetings and registration of
associated persons.
The hearing panel concluded that respondents’ failure to supervise caused many of the
violations, which could have been prevented with “diligent and reasonable supervision.” While
the firm had written supervisory procedures that addressed areas such as e-mail and instant
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message retention, registration of representatives, and soft dollar arrangements, the procedures
were not enforced. The panel noted that the respondents “made no effort” to implement an
electronic mail or message retention system, despite its procedures and warnings from the CCO.
The firm also had a written requirement that it hold an annual compliance meeting, but the firm
merely sent a PowerPoint presentation for employees to read, in lieu of a live meeting. Finally,
regulatory requirements and the firm’s own procedures required its representatives to be properly
registered, but the firm allowed unlicensed marketers to do business.
For the supervisory violations, together with the numerous other violations, the hearing
panel expelled the firm from FINRA membership and barred the CEO from associating with any
FINRA member firm in any capacity, and ordered them to pay hearing costs.
3. NYSE Enforcement Actions
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In re KCCI, Ltd., NYSE Hearing Panel Decision 11-NYSE-8; 2011 NYSE Disc. Action LEXIS 8
(Nov. 1, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 in that the firm
failed to reasonably supervise and implement adequate controls designed to achieve compliance
with NYSE Rules and policies pertaining to conducting “upstairs” operations from its booth
premises on the NYSE Floor. In addition, the firm was found to have violated NYSE Rule
70.40, governing its so-called “Blue Line” operations, by conducting “upstairs” operations in its
booth premises on the floor of the exchange without obtaining requisite approval from NYSE
Regulation, adopting and implementing written procedures and guidelines governing the conduct
and supervision of such business, and/or obtaining approval of its written procedures and
guidelines from NYSE Regulation, as required. The NYSE noted that the firm’s overall written
supervisory procedures did not have separate, “stand-alone” procedures for the Blue Line
business as required by Rule 70.40 and Information Memo 07-77. The firm resolved these
violations by consenting to a censure and a $10,000 fine.
Matter of Blue Point Securities, Inc., NYSE Hearing Panel Decision 11-NYSE-7; 2011 NYSE
Disc. Action LEXIS 7 (Sept. 27, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to
reasonably supervise and implement adequate controls, including a reasonable system of followup
and review, designed to achieve compliance with NYSE Rule 123C regarding the entry and
cancellation of market-on-close (“MOC”) and limit-on-close (“LOC”) orders. In addition, the
firm consented to findings that it violated Section 12(k)(4) of the Exchange Act, in connection
with violation of an SEC Emergency Order prohibiting short sales in certain financial institutions
during the financial crisis, in that the firm executed 212 short sale orders in such stocks. The
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firm also consented to findings that it violated NYSE Rule 123C itself, based on both entry of
orders in situations where a market imbalance was not found to exist, and cancellation of orders
after the cut-off time for cancellations. In resolution of all violations, the firm consented to a
censure, a $22,500 fine, and an undertaking to enhance its procedures and controls governing the
entry, cancellation, and supervision of MOC and LOC orders.
Matter of Credit Suisse Securities (USA) LLC, NYSE Hearing Panel Decision 11-NYSE-5; 2011
NYSE Disc. Action LEXIS 5 (Sept. 14, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to
reasonably supervise and implement adequate controls for compliance with NYSE rules
regarding entry and cancellation of Market-on-Close (“MOC”) and Limit-on-Close (“LOC”)
orders. Specifically, while the NYSE acknowledged that the firm had policies and procedures
reasonably designed to ensure compliance with NYSE rules relating to entry, modification or
cancellation of MOC and LOC orders, including reasonable policies and procedures for
conducting a follow-up and review, the firm failed to prevent the entry or cancelation of MOC
and LOC orders after certain mandated cut-off times due to technical issues within the firm’s
order entry systems. Respondent was also found to have violated NYSE Rule 123C in
connection with the entry and cancelation of such orders in 94 transactions. As a resolution of
both the failure to supervise and the order handling charges, the firm consented to a censure and
a $50,000 fine.
In re Lombardi & Co., Inc., NYSE Hearing Panel Decision 2011-4; 2011 NYSE Disc. Action
LEXIS 4 (May 25, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 in two respects.
In certain areas, it failed to follow its supervisory procedures, and in other areas it failed to
maintain adequate written supervisory procedures in other areas. Specifically, the firm’s failure
to follow its procedures was connected to violations in the areas of registration and licensing,
notification of NYSE of terminations of employment and return of identification badges,
evidencing supervisory review of employees trading, and maintaining adequate books and
records of employees’ forms U-4. In addition, NYSE found that the firm lacked adequate
procedures dealing with review and resolution of “d/k’ed” trades, reporting and/or identification
of manual trades or crosses, monitoring and preventing publishing quotations that lock or cross
markets, preventing acceptance of sub-penny orders, and maintenance of a separate error account
for errors of executions on other market centers. As a result, the firm consented to a censure and
a $12,500 fine.
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In re SG Americas Securities, LLC, NYSE Hearing Panel Decision 2011-3; 2011 NYSE Disc.
Action LEXIS 3 (May 13, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to
reasonably supervise and implement adequate controls, including a reasonable system of followup
and review, designed to achieve compliance with NYSE Rule 123C regarding compliance
with the requirements governing the cancellation of market-on-close and limit-on-close orders.
Specifically, NYSE found that the firm failed to have any systems or procedures in place to
detect possible violations of Rule 123C until March 2009, when it created an exception report for
that purpose, and failed to implement procedures designed to hold individual supervisors
responsible for reviewing the exception report. The firm also consented to findings that it
violated Rule 123C itself. As a result, for its supervisory violations, together with its Rule 123C
violations, the firm consented to a censure and a $ 350,000 fine.
In re UBS Securities LLC, NYSE Hearing Panel Decision 2011-2; 2011 NYSE Disc. Action
LEXIS 2 (Feb. 2, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated, among other rules, NYSE Rule
342 by failing to reasonably supervise and implement adequate controls, including a separate
system of follow-up and review, in connection with pre-opening odd lot orders routed to the
NYSE, and the submission of complete and accurate blue sheet data. NYSE found that the firm
had entered pre-opening, thousands of principal odd lot market orders for execution on the
NYSE in the same stock on the same side of the market, that aggregated 100 shares or more
without consolidating them into round lot orders as much as possible. Further NYSE found that
the firm had submitted incomplete or inaccurate blue sheet responses on approximately 437
occasions. In addition, the firm consented to findings that it violated, among other rules, NYSE
Arca Equities Rule 6.18 by failing to establish, maintain and/or enforce appropriate written
policies and procedures for supervision and control, including a separate system of follow-up and
review, with respect to odd lot transactions on the NYSE Arca Marketplace. In connection with
the Arca violations, the firm was found to have unbundled round lots for the purpose of entering
approximately 8,800 odd lot limit order.
As a result, Respondent consented to a censure and a fine of $225,000 for all its NYSE
violations, and $175,000 for all its NYSE Arca violations, inclusive of fines relating to
underlying handling of odd lot transactions.
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In re Keybanc Capital Markets, Inc., NYSE Hearing Panel Decision 2011-1; 2011 NYSE Disc.
Action LEXIS 1 (Jan. 31, 2011).
In a settled disciplinary proceeding, consented to by respondent without admitting or
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to
reasonably supervise and implement adequate controls, including a reasonable system of followup
and review, in connection with its Control Room procedures, Watch and Restricted Lists, and
related trading activities. Specifically, while respondent had written policies and procedures
pertaining to its Control Room, Watch and Restricted Lists, and related trading activities which
required reporting of material nonpublic information to the Control Room for inclusion on the
Watch and Restricted Lists, the NYSE found that the firm failed to establish adequate controls,
including a reasonable system of follow-up and review, to ensure that its employees were
adhering to such policies and procedures, including adequate training. Moreover, NYSE found
that the firm failed to report a significant number of companies, issuers and event updates to its
Watch and Restricted Lists, as required by its procedures, and consequently failed to monitor for
trades that were potentially associated with material nonpublic information.
In addition, respondent was found to have violated NYSE Rules 351(e)(ii) and 476(a) by
failing to disclose to the NYSE in its quarterly attestation that it had completed an internal
investigation of possible insider trading, Finally, respondent was found to have violated NYSE
Rule 342.21(a) for an inadequate system of obtaining, reviewing, and monitoring trade
confirmations and account statements for employee trades. As a result, respondent consented to
a censure and a $ 350,000 fine.
P.3
Q. SEC Litigation Affecting Broker-Dealers
1. Direct SEC Proceedings
a. Sales Practice Violations
Q.1.a
SEC v. Vianna, Litig. Release No. 21905, 2011 SEC LEXIS 1039 (S.D.N.Y. Mar. 28, 2011).
A federal district court entered a final judgment by consent against Vianna, a former
registered representative of a registered broker-dealer (the “Firm”). The Commission’s
complaint alleged that Vianna participated in a scheme to divert dozens of profitable stock trades
and millions of dollars in trading profits from one customer to another customer. Vianna
simultaneously entered orders to trade the same amounts of the same stock in the accounts of a
customer of the Firm and a company known as Creswell. Each time, he placed a buy order in
one of the accounts and a sell order in the other account. When the market moved to make the
customer’s trade profitable, Vianna diverted the profitable trade to Creswell by misusing the
Firm’s order management system to switch the identity of buyer and seller. The court
permanently enjoined Vianna from violating and from aiding and abetting violations of the
antifraud provisions of the federal securities laws . The final judgment ordered Vianna to pay
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disgorgement of $306,412, prejudgment interest of $47,442, and a $130,000 civil penalty. In a
prior administrative proceeding, the Commission barred Vianna from association.
In re Konaxis, Release No. 64298, 2011 SEC LEXIS 1334 (Apr. 13, 2011).
Q.1.a
The Commission accepted an offer of settlement from Konaxis, a former registered
representative with a registered broker-dealer. Konaxis was also an advisory account manager
for an affiliate of the broker-dealer and a registered investment adviser representative. In an
earlier action brought by the Commission in federal court, the court entered a consent judgment
against Konaxis, permanently enjoining him from future violations of the anti-fraud provisions
of the federal securities laws, and barring him from participating in an offering of penny stock.
The Commission’s complaint alleged that Konaxis defrauded one of his largest individual
customers by churning at least three of the customer’s brokerage accounts, disregarding the
customer’s interests and earning approximately $550,000 in commissions. The Commission
barred Konaxis from association.
Q.1.a
In re MMR Inv. Bankers, LLC, Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re
MMR Investment Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In
re MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8, 2011);
In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS 1966 (June 8,
2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011 SEC LEXIS 1967 (June
8, 2011).
The Commission accepted offers of settlement from MMR Investment Bankers LLC, a
registered broker-dealer (the “Firm”), Martin, its president and majority owner, Rankin, its vicepresident
and assistant compliance officer, and Hubert and Fimreite, registered representatives at
the Firm. According to the Commission, Martin and Rankin assisted in the preparation of
disclosure documents for certain private placement debenture offerings, and Hubert and Fimreite
recommended and sold the debentures to customers. Respondents were reckless in not knowing
of material omissions in the disclosure documents, including that Martin and Rankin had created
a new company, in which Martin, Rankin, Fimreite, and Hubert’s wife owned shares, to manage
the proceeds of the debenture sales, that this company received management fees that were
charged to the offering companies, and that Martin Rankin, Hubert and Fimreite had received
shares in some of the offering companies. Additionally, Respondents were reckless in not
knowing that the Firm was selling the debentures to customers for whom they were unsuitable.
The Commission ordered the Firm and individual respondents to cease and desist from
committing or causing any violations and future violations of Section 17(a) of the Securities Act
of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5 and
17a-3(a)(17)(i)(B)(1) thereunder. The Commission also censured the Firm and revoked its
registration. Based on a sworn statement of financial condition, the Commission declined to
impose a penalty against the Firm. The Commission barred the individual respondents from
association and from participating in any offering of a penny stock, ordered Martin to pay a
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$30,000 civil fine, disgorgement of $25,200 and prejudgment interest of $2,292; Rankin to pay a
$15,000 civil fine; Hubert to pay a $20,000 civil fine disgorgement of $39,615 and prejudgment
interest of $3,603; and Fimreite to pay disgorgement of $2,644 and prejudgment interest of $240.
The Commission declined to impose a penalty against Fimreite based on his sworn statement of
financial condition.
In re Brouwer, Release No. 65208, 2011 SEC LEXIS 3004 (Aug. 26, 2011).
Q.1.a
The Commission accepted an offer of settlement from Brouwer, a former registered
representative associated with a registered broker-dealer. The Commission alleged that Brouwer
made material misrepresentations and omissions concerning the risks associated with certain
structured notes. In particular, he represented that the securities were safe and failed to disclose
the risk that the notes might convert into the underlying securities at a value less than the
invested principal. The Commission further alleged that Brouwer’s recommendations of the
notes were unsuitable for at least two customers. The Commission barred Brouwer from
association and from participating in any offering of a penny stock, ordered him to cease and
desist from violating the antifraud provisions of the federal securities laws, and ordered him to
pay $33,000 in disgorgement, $6,137 in prejudgment interest, and a $33,000 civil penalty.
b. Unfair/Fraudulent Markups or Commissions
Q.1.b
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280
(Jan. 25, 2011).
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the “Firm”). The Commission alleged that the Firm’s market making desk
improperly disclosed customer order information to the Firm’s proprietary traders, who then
misused the information to place similar orders. According to the Commission, the Firm
improperly charged institutional and high net worth customers an undisclosed mark-up or markdown,
in addition to a commission equivalent, on certain riskless principal trades for which it
had agreed only to charge a commission equivalent. Additionally, on numerous occasions, the
Firm failed to make records of price guarantees that were part of the terms and conditions of
institutional customer orders. As a result of this conduct, the Commission found that the Firm
violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in
securities by means of manipulative, deceptive or other fraudulent devices or contrivances,
Section 15(g) of the Exchange Act by failing to establish written policies and procedures
designed to prevent the misuse of material, nonpublic information, Section 17(a) of the
Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain terms and
conditions of customer orders, and failed reasonably to supervise its traders. The Commission
ordered the Firm to cease and desist from committing or causing any violations and any future
violations, censured the Firm and ordered it to pay a $10 million civil penalty.
403

Q.1.b
In re Wells Fargo Sec. LLC, Release No. 64182, 2011 SEC LEXIS 1202 (Apr. 5, 2011).
The Commission accepted an offer of settlement from Wells Fargo Securities LLC (the “Firm”),
a registered broker-dealer. The Commission alleged that during late 2006 and early 2007, the
Firm’s predecessor structured and marketed two collateralized debt obligations tied to mortgagebacked
securities in violation of the antifraud provisions of the Securities Act of 1933. The
Commission alleged that the Firm’s predecessor charged an undisclosed excessive markup in
connection with certain sales of one of the securities, and that it knew or should have known that
the prices it charged were excessive. It further alleged that the Firm’s predecessor represented to
investors in the other security that it acquired assets from affiliates in an arm’s-length transaction
and at fair market prices when certain assets were transferred from an affiliate at approximately
$4.6 million above market value. The Commission ordered the Firm to cease and desist from
violating Sections 17(a)(2) and (3) of the Securities Act and to pay $6.75 million in
disgorgement and a $4.45 million civil penalty.
In re Rodriguez, Release No. 66056, 2011 SEC LEXIS 4546 (Dec. 23, 2011).
Q.1.b
The Commission accepted an offer of settlement from Rodriguez, a former registered
representative and trader of a registered broker-dealer and investment adviser. The Commission
alleged that Rodriguez violated the antifraud provisions of the federal securities laws by
needlessly interposing a Mexican brokerage firm into securities transactions between his firm
and a Mexican investment adviser’s institutional clients. As a result, four Mexican pension
funds paid approximately $65 million more for certain notes than they would have otherwise
paid, and Rodriguez received more than $6 million in additional markups. The Commission
ordered Rodriguez to cease and desist from violating the antifraud provisions of the federal
securities laws and to pay disgorgement of $6,041,810 and prejudgment interest of $613,667.
The Commission also barred Rodriguez from association and from participating in any offering
of penny stock, and prohibited him from serving as an employee, officer, director, board
member, investment adviser, depositor or principal underwriter for a registered investment
company.
c. Other Fraudulent Practices
(i)
Misappropriation
Q.1.c.(i)
In re Awan, Release No. 65961, 2011 SEC LEXIS 4410 (Dec. 15, 2011); SEC v. OCC Holdings,
Ltd., Litig. Release No. 22200, 2011 SEC LEXIS 4442 (S.D.N.Y. Dec. 16, 2011).
A federal district court entered judgments by consent against Awan and Koppel, the
remaining defendants in a case arising out of allegedly fraudulent offerings of securities. The
Commission previously obtained summary judgment or default judgment, as the case may be,
against certain other defendants, and voluntarily dismissed its claims against another defendant.
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The Commission’s complaint alleged that Awan, Koppel, and the other defendants fraudulently
raised more than $2 million from investors in three offerings by means of fraudulent
misrepresentations, including promises of imminent initial public offerings and/or substantial
increases in stock price; misappropriated investor funds for personal expenses, and failed to
disclose their disciplinary histories. The court permanently enjoined Awan and Koppel from
violating the antifraud provisions of the federal securities laws, ordered Awan to pay $655 in
disgorgement plus prejudgment interest and a $10,000 civil penalty, ordered Koppel to pay $851
in disgorgement plus prejudgment interest and a $10,000 civil penalty, and barred Koppel from
participating in the offering of any penny stock. In related administrative proceedings brought
by the Commission, Awan consented to the entry of an order barring him from association and
from participating in the offering of any penny stock, and Koppel consented to the entry of an
order barring him from association.
In re Buchholz, Release No. 63800, 2011 SEC LEXIS 344 (Jan. 31, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Buchholz, a registered
representative of a registered broker-dealer. In an earlier criminal proceeding, Buchholz pleaded
guilty to one count of wire fraud. The criminal indictment alleged that Buchholz engaged in a
scheme to defraud his clients of more than $1.3 million through such tactics as forging client
signatures, depositing client funds into personal accounts, misrepresenting that his clients had
authorized redemptions, and misrepresenting to clients that funds would be placed into their
accounts when he actually placed those funds into his personal accounts. The Commission
barred Buchholz from association and from participating in any offering of penny stock.
In re Zangari, Release No. 63923, 2011 SEC LEXIS 650 (Feb. 17, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Zangari, a stock loan trader who
was employed by several major Wall Street brokerage firms over an eleven year period. In an
earlier action brought by the Commission, a federal district court entered a partial judgment by
consent against Zangari, permanently enjoining him from violating the antifraud provisions of
the federal securities laws. The Commission’s complaint alleged that Zangari knowingly
engaged in a scheme to defraud broker-dealers in connection with the lending and borrowing of
securities. The Commission barred Zangari from association.
In re Sarnicola, Release No. 63924, 2011 SEC LEXIS 651 (Feb. 17, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Sarnicola, a securities lending
representative of a registered broker-dealer. In an earlier criminal proceeding, Sarnicola pleaded
guilty to one count of conspiracy to commit wire fraud. The criminal indictment alleged that
Sarnicola conspired to defraud the registered broker-dealer of money and property, and to obtain
money and property from the broker-dealer by means of materially false and fraudulent
pretenses. The Commission barred Sarnicola from association.
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Q.1.c(i)
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).
The Commission accepted an offer of settlement from Nicholson, the president and
owner of a registered broker-dealer and owner of a separate entity that acted as the general
partner for various issuers of limited partnership interests. In a related civil action brought by the
Commission in federal court, a judgment was entered by consent against Nicholson, permanently
enjoining him from violating the antifraud and registration provisions of the federal securities
laws. The Commission’s complaint alleged that, in connection with the sale of limited
partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose
material information regarding the use of investor proceeds, sold unregistered securities and
operated an unregistered broker-dealer. The Commission barred Nicholson from association.
In re Kobayashi, Release No. 64508, 2011 SEC LEXIS 1735 (May 17, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Kobayashi, a former registered
financial adviser at a national broker-dealer. In an earlier proceeding brought by the
Commission, a federal district court entered a final judgment by consent against Kobayashi,
permanently enjoining him from future violations of the broker-dealer registration and antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that, in
connection with the sale of securities, Kobayashi misappropriated funds from client accounts at
the broker-dealer where he was employed, and acted as unregistered broker-dealer by selling
interests in a pooled investment fund that he established and managed. The Commission barred
Kobayashi from association and from participating in the offering of any penny stock.
In re Shereshevsky, Release No. 64704, 2011 SEC LEXIS 2098 (June 20, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Shereshevsky, who was associated
with a registered broker-dealer. In a related criminal proceeding in federal district court,
Shereshevsky pleaded guilty to one count of securities fraud, one count of conspiracy to commit
securities fraud, mail fraud and wire fraud, and one count of mail fraud. The criminal indictment
alleged that Shereshevsky raised money in a private placement offering and diverted some of the
proceeds to purposes other than those specified in the private placement memoranda, without
disclosure to investors. The indictment also alleged that Shereshevsky made materially false
statements in documents distributed to investors concerning the investments. The Commission
barred Shereshevsky from association and from participating in any offering of penny stock.
In re Icely, Release No. 62215, 2011 SEC LEXIS 3012 (Aug. 29, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Icely, a former registered
representative of a registered broker-dealer. In an earlier proceeding brought by the
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Commission, a federal district court entered a final judgment by consent against Icely,
permanently enjoining him from future violations of the antifraud provisions of the federal
securities laws. The Commission alleged that Icely engaged in a scheme to defraud customers
by selling their securities and diverting the proceeds to bank accounts in the name of Icely’s
company. Icely forged wire requests and IRA distribution forms, and prepared false account
statements. The Commission barred Icely from association and from participating in an offering
of penny stock.
In re Schaefer, Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011).
Q.1.c(i)
The Commission issued an Order Instituting Proceedings (OIP) and entered a final
judgment by default against Schaefer, formerly the president, a principal, and a registered
representative of a registered broker-dealer. In an earlier proceeding brought by the Commission
in federal court, the court entered a default judgment permanently enjoining Schaefer from
violating the securities registration and antifraud provisions of the federal securities laws, and
from aiding and abetting violations of various other provisions. The Commission’s complaint
alleged that Schaefer sold unregistered securities of his firm’s parent company to investors and
diverted approximately 79% of the offering proceeds to enrich himself and others. The
Commission also alleged that Schaefer knowingly and substantially assisted in violations by not
disclosing in regulatory filings that another individual controlled the firm, by permitting
unregistered individuals to effect securities transactions, and by not making or keeping required
employment documentation for certain associated persons of the firm. Schaefer was barred from
association.
In re Jennings, Release No. 65349, 2011 SEC LEXIS 3233 (Sept. 16, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Jennings, an associated person of a
registered broker-dealer. In an earlier proceeding brought by the Commission, a federal district
court entered a final judgment by consent against Jennings, permanently enjoining him from
future violations of the securities registration and antifraud provisions of the federal securities
laws. The Commission alleged that Jennings misused investor funds to operate a Ponzi-like
scheme. The Commission barred Jennings from association and from participating in an offering
of penny stock, with the right to reapply after five years.
In re Mutascio, Release No. 65351, 2011 SEC LEXIS 3254 (Sep. 19, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Mutascio, a registered
representative associated with a registered broker-dealer. Mutascio had earlier pleaded guilty to
one count of wire fraud in federal district court, admitting in his guilty plea that he devised a
scheme to defraud one of his clients and to obtain money and property by means of fraudulent
misrepresentations, and made an unauthorized wire transfer of $44,000 from his client’s
brokerage account to a bank account owned and controlled by one of his family members and
407

then to his own bank account. The Commission barred Mutascio from association, and from
participating in any offering of a penny stock.
In re Gallardo, Release No. 65422, 2011 SEC LEXIS 3370 (Sept. 28, 2011).
Q.1.c(i)
An administrative law judge entered a default order against Gallardo, a former registered
representative. The Commission’s complaint alleged that Gallardo had solicited foreign
investors to provide him with approximately $1.2 million that he represented would be invested
by “professional traders” for a guaranteed rate of return. Instead, Gallardo invested a portion of
the money himself, returned approximately $275,000 as “distributions,” and misappropriated
approximately $685,000 for his personal use. The ALJ barred Gallardo from association and
from participating in the offering of any penny stock, ordered him to cease and desist from
violating the anti-fraud provisions of the federal securities laws, and ordered him to pay
$876,193 in disgorgement, $178,682.58 in prejudgment interest, and a $260,000 civil penalty.
In re Paganes, Release No. 65957, 2011 SEC LEXIS 4401 (Dec. 15, 2011).
Q.1.c(i)
An administrative law judge entered a default order against Paganes, a former managing
member of a former registered investment adviser and a former associated person of a former
registered broker-dealer, both of which served as trustee for a hedge fund. In a related action
brought by the Commission, a federal district court ordered Paganes to pay disgorgement of
$650,000, prejudgment interest of $90,339, and a $650,000 civil penalty. The Commission
alleged that Paganes approved hedge fund transactions and disbursed investor funds for uses not
permitted by relevant organizational documents, and that he had a direct, undisclosed financial
interest in at least one of the transactions he approved. The ALJ permanently enjoined Paganes
from engaging in conduct in connection with the purchase or sale of any security, and barred him
from association.
In re Caccioppoli, Release No. 66060, 2011 SEC LEXIS 4569 (Dec. 28, 2011).
Q.1.c(i)
The Commission accepted an offer of settlement from Caccioppoli, a former securities
lending representative associated with a registered broker-dealer (the “Firm”). In an earlier
proceeding brought by the Commission, a federal district court entered a judgment by consent
against Caccioppoli, permanently enjoining him from violating the antifraud provisions of the
federal securities laws. The Commission’s complaint alleged that Caccioppoli knowingly
engaged in a scheme to defraud the Firm in connection with the lending and borrowing of
securities. The Commission barred Caccioppoli from association.
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(ii)
Misrepresentation
Q.1.c.(ii)
In re Blech, Release No. 63801, 2011 SEC LEXIS 345 (Jan. 31, 2011).
The Commission accepted an offer of settlement from Blech, a registered representative
and Chief Executive Officer of a registered broker-dealer. In an earlier criminal proceeding in
federal court, Blech pleaded guilty to three counts of securities fraud and wire fraud. The court
sentenced him to 72 months in prison followed by three years of supervised release and ordered
him to make restitution of $18,128,599. The criminal complaint alleged that Blech defrauded
investors and obtained money and property by means of fraudulent statements. The Commission
barred him from association.
In re Demizio, Release No. 63922, 2011 SEC LEXIS 649 (Feb. 17, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from DeMizio, a securities lending
representative of a registered broker-dealer. In an earlier criminal proceeding, a jury convicted
DeMizio of conspiracy to commit securities fraud and wire fraud. The criminal indictment
alleged that DeMizio conspired to execute a scheme and artifice to defraud and obtain money
and property from the registered broker-dealer by means of false and fraudulent pretenses,
representations and promises, and to deprive the broker-dealer of its right to honest services of its
employees in connection with securities of issuers with a class of securities registered under
Section 12 of the Securities Exchange Act of 1934. The Commission barred DeMizio from
association.
In re Beachy, Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Beachy, a former registered
representative of a registered broker-dealer. In an earlier proceeding brought by the
Commission, a federal district court entered a final judgment by consent against Beachy,
permanently enjoining him from future violations of the broker-dealer registration and antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that Beachy sold
investment contracts to investors in at least 29 states using a fictitious name, made false
statements to investors, distributed false account statements, and sold unregistered securities.
The Commission barred Beachy from association and from participating in an offering of penny
stock.
In re Biddlecome, Release No. 64500, 2011 SEC LEXIS 1725 (May 16, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Biddlecome, a former registered
representative associated with a registered broker-dealer and the founder and president of a
formerly registered investment adviser. In an earlier proceeding brought by the Commission, a
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federal district court entered a final judgment by consent against Biddlecome, permanently
enjoining him from future violations of the securities registration, broker-dealer registration and
antifraud provisions of the federal securities laws. The Commission’s complaint alleged that
Biddlecome sold unregistered interests in a fund, made several misrepresentations in connection
with the sale of interests in the fund, and was not associated with a registered broker-dealer for
purposes of selling the interests. The Commission also alleged that the fund’s offering
documents stated that the fund would invest in real property, but Biddlecome instead used
investors’ funds to engage in speculative short-term trading through a brokerage account in his
own name. The Commission barred Biddlecome from association and from participating in any
offering of penny stock, with the right to reapply after three years.
Q.1.c(ii)
In re MMR Inv. Bankers, LLC, Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re
MMR Investment Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In
re MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8, 2011);
In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS 1966 (June 8,
2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011 SEC LEXIS 1967 (June
8, 2011).
The Commission accepted offers of settlement from MMR Investment Bankers LLC, a
registered broker-dealer, Martin, its president and majority owner, Rankin, its vice-president and
assistant compliance officer, and Hubert and Fimreite, registered representatives at the Firm.
According to the Commission, Martin and Rankin assisted in the preparation of disclosure
documents for certain private placement debenture offerings, and Hubert and Fimreite
recommended and sold the debentures to customers. Respondents were reckless in not knowing
of material omissions in the disclosure documents, including that Martin and Rankin had created
a new company, in which Martin, Rankin, Fimreite, and Hubert’s wife owned shares, to manage
the proceeds of the debenture sales, that this company received management fees that were
charged to the offering companies, and that Martin Rankin, Hubert and Fimreite had received
shares in some of the offering companies. Additionally, Respondents were reckless in not
knowing that the Firm was selling the debentures to customers for whom they were unsuitable.
The Commission ordered the Firm and individual respondents to cease and desist from
committing or causing any violations and future violations of Section 17(a) of the Securities Act
of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5 and
17a-3(a)(17)(i)(B)(1) thereunder. The Commission also censured the Firm and revoked its
registration. Based on a sworn statement of financial condition, the Commission declined to
impose a penalty against the Firm. The Commission barred the individual respondents from
association and from participating in any offering of a penny stock, ordered Martin to pay a
$30,000 civil fine, disgorgement of $25,200 and prejudgment interest of $2,292; Rankin to pay a
$15,000 civil fine; Hubert to pay a $20,000 civil fine disgorgement of $39,615 and prejudgment
interest of $3,603; and Fimreite to pay disgorgement of $2,644 and prejudgment interest of $240.
The Commission declined to impose a penalty against Fimreite based on his sworn statement of
financial condition.
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Q.1.c(ii)
In re Chiaese, Release No. 64932, 2011 SEC LEXIS 2496 (July 20, 2011).
The Commission accepted an offer of settlement from Chiaese, a registered
representative of a registered broker-dealer and a principal member and the controlling person of
an unregistered investment adviser. In a prior criminal proceeding, Chiaese pleaded guilty to one
count of fraud. The criminal indictment alleged that Chiaese defrauded investors of
approximately $2.4 million in money and property. The Commission barred Chiaese from
association and from participating in any offering of penny stock.
In re Ryan, Release No. 65173, 2011 SEC LEXIS 2930 (Aug. 19, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Ryan, a former registered
representative of a registered broker-dealer and owner and sole managing member of an
unregistered company (the “Company”). In an earlier action in federal district court, Ryan
pleaded guilty to one count of securities fraud in violation of Sections 10(b) and 32 of the
Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Title 18 of the United States Code,
Section 2. The criminal indictment alleged that Ryan offered and sold investors purported
contracts with the Company pursuant to which the Company promised to pay a guaranteed fixed
rate of interest. To create the appearance of legitimacy, Ryan falsely represented to investors
that, among other things, the Company was a substantial Manhattan-based financial services
firm. Ryan sent investors false account statements and diverted investor funds for personal use.
The Commission barred him from association.
In re Bjork, Release No. 65520, 2011 SEC LEXIS 3536 (Oct. 7, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Bjork, a former executive officer
of a registered investment adviser and a former registered representative associated with
registered broker-dealers. In an earlier proceeding brought by the Commission, a federal district
court entered a final judgment by consent against Bjork, permanently enjoining him from
violating or aiding and abetting violations of the antifraud provisions of the federal securities
laws. The Commission’s complaint alleged that Bjork offered and sold interests in investments
that he never made, commingled investor money, failed to provide financial statements to
investors and transferred money to affiliates without disclosing the transactions to investors. The
Commission barred Bjork from association.
In re Garcia, Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Garcia, a securities lending
representative of a registered broker-dealer. In a related criminal proceeding in federal district
court, Garcia pleaded guilty to one count of conspiracy to commit securities fraud. He was
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sentenced to three years of probation and 150 hours of community service and ordered to pay
$300,422 in restitution. The criminal indictment alleged that Garcia executed a scheme to
defraud his firm by means of false and fraudulent pretenses and to deprive his firm of the right to
honest services of its employees in connection with registered securities of issuers. The
Commission barred Garcia from association.
In re Suarez, Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Suarez, a securities lending
representative of a registered broker-dealer. In a related criminal proceeding in federal district
court, Suarez pleaded guilty to two counts of conspiracy to commit securities and wire fraud. He
was sentenced to five years of probation and ordered to pay $391,187 in restitution. The
criminal indictment alleged that Suarez executed a scheme to defraud his firm by means of false
and fraudulent pretenses and to deprive his firm of the right to honest services of its employees
in connection with registered securities of issuers. The Commission barred Suarez from
association.
Q.1.c(ii)
In re Lindsey, Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin.
Serv., Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin. Serv.,
Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011).
The Commission accepted offers of settlement from Capital Financial, a former
registered broker-dealer (the “Firm”), Boppre, the president and a registered principal of the
Firm, and Lindsey, a registered representative, senior vice president, and due diligence officer of
the Firm. The Commission alleged that the Firm, through Boppre and Lindsey, who together ran
the Firm’s due diligence process, failed to perform reasonable due diligence on numerous oil and
gas private placement offerings prior to recommending them to customers. Specifically, the
Commission alleged that the Firm never independently investigated the information in the
offering materials that the issuer provided to it and never received audited or unaudited financial
statements. The Commission’s complaint alleged that Boppre and Lindsey knew that the
offering materials stated that selling broker-dealers would receive a due diligence fee, which
misleadingly suggested that the Firm was conducting independent due diligence. It further
alleged that Boppre and Lindsey acted at least with severe recklessness by approving the
offerings without first obtaining appropriate due diligence and by not acting on red flags brought
to their attention through third party due diligence reports. The Firm received over $5 million in
sales commissions and over $600,000 in due diligence fees in connection with the offerings,
many of which involved classic Ponzi schemes and offering frauds.
The Commission ordered Respondents to cease and desist from violating the
antifraud provisions of the federal securities laws. It further barred Boppre and Lindsey from
association and from participating in any offering of a penny stock, with the right to reapply after
two years, and ordered each of them to pay, in specified installments, a $25,000 civil penalty.
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The Commission censured the Firm. Additionally, the Firm undertook to retain an independent
consultant to review its due diligence policies and procedures.
In re Sabado, Release No. 64890, 2011 SEC LEXIS 2434 (July 14, 2011).
Q.1.c(ii)
The Commission accepted an offer of settlement from Sabado, a former registered
representative and investment adviser of a dually registered broker-dealer and investment
adviser. In an earlier action in federal district court, the Commission filed a partially settled civil
injunctive action alleging Halek Energy, CBO Energy, Inc., and Jason Halek fraudulently sold
investments in purported Texas oil and gas projects, raising approximately $22 million from 300
investors nationwide. The Commission alleged that Sabado sold $491,880 of the oil and gas
interests to six of her clients, and in doing so, materially misrepresented and omitted the
interests’ risks and returns. Additionally, the Commission alleged that Sabado violated her
firm’s compliance policies and procedures by “selling away” and failing to disclose the sales on
her annual outside business activities forms. Sabado did no meaningful diligence on the interests
and was paid commissions in the form of working interests in one of the oil and gas projects.
The Commission ordered Sabado to cease and desist from committing or causing any violations
of the securities registration and antifraud provisions of the federal securities laws and to pay
disgorgement of $2,341, prejudgment interest of $275 and a $25,000 civil penalty. It further
barred her from association and from participating in any offering of a penny stock, with the
right to apply for reentry after five years.
Q.1.c(ii)
In re Sawyers, Release No. 64759, 2011 SEC LEXIS 2214 (June 28, 2011); In re Harrison,
Release No. 64965, 2011 SEC LEXIS 2558 (July 26, 2011).
The Commission accepted offers of settlement from Harrison and Sawyers, former
registered representatives associated with a registered broker-dealer (the “Firm”). In an earlier
proceeding brought by the Commission, a federal district court entered a judgment by consent
against Harrison and Sawyers, permanently enjoining them from violating the antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that Harrison and
Sawyers defrauded forty-two customers of the Firm of at least $8 million by soliciting them to
invest through an advisory firm they owned and misrepresenting that the customers would
receive a guaranteed thirty-five percent return with no risk to principal. Within one year, they
had depleted the majority of the customers’ funds. The Commission barred Harrison and
Sawyers from association and from participating in the offering of any penny stock.
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(iii)
Falsification of Documents
Q.1.c.(iii)
In re Peperno, Release No. 65018, 2011 SEC LEXIS 2649 (Aug. 3, 2011).
The Commission accepted an offer of settlement from Peperno, a former registered
representative with a registered broker-dealer. In an earlier criminal proceeding, Peperno
pleaded guilty to one count of mail fraud and was sentenced to forty-three months of prison
followed by five years of supervised release. The criminal indictment alleged that Peperno
invested funds from at least nine customers in high-commission real estate investment trusts by
forging their signatures or otherwise falsifying information on their account application
documents. These actions generated at least $54,089 in commissions for Peperno over a thirtytwo
month period. The indictment also alleged that he misappropriated $380,000 from two
customers by converting their funds to his own use. The Commission barred Peperno from
association and from participating in any offering of a penny stock.
(iv)
Failure to Maintain Accurate Books and Records
Q.1.c.(iv)
In re Legend Sec. Inc., Release No. 64502, 2011 SEC LEXIS 1726 (May 16, 2011).
The Commission accepted an offer of settlement from Legend Securities, Inc., a registered
broker-dealer (the “Firm”), and Caruso, a registered representative and the Firm’s President and
CCO. The Commission alleged that in response to multiple requests from the Commission for a
particular employee’s personnel file, Caruso, after first failing to respond, caused the employee
to sign and back date certain records to the date that the employee became a registered
representative at Legend. The Commission alleged that Caruso then provided these documents
to the Commission without disclosing the backdating. Respondents were censured and ordered
to cease and desist from committing or causing any violations and any future violations of
Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. Legend was ordered
to pay a $50,000 civil penalty and Caruso was ordered to pay a $25,000 civil penalty.
d. Mutual Fund Trading and Disclosure Violations
Q.1.d
In re Charles Schwab Inv. Mgmt., Release No. 63693, 2011 SEC LEXIS 120 (Jan. 11, 2011).
The Commission accepted offers of settlement from Charles Schwab Investment
Management (“CSIM”), a registered investment adviser, Charles Schwab & Co., Inc.
(“CS&Co.”), a registered broker-dealer, and Schwab Investments, an open-end investment
management company. In a related proceeding brought by the Commission, a federal district
court entered judgment by consent against CSIM and CS&Co., ordering them to pay
disgorgement, pre-judgment interest and civil penalties. The Commission’s complaint alleged
that CSIM and CS&Co. misled investors by inadequately disclosing the characteristics of an
ultra-short bond fund that was comprised of a series of Schwab Investments (the “Fund”). In
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particular, CSIM and CS&Co. marketed the Fund as a “cash alternative” and compared it to a
money market fund without explaining the differences between the Fund and money market
funds. The complaint further alleged that CSIM and CS&Co. misled investors in sales materials
that made it appear that the Fund’s investments were going to mature sooner on average than
they actually would. Additionally, representatives of CSIM and CS&Co. made material
omissions or misstatements in communications to investors in connection with the decline in the
Fund’s net asset value by understating the extent of redemptions experienced by the Fund. The
complaint further alleged that CSIM and CS&Co. had inadequate policies and procedures to
prevent the misuse of material non-public information, resulting in redemptions by affiliates to
the detriment of the Fund’s other investors, and that CSIM aided and abetted Schwab
Investments’ failure to obtain shareholder approval when it deviated from the Fund’s stated
concentration policy.
CSIM and CS&Co. agreed to various undertakings, including the retention of an
independent consultant to review the Firms’ policies and procedures for preventing the misuse of
material, non-public information related to its proprietary mutual funds. The Commission
censured CSIM and ordered it to cease and desist from future violations of Sections 17(a)(2) and
(3) of the Securities Act of 1933, Sections 204A and 206(4) of the Investment Advisers Act of
1940 and Rule 206(4)-8 thereunder and Sections 13(a) and 34(b) of the Investment Company Act
of 1940. The Commission censured CS&Co. and ordered it to cease and desist from future
violations of Sections 17(a)(2) and (3) of the Securities Act, Section 15(g) of the Securities
Exchange Act of 1934 and Section 34(b) of the Investment Company Act. The Commission
ordered Schwab Investments to cease and desist from future violations of Section 34(b) of the
Investment Company Act.
In re Ginder, Release No. 64098, 2011 SEC LEXIS 968 (Mar. 18, 2011).
Q.1.d
The Commission accepted an offer of settlement from Ginder, a registered representative
of a dually registered broker-dealer and investment adviser. In an earlier proceeding brought by
the Commission, a federal district court entered a final judgment by consent against Ginder,
permanently enjoining him from future violations of the antifraud provisions of the federal
securities laws and ordering him to pay a $30,000 civil penalty. The Commission’s complaint
alleged that Ginder and other registered representatives defrauded mutual fund companies and
their shareholders by engaging in market timing on behalf of two hedge fund customers, using
multiple customer account numbers and financial adviser numbers to conceal their fraud. The
Commission suspended Ginder from association and from participating in an offering of penny
stock for nine months.
Q.1.d
In re Banc of Am. Capital Mgmt, LLC, Release No. 9254, 2011 SEC LEXIS 3020 (Aug. 30,
2011).
The Commission accepted an amended offer of settlement from Banc of America Capital
Management, LLC (“BACAP”), BACAP Distributors, LLC, and Banc of America Securities,
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LLC (“BAS”), by and through their respective successors. In 2005, Respondents had consented
to the entry of an order by the Commission that ordered Respondents to cease and desist from
violations of various federal securities laws, to pay disgorgement and civil money penalties and
to comply with certain undertakings. In the amended offer of settlement, the Commission
ordered that Respondents were relieved of their continuing obligation under the 2005 order to
conduct third-party periodic reviews. The Commission further ordered Merrill Lynch, Pierce,
Fenner & Smith Incorporated (“Merrill Lynch”), as successor to the retail sales of mutual funds
business of BAS, to maintain a compliance and ethics oversight infrastructure in accordance with
the one required of BAS under the 2005 order. Additionally, the Commission ordered Merrill
Lynch to retain a disinterested third-party to determine if its compliance and ethics oversight
infrastructure met the terms of the 2005 order. The Commission further ordered Merrill Lynch
to retain a disinterested third-party to conduct a compliance review and make recommendations
concerning its supervisory, compliance, and other policies to prevent and detect breaches of
fiduciary duty, breaches of the Code of Ethics, and breaches of the federal securities law. The
Commission also ordered BACAP or BACAP Distributors to conduct a similar review in the
event that they were to seek to advise, sponsor or distribute mutual funds, other than moneymarket
funds.
e. Trading Practice Violations
(i)
Insider Trading
Q.1.e.(i)
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280
(Jan. 25, 2011).
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the “Firm”). The Commission alleged that the Firm’s market making desk
improperly disclosed customer order information to the Firm’s proprietary traders, who then
misused the information to place similar orders. According to the Commission, the Firm
improperly charged institutional and high net worth customers an undisclosed mark-up or markdown,
in addition to a commission equivalent, on certain riskless principal trades for which it
had agreed only to charge a commission equivalent. Additionally, on numerous occasions, the
Firm failed to make records of price guarantees that were part of the terms and conditions of
institutional customer orders. As a result of this conduct, the Commission found that the Firm
violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in
securities by means of manipulative, deceptive or other fraudulent devices or contrivances,
Section 15(g) of the Exchange Act by failing to establish written policies and procedures
designed to prevent the misuse of material, nonpublic information, Section 17(a) of the
Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain terms and
conditions of customer orders, and failed reasonably to supervise its traders. The Commission
ordered the Firm to cease and desist from committing or causing any violations and any future
violations, censured the Firm and ordered it to pay a $10 million civil penalty.
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Q.1.e.(i)
SEC v. Devlin, Litig. Release No. 21854, 2011 SEC LEXIS 539 (S.D.N.Y. Feb. 14, 2011); In re
Bowers, Release No. 63901, 2011 SEC LEXIS 632 (Feb. 14, 2011); In re Faulhaber, Release
No. 63902, 2011 SEC LEXIS 633 (Feb. 14, 2011); In re Glover, Release No. 63903, 2011 SEC
LEXIS 634 (Feb. 14, 2011).
The Commission accepted offers of settlement from Glover, who was affiliated with a
registered broker-dealer, Bowers, a registered representative of a dually registered broker-dealer
and investment adviser, Faulhaber, a registered representative of a registered broker-dealer, and
Holzer, a certified public accountant. In an earlier action brought by the Commission, a federal
district court entered final judgments by consent against these defendants. The Commission’s
complaint alleged that Devlin, a registered representative, traded on and tipped to others,
including Glover, Holzer, and Bowers, inside information about thirteen impending corporate
transactions. Holzer traded on the tips in at least three deals, and agreed with Devlin that he
would arrange for the purchase of shares for Devlin’s benefit, so that Devlin’s insider trading
could avoid detection. Bowers traded on the tips in five deals, and tipped his client, Faulhaber,
who then traded in three deals and paid kickbacks to Bowers. The final judgments permanently
enjoined the four defendants from future violations of Sections 10(b) and 14(e) of the Securities
Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The judgment against Glover
ordered him to pay disgorgement of $209,356, prejudgment interest of $55,390, and a $306,761
civil penalty. The judgment against Bowers ordered him to pay a $12,000 civil penalty. The
judgment against Faulhaber ordered him to pay disgorgement of $235,300, prejudgment interest
of $50,663, and a $235,300 civil penalty. The judgment against Holzer ordered him to pay
disgorgement of $52,922, prejudgment interest of $25,055.04, and a $172,269 civil penalty.
In a related criminal proceedings in federal district court, Bowers pleaded guilty to one
count of conspiracy to commit securities fraud and one count of securities fraud, and was
sentenced to three years of probation and ordered to pay $12,000 in disgorgement, a $15,000
fine, and $200 special assessment; and Faulhaber pleaded guilty to securities fraud, conspiracy to
commit securities fraud, and felonies involving moral turpitude, and was sentenced to five years
of probation and ordered to pay a $15,000 fine and over $119,300 in disgorgement. The
Commission barred Glover, Bowers, and Faulhaber from association, and suspended Holzer
from appearing or practicing before the Commission.
In re Malin, Release No. 64302, 2011 SEC LEXIS 1349 (Apr. 14, 2011)
Q.1.e(i)
The Commission accepted an offer of settlement from Malin, a consultant to and later the
CEO and Chairman of the Board of the parent company of a registered broker-dealer. In an
action brought by the Commission a federal court entered consent judgment against Malin,
permanently enjoining him from future violations of the anti-fraud provisions of the federal
securities laws, and from aiding and abetting violations of Section 15(c) of the Securities
Exchange Act of 1934. The Commission alleged that Malin participated in a scheme to
improperly obtain material confidential information from the broker-dealer’s squawk boxes to
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permit day traders at the broker-dealer to trade ahead of institutional orders. The Commission
barred Malin from association, with the right to reapply after one year.
In re Shankar, Release No. 64714, 2011 SEC LEXIS 2185 (June 21, 2011).
Q.1.e(i)
The Commission accepted an offer of settlement from Shankar, a registered
representative and proprietary trader of a registered broker-dealer. In two earlier actions brought
by the Commission, a federal district court entered a final judgments by consent against Shankar,
permanently enjoining him from future violations of the antifraud provisions of the federal
securities laws. The Commission’s complaints alleged that Shankar was tipped material,
nonpublic information concerning five companies and that he traded on the information and also
tipped certain of the information to others. In a related criminal proceeding in federal district
court, Shankar pleaded guilty to one count of conspiracy to commit securities fraud and one
count of securities fraud. The Commission barred Shankar from association and from
participating in any offering of penny stock.
Q.1.e(i)
SEC v. Galleon Mgmt. LP, Litig. Release No. 22021, 2011 SEC LEXIS 2258 (S.D.N.Y. June 30,
2011).
A federal district court entered judgment against Plate, a registered representative and
proprietary trader of a registered broker-dealer (the “Firm”). In a related criminal case, Plate
previously pleaded guilty to charges of securities fraud and conspiracy to commit securities
fraud. The Commission’s complaint alleged that Plate, upon being tipped inside information,
traded ahead of an impending acquisition announcement in a Firm account he managed. The
court permanently enjoined Plate from further violations of the antifraud provisions of the
federal securities laws and ordered him to pay $43,876 in disgorgement plus $9,416 in
prejudgment interest. The judgment provided that the court would determine civil penalty issues
at a later date.
Q.1.e(i)
In re Janney Montgomery Scott LLC, Release No. 64855, 2011 SEC LEXIS 3166 (July 11,
2011).
The Commission accepted an offer of settlement from Janney Montgomery Scott LLC, a
dually-registered broker-dealer and investment adviser (the “Firm”). The Commission alleged
that the Firm failed to adhere to its policy requiring a member of the Compliance Department or
Legal Department to attend meetings between investment bankers and research analysts, and
failed to properly maintain and enforce its email communication firewall procedures.
Additionally, the Commission alleged that beginning in 2005, the Firm began using research
analysts to help investment bankers explore new business opportunities, yet did not revise its
policies and procedures to prevent the possible misuse of material, nonpublic information. The
Commission also alleged that the Firm failed to adequately monitor trading in the securities of
firms on its Watch List, allowed a compliance employee to conduct supervisory reviews of pre-
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clearance trades without being a registered principal, enabled investment bankers to trade
without pre-clearance, failed to obtain and/or timely obtain completed questionnaires and
disclosure forms necessary to review employees’ outside account transactions, and failed to
request and review employees’ outside account statements to identify possible improper trading.
The Commission ordered the Firm to pay a $850,000 civil penalty and to cease and desist
from committing or causing any violations and any future violations of Section 15(g) of the
Exchange Act. The Firm also undertook to retain an independent consultant to review the Firm’s
policies and procedures relating to Section 15(g).
In re Tudor, Release No. 65009, 2011 SEC LEXIS 2616 (Aug. 2, 2011).
Q.1.e(i)
The Commission accepted an offer of settlement from Tudor, a registered representative
and proprietary trader associated with a registered broker-dealer. In an earlier action brought by
the Commission, the federal district court entered judgment by consent against Tudor,
permanently enjoining him from future violations of the antifraud provisions of the federal
securities laws. The Commission alleged that Tudor was tipped material, nonpublic information
and traded on the basis of that information. The Commission barred Tudor from association.
In re Hansen, Release No. 65513, 2011 SEC LEXIS 3532 (Oct. 7, 2011).
Q.1.e(i)
The Commission accepted an offer of settlement from Hansen, a former associated
person of a registered broker-dealer. In an earlier criminal proceeding, a federal district court
convicted Hansen pursuant to his guilty plea for conspiracy to commit securities fraud and
securities fraud. In an earlier civil proceeding brought by the Commission, a federal district
court entered a final judgment by consent against Hansen, permanently enjoining him from
future violations of the antifraud provisions of the federal securities laws. The Commission’s
complaint alleged that Hansen traded on tips of material, non-public information that he knew or
was reckless in not knowing had been dispensed improperly. The Commission barred Hansen
from association and from participating in any offering of a penny stock.
In re Skowron, Release No. 65783, 2011 SEC LEXIS 4065 (Nov. 17, 2011).
Q.1.e(i)
The Commission accepted an offer of settlement from Skowron, a managing director
associated with a registered broker-dealer, a co-portfolio manager for six hedge funds, and an
officer of the investment adviser to the hedge funds. In an earlier proceeding brought by the
Commission, a federal district court entered a judgment by consent against Skowron,
permanently enjoining him from violating the antifraud provisions of the federal securities laws.
The Commission’s complaint alleged that Skowron ordered the sale of approximately six million
shares of stock of a company based on material non-public information he had been tipped,
thereby avoiding losses of approximately $30 million. In a related criminal proceeding,
Skowron pleaded guilty to one count of conspiracy to commit securities fraud and obstruct
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justice. The criminal indictment alleged that, in addition to trading on the basis of material nonpublic
information, Skowron and his tipper agreed to provide false and misleading information to
the Commission regarding the sales, and that Skowron made a cash payment to the tipper in
furtherance of that agreement. The Commission barred Skowron from association and from
participating in the offering of any penny stock.
(ii)
Market Manipulation
Q.1.e.(ii)
In re Adams, Release No. 63850, 2011 SEC LEXIS 454 (Feb. 7, 2011).
An administrative law judge entered a default order against Adams, a former registered
representative. In a parallel criminal proceeding, Adams was convicted of conspiracy to commit
securities, mail, and wire fraud and conspiracy to commit money laundering, and was sentenced
to time served and three years of supervised release, and ordered to pay $5,000,000 in restitution.
The Commission alleged that Adams used a variety of fraudulent tactics to artificially inflate the
demand for, and market price of, the securities of a publicly traded company, and sold them to
customers at inflated prices. These tactics included effecting unauthorized purchases of the stock
in the accounts of existing customers and making material misrepresentations and omissions
concerning the stock’s future price. The ALJ found that Adams violated and aided and abetted
his associated Firm’s violations of the antifraud provisions of the federal securities laws. The
ALJ ordered Adams to cease and desist from future violations and barred him from association
with a broker-dealer and from participating in an offering of penny stock.
In re Ahn, Release No. 63963, 2011 SEC LEXIS 681 (Feb. 24, 2011).
Q.1.e(ii)
The Commission accepted an offer of settlement from Ahn, a former registered
representative and primary trader of a former registered broker-dealer (the “Firm”). The
Commission alleged that Ahn and others engaged in market manipulation of the prices of a
number of thinly-traded microcap stocks, including some that the Firm helped bring public, in
return for placement fees and warrants and shares of stock. A variety of techniques were used to
manipulate the stocks’ prices, including matched orders, marking the close, wash trades and
purchases at artificially increasing prices. As a result of the manipulation, the Firm’s co-owners
and others reaped over $65.5 million in illicit profits. The Commission ordered Ahn to pay a
$40,000 civil penalty and to cease and desist from committing or causing any violations and any
future violations of the antifraud provisions of the federal securities laws, and barred him from
association with the right to reapply after five years. The Commission did not impose a greater
civil penalty based on Ahn’s agreement to cooperate in a Commission investigation and/or
related enforcement action.
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Q.1.e(ii)
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)
The Commission accepted an offer of settlement from Huntleigh Securities Corp., a
registered broker-dealer, and Jeffrey Christanell. The Commission alleged that Christanell, a
registered representative, executed a series of “marking the close” trades at the request of a third
party SEC-registered investment adviser. The Commission further alleged that Huntleigh failed
to supervise Christanell by failing to establish procedures, or implement existing policies and
procedures, designed to prevent and detect such unlawful trading. The Commission ordered
Christanell to cease and desist from future violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder, barred him from association with the right to reapply
after one year and ordered him to pay a $15,000 civil penalty. The Commission censured
Huntleigh and ordered it to comply with undertaking to implement improved compliance
procedures. Based on Huntleigh’s representation regarding its inability to pay, the Commission
did not impose a civil penalty.
Q.1.e(ii)
SEC v. Fareri, Litig. Release No. 21874, 2011 SEC LEXIS 819 (S.D. Fla. Mar. 7, 2011); In re
Fareri, Release No. 64413, 2011 SEC LEXIS 1591 (May 5, 2011).
An administrative law judge entered a default order against Fareri, a former registered
principal of Fareri Financial Services (the “Firm”), a registered broker-dealer. In an earlier
proceeding brought by the Commission, a federal district court entered a final judgment by
default against Fareri, the Firm, and Anthony Fareri & Associates, Inc., a relief defendant. The
court’s order permanently enjoined Fareri and the Firm from future violations of the antifraud
provisions of the federal securities laws. Additionally, the court ordered Fareri to pay
disgorgement of $1,840,703, prejudgment interest of $667,032, and a $100,000 civil penalty, and
barred him from participating in an offering of penny stock. Under the order, the Firm was
jointly and severally liable for $160,704 of the disgorgement, and Anthony Fareri & Associates
was jointly and severally liable for $820,000 of the disgorgement plus prejudgment interest of
$297,150. The Commission’s complaint alleged that Fareri defrauded his customers of more
than $4.7 million by purchasing and acquiring worthless shares of two shell companies for their
accounts and creating an artificial market for the two stocks by using pre-arranged matched
orders to create the illusion of market demand. Additionally, Fareri received secret kickbacks
totaling more than $1 million. The ALJ barred Fareri from association.
In re Feinblum, Release No. 64575, 2011 SEC LEXIS 1893 (May 31, 2011).
Q.1.e(ii)
The Commission accepted an offer of settlement from Feinblum, a registered
representative with a registered broker-dealer (the “Firm”). The Commission alleged that
Feinblum and his direct report executed numerous swap trades in certain securities that created
net risk positions substantially in excess of internal risk trading limits. To conceal these
excessions, Feinblum entered and then cancelled fake swap orders which had the effect of
temporarily and artificially reducing the net risk positions in the securities as recorded in the
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Firm’s risk management systems. Upon learning of the misconduct, Feinblum’s associated
broker-dealer unwound the unauthorized trading positions, thereby sustaining a loss of
approximately $24.47 million. The Commission ordered him to cease and desist from any future
violations, barred him from association for two years, and ordered him to pay a $150,000 civil
penalty.
In re Hertz, Release No. 64831, 2011 SEC LEXIS 2347 (July 7, 2011).
Q.1.e(ii)
The Commission accepted an offer of settlement from Hertz, an associated person of a
registered broker-dealer and registered municipal securities dealer. In a prior criminal
proceeding, Hertz pleaded guilty to two counts of conspiracy and one count of wire fraud. The
criminal indictment alleged that Hertz engaged in a bid rigging scheme to defraud municipal
issuers by causing them to award investment agreements and other municipal finance contracts at
artificially determined or suppressed rates. The Commission barred Hertz from association and
from participating in any offering of penny stock.
In re Kim, Release No. 64862, 2011 SEC LEXIS 2389 (July 12, 2011).
Q.1.e(ii)
The Commission accepted an offer of settlement from Kim, a former trader associated
with a registered broker-dealer (the “Firm”). The Commission alleged that Kim executed
numerous trades in certain securities on behalf of the Firm that created net risk positions in
excess of internal limits imposed by the Firm. To conceal the true risk exposure, Kim and
another trader entered swap orders that they had no intention of executing for the sole purpose of
artificially reducing the net risk positions in the securities. Kim would certify the artificial net
exposure in the Firm’s risk management system, and then promptly cancel the swap orders. As a
result of this conduct, Kim violated Section 13(b)(5) of the Securities Exchange Act of 1934.
The Commission ordered Kim to cease and desist from violating the Exchange Act, barred her
from association with a right to reapply after three years, and ordered her to pay a $25,000 civil
penalty.
Q.1.e(ii)
SEC v. Badian, Litig. Release No. 22070, 2011 SEC LEXIS 2931 (S.D.N.Y. Aug. 19, 2011); In
re Drillman, Release No. 65172, 2011 SEC LEXIS 2929 (Aug. 19, 2011); In re Spinner, Release
No. 65171, 2011 SEC LEXIS 2928, (Aug. 19, 2011).
The Commission accepted offers of settlement from Drillman and Spinner, two former
registered representatives that were associated with a registered broker-dealer (the “Firm”). In a
related civil action brought by the Commission, a federal district court entered judgment by
consent against Respondents, enjoining them from future violations of, and aiding and abetting
violations of, the antifraud provisions of the federal securities laws. The judgment further
ordered each of them to pay disgorgement of $4,000, prejudgment interest of $3,107.25, and a
$25,000 civil penalty. The Commission’s complaint alleged that Respondents participated in a
scheme to defraud by manipulating the price of certain common stock and that they knowingly
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assisted in the Firm’s creation of materially inaccurate trade tickets. The Commission suspended
Respondents from association for six months.
Q.1.e(ii)
SEC v. Geiger, Litig. Release No. 21831, 2011 SEC LEXIS 349 (D. Colo. Jan. 31, 2011); In re
Geiger, Release No. 63849, 2011 SEC LEXIS 752 (Feb. 7, 2011); In re Geiger, Release No.
65265, 2011 SEC LEXIS 3096 (Sept. 6, 2011).
The Commission accepted an offer of settlement from Geiger, a former registered
representative of Sierra Brokerage Services, Inc. (“Sierra”), a registered broker-dealer. In an
earlier action brought by the Commission, a federal district court entered a final judgment by
consent against Geiger, permanently enjoining him from future violations of the antifraud
provisions of the federal securities laws and future aiding and abetting violations of Section
15(c)(1) of the Securities Exchange Act of 1934, and ordering him to pay $261,110 in
disgorgement, $221,466 in prejudgment interest and a $220,000 civil penalty. The Commission
alleged that Geiger participated in a scheme to manipulate the share price of a security through
artificial trading activity, and aided and abetted Sierra’s price leadership and domination of other
market makers by leading the bid and raising the bid throughout the first day of trading even
though it had no legitimate reason to do so. The Commission barred Geiger from association
and from participating in an offering of penny stock.
(iii)
Securities Offering Violations
Q.1.e.(iii)
In re Fayette, Release No. 63698, 2011 SEC LEXIS 151 (Jan. 11, 2011).
The Commission accepted an offer of settlement from Fayette, a former registered
representative of a registered broker-dealer. In an earlier action brought by the Commission, a
federal district court entered a final judgment by consent against Fayette, permanently enjoining
him from future violations of Section 5 of the Securities Act of 1933. The Commission’s
complaint alleged that Fayette failed to make a reasonable inquiry under the circumstances to
ensure his customers were not acting as underwriters, and facilitated a penny stock pump and
dump scheme by liquidating millions of shares into the public market when no registration
statement was in effect. The Commission barred Fayette from association.
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).
Q.1.e(iii)
The Commission accepted an offer of settlement from Nicholson, the president and
owner of a registered broker-dealer and owner of a separate entity that acted as the general
partner for various issuers of limited partnership interests. In a related civil action brought by the
Commission in federal court, the court entered a judgment by consent against Nicholson,
permanently enjoining him from violating the antifraud and registration provisions of the federal
securities laws. The Commission’s complaint alleged that, in connection with the sale of limited
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partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose
material information regarding the use of investor proceeds, sold unregistered securities, and
operated an unregistered broker-dealer. The Commission barred Nicholson from association.
In re Oldham, Release No. 64491, 2011 SEC LEXIS 1705 (May 13, 2011).
Q.1.e(iii)
The Commission accepted an offer of settlement from Oldham, a registered
representative with a registered broker-dealer and an investment adviser representative with a
registered investment adviser. In an earlier proceeding brought by the Commission, a federal
district court entered a judgment by consent against Oldham, permanently enjoining him from
violating the securities registration provisions of the federal securities laws. The Commission’s
complaint alleged that Oldham offered and sold securities for which there was no registration
statement in effect and for which no exemption from the registration requirements applied. The
Commission barred Oldham from association, with the right to reapply after eighteen months.
In re Harris, Release No. 64942, 2011 SEC LEXIS 2518 (July 21, 2011).
Q.1.e(iii)
The Commission accepted an offer of settlement from Harris, a registered representative
of a registered broker-dealer. In an earlier action brought by the Commission, a federal district
court entered a final judgment by consent against Harris, permanently enjoining him from future
violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission alleged that
Harris offered and sold unregistered securities from 2004 through 2006. The Commission barred
Harris from association and from participating in any penny stock offering, both for a period of
eighteen months.
In re Divine Capital Mkts., LLC, Release No. 64999, 2011 SEC LEXIS 2610 (Aug. 1, 2011).
Q.1.e(iii)
The Commission accepted an offer of settlement from Buonomo, a registered
representative with Divine Capital Markets, LLC (the “Firm”), a registered broker-dealer. The
Commission alleged that Buonomo sold over 9.8 billion shares of a penny stock on behalf of a
client in violation of the securities registration provisions of the federal securities laws. The
sales generated at least $29,017 in commissions and other remuneration for Buonomo.
Buonomo either knew or should have known that the client had acquired the shares directly from
the issuer, and did not perform any due diligence to determine if there was a registration
statement in effect or on file for the shares. The Commission ordered Buonomo to cease and
desist from violating Sections 5(a) and (c) of the Securities Act, suspended him from
participating in any offering of a penny stock for twelve months, suspended him from association
for twelve months, and ordered him to disgorge $29,017 plus $5,948 in prejudgment interest.
The Commission waived Buonomo’s obligation to pay all but $3,000 of these amounts and did
not impose a civil penalty based on Buonomo’s sworn statement of financial condition.
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Q.1.e(iii)
In re Schaefer, Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011).
The Commission issued an Order Instituting Proceedings (OIP) and entered a final
judgment by default against Schaefer, formerly the president, a principal, and a registered
representative with a registered broker-dealer. In an earlier proceeding brought by the
Commission in federal court, the court entered a default judgment permanently enjoining
Schaefer from violating the securities registration and antifraud provisions of the federal
securities laws, and from aiding and abetting violations of various other provisions. The
Commission’s complaint alleged that Schaefer sold unregistered securities of his firm’s parent
company to investors and diverted approximately 79% of the offering proceeds to enrich himself
and others. The Commission also alleged that Schaefer knowingly and substantially assisted in
violating numerous regulatory provisions governing broker-dealers by not disclosing in
regulatory filings that another individual controlled the firm, by permitting unregistered
individuals to effect securities transactions, and by not making or keeping required employment
documentation for certain associated persons of the firm. The Commission barred Schaefer
barred from association.
In re Gilford Sec., Inc., Release No. 9264, 2011 SEC LEXIS 3419 (Sept. 30, 2011).
Q.1.e(iii)
The Commission accepted offers of settlement from Gilford, a registered broker-dealer
(the “Firm”), Worthington, Gilford’s CEO and trading desk supervisor, Granahan, Gilford’s
CCO and AML officer, and Kaplan, a sales manager and supervisor of Berger, a former
registered representative of the Firm. In an earlier action in federal district court, Berger pleaded
guilty to conspiracy to commit securities fraud and wire fraud. The Commission’s complaint
against Berger alleged that Berger, together with others, engaged in schemes to pump and dump
the securities of at least eight U.S. microcap stocks, and facilitated unregistered sales of millions
of shares of these stocks, generating proceeds in excess of $33 million. Berger resold shares of
the unregistered securities through at least twenty customer accounts at the Firm. The
Commission alleged that the Firm failed reasonably to supervise Berger, permitted customers to
deliver in and sell millions of shares of stock without registered representatives and officers at
the Firm conducting reasonable inquiry into the source of the stock, failed to fulfill its
obligations under the Bank Secrecy Act with respect to filing Suspicious Activity Reports,
allowed employees to execute customer orders without the requisite trading licenses, failed to
make and keep current either a questionnaire or application for employment for these employees,
and violated Regulation S-P by sharing nonpublic customer information with unauthorized third
parties. The Commission alleged that Worthington and Kaplan aided and abetted some of the
Firm’s violations, and that Granahan aided and abetted the Firm’s Suspicious Activity Report
violation.
The Commission ordered all Respondents to cease and desist from committing or causing
any future violations of the federal securities laws. It further censured the Firm and ordered it to
pay disgorgement of $275,000, prejudgment interest of $77,113, and a $260,000 civil penalty.
The Firm also undertook to retain an independent consultant to review its policies and
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procedures relating to AML and its systems for implementing its supervisory policies and
procedures. The Commission suspended Worthington in a supervisory capacity for 12 months
and ordered him to pay a $45,000 civil penalty. The Commission suspended Kaplan in a
supervisory capacity for 12 months and ordered him to pay disgorgement of $225,000,
prejudgment interest of $63,092, and a $30,000 civil penalty. Worthington and Kaplan each also
undertook to submit an affidavit following the end of their suspensions concerning their full
compliance with the sanctions imposed. The Commission censured Granahan and ordered him
to pay a $20,000 civil penalty.
Q.1e(iii)
In re Lindsey, Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin.
Serv., Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin. Serv.,
Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011).
The Commission accepted offers of settlement from Capital Financial, a former
registered broker-dealer (the “Firm”), Boppre, the president and a registered principal of the
Firm, and Lindsey, a registered representative, senior vice president, and due diligence officer of
the Firm. The Commission alleged that the Firm, through Boppre and Lindsey, who together ran
the Firm’s due diligence process, failed to perform reasonable due diligence on numerous oil and
gas private placement offerings prior to recommending them to customers. Specifically, the
Commission alleged that the Firm never independently investigated the information in the
offering materials that the issuer provided to it and never received audited or unaudited financial
statements. The Commission’s complaint alleged that Boppre and Lindsey knew that the
offering materials stated that selling broker-dealers would receive a due diligence fee, which
misleadingly suggested that the Firm was conducting independent due diligence. It further
alleged that Boppre and Lindsey acted at least with severe recklessness by approving the
offerings without first obtaining appropriate due diligence and by not acting on red flags brought
to their attention through third party due diligence reports. The Firm received over $5 million in
sales commissions and over $600,000 in due diligence fees in connection with the offerings,
many of which involved classic Ponzi schemes and offering frauds.
The Commission ordered Respondents to cease and desist from violating the
antifraud provisions of the federal securities laws. It further barred Boppre and Lindsey from
association and from participating in any offering of a penny stock, with the right to reapply after
two years, and ordered each of them to pay, in specified installments, a $25,000 civil penalty.
The Commission censured the Firm. Additionally, the Firm undertook to retain an independent
consultant to review its due diligence policies and procedures.
(iv)
Trading Rules Violations
Q.1.e.(iv)
In re Shaw, Release No. 9174, 2011 SEC LEXIS 251 (Jan. 14, 2011).
The Commission accepted an offer of settlement from Shaw, a registered representative
and institutional order desk manager of a registered broker-dealer. The Commission alleged that,
for more than eight years, Shaw engaged in a best execution fraud on behalf of certain individual
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and hedge fund accounts, to the detriment of certain employee stock purchase plans and similar
accounts. Specifically, Shaw and other traders under his direction manipulated time delays in
systems for executing and reporting agency cross trades to obtain the lower prices to benefit the
hedge funds and conversely, the higher prices for the plan customers. The order desk was paid
commissions on both sides of each cross trade, with the hedge funds generally paying greater
commissions than plan customers. The Commission ordered Shaw to cease and desist from
violating the antifraud provisions of the federal securities laws, barred him from association, and
ordered him to pay a $150,000 civil fine, disgorge $195,300 and pay $23,291 in prejudgment
interest. The Commission further created a Fair Fund pursuant to Section 308(a) of the
Sarbanes-Oxley Act of 2002 for purposes of administering the proceeds of the settlement, and
Shaw agreed not to seek any offset of the civil fine imposed by the Commission based on any
offset that might be ordered in any related investor action.
Q.1.e(iv)
In re Melhado, Flynn & Associates, Inc.,, Release No. 64467, 2011 SEC LEXIS 1662 (May 11,
2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64468, 2011 SEC LEXIS 1663
(May 11, 2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64469, 2011 SEC LEXIS
1664 (May 11, 2011).
The Commission accepted offers of settlement from Melhado, Flynn & Associates, Inc., a
dually registered broker-dealer and investment adviser (the “Firm”), McCarthy, a Financial and
Operations Principal, and later, the Director of Compliance Coordination at the Firm, and Motz,
the President, CEO, Director and CCO at the Firm. In an earlier proceeding brought by the
Commission in federal district court, Motz pleaded guilty to securities fraud and the court
sentenced him to eight years in prison, with three years of supervised release and ordered him to
pay $864,806 in restitution. The Commission alleged that, from 2001 through approximately
September 2003, Motz effectuated a cherry-picking trading scheme whereby he would submit
equity orders to the Firm’s trading desk in the morning, but wait until later in the day to decide
whether to allocate the orders to the Firm’s proprietary account or to advisory clients. The trades
that were allocated to the Firm’s proprietary account were profitable 98% of the time, and
yielded a net gain of $1.4 million. The Commission further alleged that during an SEC
examination, Motz, with the assistance of McCarthy, who was aware of the late-day trade
allocation practices, altered certain order tickets to conceal the practices from regulators. The
Commission also alleged the Firm filed a misleading Form ADV because the Firm did not
disclose that proprietary trades could received prices more favorable than those allocated to
advisory clients.
The Commission ordered Respondents to cease and desist from committing or causing
any violations and any future violations of the anti-fraud provisions of the federal securities laws.
The Commission also revoked the Firm’s registrations and barred McCarthy and Motz from
association. The Commission further ordered Motz to pay disgorgement and prejudgment
interest totaling $864,806, but deemed those satisfied by the restitution ordered in the criminal
case. Based upon evidence of the Firm’s inability to pay, and given the revocation of the Firm’s
registrations, the Commission declined to impose a penalty against it. Based upon evidence of
McCarthy’s inability to pay, the Firm declined to impose a penalty against her. Based upon the
prison sentence imposed on Motz, the Commission declined to impose a penalty against him.
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Q.1.e(iv)
In re UBS Sec. LLC, Release No. 65733, 2011 SEC LEXIS 3985 (Nov. 10, 2011).
The Commission accepted an offer of settlement from UBS Securities, LLC, a registered
broker-dealer. The Commission alleged that Respondent’s lending desk traders recorded
“locates” (i.e., an indication that shares to satisfy a short sale had been identified, or alternatively
that reasonable grounds existed to believe the shares could be borrowed for delivery when due)
on the Firm’s “locate log” sourced to employees of lenders even when no one at Respondent had
contacted the lender to confirm the availability of shares, and duplicated and reused locate
approval information from prior locates to document new locate approvals. Respondent knew of
these practices and allowed them to continue. The Commission noted that several mitigating
factors existed. For instance, some of the locates Respondent granted were furnished to clients
who did not execute short sales using the locates, some of the lenders may have had the ability to
lend sufficient securities by the delivery date notwithstanding the inaccurate locate log, and
Respondent was generally able to meet its settlement obligations by borrowing stock from
sources other than the lenders identified in the locate log. The Commission censured
Respondent and ordered it to cease and desist from violating Section 17(a) of the Securities
Exchange Act of 1934 and Rule 203(b) of Regulation SHO, and to pay a $8 million civil penalty.
Respondent also undertook to hire an independent consultant to review its policies and
procedures with respect to granting locate requests and monitoring compliance therewith.
In re Bell, Release No. 65941, 2011 SEC LEXIS 4379 (Dec. 13, 2011).
Q.1.e(iv)
The Commission accepted an offer of settlement from Bell, a former registered brokerdealer,
former part owner of a registered broker-dealer and former member of the Chicago Board
Options Exchange. According to the Commission, Bell and his firm, both purported options
market makers, violated the locate and close-out requirements of Regulation SHO of the
Securities Exchange Act of 1934 by improperly relying on the market maker exception to avoid
locating shares before effecting short sales. The Commission also alleged that Bell and his firm
engaged in a series of sham reset transactions that employed short-term, paired stock and options
positions, which enabled them to circumvent their close out obligations. Additionally, Bell and
his firm assisted other options market makers who were executing their own sham reset
transactions by acting as a counterparty to the sham transactions. As a result of these activities,
Bell caused large persistent fail to deliver positions in SHO threshold securities. The
Commission ordered Bell to cease and desist from committing or causing any current or future
violations of the Exchange Act Rules 203(b)(1) and 203(b)(3), and to pay $1,500,000 in
disgorgement, a $250,000 civil penalty, and $336,094 in prejudgment interest. The Commission
also suspended Bell from association for nine months.
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f. Failure to Supervise
Q.1.f
In re BNY Mellon Sec. LLC, Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).
The Commission accepted an offer of settlement from BNY Mellon Securities LLC, a
registered broker-dealer (the “Firm”). The Commission alleged that the Firm failed reasonably
to supervise its institutional order desk and traders over a period of more than eight years in
connection with the Firm’s best execution obligations, in violation of Section 15(b)(4)(E) of the
Securities Exchange Act of 1934. Specifically, the Firm failed to establish reasonable
procedures for its best execution committee concerning how to follow up on best execution
exception reports. The Commission censured the Firm and ordered it to pay disgorgement of
$19,297,016, prejudgment interest of $3,748,431, and a $1,000,000 civil fine. Additionally, the
Firm agreed to retain an independent distribution consultant to administer the distribution of the
settlement proceeds through a Fair Fund.
Q.1.f
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280
(Jan. 25, 2011).
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a registered broker-dealer (the “Firm”). The Commission’s complaint
alleged that the Firm’s market making desk improperly disclosed customer order information to
the Firm’s proprietary traders, who then misused the information to place similar orders. The
Commission’s complaint further alleged that the Firm improperly charged institutional and high
net worth customers an undisclosed mark-up or mark-down, in addition to a commission
equivalent, on certain riskless principal trades for which it had agreed only to charge a
commission equivalent. Additionally, on numerous occasions, the Firm failed to make records
of price guarantees that were part of the terms and conditions of institutional customer orders.
As a result of this conduct, the Commission found that the Firm willfully violated Section
15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in securities by
means of manipulative, deceptive or other fraudulent devices or contrivances, willfully violated
Section 15(g) of the Exchange Act by failing to establish written policies and procedures
designed to prevent the misuse of material, nonpublic information, willfully violated Section
17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain
terms and conditions of customer orders, and failed reasonably to supervise its traders. The
Commission ordered the Firm to cease and desist from committing or causing any violations and
any future violations, censured the Firm and ordered it to pay a $10 million civil penalty.
In re Smith, Release No. 63834, 2011 SEC LEXIS 390 (Feb. 3, 2011).
Q.1.f
The Commission accepted an offer of settlement from Smith, president, CEO and partowner
of a registered broker-dealer (the “Firm”). In an earlier action brought by the
Commission, a federal district court entered a final judgment against Keating, also a part-owner
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and a former registered representative of the Firm, permanently enjoining him from future
violations of the securities and broker-dealer registration and antifraud provisions of the federal
securities laws, and barring him from association. Keating had conducted an unregistered
private securities offering outside the scope of his employment with the Firm. The
Commission’s complaint alleged that Smith failed to establish reasonable policies and
procedures to adequately supervise Keating. It further alleged that Smith failed to establish
systems to implement and enforce policies for supervisors and the Firm’s compliance
department, and failed to monitor registered representatives’ outside business activities and to
follow up on activities that might signal selling away. The Commission suspended Smith from
supervision for nine months and ordered him to pay a $25,000 civil penalty.
In re TD Ameritrade, Inc., Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011).
Q.1.f
The Commission accepted an offer of settlement from TD Ameritrade, Inc., a registered
broker-dealer. The Commission’s complaint alleged that the Firm violated Section 15(b)(4)(E)
of the Securities Exchange Act of 1934 by failing to reasonably supervise its registered
representatives to prevent violations of Section 17(a)(2) of the Securities Act of 1933 in
connection with their offer and sale of a mutual fund (the “Fund”). According to the
Commission’s complaint, from January 2007 to September 2008, the Firm failed to ensure that
trainings mandated by its policies and procedures occurred or that the materials used in the
trainings that did occur were the ones the Firm had prepared. The Firm subsequently
implemented a computer-based system designed to generate reports to assist managers in
conducting a suitability review of transactions in the Fund. However, the Commission’s
complaint alleged that the system was not reasonably designed to prevent violations of Section
17(a)(2) because it did not assist managers in determining whether registered representatives
were making proper disclosures about the Fund to customers. As a result of these failures,
registered representatives mischaracterized the Fund as a money market fund, overstated its
safety and liquidity and failed to disclose its risks, in violation of Section 17(a)(2) of the
Securities Act. In its offer of settlement, the Firm undertook to distribute $0.012 per share to
each customer who purchased Fund shares at the Firm during the relevant period and who
continued to hold such shares as of the date of the order. The distribution was expected to
amount to approximately $10 million. The Commission also censured the Firm.
In re Pagliarini, Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011).
Q.1.f
The Commission accepted an offer of settlement from Pagliarini, CCO and anti-money
laundering compliance officer of a former registered broker-dealer (the “Firm”). The
Commission’s complaint alleged that Pagliarini failed reasonably to supervise Ahn, a registered
representative and primary trader for the broker-dealer who engaged in market manipulation.
Specifically, the Commission’s complaint alleged that Pagliarini failed to follow up on the red
flags posed by Ahn’s trading activity, and failed to cause the broker-dealer to file suspicious
activity reports concerning Ahn’s wash transactions, suspicious cash transfers to and from the
brokerage account of a co-owner of the broker-dealer, and $4 million wire transfer that violated
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Firm policy disallowing wires from customer accounts to third parties. The Commission ordered
Pagliarini to pay a $20,000 civil penalty and to cease and desist from committing or causing any
violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-8
thereunder, and suspended her from serving in a supervisory capacity for twelve months.
In re Torrey Pines Sec., Inc, Release No. 64317, 2011 SEC LEXIS 1394 (Apr. 20, 2011).
Q.1.f
The Commission accepted an offer of settlement from Torrey Pines Securities, Inc., (the
“Firm”) a registered broker-dealer. The Commission alleged that the Firm failed to supervise
reasonably one of its brokers, a part-owner of the Firm, because the Firm did not establish
reasonable policies and procedures to assign responsibility for supervising that broker. The
Commission also alleged that the Firm failed to develop systems to implement its procedures
regarding selling away and outside business activities. The Commission alleged that without
these and other failures, including failing to follow-up on oral and written investor complaints,
the Firm would have likely detected the broker’s outside sale of a $17 million private,
unregistered offering of securities. The Commission censured the Firm but did not impose a
penalty based on the Firm’s sworn statement of financial condition. As part of the settlement,
the Firm agreed to retain an independent consultant to review its procedures regarding the
supervision of registered representatives and the outside business activities of associated persons.
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)
Q.1.f
The Commission accepted an offer of settlement from Huntleigh Securities Corp., a
registered broker-dealer, and Jeffrey Christanell, a registered representative. The Commission
alleged that Christanell executed a series of “marking the close” trades at the request of a third
party SEC-registered investment adviser. The Commission further alleged that Huntleigh failed
to supervise Christanell by failing to establish procedures, or implement existing policies and
procedures designed to prevent and detect such unlawful trading. The Commission ordered
Christanell to cease and desist from future violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder, barred him from association with the right to reapply
after one year and ordered him to pay a $15,000 civil penalty. The Commission censored
Huntleigh and ordered it to comply with undertaking to implement improved compliance
procedures. Based on its representation regarding its inability to pay, the Commission did not
impose a civil penalty.
In re Divine Capital Mkts., LLC, Release No. 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011).
Q.1.f
The Commission accepted an offer of settlement from Divine Capital Markets, LLC (the
“Firm”), a registered broker-dealer, and Hughes, who held a controlling interest in the Firm and
served as the Firm’s CEO and General Securities Principal. The Commission alleged that
Hughes failed reasonably to supervise a registered representative who sold unregistered shares of
a penny stock. In particular, Hughes failed to respond to red flags, such as the large volume of
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trades in the penny stock for a new client and information on the stock purchase agreement
showing that the client acquired the shares directly from the issuer. The Commission also
alleged that the Firm failed to have adequate supervisory policies in that its policies failed to
address unregistered distributions through statutory underwriters and situations in which
certificates without restrictive legends were acquired by a customer from an issuer with a view to
distribution. The Commission censured the Firm, ordered it to cease and desist from violating
the securities registration provisions of the federal securities laws, suspended it from
participating in any offering of a penny stock for twelve months, and ordered it to pay
disgorgement of $33,762, prejudgment interest of $6,921, and a $60,000 civil penalty. The
Commission suspended Hughes from association in a supervisory capacity for four months and
ordered her to pay a $25,000 civil penalty.
Q.1.f
In re Gautney, Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011); In re Gautney,
Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011).
The Commission accepted offers of settlement from Bellia, a registered branch manager
and branch owner of a registered broker-dealer (the “Firm”), and Blum, a registered branch
manager of a separate branch office of the Firm. The Commission alleged that Bellia failed to
reasonably supervise two registered representatives who churned the accounts of seven
customers, and that Blum failed to reasonably supervise one registered representative who
churned the accounts of two customers. In particular, Respondents failed to follow the Firm’s
written supervisory procedures requiring “immediate attention” be given to accounts with
annualized turnover rates greater than six. The registered representatives Respondents
supervised were also the subject of complaints that reinforced the need for Respondents to
contact their customers about the large trading volume. During his time at the Firm, Bellia was
under heightened supervision due to a FINRA disciplinary history for failing to supervise
registered representatives at another broker-dealer. The Commission barred Bellia from
association and from participating in any offering of a penny stock, and ordered him to pay
disgorgement of $5,959 and prejudgment interest of $901. The Commission waived the
obligation to pay these amounts and did not impose a civil penalty based upon Bellia’s sworn
statement of financial condition. The Commission barred Blum from association, with the right
to reapply after two years, and ordered him to pay disgorgement of $4,753, prejudgment interest
of $355, and a $10,000 civil penalty.
In re Lopez-Tarre, Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011).
Q.1.f
The Commission accepted an offer of settlement from Lopez-Tarre, a former CCO of a
registered broker-dealer (the “Firm”). In an earlier action brought by the Commission, a federal
district court entered a final judgment by consent against Clamens, the Firm’s sole owner, and
Lopez, one of the Firm’s employees, enjoining them from violating the antifraud provisions of
the federal securities laws. The Commission alleged that Clamens had engaged in unauthorized
trading in the brokerage accounts of two customers, causing losses exceeding $20 million, and
that Lopez participated in the fraud through the creation and sending of fake account statements.
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The Commission alleged that Lopez-Tarre failed reasonably to supervise Clamens and Lopez.
Lopez-Tarre failed to follow established procedures for reviewing Clamens’ customer accounts,
did not review email correspondence, and failed to respond to several red flags, including
shortfalls in wire transfers. The Commission barred Lopez-Tarre from association, with a right
to reapply after one year.
In re Gilford Sec., Inc., Release No. 9264, 2011 SEC LEXIS 3419 (Sept. 30, 2011).
Q.1.f
The Commission accepted offers of settlement from Gilford, a registered broker-dealer
(the “Firm”), Worthington, Gilford’s CEO and trading desk supervisor, Granahan, Gilford’s
CCO and AML officer, and Kaplan, a sales manager and supervisor of Berger, a former
registered representative of the Firm. In an earlier action in federal district court, Berger pleaded
guilty to conspiracy to commit securities fraud and wire fraud. The Commission’s complaint
against Berger alleged that Berger, together with others, engaged in schemes to pump and dump
the securities of at least eight U.S. microcap stocks, and facilitated unregistered sales of millions
of shares of these stocks, generating proceeds in excess of $33 million. Berger resold shares of
the unregistered securities through at least twenty customer accounts at the Firm. The
Commission alleged that the Firm failed reasonably to supervise Berger, permitted customers to
deliver in and sell millions of shares of stock without registered representatives and officers at
the Firm conducting reasonable inquiry into the source of the stock, failed to fulfill its
obligations under the Bank Secrecy Act with respect to filing Suspicious Activity Reports,
allowed employees to execute customer orders without the requisite trading licenses, failed to
make and keep current either a questionnaire or application for employment for these employees,
and violated Regulation S-P by sharing nonpublic customer information with unauthorized third
parties. The Commission alleged that Worthington and Kaplan aided and abetted some of the
Firm’s violations, and that Granahan aided and abetted the Firm’s Suspicious Activity Report
violation.
The Commission ordered all Respondents to cease and desist from committing or causing
any future violations of the federal securities laws. It further censured the Firm and ordered it to
pay disgorgement of $275,000, prejudgment interest of $77,113, and a $260,000 civil penalty.
The Firm also undertook to retain an independent consultant to review its policies and
procedures relating to AML and its systems for implementing its supervisory policies and
procedures. The Commission suspended Worthington in a supervisory capacity for 12 months
and ordered him to pay a $45,000 civil penalty. The Commission suspended Kaplan in a
supervisory capacity for 12 months and ordered him to pay disgorgement of $225,000,
prejudgment interest of $63,092, and a $30,000 civil penalty. Worthington and Kaplan each also
undertook to submit an affidavit following the end of their suspensions concerning their full
compliance with the sanctions imposed. The Commission censured Granahan and ordered him
to pay a $20,000 civil penalty.
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Q.1.f
In re Gallardo, Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011).
The Commission accepted an offer of settlement from Orion Trading, LLC (the “Firm”),
a registered broker-dealer, and Zurita, president of the Firm and supervisor of a branch office of
the Firm. The Commission alleged that a registered representative under Zurita’s supervision
had solicited foreign investors to provide him with approximately $1.2 million that he
represented would be invested by an investment company for a guaranteed rate of return.
Instead, the registered representative invested a portion of the money himself, returned
approximately $275,000 as “distributions,” and misappropriated approximately $685,000 for his
personal use. The Commission alleged that Zurita failed to follow-up on red flags regarding this
activity, including certain suspect emails from the registered representative’s foreign investors
that Zurita had reviewed. As a result, Zurita and the Firm failed reasonably to supervise the
registered representative within the meaning of Section 15(b)(4)(E) of the Securities Exchange
Act of 1934. The Commission further alleged that Zurita permitted an unlicensed associate to
perform the functions of a registered representative. As a result, the Firm willfully violated, and
Zurita willfully aided and abetted and caused the Firm’s violations of, Section 15(b)(7) of the
Exchange Act and Rule 15b7-1 thereunder. The Commission ordered Respondents to cease and
desist from violating the federal securities laws. It barred Zurita from association in a
supervisory capacity, with a right to reapply in three years, and ordered him to pay a $35,000
civil penalty. The Commission censured the Firm and ordered it to pay a $50,000 civil penalty.
The Firm also undertook to hire an individual with appropriate supervisory licenses and
qualifications to assume supervisory authority at the Firm.
In re Inv. Placement Group, Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011).
Q.1.f
The Commission accepted an offer of settlement from Investment Placement Group, a
registered broker-dealer and a former registered investment adviser (the “Firm”), and Gonzalez-
Rubio, former COO and current CEO of the Firm. The Commission alleged that Respondents
failed to supervise reasonably Rodriguez, a former registered representative and trader who
engaged in a fraudulent interpositioning scheme. In particular, the Firm failed to establish a
reasonable system to implement its policies and procedures to prevent and detect
interpositioning, and Gonzalez-Rubio effectively allowed Rodriguez to supervise himself by
delegating trading supervisory oversight to Rodriguez. Additionally, Gonzalez-Rubio failed to
respond to red flags regarding Rodriguez’s fraudulent scheme, including a dramatic rise in
revenue resulting from the interpositioned transactions. As a result of Rodriguez’s misconduct,
four Mexican pension funds paid approximately $65 million more for certain notes than they
would have otherwise paid, and the Firm and Rodriguez received more than $6 million in
additional markups.
The Commission censured the Firm and ordered it to pay a $260,000 civil penalty,
disgorgement of $3,572,016, and prejudgment interest of $240,012. The Commission suspended
Gonzalez-Rubio from association in a supervisory capacity for three months. Gonzalez-Rubio
also undertook to provide to the Commission an affidavit within fifteen days after the end of his
434

suspension concerning his compliance with the sanctions imposed. The Firm undertook to
review its policies and procedures regarding the detection and prevention of interpositioning
violations and to submit a report to the Commission within ninety days concerning that review.
The Firm further agreed to cooperate fully with the Commission in related investigations and
proceedings.
g. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed
. No cases decided in 2011.
h. Procedural Issues
(i)
Jurisdiction and Time Bars
No cases decided in 2011.
(ii)
Standard of Review
. No cases decided in 2011.
(iii)
Due Process
. No cases decided in 2011.
(iv)
Prior Disciplinary Histories
.. No cases decided in 2011.
(v)
Selective Prosecution
. No cases decided in 2011.
(vi)
Sanctions
Q.1.h(vi)
SEC v. Koji Goto, Litig. Release No. 22123, 2011 SEC LEXIS 3565 (Oct. 12, 2011).
The Commission moved to dismiss its claims against Goto, a former registered
representative with a registered broker-dealer, in light of the outcome of other related
proceedings. The Commission’s complaint alleged that Goto misappropriated more than $5
million of investor funds. In a related criminal action in state court, Goto was charged with theft
by misapplication of property, theft by deception, criminal solicitation, unlawful securities
practice, and witness tampering. A jury found Goto guilty of 23 counts and the court sentenced
him to 25 to 75 years in prison and ordered him to pay $3.2 million in restitution. Subsequent to
the trial, the state court found Goto incompetent to stand trial on the remaining criminal charges.
Following the criminal conviction, the Commission instituted a public administrative proceeding
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and permanently barred Goto from association. Following that proceeding, Goto filed for
bankruptcy. The federal district court granted the Commission’s motion.
i. Broker/Dealer Registration Violations
In re Beachy, Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011).
Q.1.i
The Commission accepted an offer of settlement from Beachy, a former registered
representative of a registered broker-dealer. In an earlier proceeding brought by the
Commission, a federal district court entered a final judgment by consent against Beachy,
permanently enjoining him from future violations of the broker-dealer registration and antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that Beachy sold
investment contracts to investors in at least 29 states using a fictitious name, made false
statements to investors, distributed false account statements, knowingly and intentionally hid his
losses and sold unregistered securities. The Commission barred Beachy from association and
prohibited Beachy from participating in an offering of penny stock.
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).
Q.1.i
The Commission accepted an offer of settlement from Nicholson, the president and
owner of a registered broker-dealer and owner of a separate entity that acted as the general
partner for various issuers of limited partnership interests. In a related civil action brought by the
Commission in federal court, the court entered a judgment by consent against Nicholson,
permanently enjoining him from violating the antifraud and registration provisions of the federal
securities laws. The Commission’s complaint alleged that, in connection with the sale of limited
partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose
material information regarding the use of investor proceeds, sold unregistered securities and
operated an unregistered broker-dealer. The Commission barred Nicholson from association.
In re LeBouef, Release No. 65216, 2011 SEC LEXIS 3013 (Aug. 29, 2011).
The Commission accepted an offer of settlement from LeBouef, a former registered
representative with a registered broker-dealer. In a related criminal action in federal district
court, LeBoeuf pleaded guilty to one count of mail fraud and was sentenced to a prison for thirty
months followed by three years of supervised release, and ordered to pay $492,365 in restitution.
In a related civil action brought by the Commission, a federal district court entered a final
judgment by consent against LeBouef enjoining him from future violations of the antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that, in
connection with six oil and gas offerings, LeBouef acted as an unregistered broker-dealer when
he actively solicited investors and raised over $500,000 from nine investors after his license had
lapsed, misused and misappropriated investor funds, and made various misrepresentations. The
Q.1.i
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Commission barred LeBouef from association and from participating in any offering of a penny
stock.
j. Miscellaneous / MSSR Municipal Bond Offerings
In re Ellis, Release No. 64220, 2011 SEC LEXIS 1199 (Apr. 7, 2011).
Q.1.j
The Commission accepted an offer of settlement from Ellis, CCO of a former registered
broker-dealer (the “Firm”). The Commission’s complaint alleged that Ellis willfully aided and
abetted and caused the Firm’s violations of Rule 30(a) of Regulation S-P (the “Safeguard Rule”)
under the Securities Exchange Act of 1934 by failing to direct the Firm to revise or supplement
its written supervisory procedures for safeguarding customer information after being notified of
the theft of three laptop computers and a registered representative’s computer password. The
Commission’s complaint further alleged the Firm’s supervisory procedures were inadequate and
failed to instruct the Firm’s registered representatives and supervisors how to comply with the
Safeguard Rule. The Commission censured Ellis and ordered him to pay a $15,000 civil penalty
and to cease and desist from committing or causing any violations and any future violations of
Rule 30(a) of Regulation S-P.
Q.1.j
In re Kraus, Release No. 64221, 2011 SEC LEXIS 1200 (Apr. 7, 2011), In re Levine, Release
No. 64222, 2011 SEC LEXIS 1201 (Apr. 7, 2011).
The Commission accepted offers of settlement from Kraus, President, CFO and Director
of Supervision of a former registered broker-dealer (the “Firm”) and Levine, National Sales
Manager of the Firm. The Commission’s complaint alleged that at the time the Firm was
winding down its business, Kraus authorized the transfer of 16,000 accounts to Levine and any
broker-dealer with whom he became affiliated. In connection with this transfer, Levine
downloaded nonpublic customer information for the accounts onto a portable thumb drive. After
joining the new broker-dealer, Levine mailed a letter that Kraus had reviewed and approved to
the account holders advising them of the transfer and of their right to opt out of the transfer, but
failing to provide procedures on how to exercise that right, contact information or the identity of
the new broker-dealer. Thereafter, Levine supplied the receiving broker-dealer with the
nonpublic customer information.
The Commission’s complaint alleged that Kraus and Levine willfully aided and
abetted and caused the Firm’s violations of Rules 7(a) and 10(a) of Regulation S-P under the
Securities Exchange Act of 1934 by failing to provide the customers with proper notice, a
reasonable opportunity to opt out of the transfer, a reasonable means to exercise their opt out
right and sufficient time within which to opt out before disclosing their personal nonpublic
information to Levine and the receiving broker. The Commission’s complaint also alleged that
Kraus and Levine willfully aided and abetted and caused the broker-dealer’s violations of Rule
30(a) of Regulation S-P by knowingly placing customer information at substantial risk of
unauthorized access and misuse. The Commission censured Kraus and Levine and ordered them
to cease and desist from committing or causing any violations and any future violations of Rules
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7(a), 10(a) and 30(a) of Regulation S-P. The Commission also ordered each of them to pay a
$20,000 civil penalty.
k. Regulation S-P
In re Zaino, Release No. 64398, 2011 SEC LEXIS 1574 (May 4, 2011).
Q.1.k
The Commission accepted an offer of settlement from Zaino, an employee of a registered
broker-dealer. In a related criminal action in federal court, Zaino pleaded guilty to one count of
conspiracy to allocate and rig bids for investment agreements or other municipal finance
contracts, one count of conspiracy to defraud the Internal Revenue Service by impeding the
collection of revenue due from municipal issuers, and one count of wire fraud. The criminal
indictment alleged that Zaino engaged in fraudulent misconduct in connection with the
competitive bidding process for the selection of firms to provide instruments in which municipal
issuers temporarily invested the proceeds of tax-exempt municipal bonds. Specifically, Zaino
devised a scheme to defraud municipalities of money by facilitating the payment of kickbacks
through the execution of swap transactions and by submitting intentionally losing bids. The
Commission barred Zaino from association.
Q.1.k
SEC v. N. Am. Clearing, Inc., Litig. Release No. 21960, 2011 SEC LEXIS 1608 (M.D. Fla. May
5, 2011).
In an action initiated by the Commission, a federal district court entered a final judgment
against defendant Goble, the founder, sole owner, and director of North American Clearing, Inc.
(the “Firm”), a clearing broker-dealer for approximately 40 correspondent firms and more than
10,000 customer accounts. Following a five-day bench trial, the court found that Goble acted
with a high degree of scienter in directing the Firm to falsely record a $5 million money market
purchase, which artificially lowered the Firm’s reserve requirement under the Customer
Protection Rule and allowed the Firm to improperly withdraw more than $3 million from its
Exclusive Benefit of Customers Account. The court further found that this “sham” transaction
constituted fraud on the market. The court permanently enjoined Goble from future violations of
Sections 10(b), 15(c)(3), and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
15c3-3, and 17a-3 thereunder. Additionally, on its own initiative, the court enjoined Goble from
attempting to secure any securities licenses or attempting to engage in the securities business.
The court also ordered Goble to pay a reduced $7,500 civil penalty based, in part, on the Firm
having been liquidated in a Securities Investor Protection Corporation bankruptcy proceeding.
In re EDGX Exchange, Inc., Release No. 65556, 2011 SEC LEXIS 3592 (Oct. 13, 2011).
Q.1.k
The Commission accepted an offer of settlement from EDGX Exchange, Inc., a
registered national securities exchange, EDGX, a registered national securities exchange, and
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Direct Edge ECN LLC, doing business as DE Route, a registered broker-dealer. The
Commission alleged that, after certain orders were overfilled due to operational errors, the
exchanges decided that DE Route would assume and liquidate the overfilled positions through its
error account, and that Respondents also assumed positions in other securities to facilitate the
resolution. The Commission alleged that the exchanges violated Section 19(b)(1) of the
Securities Exchange Act of 1934 by not filing a proposed rule change concerning the use of the
DE Route error account to assume overfilled or error positions, and Section 19(g)(1) of the
Exchange Act by not complying with their own rules when they allowed DE Route to engage in
activities not approved by the Commission. The operational errors caused approximately 27
million shares of excess trading with a value of approximately $773 million across
approximately one thousand symbols, and the exchanges realized a net loss of $2.1 million in
connection with the positions that were assumed and liquidated. In an attempt to liquidate the
positions quickly, DE Route engaged in short selling activity without marking its orders as short
and without locating the shorted stock prior to effecting the short sales, in violation of Regulation
SHO.
In a separate incident, an EDGX database administrator effectively disabled the
exchange’s ability to process incoming orders, modifications, and cancellations, leading to
member claims totaling over $680,000 in losses. Respondents promptly notified the
Commission staff of this incident, and submitted to the Commission staff a plan of remediation,
which they promptly began to implement. The Commission alleged that EDGX, which
displayed quotations representing that it was operating as an automated trading center, violated
Regulation NMS by not immediately notifying all specified persons when it determined that it
was not capable of displaying quotations that accurately reflected the current state of the market
on EDGX. The Commission censured Respondents and ordered them to cease and desist from
future violations and to comply with certain undertakings.
2. SEC Review of SRO Proceedings
a. Sales Practice Violations
Q.2.a
In re Cody, Release No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); In re Cody, Release No.
65235, 2011 SEC LEXIS 3041 (Aug. 31, 2011).
The Commission rejected a request for reconsideration by Cody, a former registered
representative. The underlying FINRA hearing panel decision found that Cody violated NASD
Rules 2310 and 2110 and suspended Cody from association for three months, fined him $27,500,
and assessed $8,711 in costs against him. Cody first appealed to the National Adjudicatory
Council, which increased the suspension to one year and otherwise sustained the decision. On
further appeal, the Commission sustained the decision by the National Adjudicatory Council.
The Commission found that Cody recommended unsuitable trades to customers, sent misleading
account summaries and information to customers, and failed to timely disclose two customer
settlement agreements on his Form U-4. The Commission found that this conduct violated
NASD Rules 2310 and 2110, and rejected Cody’s arguments concerning alleged procedural
439

infirmities warranting reversal. The Commission denied the motion for reconsideration on the
grounds that Cody failed to show any manifest errors of law or fact or present newly discovered
evidence.
b. Unfair/Fraudulent Markups or Commissions
In re Am. Funds Distrib., Inc., Release No. 64747, 2011 SEC LEXIS 2191 (June 24, 2011).
Q.2.b
The Commission overturned a NASD hearing panel’s censure and imposition of a
$5 million fine on a NASD member firm that was the principal underwriter and distributor for a
family of mutual funds. The NASD imposed the sanctions based on the firm’s participation in
mutual fund directed brokerage practices from 2001-2003, in violation of NASD Rule 2830(k),
the “Anti-Reciprocal Rule.” The National Adjudicatory Council had affirmed the hearing
panel’s decision and the sanctions it imposed, finding that the member firm violated the Rule
because its target commissions, while considered non-binding arrangements with retail firms,
constituted a specific amount or percentage of brokerage for the sale of mutual fund shares, in
violation of the Rule. The Commission concluded that the Rule in effect at the time of the
directed brokerage arrangement was sufficiently ambiguous to preclude the member firm from
having fair notice that its practices were prohibited. The Commission noted, however, that the
2004 Amendments to the Rule “addressed the uncertainty . . . and, as a result of these changes,
the directed brokerage practices at issue are now clearly prohibited.”
c. Other Fraudulent Practices
(i)
Misrepresentation
Q.2.c(i)
In re Spartis, Release No. 64489, 2011 SEC LEXIS 1693 (May 13, 2011).
The Commission sustained the NYSE’s imposition of sanctions against Spartis and Elias
(together “Applicants”), former registered representatives associated with a NYSE member firm
(the “Firm”). A NYSE hearing panel had found that Spartis and Elias had caused the Firm to
violate NYSE Rule 472.30 by sending customers communications between 1998 and 2001 that
failed to depict any downside risk of holding WorldCom, Inc. shares on margin. The hearing
panel censured Spartis and Elias and suspended Spartis for five months and Elias for three
months. Applicants appealed to the NYSE Board of Directors, which vacated the suspensions
but otherwise affirmed the hearing panel’s ruling. In their appeal to the Commission, the
Applicants argued in relevant part that they should not be found liable because they had not acted
with scienter. The Commission rejected this argument on the basis that Rule 472.30 does not
require a showing of scienter. The Commission sustained the NYSE’s censures.
440

(ii)
Falsification of Documents
. No cases decided in 2011.
(iii)
Failure to Maintain Accurate Books and Records
No cases decided in 2011.
(iv)
Selling Away
No cases decided in 2011.
d. Financial Responsibility Violations
(i)
Segregation of Customer Funds
No cases decided in 2011.
(ii)
Regulation T Violations
No cases decided in 2011.
e. Trading Practice Violations/Market Manipulation
No cases decided in 2011.
f. Failure to Supervise
Q.2.f
In re Kaminski, Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).
The Commission reviewed an appeal by Kaminski, a general securities principal and
senior executive officer of an NASD member firm (the “Firm”). The appeal concerned a 2008
NASD disciplinary decision finding that Kaminski violated NASD Conduct Rules 3010 and
2110 by failing to supervise the Firm’s variable annuity trading. The NASD fined Kaminiski
$50,000 and suspended him in all principal capacities for six months. The National Adjudicatory
Council affirmed the fine, but increased Kaminski’s suspension to eighteen months in all
capacities and required that he requalify before acting in any capacity requiring qualification.
Kaminski had previously assisted the Firm in settling a NASD disciplinary proceeding in
which the Firm undertook certain specified corrective actions relating to the Firm’s supervision
of variable annuity transactions, including the creation of a Trade Review Team (“TRT”) and a
441

Red Flag Blotter. The Commission found that Kaminski ignored TRT’s staffing shortages,
failed diligently to inform senior management of compliance needs, had unlicensed individuals
review the backlog of Red Flag Blotters, failed to effectively communicate to senior
management the need to restrict business expansion to that which could be supervised
adequately, and failed to limit the Firm’s activities when resources were not made available.
Kaminski also failed to inform NASD staff of the suspension of the Red Flag Blotter review
process during an NASD examination and subsequent investigation. The Commission found that
Kaminski’s supervisory failure was egregious and sustained the NASD’s ruling.
g. Registration Violations
No cases decided in 2011.
h. Failure to Cooperate with FINRA Investigation/Failure to Comply with
FINRA Requests for Financial Information
In re Osborn, Release No. 64145, 2011 SEC LEXIS 1055 (Mar. 29, 2011).
Q.2.h
The Commission considered an application for review by Osborn, a former registered
representative of a FINRA member firm. FINRA had barred Osborn from association after
Osborn failed to respond to FINRA’s information requests pertaining to his termination from a
FINRA member firm. Osborn requested that the Commission set aside the bar since he was
incarcerated due to an unrelated family court matter and had not received FINRA’s information
requests or the subsequent suspension notices that resulted in his bar. In his application for
review, Osborn included information responsive to FINRA’s information requests. As a result of
Osborn’s willingness to respond to FINRA’s request for information and the circumstances that
made him unavailable, Osborn and FINRA agreed to settle the matter for a sanction less than a
bar. FINRA filed an assented-to motion to dismiss, arguing that Osborn’s application for review
was mooted by the settlement. The Commission granted FINRA’s motion to dismiss.
In re Gizankis, Release No. 64391, 2011 SEC LEXIS 1576 (May 4, 2011).
Q.2.h
The Commission considered an application for review by Gizankis, a former registered
representative of a FINRA member firm. FINRA had barred Gizankis from association after
Gizankis failed to respond to FINRA’s information requests pertaining to her termination from a
FINRA member firm. Gizankis requested that the Commission set aside the bar since she had
recently relocated to another state and had not received FINRA’s information requests or the
subsequent suspension notices that resulted in her bar. In her application for review, Gizankis
also included information responsive to FINRA’s information requests. As a result of Gizankis’s
willingness to respond to FINRA’s request for information and the circumstances that made her
442

unavailable, Gizankis and FINRA agreed to settle the matter for a sanction less than a bar.
FINRA filed an assented-to motion to dismiss, arguing that Gizankis’s application for review
was mooted by the settlement. The Commission granted FINRA’s motion to dismiss.
In re Sweat, Release No. 65117, 2011 SEC LEXIS 2814 (Aug. 11, 2011).
Q.2.h
The Commission considered a motion for reconsideration by Intermountain Financial
Securities, Inc. (“IFS”), a FINRA member firm, and Sweat, a registered general securities
representative and IFSs’ President and CCO. The Applicants moved for reconsideration of an
order by the Commission dismissing their petition for review of a FINRA hearing panel decision.
The FINRA hearing panel had suspended Sweat from association and suspended IFS
from FINRA membership until they complied with requests for information that FINRA had
issued during a routine examination of IFS. Under the terms of the hearing panel’s order, if the
Applicants did not comply with the requests for information within three months, Sweat’s
suspension would automatically convert into a bar and IFS’s suspension would convert into an
expulsion. Applicants filed an appeal with the Commission and requested a stay of their
suspensions. The Commission denied Applicants’ stay request and issued a briefing order
setting a deadline for Applicants to submit a brief and noting that failure to file a brief could
result in dismissal pursuant to Rule of Practice 180(c). The Commission did not receive a brief
from Applicants and dismissed their appeal.
Applicants sought reconsideration claiming that their failure to file a brief was “due to
illness.” The Commission denied the request, noting that reconsideration is an extraordinary
remedy designed to correct manifest errors of law or fact, or to permit the presentation of newly
discovered evidence, and that Applicants’ motion failed to provide such grounds for
reconsideration.
In re Chen, Release No. 65345, 2011 SEC LEXIS 3224 (Sept. 16, 2011).
Q.2.h
The Commission considered an application for review by Chen, a former registered
representative of a FINRA member firm, of a FINRA decision. FINRA had barred Chen after
Chen failed to respond to letters FINRA sent him inquiring about his discharge from a FINRA
member firm, which the Firm had disclosed on Chen’s Form U-5. FINRA’s letters repeatedly
warned Chen that he would be suspended and automatically barred if he failed to respond to
FINRA’s inquiries. Chen apologized but did not dispute that he had notice of FINRA’s requests
and that he failed to respond, and his request for a hearing was also untimely. The Commission
granted FINRA’s motion to dismiss.
443

Q.2.h
In re Picozzi, Release No. 65569, 2011 SEC LEXIS 3609 (Oct. 14, 2011).
The Commission considered an appeal by Picozzi, a former associated person of a
member firm of PCX Equities, Inc. (“PCX”), the predecessor-in-interest to NYSE Euronext and
NYSE Regulation Inc. In 2004, PCX filed a complaint against Picozzi charging him with
violation of PCX Rule 10.2(d) for failing to furnish information and testimony requested by
PCX. PCX mailed the complaint to Picozzi, but Picozzi failed to respond. PCX issued a Notice
of Summary Determination that censured and barred Picozzi, and stated that if Picozzi and his
member firm fully cooperated within three months after issuance of the Notice, the bar would be
lifted and an appropriate sanction for obstructing the investigation would be imposed. On
appeal, Picozzi argued that he did not receive any of the PCX documents until 2010. The
Commission overturned PCX’s findings of violation and sanction, noting the lack of evidence
surrounding PCX’s attempts to serve Picozzi and PCX’s successor’s statement that it did not
oppose Picozzi’s petition. The Commission declined Picozzi’s request that it expunge his CRD
record, noting its assumption that FINRA would update the record.
i. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed
Q.2.i
In re FCS Sec., Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec.,
Release No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011).
The Commission rejected a request for reconsideration by FCS Securities, a registered
broker-dealer (the “Firm”), and Kleinser, its sole proprietor. Applicants sought review of the
Commission’s earlier decision sustaining a FINRA decision from 2008 finding violations of
Section 17(e) of the Securities Exchange Act of 1934, Rule 17a-5 thereunder, and NASD Rule
2110 by FCS Securities and Kleinser for failure to file audited financial statements. FINRA had
fined the Firm and Kleinser $5,000, jointly and severally, and suspended the Firm from
membership for four months, with the suspension to convert to an expulsion if the Firm did not
file audited annual reports for 2006 and 2007 before the suspension ended. Applicants first
appealed to the National Adjudicatory Council, which sustained FINRA’s decision. On appeal
to the Commission, the Commission found that the Firm failed to file audited financial reports
for fiscal years 2006 and 2007 and failed to show that the exemption contained in Rule 17a-
5(e)(1)(i)(B) under the Securities Exchange Act of 1934 permitted them to file unaudited annual
reports for those years. The Commission further rejected the Applicants’ argument that their
situation was similar to that described in certain No Action Letters, distinguishing the facts
described in those letters and stating that the Commission was not bound by the statements of
Commission staff in such letters. In denying Applicants’ subsequent motion for reconsideration,
the Commission found that the motion raised arguments that the Commission had already
rejected and did not introduce any newly discovered evidence.
444

j. Procedural Issues
(i)
Evidence
No cases decided in 2011.
(ii)
Due Process
No cases decided in 2011.
(iii)
Jurisdiction and Time Bars
Q.2.j(iii)
In re Sharemaster, Release No. 65570, 2011 SEC LEXIS 3610 (Oct. 14, 2011).
The Commission considered an appeal by Sharemaster, a registered broker-dealer,
of a FINRA disciplinary decision. A FINRA hearing panel had found that Sharemaster violated
Section 17(e) of the Securities Exchange Act of 1934 and Rule 17a-5 thereunder by filing an
annual report with financial statements that were audited by an accounting firm that was not
registered with the Public Company Accounting Oversight Board. The hearing panel suspended
Sharemaster’s membership pending the filing of the requisite annual report, with the suspension
to convert to an expulsion at the end of six months if the report was not filed, and assessed
$1,785 in costs. Sharemaster appealed to the Commission, and while the appeal was pending,
Sharemaster filed a compliant annual report and the suspension was lifted. Both parties argued
that the Commission should resolve this case because, although the suspension was lifted, a
violation was found and costs were assessed. The Commission dismissed the appeal for lack of
jurisdiction, finding that because the sanction was lifted, there was no final disciplinary sanction
to review.
(iv)
Discovery
No cases decided in 2011.
(v)
Sanctions
Q.2.j.(v)
In re Houston, Release No. 66014, 2011 SEC LEXIS 4491 (Dec. 20, 2011).
The Commission reviewed an appeal by Houston, a former general securities
representative with a former NASD member firm, from a NASD disciplinary action. The NASD
had found that Houston violated NASD Rules 3030 and 2110 by engaging in outside business
activities without providing his member firm with written notice, and violated NASD Rules 8210
and 2110 by failing to appear for an on-the-record interview with NASD staff. The NASD fined
Houston $100,000 and suspended him for one year in all capacities, and, for failing to appear for
445

testimony, barred him from association. The National Adjudicatory Council affirmed the
hearing panel’s findings of violation and the bar. However, it overturned the fine and suspension
in light of the bar imposed on Houston.
The Commission sustained the findings of violations, but vacated the sanction and
remanded for redetermination of the sanction. The Commission explained that Houston did
respond in some manner to the NASD’s information requests, and therefore the determination of
the sanction should analyze factors other than the presumptive unfitness indicated by a failure to
respond in any manner.
(vi)
Right to Counsel
No cases decided in 2011.
k. Statutory Disqualification
Q.2.k
In re Bahl, Release No. 65323, 2011 SEC LEXIS 3182 (Sept. 12, 2011).
The Commission considered FINRA’s application for an order allowing Bahl to be
associated with a registered broker-dealer. In 1974, the Commission had barred Bahl from
association with a broker-dealer except as a supervised person in a non-supervisory capacity, and
upon a satisfactory showing to the Commission’s Division of Enforcement that a firm would
adequately supervise him. The order further subjected Bahl to a statutory disqualification under
Section 3(a)(39)(B) of the Securities Exchange Act of 1934. In a parallel proceeding, a federal
district court permanently enjoined Bahl from further violations of the federal securities laws
relating to fraud in prospectus delivery. Thereafter, Bahl was associated with two brokerdealers.
In each case, FINRA’s CRD failed to identify Bahl as being subject to a statutory
disqualification, and as a result, FINRA did not file the required notifications with the
Commission pursuant to Rule 19h-1 of the Exchange Act on behalf of Mr. Bahl for these two
associations. FINRA’s application sought to allow Bahl to be associated with a registered
broker-dealer as a general securities principal working out of his home subject to heightened
remote supervision. The Commission approved FINRA’s application.
l. Reporting Violations
In re Gremo Invs., Inc., Release No. 64481, 2011 SEC LEXIS 1695 (May 12, 2011).
The Commission considered an appeal by Gremo Investments, Inc., a registered brokerdealer,
of a FINRA disciplinary decision. A FINRA hearing panel had suspended Gremo’s
membership, imposed a $1,000 fine and assessed $1,605 in costs after finding that Gremo
violated Section 17(e) of the Securities Exchange Act of 1934 and Rule 17a-5 thereunder, and
Q.2.l
446

FINRA Rule 2010 by submitting an annual report with financial statements audited by an
accounting firm that was not registered with the Public Company Accounting Oversight Board
(“PCAOB”). Previously, non-public broker-dealers such as Gremo were exempted from the
requirement that their annual financial statements be audited by a PCAOB-registered accounting
firm. However, in December 2008, FINRA published two Information Notices notifying nonpublic
broker-dealers that their fiscal year 2009 and subsequent audits were required to be
conducted by a PCAOB-registered accounting firm.
On appeal, Gremo argued in relevant part that the requirement that it use a PCAOBregistered
accounting firm was a violation of antitrust laws. The Commission rejected this
argument on the basis that the antitrust laws are impliedly repealed to the extent necessary for the
Exchange Act to function in the manner Congress intended. The Commission sustained
FINRA’s findings and sanction, noting that they would serve to impress upon Gremo and others
the importance of filing annual reports that are audited by PCAOB-registered firms.
In re Friedman, Release No. 64486, 2011 SEC LEXIS 1699 (May 13, 2011).
The Commission reviewed an appeal by Friedman, a general securities representative and
general securities principal formerly registered with a FINRA member firm (the “Firm”), from a
FINRA disciplinary action. A FINRA hearing panel had found that Friedman engaged in private
securities transactions without prior written notice to the Firm, in violation of NASD Conduct
Rules 3040 and 2110. The hearing panel suspended Friedman in all capacities for forty-five days
and imposed a $77,500 fine. FINRA appealed to the National Adjudicatory Council, seeking a
longer suspension. The National Adjudicatory Council affirmed the hearing panel’s decision in all
respects except for the suspension, which it increased to nine months based on the seriousness of
the violations. Friedman appealed, arguing in relevant part that another employee of the Firm,
Schnaier, was responsible for disclosing the transactions to the Firm because all relevant
conversations with the private company had occurred through him.
The Commission rejected this argument on the basis that Rule 3040 requires each person
who participates in a private securities transaction to provide prior written notice to his member
firm. The Commission found that Friedman’s conduct constituted a “very serious violation,” as
private securities transactions deprive investors of a firm’s oversight, due diligence, and
supervision. The Commission noted that the nine-month suspension was shorter than the
minimum suspension recommended in the Sanction Guidelines (which support a suspension of
twelve months to a bar), and that FINRA aligned the fine with the “financial benefit” Friedman
received as a result of the violations. The Commission sustained the National Adjudicatory
Council’s findings and sanctions.
Q.2.l
Q.2.l
In re FCS Sec., Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec.,
Release No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011).
The Commission rejected a request for reconsideration by FCS Securities, a registered
broker-dealer (the “Firm”), and Kleinser, its sole proprietor. Applicants sought review of the
447

Commission’s earlier decision sustaining a FINRA decision from 2008 finding violations of
Section 17(e) of the Securities Exchange Act of 1934, Rule 17a-5 thereunder, and NASD Rule
2110 by FCS Securities and Kleinser for failure to file audited financial reports. FINRA had fined
the Firm and Kleinser $5,000, jointly and severally, and suspended the Firm from membership for
four months, with the suspension to convert to an expulsion if the Firm did not file audited annual
reports for 2006 and 2007 before the suspension ended. Applicants first appealed to the National
Adjudicatory Council, which sustained FINRA’s decision. On appeal to the Commission, the
Commission found that the Firm failed to file audited financial reports for fiscal years 2006 and
2007 and failed to show that the exemption contained in Rule 17a-5(e)(1)(i)(B) under the
Securities Exchange Act of 1934 permitted them to file unaudited annual reports for those years.
The Commission further rejected the Applicants’ argument that their situation was similar to that
described in certain No Action Letters, distinguishing the facts described in those letters and
stating that the Commission was not bound by the statements of Commission staff in such letters.
In denying Applicants’ subsequent motion for reconsideration, the Commission found that the
motion raised arguments that the Commission had already rejected and did not introduce any
newly discovered evidence.
In re Neaton, Release No. 65863, 2011 SEC LEXIS 4232 (Dec. 1, 2011).
The Commission denied a motion for reconsideration by Neaton, a former registered
representative of various FINRA member firms, of a Commission decision. The underlying
FINRA hearing panel decision barred Neaton from association and fined him $5,000. Neaton
appealed to the National Adjudicatory Council, which sustained the bar against him but waived
the fine. On further appeal, the Commission found that Neaton violated NASD Conduct Rule
2110 and Membership Rule IM-1000-1 by willfully submitting a Form U-4 that did not disclose
disciplinary actions and sanctions imposed on him by a state bar disciplinary board. The
Commission, noting that it is the decision of the National Adjudicatory Council and not the
underlying FINRA hearing panel decision that is subject to Commission review, sustained the
bar, and further found that Neaton was subject to a statutory disqualification because his failures
to disclose were willful. In his motion for reconsideration, Neaton argued, in relevant part, that
the Commission erred in finding that his actions caused harm. The Commission rejected this
argument, concluding there was harm by Neaton’s failure to amend his Form U-4 as employers,
regulators, and potential customers were deprived of the information. The Commission upheld
the bar..
m. Net Capital Violations
No cases decided in 2011.
n. Trading Practice Violations/Market Manipulation
No cases decided in 2011.
Q.2.l
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R. Broker-Dealer Employment Litigation and Arbitration
R.
FleetBoston Fin. Corp. v. Alt, 638 F.3d 70 (1st Cir. 2011).
An investment banking firm and its former employees arbitrated claims brought by the
employees arising from the firm’s alleged failure to pay deferred compensation. The arbitrators
issued an award in favor of the employees. A subset of the employees’ claims were stayed in
federal court during the arbitration. After the district court confirmed the arbitral award, it was
asked to enter summary judgment against the employees on the stayed claims. The essential
question was whether the confirmed arbitral award precluded the employees from pursuing the
stayed claims. The district court decided that the essence of the stayed claims was litigated
during the arbitration and entered judgment against the employees. The employees appealed,
arguing that investment firm’s parent was named in the lawsuit but was not a party to the
arbitration and, as a result, the arbitral panel did not decide the employees’ claims against the
parent company.
The U.S. Court of Appeals for the First Circuit affirmed the district court’s decision. The
First Circuit looked at the scope of the arbitral award to determine whether the claims before the
arbitration panel and the arbitral award itself encompassed the federal stayed claims. The court
concluded that the scope of the stayed claims were the same as the arbitrated claims because the
same underlying conduct was the basis for both claims. The court relied on the fact that (1) the
arbitrators stated they were resolving all claims between the parties; (2) the employees argued
that the claims could be fully resolved without adding the investment firm’s parent to the matter,
because the parent was liable under an alter ego theory and would be subject to the award
without being formally added as a party; (3) the arbitrators’ case summary unambiguously
included the types of claims stayed in federal court; and (4) the arbitrators refused to amend the
award to exclude the investment firm’s parent company. Moreover, because the final arbitral
award did not specify the basis for the amounts awarded, the court could not conclude that the
award excluded damages for the stayed claims. The court noted that the employees could have
pursued many different avenues for clarifying any ambiguity in the award, but instead sought a
“second bite at the apple” by having the district court confirm the award and then relying on the
ambiguity to pursue their stayed federal court claims. The court refused to play this game and
ultimately denied the employees’ appeal under the doctrine of res judicata, explaining that the
judgment confirming the arbitral award had the same force and effect as any other judgment and
that the employees had a full opportunity to litigate the stayed claims before the arbitrators. The
First Circuit affirmed summary judgment on the stayed federal court claims in favor of the
investment firm.
Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011)
The Securities and Exchange Commission brought suit against an investment company
and related entities for allegedly perpetrating a massive Ponzi scheme. The district court
R.
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appointed a receiver to marshal the assets of the estate. The receiver subsequently obtained a
preliminary injunction against numerous former financial advisors and employees of the
investment company, freezing the accounts of those individuals pending the outcome of trial. In
an interlocutory appeal, the employee defendants contended that the district court should have
granted their motion to compel arbitration, and that the district court had no power to grant the
preliminary injunction when the motion to compel arbitration was pending. In a 2010 opinion,
the U.S. Court of Appeals for the Fifth Circuit disagreed, holding that the district court acted
within its power when it considered and decided the motion for preliminary injunction before
deciding the outstanding motion to compel arbitration. In addition, the Fifth Circuit held that the
district court did not abuse its discretion in issuing the preliminary injunction. The receiver had
a substantial likelihood of success on the merits on its claim pursuant to the Texas Uniform
Fraudulent Transfer Act (TUFTA), since there was sufficient evidence to support the district
court’s finding that the investment company entities constituted a Ponzi scheme and had paid the
defendant advisors and employees from the alleged Ponzi scheme. The receiver would likely
suffer irreparable harm in the absence of a preliminary injunction against the employee
defendants, because the accounts of those individuals would be frozen pending the outcome of
trial. If the defendants were to dissipate or transfer those assets out of the jurisdiction, the
district court would not be able to grant an effective remedy for the fraudulent transfers or
obligations. Furthermore, the receiver’s claims were not subject to arbitration in any event,
because the receiver was suing on behalf of estate creditors, who are not party to any alleged
arbitration agreements. Thus, the Fifth Circuit affirmed and remanded the matter back to the
district court for further proceedings.
In 2011, the Fifth Circuit withdrew its 2010 opinion and replaced it. The Fifth Circuit
simply adopted and reiterated its 2010 opinion as to all issues except for the motion to compel
arbitration. For that issue, the Fifth Circuit concluded that it did not have jurisdiction to decide
the motion because the district court had not decided the motion in the first instance. Because
the district court had not issued a final and appealable order, the Fifth Circuit lacked jurisdiction
to decide the motion to compel. The Fifth Circuit continued to add that, even if the district court
had ruled on a motion to compel arbitration, such a ruling is not a final judgment ending the
litigation on the merits and is thus not appealable. The Fifth Circuit remanded the matter back to
the district court for a ruling on the motion to compel arbitration.
Wanken v. Wanken, 2011 WL 4495597 (5th Cir. Sept. 29, 2011).
After a sales associate was terminated from an advisory firm owned by his father, he filed
for arbitration with FINRA. The sales associate alleged that he was wrongfully terminated, but
the arbitral panel dismissed all of his claims. Still disgruntled, the associate sued the firm and his
father to vacate or modify the arbitration award. The firm and father cross-moved to confirm the
award. A magistrate judge recommended confirming the arbitration award and the district court
agreed. The associate appealed. The U.S. Court of Appeals for the Fifth Circuit affirmed the
district court’s decision to confirm the award. The Fifth Circuit found the associate’s allegations
of arbitral fraud and bias to be merely conclusory and lacked support in the record. The
associate’s arguments that the arbitrators failed to support his efforts to obtain complete
R.
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discovery responses was also meritless because his father and the firm produced over 6,000
pages of documents in response to over 250 discovery requests. The court also held that the
arbitral panel did not exceed its authority under the FAA by failing to inform the associate that
he was entitled to a continuance or by issuing a “gag” order that prevented him from
communicating with the media. The court decided that nothing in the record supported vacatur
and affirmed the district court’s decision to confirm the arbitration award.
Aviles v. Charles Schwab & Co., Inc., 435 Fed. Appx. 824 (11th Cir. 2011).
A securities broker resigned from his employment with a broker-dealer. The brokerdealer
brought an arbitration action against the broker, alleging that he was improperly soliciting
the broker-dealer’s clients. The arbitral panel entered an award in favor of the broker-dealer.
The broker filed an action in state court to vacate the award. The broker-dealer removed the case
to federal court and filed a motion to confirm the award. The district court confirmed the award
and the broker appealed. The broker argued that the arbitrators refused to hear material
evidence, refused to postpone the hearing despite sufficient cause shown, rendered an award that
was in manifest disregard of the law, and suffered from bias. In dismissing the broker’s
arguments, the appellate court emphasized the significant discretion that arbitrators have in
conducting an arbitration. The appellate court also ruled that the broker failed to present any
evidence of bias. The broker presented one affidavit allegedly proving bias, but the affidavit did
not indicate that the arbitrator was predisposed to find in favor of the broker-dealer based, for
example, on prior dealings or relationships that required disclosure. Because the broker failed to
present sufficient evidence to support his arguments of vacatur, the appellate court affirmed the
district court’s decision to confirm the award.
Hook v. UBS Fin. Servs., Inc., 2011 WL 1741997 (D. Conn. May 4, 2011)
A financial advisor filed suit to enjoin his former employer from enforcing a promissory
note. The employer moved to compel arbitration based on an arbitration agreement in the
promissory note. The financial advisor argued that the promissory note as a whole was not valid,
and, as such, he should not be bound by the arbitration provision therein. The court disagreed
with the financial advisor, explaining that he failed to adequately challenge the validity of the
arbitration provision by contesting the validity of the contract as a whole. The validity of the
arbitration provision must be specifically challenged. Alternatively, the financial advisor argued
that his claims fell outside the scope of the arbitration provision because the arbitration provision
required the parties to arbitrate any disputes arising from the promissory note. The court held
that even the financial advisor’s claims for conversion and statutory theft, which were based on
the employer’s freezing various accounts after his resignation, were collateral matters that were
encompassed by the promissory note’s broad arbitration provision. The arbitration clause had an
exception for injunctive relief, but the court found this issue to be moot because the financial
advisor’s complaint failed to adequately plead his right to injunctive relief. Accordingly, the
R.
R.
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court found that an arbitral panel was responsible for determining all of the financial advisor’s
remaining claims and it dismissed the action for arbitration.
Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp.2d 445 (S.D.N.Y. 2011).
A stock broker, on behalf of himself and other similarly situated stock brokers, sued a
brokerage firm for its alleged failure to pay overtime, commissions, and timely wages.
Additionally, the stock broker asked the court to designate his claims as a collective action
pursuant to the Fair Labor Standards Act (“FLSA”) and as a class action under the federal rules
for his state law claims. The brokerage firm moved to dismiss or, alternatively, to compel
arbitration based on an arbitration clause in the broker’s employment agreement. The stock
broker argued that his claims fell within an exception of the FINRA arbitration rules, which
prohibited arbitration of class action claims. The court agreed that the broker’s state law class
action claims fell within the exception, but held that the broker’s FLSA collective action was
distinguishable from a class action and not subject to the exception to arbitration. The court
focused on a key distinction between class actions and collective actions: that members must optin
to collective actions whereas class actions require class members to opt-out. The court also
noted that every other court to address whether an FLSA claim is arbitrable under the FINRA
rules has found in favor of arbitrability. As a result, the court compelled the parties to submit to
arbitration on the broker’s FLSA claims and stayed the proceedings on the class action claim
while arbitration was pending.
Bayme v. GroupArgent Secs., LLC, 2011 WL 2946718 (S.D.N.Y. July 19, 2011)
A former employee brought a FINRA arbitration action against a broker-dealer for
damages arising out of claims for compensation and expenses paid during his employment. The
broker-dealer defended the arbitration on the basis that FINRA lacked jurisdiction to hear the
matter because the broker-dealer was not the entity for which the employee had worked. After a
hearing on the issue, the arbitral panel determined that it lacked jurisdiction over the matter and
dismissed the case. The employee sought to vacate the award, arguing that FINRA did not have
the authority to decide the question of jurisdiction. The court denied the employee’s petition
because the arbitration agreement gave the panel the right to consider the issue of arbitrability
and, in considering that issue, the arbitral panel acted properly. The court considered the facts
that the arbitral panel held a hearing, allowed both sides to argue, and evaluated testimonial and
documentary evidence in deciding that the panel properly decided the issue of arbitrability. Even
though the Director of FINRA gave an opinion that FINRA had jurisdiction, the court ruled that
the Director’s opinion was not binding. The court confirmed the award because the record
supported the panel’s decision.
R.
R.
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R.
Frankel v. McDonough, 2011 WL 5059181 (S.D.N.Y. Oct. 24, 2011)
Arbitrators found a broker and her employer jointly liable to investors for fraud. The
broker appealed the decision to the New York Supreme Court on the basis that the arbitral panel
erred in awarding joint and several liability to the investors. In confirming the award, the New
York Supreme Court noted that the parties fully arbitrated the issue of joint and several liability
and the Appellate Division added that the investors’ allegations substantially related to the
broker’s own misconduct, rendering an award of joint and several liability appropriate. After the
arbitration and related appeals concluded, the broker sued her former attorney and law firm for
legal malpractice and breach of fiduciary duty. The broker alleged that her attorney committed
malpractice by failing to take action to limit the investors’ joint liability claim because the
investors never sought relief against the broker. The broker’s former attorney moved to dismiss
the case and the court granted the motion. The court relied heavily on the fact that the investors’
claim against the broker’s employer were derivative of her own misconduct in dismissing the
broker’s claims for negligence. Looking to this fact, the court found that the broker could not
allege negligence based upon the attorney’s failure to challenge the joint liability claim because
the broker could have been individually liable. This fact also evidenced the mutual interests
between the broker and her employer, negating her claim that the attorney should have disclosed
a conflict of interest arising from their joint defense and that the attorney failed to adequately
represent her interests as a result of that conflict. The court further found that the broker failed to
plead that the lawyer’s actions caused the award against her because the investors’ statement of
claim and the liberal rules for amending pleadings clearly included individual liability against the
broker. As such, an allegation that her attorney was negligent in not challenging the arbitral
panel’s right to issue an award against her was unfounded. Because the claim for legal
malpractice was dismissed, the court was bound by state law to dismiss the breach of fiduciary
duty claim. The court also denied the broker leave to re-plead because the record clearly
established that the arbitral award was entered against the broker as a result of her own
misconduct, not from a deficiency in representation. Accordingly, the court dismissed the
broker’s complaint in its entirety.
Reljic v. Tullett Prebon Americas Corp., 2011 WL 2491342 (D.N.J. June 21, 2011)
A broker-dealer moved to compel arbitration of its former broker’s claims of gender
discrimination, sexual harassment, and retaliation. The firm argued that the claims should be
arbitrated pursuant to an arbitration agreement in the broker’s employment agreement. The
district court agreed. The broker argued that the arbitration clause should not be enforced
because it interfered with her right to pursue a claim with the Equal Employment Opportunity
Commission (“EEOC”). The district court found that the arbitration clause did not interfere with
the broker’s EEOC rights because the broker still could – and did –file a charge with the EEOC.
The arbitration clause only affected the remedies available to the broker after the EEOC’s
determination: the broker was limited to appealing the EEOC’s decision in an arbitral forum
instead of in federal court. This limitation on remedies was not enough to affect the
R.
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enforceability of the arbitration agreement. The broker knowingly and voluntarily waived her
rights to a jury trial by signing the agreement because the arbitration clause in the agreement was
unambiguous, and it clearly specified that the broker’s discrimination claims were arbitrable
matters. The court also dismissed the broker’s argument that the arbitration clause was
unconscionable. The contract was not procedurally unconscionable in light of the broker’s
educational and professional background and the broker’s failure to provide evidence that she
was precluded from carefully reviewing the contract or negotiating its terms. The contract was
not substantively unconscionable because the contract was not one-sided; both parties were
required to arbitrate disputes under the arbitration clause. The district court also noted that the
contract was not substantively unconscionable because the arbitral panel could award any relief
available in a court of law. As a result, the district court compelled arbitration of the broker’s
claims, including claims against the broker’s coworkers, who were not subject to the
employment agreement. Even though the broker’s coworkers were not signatories, they were
employees of one of the parties to the contract. As a result, the court decided that the broker’s
employment contract fairly required her to arbitrate those claims as well.
Walker v. Morgan Stanley Smith Barney LLC, 2011 WL 1603490 (E.D. Pa. Apr. 28, 2011).
A broker-dealer terminated an investment counselor’s employment. The investment
counselor sued his former employer in state court, alleging that the broker-dealer had denied him
the opportunity to gather his personal belongings before escorting him out of the office. The
employer removed the case to federal court and filed a motion to compel arbitration. The
arbitration agreement required the investment counselor to arbitrate “any controversy or claim
arising out of or in any way relating to Employee’s employment … or termination thereof.” The
investment counselor opposed the motion, arguing that the relief he sought was outside the scope
of the arbitration clause. Specifically, he argued that his claims concern his personal property
and, as such, the claims do not relate to his employment. Based on its review of the complaint,
the court held that the claims fell within the scope of the arbitration agreement, which it noted
was “particularly broad.” The investment counselor’s complaint alleged that his personal
belongings included employment-related materials. For example, he sought return of his
personal computer, which contained a database of prospective clients. The court decided that
these claims fell squarely within the scope of the arbitration agreement and granted the brokerdealer’s
motion to compel arbitration.
Alvarado v. Wells Fargo Advisors, LLC, 2011 WL 677354 (S.D. Tex. Feb. 15, 2011)
After a financial advisor was terminated from her employment with a brokerage firm, she
and the firm had a dispute regarding commissions and payment on a promissory note the
financial advisor signed during her employment. The parties arbitrated their dispute and the
arbitral panel issued an award in favor of the brokerage firm. The financial advisor moved to
vacate the arbitration award on the basis that the award was ambiguous. First, she argued that
the arbitration award did not specifically address one of her defenses, and, as such, the panel
R.
R.
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must not have ruled on that defense. The court dismissed this argument because the award’s
broad language suggested that the panel considered all defenses and rejected them in awarding
damages to the brokerage firm, especially since the defense was discussed during the
proceedings. Second, the financial advisor argued that the arbitration award was ambiguous
because it did not state whether her previous payments should be applied to the firm’s damages
award. The court dismissed this argument based on the terms of the arbitral award. The award
stated that the financial advisor “shall pay” the damages to the firm, which mean that the
arbitrators intended the award to be paid in the future. Also, the court noted that the damages
award was less than the difference between the sum sought by the firm and the sums the
financial advisor had already paid, so the arbitrators could have easily subtracted the previously
paid amount from the award in favor of the firm. As a result, the court concluded that the
arbitral award was final and definite because it resolved all the disputed issues. The court
confirmed the arbitral award and denied the financial advisor’s motion to vacate.
In re QA3 Fin. Corp., 2011 WL 2678591 (Bankr. D. Neb. July 7, 2011)
Former clients of a broker-dealer filed arbitration claims against the broker-dealer and its
employees. After the broker-dealer filed for bankruptcy, it sought to have its automatic stay
extended to its employees in certain claims. The court granted the extension of the automatic
stay because a judgment against the employees would effectively be a judgment against the
debtor, the broker-dealer. The court refused to extend the automatic stay to the employees on
claims against them personally because those claims would not extend to the debtor.
Shaffer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 779 F. Supp.2d 1085 (N.D. Cal. 2011).
A financial advisor moved to confirm an arbitration award entered in his favor and
against his former employer. The former employer, a broker-dealer, sought to vacate the award
because the arbitrator had hired two research attorneys for assistance in deciding the case. The
court determined that the arbitrator not acted improperly and confirmed the award. Specifically,
the court found that hiring the research attorneys did not constitute arbitrator misconduct because
state statutory law did not require the arbitrator to disclose its legal research sources nor the use
of non-expert attorneys. Further, the broker-dealer had not shown any evidence that the research
attorneys had any conflicts of interest or were otherwise biased. The arbitrator gave the brokerdealer
the benefit of its contractual bargain by making an independent decision and obeying the
relevant statutes and standards. The court noted that even if the broker-dealer established
arbitrator misconduct, it waived its right to object on that ground by waiting to raise the issue
until after the arbitrator issued its final decision, months after learning about the research
attorneys. The court confirmed the arbitration award in favor of the financial advisor and
corrected a miscalculation in the total sum. The court denied the employer’s motion to vacate.
R.
R.
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R.
Wells Fargo Advisors, LLC v. Shaffer, 2011 WL 2669479 (N.D. Cal. July 7, 2011).
A broker-dealer brought a FINRA arbitration against its former employee to recover the
balance of a forgivable loan. The arbitral panel found the promissory note for the loan to be
procedurally and substantively unconscionable and dismissed the broker-dealer’s claims. The
panel also recommended expunging the language in the employee’s Form U-5, which stated that
he had charged an excessive fee and failed to forward a customer complaint to his supervisor.
The broker-dealer brought an action to set aside the arbitral award and the employee moved to
confirm the award and for attorneys’ fees. The court rejected the broker-dealer’s argument that
the panel ignored California law in ruling that the terms of the promissory note were
unconscionable and that it defamed the employee through the statements on the employee’s U-5.
Because unconscionability is determined on a case-by-case basis, the court ruled that the brokerdealer
was merely trying to reargue the facts. The court also ruled that the arbitrators acted
properly in finding that the broker-dealer defamed the employee because there was a colorable
basis for defamation and the FAA only gives the court a highly deferential standard of review for
arbitral awards. As a result, the court confirmed the award. The court granted the employee’s
motion for attorneys fees and costs because the one-sided attorneys’ fees provision in the
promissory note was interpreted under California law to apply to any party to the contract.
Shaffer v. Merrill Lynch, Pierce, Fenner, and Smith, Inc., 2011 WL 3047478 (N.D. Cal. July 25,
2011)
A financial advisor and his coworker had a wage dispute. A FINRA arbitration resolved
the dispute in favor of the coworker. A month after the FINRA arbitration concluded, the
financial advisor initiated an arbitration with another arbitration organization: Judicial
Arbitration and Mediation Services, Inc. (“JAMS”). The arbitral panel at JAMS entered an award
in favor of the financial advisor and against his former employer for unpaid compensation, which
was confirmed by the district court. The financial advisor sued his former employer again,
alleging gender discrimination, inter alia, arising out of the wage dispute with his coworker. The
former employer filed a motion asking the court to hold that the findings of the FINRA
arbitration were binding and could not be re-litigated in the gender discrimination lawsuit. The
financial advisor filed a similar motion asking the court to hold that findings of the JAMS
arbitration were binding.
The court agreed with the former employer that the results of the FINRA arbitration had a
preclusive effect, but held that the JAMS award did not. As an initial matter, the court
determined that Pennsylvania law applied because the FINRA arbitration took place in
Pennsylvania. The financial advisor had argued against the application of Pennsylvania law
because California has a strong public policy against non-mutual collateral estoppel, which
Pennsylvania law permits. The court dismissed the financial advisor’s argument and
distinguished the California precedent that the financial advisor cited because the underlying
arbitrations took place in California. Applying Pennsylvania law, the court reasoned that the
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FINRA award was entitled to full faith and credit, even though it was not confirmed, because it
was a judicial proceeding with a final judgment on the merits. The issues that the employer
sought to preclude – relating to the wage dispute with the financial advisor’s coworker – were
fully litigated during the FINRA arbitration, and, even though the panel did not outline the basis
for its award, the court could infer based on the circumstances that the panel decided the issues.
The award was binding upon the financial advisor, who was a party to those proceedings. As a
result, the court granted the former employer’s motion and held that the FINRA arbitration did
preclude re-litigating certain issues. The court declined to find that the JAMS arbitration had a
preclusive effect, however, because the issues that the financial advisor sought to preclude were
not litigated during the JAMS arbitration. The arbitration related only to the financial advisor’s
entitlement to deferred compensation, while the issues that the financial advisor sought to
preclude related to the wage dispute with his coworker. The court found that issue preclusion
was inappropriate because the former employer did not have a full and fair opportunity to litigate
the issues relating to the wage dispute with the financial advisor’s coworker. The court refused
to preclude the issues from the JAMS arbitration and denied the financial advisor’s motion.
Lewis v. UBS Fin. Servs. Inc., 2011 WL 4727795 (N.D. Cal. Sept. 30, 2011).
A financial advisor brought a putative class action in state court against his former
employer, a broker-dealer. The financial advisor claimed that the broker-dealer’s administration
of its recruiting bonuses violated California state law. After removing the case to federal court,
the broker-dealer moved to compel arbitration based on five separate arbitration agreements: one
in the financial advisor’s Form U-4, which he used to register as a securities advisor, two
arbitration agreements in promissory notes for forgivable loans he received from the brokerdealer,
and two employment agreements with arbitration clauses. The financial advisor argued
that the case was not appropriate for arbitration under any of the five agreements because the
agreements provide that the NASD or NYSE govern arbitration and neither of those entities
exist. The financial advisor also argued that the case was not appropriate for arbitration because
the arbitration agreements have class action waivers that are not enforceable under California
law. The court disagreed with both of the financial advisor’s arguments. First, the court noted
that one of the arbitration agreements specifically provided for FINRA arbitration and, even if it
had not, the court could compel FINRA arbitration because FINRA is a successor entity to the
NASD/NYSE. Second, the court found that a recent U.S. Supreme Court decision overruled the
California precedent holding that class action waivers in arbitration agreements are
unenforceable. Specifically, the court noted that AT&T Mobility v. Concepcion, 131 S.Ct. 1740
(2011) expressly stated when state law prohibits arbitration of a category of claims, the FAA
preempts state law. The court further held that all of the financial advisor’s claims were subject
to arbitration, including his statutory claims and claim for injunctive relief. The court reasoned
that the statutory claims could be arbitrated because he was able to pursue these claims to the
same extent in arbitration as he could in court. The court reasoned that the injunctive relief claim
was likewise subject to arbitration because, even though it was expressly excluded from
arbitration under the terms of one promissory note, the injunctive relief the financial advisor
sought was not based on that promissory note. The court dismissed the matter for arbitration
based on these findings.
R.
457

R.
Cortina v. Citigroup Global Markets, Inc., 2011 WL 3654496 (S.D. Cal. Aug. 19, 2011)
A financial advisor sought an arbitration award for discrimination and harassment against
his former employer, who filed a counterclaim to enforce a promissory note. The arbitral panel
dismissed the financial advisor’s claim and entered an award in favor of his former employer.
The financial advisor filed a petition to vacate the award in state court. The former employer
removed the matter to federal court and cross-moved to confirm the award. The district court
granted the former employer’s motion and confirmed the award. As an initial matter, the court
had to decide whether the Federal Arbitration Act (“FAA”) applied because the FAA contained
different standards for vacatur than state law. The arbitration agreement contained a choice of
law provision electing to proceed under New York – not California, the forum state – law.
Ultimately, instead of undergoing an analysis between New York and California law, the court
applied the FAA because the promissory note incorporated the rules and regulations of the
NASD and NYSE, which bears on interstate commerce and precedent held that choice of law
provisions cannot trump the application of the FAA. The financial advisor argued that the award
should be vacated because the arbitration panel did not clearly articulate its decision and he was
entitled to a reasoned decision because statutory employment claims are subject to a more
rigorous review. The court distinguished the precedent that the financial advisor relied upon,
because the cases did not apply the FAA and, even if it did, those cases involved mandatory
arbitration, whereas the financial advisor voluntarily submitted to arbitration in this matter. The
court added that, regardless of the applicability of the case law, the arbitral award complied with
it by revealing the essential findings and conclusions underlying the award. The financial
advisor also argued that the award should be vacated because the panel denied his request for a
continuance to obtain outstanding discovery responses. The court again disagreed with the
financial advisor and found that the arbitral panel properly found that there was not sufficient
cause nor a reasonable basis for a postponement, especially in light of the previous continuances
the panel granted to the financial advisor. Next, the court dismissed the financial advisor’s
argument that the award should be vacated because one of the arbitrators was not a specialist in
employment law, because this is not a valid ground upon which to challenge an arbitral award.
The court also dismissed the financial advisor’s claim that the arbitrator was biased because he
had an ongoing relationship with banks, which the arbitrator disclosed before the arbitration.
The financial advisor’s claim that the arbitrator was racially biased was unsupported by the
record. Finally, the court disagreed with the financial advisor’s argument that the award should
be vacated based on clear errors of law because the FAA does not provide vacatur of arbitration
awards based on clear errors of law. Because there was no basis to vacate it, the court affirmed
the arbitration award.
458

Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 WL 855354 (D. Nev. Mar. 9,
2011)
A financial advisor and a broker-dealer executed an employment agreement in 2009.
Contemporaneously, the financial advisor executed a Form U-4 to register with various
regulatory organizations. Less than a year later, the broker-dealer terminated the financial
advisor’s employment. The financial advisor sued the broker-dealer alleging that it had
terminated his employment without cause and, thus, breached the parties’ employment
agreement. The broker-dealer moved to compel arbitration pursuant to the terms of the
arbitration clause in the Form U-4. The financial advisor opposed the motion, arguing that the
employment agreement, which was executed on the same day as the Form U-4, does not require
arbitration and contains a merger clause. The court determined that, although both facts about
the employment agreement were true, the arbitration clause in the Form U-4 was still a valid
agreement to arbitrate under which the court could compel arbitration. Moreover, the
employment agreement was silent on the method of resolving disputes and accordingly, the court
could infer that the Form U-4 was intended to answer how the parties were to resolve disputes.
Once the court determined that the Form U-4 contained a valid arbitration agreement, it turned to
whether the parties’ dispute fell within the scope of the arbitration clause. Pursuant to the
arbitration clause, “members” and “associated persons” were required to arbitrate their disputes.
The broker-dealer was a “member” because it was admitted to FINRA membership and the
financial advisor was an “associated person” because he was a former member. The dispute
arose out of their business activities because hiring, employment, and termination directly
implicated some of the most fundamental aspects of the parties’ business relationship.
Accordingly, the court stayed the proceedings pending arbitration and compelled the parties to
arbitrate their dispute.
Feller v. Wells Fargo Advisors, LLC, 2011 WL 3331265 (M.D. Fla. Aug. 3, 2011)
A broker-dealer brought an arbitration action against its former employee, a financial
advisor, seeking to recover the balance due on a promissory note for an outstanding loan. The
financial advisor filed an action in state court seeking rescission of the promissory note, among
other things. The broker-dealer removed the case to federal court and filed a motion to compel
arbitration. The financial advisor conceded the validity of the arbitration clause in her
promissory note, but argued that the claims were outside the scope of the agreement. The court
found that the arbitration clause was broad, covering “any controversy arising out of this note,”
and included the financial advisor’s claim for fraud in the inducement of the contract. Even if
the claims fell outside the scope of the arbitration agreement in the promissory note, the court
found that the parties would be required to arbitrate their claims pursuant to at least two other
arbitration agreements: one in the financial advisor’s employment contract and one in the Form
U-4 which the financial advisor signed to register with the NASD and others. Accordingly, the
court stayed the case so that the parties could arbitrate their dispute.
R.
R.
459

R.
Bank of the Commonwealth v. Hudspeth, 714 S.E.2d 566 (Va. 2011).
The former vice president of a bank’s affiliate sued the bank following his termination,
alleging various compensation claims. The bank sought to compel arbitration of the vice
president’s claims. Both the county court and the appellate court denied the bank’s motion to
compel arbitration. The bank appealed to the Virginia Supreme Court. The bank argued the
dispute must be arbitrated because the bank was either a “customer” or a “member” and because
the former vice president was an associated person of a member. FINRA requires disputes to be
arbitrated if the disputes arise from the business activities of a member and an associated person
or if arbitration is requested by a customer. The vice president conceded that he was an
associated person of a member, but asserted that the bank is neither a member firm nor a
customer. As a matter of first impression, the Virginia Supreme Court held that the bank was not
a member firm, but it was a customer entitled to compel arbitration of the vice president’s claim.
The Virginia Supreme Court reasoned that one interpretation of the FINRA rules could consider
anyone, including the bank, who receives investment and brokerage services and who is not a
broker-dealer, to be a customer. Because the U.S. Supreme Court has stated that any doubts as
to the scope of arbitrable issues should be resolved in favor of arbitration and the bank could be
considered a customer, the Virginia Supreme Court ruled that the parties must resolve their
dispute through arbitration.
Wells Fargo Advisors, LLC v. Stifel Nicolaus, LLC, 2011 WL 4695369 (Cal. App. Ct. Oct. 7,
2011).
A financial advisor resigned from his employment and began working for a new branch
of a different securities firm. His former assistant and three of his former coworkers joined the
new branch as well. The former employer brought an arbitration action against the financial
advisor and his new employer, alleging that they were stealing clients and employees and
misappropriating trade secrets, among other things. The arbitral panel rejected all of the former
employer’s claims and awarded the financial advisor and his new employer attorneys’ fees
totaling nearly one million dollars. The district court confirmed the arbitral award. The former
employer appealed. Initially, the court had to decide whether the California Arbitration Act
(“CAA”) or the Federal Arbitration Act (“FAA”) specified the grounds for vacatur. The court
concluded that California state arbitration law governed based on precedent holding that petitions
to vacate arbitration awards filed in California courts are automatically governed by the CAA. In
doing so, the court distinguished U.S. Supreme Court precedent set in Hall Street Associates,
LLC v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008) (holding that Section 10 of FAA
provides exclusive grounds for vacatur) because, according to the court, Hall Street only governs
when the arbitration is governed solely by the FAA, typically pursuant to the terms of the
agreement to arbitrate. Applying the CAA, the court held that the arbitral award should not be
vacated due to exclusion of evidence nor due to the new employer’s failure to disclose
documents. The former employer argued that the exclusion of two emails substantially
prejudiced its rights, but the court disagreed. The court explained that the former employer
R.
460

failed to show that it was prejudiced by the decision to exclude the emails because the arbitral
panel likely would not have attached enough weight to them to have produced a different result.
The former employer also argued that the new employer’s failure to disclose a “recruiting log”
deprived it of a fair hearing. Again, the court disagreed because the former employer failed to
prove that the exclusion was prejudicial. Finally, the court dismissed the former employer’s
claim that the award should be vacated because the panel erred in failing to specifically state that
legal fees were limited to the trade secret misappropriation claim. The court explained that
manifest disregard of the law is not a basis for vacatur under the CAA and that the former
employer could not prove that the arbitrators exceeded their authority by merely alleging that the
arbitrators failed to comply with a statute. Instead, arbitrators exceed their authority only when
the arbitrator decides issues that were not submitted for decision. The court affirmed the district
court’s judgment, confirming the arbitral award.
Muthukamatchi v. Citigroup Global Markets, Inc., Docket No. 10-05322, 2011 WL 5025062
(FINRA Oct. 9, 2011).
A broker-dealer terminated an employee, who was also a client. The employee brought
an arbitration action against the broker-dealer for its failure to disclose brokerage fees and to
timely process the employee’s account transfer. The broker-dealer sought to expunge a nonparty’s
registration record, which contained references to the arbitration and his wrongdoing in
the incident underlying the arbitration. The arbitrator dismissed the employee’s claims in their
entirety. The arbitrator recommended expungement as to the non-party, but, because the
registration records belonged to a non-party, the arbitrator advised the broker-dealer to obtain
confirmation of the arbitral award from a court before executing on the expungement directive.
The arbitrator held that all of the employee’s claims were without merit and dismissed the case.
R.
461

TABLE OF AUTHORITIES
Page
380544 Canada, Inc. v. Aspen Technology, Inc.,
2011 WL 4089876 (S.D.N.Y. Sept. 14, 2011)...................................................................... 141
Abene v. Jaybar, LLC,
2011 WL 2847436 (E.D. La. July 14, 2011). ....................................................................... 301
Akamai Tech., Inc. v. Deutsche Bank AG,
764 F. Supp. 2d 263 (D. Mass. 2011). .................................................................... 72, 128, 241
Alack v. Jaybar, LLC,
2011 WL 3626687 (E.D. La. Aug. 17, 2011). ...................................................................... 301
Alki Partners, L.P. v. Vatas Holding GmbH,
769 F. Supp. 2d 478 (S.D.N.Y. 2011)..................................................... 74, 133, 230, 243, 367
Allen v. Devon Energy Holdings, L.L.C.,
2011 WL 3208234 (Tex. App. Hous. (1st Dist.) July 28, 2011). ......................................... 310
Alvarado v. Wells Fargo Advisors, LLC,
2011 WL 677354 (S.D. Tex. Feb. 15, 2011) ........................................................................ 454
Amacker v. Renaissance Asset Mgmt. LLC,
657 F.3d 252 (5th Cir. 2011). ............................................................................................... 268
Ambert v. Caribe Equity Group, Inc.,
2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011)....................................................... 28, 130
Amorosa v. AOL Time Warner Inc.,
2011 WL 310316 (2nd Cir. 2011)................................................................................... 79, 122
Amorosa v. AOL Time Warner Inc.,
409 Fed. App’x 412 (2d Cir. 2011)..................................................................................... 4, 95
Amos v. Franklin Fin. Servs. Corp.,
2011 WL 2111991 (M.D. Pa. May 26, 2011)....................................................................... 300
AnchorBank, FSB v. Hofer,
649 F.3d 610 (7th Cir. 2011). ......................................................................................... 65, 125
Anderson v. Beland,
2011 U.S. App. LEXIS 22209 (2d Cir. Nov. 3, 2011).......................................................... 331
Anschutz Corp. v. Merrill Lynch & Co.,
785 F. Supp. 2d 799 (N.D. Cal. 2011). ......................................................... 327, 328, 359, 373
i

Antelis v. Freeman,
2011 WL 6009609 (N.D. Ill. Nov. 30, 2011). ...................................................................... 156
Antelis v. Freeman,
799 F.Supp.2d 854 (N.D. Ill. 2011). ....................................................................... 90, 154, 325
Anwar v. Fairfield Greenwich Ltd.,
2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011)........................................................ 222, 227, 355
Applestein v. Medivation, Inc.,
2011 WL 3651149 (N.D. Cal. Aug. 18, 2011). .............................................................. 92, 163
Asensio v. SEC,
2011 WL 6032933 (11th Cir. Dec. 5, 2011)......................................................................... 329
Ashland Inc. v. Morgan Stanley & Co., Inc.,
652 F.3d 333 (2d Cir. 2011).................................................................................................... 63
Ashland, Inc. v. Oppenheimer & Co., Inc.,
648 F.3d 461 (6th Cir. 2011). ......................................................................... 64, 124, 221, 225
AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011).......................................................................................................... 330
Atkinson, MD v. Morgan Asset Mgmt., Inc.,
2011 WL 3926376 (6th Cir. Sept. 8, 2011). ......................................................................... 207
Aubrey v. Barlin,
2011 U.S. Dist. LEXIS 15332 (W.D. Tex. Feb. 16, 2011)................................................... 252
Aventa Learning, Inc. v. K12, Inc.,
2011 WL 5438960 (W.D. Wash. Nov. 8, 2011)....................................................................... 2
Aviles v. Charles Schwab & Co., Inc.,
435 Fed. Appx. 824 (11th Cir. 2011)............................................................................ 349, 451
Bachman v. A.G. Edwards, Inc.,
344 S.W.3d 260 (Mo. Ct. App. 2011)................................................................................... 316
Backus v. Conn. Cmty. Bank, N.A.,
2011 WL 2119240 (D. Conn. May 27, 2011)....................................................................... 209
Backus v. Conn. Cmty. Bank, N.A.,
2011 WL 2183984 (D. Conn. March 30, 2011).................................................................... 209
Bacon v. Stiefel Labs., Inc.,
275 F.R.D. 681 (S.D. Fla. 2011)........................................................................................... 366
ii

Baldwin v. Cavett,
2011 U.S. Dist. LEXIS 117755 (E.D. Tex. Sept. 12, 2011). ................................................ 302
Banco Indus. De Venezuela C.A., Miami Agency v. De Saad,
68 So.3d 895 (Fla. 2011)....................................................................................................... 318
Bang v. Acura Pharms., Inc.,
2011 WL 91099 (N.D. Ill. Jan. 11, 2011)............................................................................. 186
Bank of the Commonwealth v. Hudspeth,
714 S.E.2d 566 (Va. 2011).................................................................................................... 460
Barnard v. Verizon Communications, Inc.,
2011 WL 294027 (E.D. Pa. Jan. 31, 2011)........................................................................... 149
Barnard v. Verizon Communications, Inc.,
2011 WL 5517326 (3d Cir. Nov. 14, 2011)............................................................ 96, 124, 351
Basis Yield Alpha Fund v. Goldman Sachs Group, Inc.,
798 F.Supp.2d 533 (S.D.N.Y. 2011)....................................................................................... 96
Baxi v. Ennis Krupp & Assocs., Inc.,
2011 WL 3898034 (N.D. Ill. Sept. 2, 2011). ........................................................................ 305
Bayme v. GroupArgent Secs., LLC,
2011 WL 2946718 (S.D.N.Y. July 19, 2011) ....................................................................... 452
BCJJ, LLC v. Lefevre,
2011 WL 1296682 (M.D.Fla. Mar. 31, 2011) ...................................................................... 174
Beaman v. Barth,
2011 Bankr. LEXIS 819 (E.D.N.C. Mar. 2, 2011) ............................................................... 301
Bear Stearns & Co., Inc. v. Int’l Capital & Mgmt. Co., LLC,
926 N.Y.S.2d 826 (N.Y. Sup. Ct. 2011) ............................................................................... 316
Bello v. Chase Home Finance,
2011 WL 133351 (S.D. Cal. 2011)......................................................................................... 82
Benincasa v. Lafayette Life Ins. Co.,
2011 WL 5967300 (D. Minn. Nov. 29, 2011). ..................................................................... 309
Bensinger v. Denbury Res. Inc.,
2011 WL 3648277 (E.D.N.Y. Aug. 17, 2011)........................................................................ 13
Bensley v. FalconStor Software, Inc.,
2011 WL 3849541 (E.D.N.Y. Aug. 29, 2011)...................................................................... 177
iii

Berman v. Morgan Keegan & Co.,
2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011) ...................................................... 226, 228, 271
Besinger v. Denbury Resources Inc.,
2011 U.S. Dist. LEXIS 91905 (E.D.N.Y., Aug. 11, 2011)..................................................... 99
Billitteri v. Sec. Am, Inc.,
2011 WL 3586217 (N.D. Tex. Aug 4, 2011).......................................................................... 39
Black v. Cincinnati Fin. Corp.,
2011 U.S. Dist. LEXIS 46852 (S.D. Ohio 2011).................................................................. 105
Board of Trustees of the City of Ft. Lauderdale General Employees’ Retirement System
v. Mechel OAO,
2011 WL 3502016 (S.D.N.Y. Aug. 9, 2011)................................................................ 140, 247
Bobrowski v. Red Door Group,
2011 WL 3555712 (D. Ariz. Aug. 11, 2011)........................................................................ 303
Borsellino v. Putnam,
2011 WL 6090694 (Ill. App. 1st Dist. Dec. 2, 2011) ........................................................... 227
Botton v. Ness Techs., Inc.,
2011 WL 3438705 (D.N.J. Aug. 4, 2011). ........................................................................... 376
Bourienne v. Calamos,
2011 WL 3421559 (N.D. Ill. Aug. 4, 2011). ........................................................................ 215
Bowler v. Green Tree Servicing, LLC,
2011 WL 320398 (E.D. Cal. Jan. 28, 2011) ........................................................................... 44
Branch v. Sicker,
2011 U.S. Dist. LEXIS 19392 (N.D. Ga. Feb. 28, 2011) ..................................................... 335
Brecher v. Citigroup Inc.,
2011 WL 5525353 (S.D.N.Y. Nov. 14, 2011)........................................................................ 37
Brecher v. Citigroup, Inc.,
797 F. Supp. 2d 354 (S.D.N.Y. 2011)................................................................................... 136
Brooks v. Transamerica Fin. Advisors,
57 So. 3d 1153 (La. Ct. App. 2011)...................................................................................... 233
Brown v. Calamos,
2011 WL 5505375 (7th Cir. Nov. 10, 2011)......................................................................... 208
Brown v. Schwartzberg,
2011 WL 5599214 (M.D. La. Nov. 16, 2011) ...................................................................... 151
iv

Broyles v. Cantor Fitzgerald & Co.,
2011 WL 4737197 (M.D. La. Sept. 14, 2011)...................................................................... 214
Burgraff v. Green Bankshares, Inc.,
2011 WL 613281 (E.D. Tenn. Feb. 11, 2011) ...................................................................... 185
Busacca v. SEC,
2011 U.S. App. LEXIS 25933 (11th Cir. Dec. 28, 2011)..................................................... 283
Camofi Master LDC v. Riptide Worldwide Inc.,
2011 U.S. Dist. LEXIS 31237 (S.D.N.Y. Mar. 23, 2011) .................................................... 247
Campbell v. Castle Stone Homes, Inc.,
2011 WL 902637 (D. Utah Mar. 15, 2011) ............................................................................ 48
Canson v. WebMD Health Corp.,
2011 WL 5331712 (S.D.N.Y. Nov. 7, 2011)........................................................................ 182
Carbon Capital Mgmt., LLC v. Am. Express Co.,
932 N.Y.S.2d 488 (N.Y. App. Div. 2011) ............................................................................ 328
Casula v. AthenaHealth, Inc,
2011 WL 45661155 (D. Mass. Sept. 30, 2011) .................................................................... 129
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial Corp.,
793 F. Supp. 2d 1138 (C.D. Cal. 2011) .......................................................................... 68, 165
Charles Schwab Corp. v. Bank of Am. Sec. LLC,
2011 WL 864978 (N.D. Cal. Mar. 11, 2011)........................................................................ 374
Charles Schwab Corp. v. BNP Paribas Sec.,
2011 WL 724696 (N.D. Cal. Feb. 23, 2011) ........................................................................ 373
Charles Schwab Corp. v. J.P. Morgan Sec. Inc.,
2011 WL 1642459 (N.D. Cal. May 2, 2011).......................................................................... 45
Chau v. Aviva Life and Annuity Co.,
2011 WL 1990446 (N.D. Tex. May 20, 2011) ..................................................................... 357
Chechelle v. Sheetz,
2011 U.S. Dist. LEXIS 97489 (S.D.N.Y., Aug. 29, 2011)................................................... 114
Cianci v. Sentaurus Fin.,
2011 Cal. App. Unpub. LEXIS 3346 (May 5, 2011)............................................................ 238
Citibank, N.A. v. Franco,
2011 U.S. Dist. LEXIS 150741 (S.D.N.Y. Dec. 29, 2011) .................................................. 333
v

Citigroup Smith Barney v. Henderson,
241 Ore. App. 65 (Or. Ct. App. 2011). ................................................................................. 338
City of Ann Arbor Employees’ Retirement System v. Sunoco Products Co.,
2011 WL 5041367 (D.S.C. Oct. 19, 2011). .............................................................. 78, 88, 198
City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp.,
632 F.3d 751 (1st Cir. 2011)................................................................................................. 121
City of Livonia Employees’ Retirement System v. The Boeing Company,
2011 WL 824604 (N.D. Ill. Mar. 7, 2011)............................................................................ 155
City of Marysville General Employees Retirement System v. Nighthawk Radiology
Holdings, Inc.,
2011 WL 4584778 (D. Idaho Sept. 12, 2011)....................................................................... 170
City of Monroe Employees’ Retirement System v. Hartford Financial Services Group,
Inc.,
2011 WL 4357368 (S.D.N.Y. Sept. 19, 2011)...................................................................... 141
City of New Orleans Employees’ Retirement System v. Private Bankcorp, Inc.,
2011 WL 5374095 (N.D. Ill. Nov. 3, 2011) ............................................................. 18, 41, 156
City of Omaha v. CBS Corporation,
2011 WL 2119734 (S.D.N.Y. May 24, 2011) ...................................................................... 140
City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc.,
637 F.3d 169 (2d Cir. 2011).......................................................................................... 319, 350
City of Pontiac General Employees Retirement System v. Schweitzer-Maudit
International, Inc.,
806 F. Supp. 2d 1267 (N.D. Ga. 2011)................................................................................. 175
City of Roseville Employees Ret. Sys. v. Horizon Lines, Inc.,
2011 U.S. App. LEXIS 17701 (3d Cir. June 23, 2011) ........................................................ 234
City of Roseville Employees’ Retirement Sys. v. EnergySolutions, Inc.,
2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011)............................................ 15, 35, 77, 143, 195
City of Roseville Employees’ Retirement Sys. v. Horizon Lines, Inc,
2011 WL 3695897 (3d Cir. Aug. 24, 2011).......................................................................... 123
City of Roseville Employees’ Retirement Sys. v. Textron, Inc.,
2011 WL 3740768 (D.R.I. Aug. 24, 2011)........................................................................... 130
Clifford v. Morgan Keegan & Co., Inc.,
2011 WL 5025045 (FINRA Oct. 11, 2011) (Pieroni, Arb.) ................................................... 24
vi

Cobalt Multifamily Investors I, LLC v. Arden,
2011 WL 4542734 (S.D.N.Y Sept. 30, 2011)......................................................................... 36
Commonwealth of Pa. Pub. Sch. Emp. Ret. Sys. v. Citigroup, Inc.,
2011 WL 1937737 (E.D. Pa. May 20, 2011)........................................................................ 370
Connecticut Retirement Plans and Trust Funds v. Amgen Inc.,
660 F.3d 1170 (9th Cir. 2011). ....................................................................................... 66, 362
Conwill v. Greenberg Traurig, LLP,
2011 WL 1103728 (E.D. La. Mar. 22, 2011). ...................................................................... 302
Coquina Investments v. Rothstein,
2011 WL 4971923 (S.D. Fla. Oct. 19, 2011)........................................................................ 304
Cortina v. Citigroup Global Markets, Inc.,
2011 WL 3654496 (S.D. Cal. Aug. 19, 2011) ...................................................................... 458
Costa v. Carambola Partners, LLC,
2011 WL 397949 (M.D. Fla. Feb. 4, 2011) ............................................................................ 49
Cumberland & Ohio Co. of Tex. v. Goff,
2011 U.S. Dist. LEXIS 52897 (M.D. Tenn. May 17, 2011)................................................. 253
Curry v. Hansen Medical, Inc.,
2011 WL 3741238 (N.D. Cal. Aug. 25, 2011). ...................................................... 92, 163, 203
Darocy v. Abildtrup,
345 S.W.3d 129 (Tex. App. 2011)........................................................................................ 264
Davis v. Duncan Energy Partners L.P.,
801 F. Supp. 2d 589 (S.D. Tex. 2011). ................................................................................. 377
Dean v. China Agritech, Inc.,
2011 WL 5148598 (C.D. Cal. Oct. 27, 2011)......................................................... 20, 168, 258
Department of Enforcement v. ACAP Financial, Inc.,
Disciplinary Proceeding No. 2007008239001, 2011 FINRA Discip. LEXIS 32 (OHO,
May 3, 2011)......................................................................................................................... 396
Department of Enforcement v. AIS Financial, Inc.,
Disciplinary Proceeding No. 2008012169101, 2011 FINRA Discip. LEXIS 24,
(OHO, March 3, 2011).......................................................................................................... 397
Department of Enforcement v. Gallagher,
Disciplinary Proceeding No. 2008011701203, 2011 FINRA Discip. LEXIS 40 (OHO
June 13, 2011)....................................................................................................................... 395
vii

Department of Enforcement v. Hedge Fund Capital Partners LLC,
Disciplinary Proceeding No. 2006004122402, 2011 FINRA Discip. LEXIS 20 (OHO,
Jan. 26, 2011)........................................................................................................................ 397
Department of Enforcement v. Max International Broker-Dealer Corp.,
Disciplinary Proceeding No. 20070072538-03, 2011 FINRA Discip. LEXIS 58
(OHO, Sept. 1, 2011). ........................................................................................................... 394
Department of Enforcement v. Midas Securities, LLC,
Complaint No. 2005000075703, 2011 FINRA LEXIS 71, (NAC, March 3, 2011)............. 393
Department of Enforcement v. Otalvaro,
Disciplinary Proceeding No. 2008011725901, 2011 FINRA Discip. LEXIS 39 (OHO,
June 24, 2011)....................................................................................................................... 395
Department of Enforcement v. Thomas Weisel Partners, LLC,
Disciplinary Proceeding No. 2008014621701, 2011 NASD Discip. LEXIS 59 (OHO,
Nov. 8, 2011). ....................................................................................................................... 394
Dixon v. Ladish Company, Inc.,
785 F.Supp.2d 746 (E.D.Wis. 2011)............................................................................. 106, 157
Doucet v. First Fed. Guar.,
72 So.3d 478 (La. Ct. App.), cert. denied, 76 So.3d 1207 (La. 2011). ................................. 316
Drescher v. Baby It’s You, LLC,
2011 WL 63615 (C.D. Cal. 2011)..................................................................................... 42, 81
Dronsejko v. Grant Thornton,
632 F.3d 658 (10th Cir. 2011) ........................................................................................ 96, 127
Durden v. Citicorp Trust Bank, FSB,
763 F. Supp. 2d 1299 (M.D. Fla. 2011)................................................................................ 314
Durgin v. Mon,
2011 WL 573483 (11th Cir. Feb. 18, 2011) ......................................................................... 127
Egan v. Tradingscreen, Inc.,
2011 WL 1672066 (S.D.N.Y. May 4, 2011) ........................................................................ 139
Egan v. Tradingscreen, Inc.,
2011 WL 4344067 (S.D.N.Y. Sept. 12, 2011)...................................................................... 141
Elipas v. Jedynak,
2011 WL 1706059 (N.D. Ill. May 5, 2011).................................................................. 254, 309
Elton v. McClain,
2011 WL 6934812 (W.D. Tex. Dec. 29, 2011). ................................................................... 308
viii

Employees’ Ret. Sys. of the Gov’t of the Virgin Islands v. J.P. Morgan Chase & Co.,
2011 WL 1796426 (S.D.N.Y. May 10, 2011). ................................................................. 12, 33
Employees’ Ret. Sys. v. JP Morgan Chase & Co.,
2011 Fed. Sec. L. Rep. (CCH) 96, 278 (S.D.N.Y. Mar. 23, 2011).................................... 246
Emposimato v. CIFC Acquisition Corp.,
932 N.Y.S.2d 33 (App. Div. 2011)............................................................................... 306, 310
Endress v. Gentiva Health Servs., Inc.,
276 F.R.D. 62 (E.D.N.Y. 2011)............................................................................................ 176
Engstrom v. Elan Corporation PLC,
2011 WL 4946434 (S.D.N.Y. Oct. 18, 2011)....................................................................... 144
Erica P. John Fund, Inc. v. Halliburton Co.,
131 S. Ct. 2179 (U.S. 2011)............................................................................................ 61, 362
Facciola v. Greenberg Traurig,
781 F. Supp. 2d 913 (N.D. Ariz. 2011)......................................................................... 256, 274
Fait v. Regions Fin. Corp.,
655 F.3d 105 (2d Cir. 2011).......................................................................................... 4, 25, 63
Faris v. Longtop Fin. Techs. Ltd.,
2011 WL 4444176 (S.D.N.Y. Sept. 22, 2011)...................................................................... 182
Fed. Home Loan Bank of Chicago v. Bank of Am. Sec. LLC,
448 B.R. 517 (C.D. Cal. 2011). ............................................................................................ 372
Feller v. Wells Fargo Advisors, LLC,
2011 WL 3331265 (M.D. Fla. Aug. 3, 2011) ............................................................... 336, 459
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
2011 Tex. App. LEXIS 5286 (Tex. App. July 12, 2011).............................. 265, 278, 284, 296
Fiero v. Financial Ind. Regulatory Auth., Inc.,
660 F.3d 569 (2d. Cir. 2011)......................................................................................... 118, 295
Filho v. Safra Nat’l Bank,
797 F. Supp. 2d 289 (S.D.N.Y. 2011)................................................................................... 332
Findwhat Investor Group v. Findwhat.com,
658 F.3d 1282 (11th Cir. 2011). ..................................................................................... 67, 127
Finkelstein v. UBS Global Asset Management (US) Inc.,
2011 U.S. Dist. LEXIS 89800 (S.D.N.Y. August 9, 2011). ................................................. 349
ix

FINRA Department of Enforcement v. Kale E. Evans,
FINRA Disc. Action Complaint No. 2006005977901, 2011 FINRA Discip. LEXIS 36
(Oct. 3, 2011). ....................................................................................................................... 120
FINRA Department of Enforcement v. William J. Murphy Midlothian, Carl M.
Birkelbach, and Birkelbach Investment Securities, Inc.,
FINRA Disc. Action Complaint No. 2005003610701, 2011 FINRA Discip. LEXIS 42
(Oct. 20, 2011). ..................................................................................................................... 120
First Bank P.R., Inc. v. La Vida Merger Sub, Inc.,
638 F.3d 37 (1st Cir. 2011)................................................................................................... 319
Fishman v. Morgan Keegan & Co.,
2011 WL 4853367 (E.D. La. Oct. 13, 2011) ........................................................................ 222
Fishman v. Morgan Keegan & Co., Inc.,
2011 WL 3705187 (E.D. La. Aug. 24, 2011). ........................................................................ 99
Fishoff v. Coty, Inc.,
634 F.3d 647 (2d Cir. 2011).................................................................................................. 360
FleetBoston Fin. Corp. v. Alt,
638 F.3d 70 (1st Cir. 2011)................................................................................................... 449
Foley v. Transocean Ltd.,
272 F.R.D. 126 (S.D.N.Y. 2011). ......................................................................................... 177
Footbridge Ltd. Trust v. Countrywide Fin. Corp.,
770 F.Supp.2d 618 (S.D.N.Y. 2011)......................................................................................... 8
Fosbre v. Las Vegas Sands Corp.,
2011 WL 3705023 (D. Nev. Aug. 24, 2011) ................................................................ 172, 204
Frank v. Dana Corporation,
646 F.3d 954 (6th Cir. 2011) ................................................................................ 124, 240, 352
Frankel v. McDonough,
2011 WL 5059181 (S.D.N.Y. Oct. 24, 2011)....................................................................... 453
Freecharm Ltd. v. Atlas Wealth Holdings Corp.,
2011 U.S. Dist. LEXIS 113172 (S.D. Fla. Sep. 30, 2011).................................................... 344
Frias v. Dendreon Corp.,
2011 WL 6330179 (W.D. Wash. Dec. 19, 2011). ................................................................ 191
Fried v. Lehman Brothers Real Estate Associates III, L.P.,
2011 WL 1345097 (S.D.N.Y. Mar. 29, 2011). ..................................................................... 137
x

Fulton Bank, N.A. v. UBS Securities, LLC,
2011 WL 5386376 (E.D. Pa. Nov. 7, 2011). ................................................ 150, 222, 226, 228
Garden City Employees’ Retirement System v. Anixter International, Inc.,
2011 WL 1303387 (N.D.Ill. Mar. 31, 2011)......................................................................... 155
Garden City Employees’ Retirement System v. Psychiatric Solutions, Inc.,
2011 WL 1335803 (M.D.Tenn. Mar. 31, 2011). .......................................................... 153, 199
GE Investor, v. General Electric Company,
2011 WL 5607137 (2d Cir. Nov. 18, 2011).......................................................................... 122
Gehron v. Best Reward Credit Union,
2011 WL 976624 (S.D. Cal. 2011)......................................................................................... 82
General Retirement System of City of Detroit v. Onyx Capital Advisors, LLC,
2011 WL 4528304 (E.D. Mich. Sept. 29, 2011)................................................................... 303
Genesee County Employees’ Retirement Sys. v. Thornburg Mortg. Sec. Trust 2006-3,
2011 WL 5840482 (D.N.M. Nov. 12, 2011). ................................................. 48, 206, 263, 309
Gerstner v. Sebig, LLC,
426 Fed. App’x. 470 (8th Cir. 2011). ..................................................................................... 26
Gibbons v. Malone,
801 F. Supp. 2d 243; (S.D.N.Y. 2011). ................................................................................ 115
Gibbons v. Nat’l Real Estate Investors, LC,
2011 WL 1086364 (D. Utah Mar. 23, 2011) .................................................................. 49, 224
Gilmore v. Brandt,
2011 U.S. Dist. LEXIS 125812 (D. Colo. Oct. 31, 2011). ................................................... 344
Glaser v. The9, Ltd.,
772 F. Supp. 2d 573 (S.D.N.Y. 2011)................................................................................... 134
Goldenson v. Steffens,
802 F. Supp. 2d 240 (D. Me. Aug. 4, 2011). .............................................. 57, 73, 83, 241, 320
Goldstein v. Puda Coal, Inc.,
2011 WL 6075861 (S.D.N.Y. Dec. 6, 2011). ....................................................................... 183
Good v. DeLange,
2011 WL 6888649 (S.D. Cal. Nov. 29, 2011). ..................................................................... 219
Gordon v. Royal Palm Real Estate Inv. Fund I, LLP,
2011 U.S. Dist. LEXIS 22911 (E.D. Mich. Mar. 8, 2011). .................................................. 334
xi

Grecco v. Local.Com Corp.,
806 F. Supp. 2d 653; 2011 U.S. Dist. LEXIS 4319 (S.D.N.Y. 2011). ................................. 115
Grund v. Delaware Charter Guar. & Trust Co.,
2011 WL 2118754 (S.D.N.Y. May 26, 2011). ..................................................................... 211
Guenther v. B.C. Ziegler and Company,
FINRA Case No. 10-00558, Jan. 13, 2011. ............................................................................ 60
Haarbauer v. Morgan Keegan & Co.,
2011 WL 457971 (FINRA Feb. 1, 2011) (Gomez, Barrett, Dorsey, Arbs.)........................... 24
Haase v. GunnAllen Fin., Inc.,
2011 WL 768045 (E.D.Mich. Feb. 28, 2011)......................................................... 40, 223, 229
Hanson v. Morgan Stanley Smith Barney, LLC,
762 F. Supp. 2d 1201 (C.D. Cal. 2011). ............................................................................... 216
Hantz Group, Inc. v. Van Duyn,
2011 Mich. App. LEXIS 1212 (Mich. Ct. App. June 30, 2011)........................................... 344
Hawaii Ironworkers Annuity Trust Fund v. Cole,
2011 WL 1257756 (N.D.Ohio Mar. 31, 2011). .................................................................... 152
Healthy Habits, Inc. v. Fusion Excel Corp.,
2011 WL 2448256 (C.D. Cal. June 17, 2011) ................................................................ 43, 166
Hellum v. Breyer,
194 Cal. App. 4th 1300 (2011). ............................................................................................ 266
Henning v. Orient Paper, Inc.,
2011 WL 2909322 (C.D. Cal. July 20, 2011)....................................................................... 167
Hill and NECA-IBEW Pension Fund, v. Gozani,
638 F.3d 40 (1st Cir. 2011)..................................................................................................... 62
Hill v. Gozani,
638 F.3d 40 (1st Cir. 2011)................................................................................................... 121
Hill v. State Street Corporation,
2011 WL 3420439 (D. Mass. Aug. 3, 2011). ................................................. 84, 129, 192, 353
Hines v. Cal. Pub. Utils. Comm.,
2011 U.S. Dist. LEXIS 134583 (N.D. Cal. Nov. 21, 2011).................................................. 118
HMV Props., LLC v. IDC Ohio Mgmt., LLC,
2011 U.S. Dist. LEXIS 1161 (S.D. Ohio Jan. 4, 2011). ....................................................... 274
xii

Hodges v. Akeena Solar, Inc.,
274 F.R.D. 259 (N.D. Cal. 2011).................................................................................... 68, 365
Homestore.com, Inc. Sec. Litig.,
2011 U.S. Dist. LEXIS 46552 (C.D. Cal. Apr. 22, 2011). ................................................... 256
Hook v. UBS Fin. Servs.,
2011 U.S. Dist. LEXIS 48036 (D. Conn. May 4, 2011)............................................... 333, 451
Hopson v. MetroPCS Communications, Inc.,
2011 WL 1119727 (N.D. Tex. Mar. 25, 2011)....................................................... 89, 151, 199
Horvath v. Banco Comercial Portuges, S.A.,
2011 U.S. Dist. LEXIS 15865 (S.D.N.Y. Feb. 15, 2011)..................................................... 271
Hosier v. Citigroup Global Markets, Inc.,
2011 U.S. Dist. LEXIS 1446670 (D. Colo. Dec. 21, 2011).................................. 238, 311, 346
Howard Family Charitable Found., Inc. v. Trimble,
259 P.3d 850 (Okla. Civ. App. 2011). .......................................................................... 233, 279
Hudes v. Aetna Life Ins. Co.,
2011 WL 3805679 (D.D.C. Aug. 30, 2011) ........................................................................... 27
Huelbig v. Aurora Loan Servs., LLC,
2011 WL 4348281 (S.D.N.Y. May 18, 2011) ........................................................................ 33
Hufnagle v. RINO Int’l Corp.,
2011 WL 2650755 (C.D. Cal. July 6, 2011)......................................................................... 377
Hufnagle v. RINO Int’l Corp.,
2011 WL 710676 (C.D. Cal. Feb. 16, 2011)......................................................................... 187
Hufnagle v. RINO Int’l Corp.,
2011 WL 710704 (C.D. Cal. Feb. 14, 2011)......................................................................... 186
Hussain v. Garson,
783 F. Supp. 2d 846 (W.D. La. 2011)................................................................................... 334
Hutchison v. Deutsche Bank Sec. Inc.,
2011 WL 3084969 (2d Cir. July 26, 2011)............................................................................... 5
Hutchison v. Deutsche Bank Sec. Inc.,
647 F.3d 479 (2d Cir. 2011).................................................................................................... 25
Hysong v. Encore Energy Partners LP,
2011 U.S. Dist. LEXIS 130688 (D. Del. Nov. 10, 2011). .................................................... 103
xiii

IAC/InterActiveCorp v. O’Brien,
26 A.3d 174 (Del. 2011). ...................................................................................................... 317
IBEW Local 90 Pension Fund v. Deutsche Bank AG,
2011 WL 6057812 (S.D.N.Y. Dec. 5, 2011) ........................................................................ 183
In re Access Cardiosystems, Inc.,
460 B.R. 67 (Bankr. D. Mass. 2011). ................................................................................... 313
In re Adams,
Release No. 63850, 2011 SEC LEXIS 454 (Feb. 7, 2011)................................................... 420
In re Ahn,
Release No. 63963, 2011 SEC LEXIS 681 (Feb. 24, 2011)................................................. 420
In re Am. Funds Distrib., Inc.,
Release No. 64747, 2011 SEC LEXIS 2191 (June 24, 2011)............................................... 440
In re Amerlink, Ltd.,
2011 WL 802794 (Bankr. E.D.N.C. Mar. 2, 2011). ............................................................. 301
In re Anadigics, Inc., Securities Litigation,
2011 WL 4594845 (D. N.J. Sept. 30, 2011) ................................................... 86, 148, 252, 356
In re Apollo Group, Inc. Securities Litigation,
2011 WL 5101787 (D.Ariz. Oct. 27, 2011).......................................................................... 159
In re Application of Kamiski,
Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).............................................. 292
In re Application of Philip L. Spartis and Amy J. Elias,
FINRA Admin. Proc. File No. 3-13979, 2011 SEC LEXIS 1693 (May 13, 2011).............. 119
In re Awan,
Release No. 65961, 2011 SEC LEXIS 4410 (Dec. 15, 2011); SEC v. OCC Holdings,
Ltd., Litig. Release No. 22200, 2011 SEC LEXIS 4442 (S.D.N.Y. Dec. 16, 2011). ........... 404
In re Bahl,
Release No. 65323, 2011 SEC LEXIS 3182 (Sept. 12, 2011).............................................. 446
In re Banc of Am. Capital Mgmt, LLC,
Release No. 9254, 2011 SEC LEXIS 3020 (Aug. 30, 2011)................................................ 415
In re Bank of America Corp. Auction Rate Securities (ARS) Marketing Litigation,
2011 WL 740902 (N.D. Cal. Feb. 24, 2011). ....................................................................... 160
In re Bank of America Corp. Securities, Derivative, and ERISA Litigation,
2011 WL 3211472 (S.D.N.Y. 2011)............................................................................... 81, 140
xiv

In re Bankatlantic Bancorp, Inc. Securities Litigation,
2011 WL 1585605 (S.D. Fla. Apr. 25, 2011). ........................................................................ 93
In re Barclays Bank PLC Sec. Litig.,
2011 WL 31548 (S.D.N.Y. Jan. 5, 2011). ................................................................ 11, 32, 194
In re Beachy,
Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011). ..................................... 409, 436
In re Bear Stearns Companies, Inc. Sec., Derivative, and ERISA Lit.,
763 F. Supp. 2d. 423 (S.D.N.Y. 2011).............................................. 58, 74, 132, 179, 193, 244
In re Bell,
Release No. 65941, 2011 SEC LEXIS 4379 (Dec. 13, 2011). ............................................. 428
In re Biddlecome,
Release No. 64500, 2011 SEC LEXIS 1725 (May 16, 2011)............................................... 409
In re Bjork,
Release No. 65520, 2011 SEC LEXIS 3536 (Oct. 7, 2011). ................................................ 411
In re Blech,
Release No. 63801, 2011 SEC LEXIS 345 (Jan. 31, 2011).................................................. 409
In re Bloomfield,
Release No. 416-A, 2011 SEC LEXIS 1457 (Apr. 26, 2011). ............................................. 290
In re BNY Mellon Sec. LLC,
Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).......................................... 285, 429
In re Boston Scientific Corporation Securities Litigation,
2011 WL 4381889 (D. Mass. Sept. 19, 2011). ..................................................................... 129
In re BP S’holder Derivative Litig.,
2011 WL 4345209 (S.D. Tex. Sept. 15, 2011). .................................................................... 372
In re Brouwer,
Release No. 65208, 2011 SEC LEXIS 3004 (Aug. 26, 2011).............................................. 403
In re Buchholz,
Release No. 63800, 2011 SEC LEXIS 344 (Jan. 31, 2011).................................................. 405
In re Burton W. Wiand, as Receiver,
2011 U.S. Dist. LEXIS 113212 (M.D. Fla. Sept. 29, 2011). .................................................. 99
In re Caccioppoli,
Release No. 66060, 2011 SEC LEXIS 4569 (Dec. 28, 2011). ............................................. 408
xv

In re Cell Therapeutics, Inc. Class Action Litigation,
2011 WL 444676 (W.D. Wash. Feb. 4, 2011)........................................................ 93, 172, 204
In re Century Aluminum Co. Sec. Lit.,
2011 WL 830174 (N.D. Cal. Mar. 3, 2011)............................................................................ 22
In re Charles Schwab Inv. Mgmt.,
Release No. 63693, 2011 SEC LEXIS 120 (Jan. 11, 2011).................................................. 414
In re Chen,
Release No. 65345, 2011 SEC LEXIS 3224 (Sept. 16, 2011).............................................. 443
In re Chiaese,
Release No. 64932, 2011 SEC LEXIS 2496 (July 20, 2011). .............................................. 411
In re China Educ. Alliance, Inc. Sec. Litig.,
2011 WL 4978483 (C.D. Cal. Oct. 11, 2011)............................................................... 167, 377
In re Citigroup, Inc.,
2011 WL 744745 (S.D.N.Y. Mar. 1, 2011). ......................................................................... 137
In re ClassicStar Mare Lease Litigation,
2011 WL 4591927 (E.D. Ky. Sept. 30, 2011). ..................................................................... 302
In re Clifton,
Release No. 443, 2011 SEC LEXIS 4185 (Nov. 29, 2011).................................................. 294
In re Clifton,
Release Nos. 9188 & 63926, 2011 SEC LEXIS 644 (Feb. 17, 2011). ................................. 287
In re Cody,
Release No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); In re Cody, Release No.
65235, 2011 SEC LEXIS 3041 (Aug. 31, 2011). ................................................................. 439
In re Coinstar Inc. Securities Litigation,
2011 WL 4712206 (W.D. Wash. Oct. 6, 2011). ........................................................... 172, 205
In re Conventry Healthcare, Inc. Securities Litigation,
2011 WL 1230998 (D. Md. Mar. 30, 2011)............................................................ 88, 150, 198
In re Coventry Healthcare, Inc. Securities Litigation,
2011 WL 3880431 (D. Md. Aug. 30, 2011). ........................................................................ 150
In re Credit Suisse-AOL,
2011 U.S. Dist. LEXIS 95889 (S.D. Mass. Aug. 26, 2011). ................................................ 242
In re Crocs, Inc. Securities Litigation,
774 F. Supp. 2d 1122 (D. Colo. 2011).................................................................................. 173
xvi

In re Demizio,
Release No. 63922, 2011 SEC LEXIS 649 (Feb. 17, 2011)................................................. 409
In re Deutsche Bank AG Sec. Litig.,
2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).......................................................... 14, 34, 247
In re Divine Capital Mkts., LLC,
Release Nos. 9247 & 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011) ................................. 290
In re Divine Capital Mkts., LLC,
Release No. 63980, 2011 SEC LEXIS 722 (Feb. 25, 2011)................................................. 288
In re Divine Capital Mkts., LLC,
Release No. 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011)........................................ 385, 431
In re Divine Capital Mkts., LLC,
Release No. 64999, 2011 SEC LEXIS 2610 (Aug. 1, 2011)................................................ 424
In re DVI, Inc. Securities Litigation,
639 F.3d 623 (3d Cir. 2011)............................................................................................ 64, 362
In re Dynex Capital, Inc. Sec. Litig.,
2011 WL 781215 (S.D.N.Y. Mar. 7, 2011). ......................................................................... 364
In re EDGX Exchange, Inc.,
Release No. 65556, 2011 SEC LEXIS 3592 (Oct. 13, 2011). .............................................. 438
In re Ellis,
Release No. 64220, 2011 SEC LEXIS 1199 (Apr. 7, 2011)................................................. 437
In re Enron Corp. Sec. Derivative & ERISA Litig.,
Nos. H–01–3624, H–03–0815, 2011 WL 3489524 (S.D. Tex. Aug. 9, 2011). ...................... 40
In re Enron Corp. Sec., Derivative & ERISA Litig.,
761 F. Supp. 2d 504 (S.D. Tex. 2011) ............................................................................ 40, 273
In re Evergreen Ultra Short Opportunities Fund Sec. Litig.,
275 F.R.D. 382 (D. Mass. 2011)............................................................................... 27, 73, 363
In re Fayette,
Release No. 63698, 2011 SEC LEXIS 151 (Jan. 11, 2011).................................................. 423
In re FCS Sec.,
Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec., Release
No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011). .................................................... 444, 447
In re Feinblum,
Release No. 64575, 2011 SEC LEXIS 1893 (May 31, 2011)............................................... 421
xvii

In re Franklin Bank Corp. Sec. Litig.,
782 F.Supp.2d 364 (S.D. Tex. 2011). ............................................................... 17, 79, 152, 325
In re Friedman,
Release No. 64486, 2011 SEC LEXIS 1699 (May 13, 2011)............................................... 447
In re Gallardo,
Release No. 65422, 2011 SEC LEXIS 3370 (Sept. 28, 2011).............................................. 408
In re Gallardo,
Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011). ...................................... 294, 434
In re Garcia,
Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011). ............................................. 411
In re Gautney,
Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011)...................................... 291, 432
In re Gautney,
Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011)...................................... 291, 432
In re Gilford Sec., Inc.,
Release Nos. 9264 & 65450, 2011 SEC LEXIS 3419 (Sept. 30, 2011). .............. 293, 425, 433
In re Ginder,
Release No. 64098, 2011 SEC LEXIS 968 (Mar. 18, 2011). ............................................... 415
In re Gizankis,
Release No. 64391, 2011 SEC LEXIS 1576 (May 4, 2011)................................................. 442
In re Gremo Invs., Inc.,
Release No. 64481, 2011 SEC LEXIS 1695 (May 12, 2011)............................................... 446
In re Hansen,
Release No. 65513, 2011 SEC LEXIS 3532 (Oct. 7, 2011). ................................................ 419
In re Harris,
Release No. 64942, 2011 SEC LEXIS 2518 (July 21, 2011). .............................................. 424
In re Heckmann Corp. Sec. Lit.,
2011 WL 2413999 (D. Del. June 16, 2011).......................................................... 147, 250, 370
In re Herald, Primeo, and Thema Sec. Litig.,
2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).............................................................. 212, 369
In re Hertz,
Release No. 64831, 2011 SEC LEXIS 2347 (July 7, 2011). ................................................ 422
xviii

In re Houston,
Release No. 66014, 2011 SEC LEXIS 4491 (Dec. 20, 2011). ............................................. 445
In re Huntleigh Sec. Corp.,
Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)....................... 289, 386, 421, 431
In re Icely,
Release No. 62215, 2011 SEC LEXIS 3012 (Aug. 29, 2011).............................................. 406
In re IMAX Sec. Litig.,
2011 WL 1487090 (S.D.N.Y. Apr. 15, 2011)....................................................................... 180
In re Immersion Corp. Sec. Litig.,
2011 WL 6303389 (N.D.Cal. Dec. 16, 2011)....................................................................... 164
In re Immucor, Inc. Securities Litigation,
2011 WL 2619092 (N.D.Ga. June 30, 2011)........................................................................ 175
In re Immucor, Inc. Securities Litigation,
2011 WL 3844221 (N.D. Ga. Aug. 29, 2011). ....................................................................... 94
In re IndyMac Mortgage-Backed Sec. Litig.,
793 F.Supp.2d 637 (S.D.N.Y. 2011)........................................................................... 8, 29, 322
In re Infineon Technologies AG Securities Litigation,
2011 WL 7121006 (N.D.Cal. Mar. 17, 2011)....................................................................... 161
In re Inv. Placement Group,
Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011). ..................................... 295, 434
In re J.P. Jeanneret Assocs., Inc.,
769 F. Supp. 2d 340 (S.D.N.Y. 2011)........................................................... 133, 210, 244, 270
In re Jamuna Real Estate, L.L.C.,
460 B.R. 661 (Bankr. E.D. Pa. 2011) ............................................................................... 2, 300
In re Janney Montgomery Scott LLC,
Release No. 64855, 2011 SEC LEXIS 3166 (July 11, 2011). .............................................. 418
In re Jennings,
Release No. 65349, 2011 SEC LEXIS 3233 (Sept. 16, 2011).............................................. 407
In re Jensen-Ames,
No. 10-10684, 2011 WL 1238929 (Bankr. W.D. Wash. March 30, 2011). ............................. 2
In re Kaminski,
Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).............................................. 441
xix

In re Kim,
Release No. 64862, 2011 SEC LEXIS 2389 (July 12, 2011). .............................................. 422
In re Kingate Mgmt. Ltd. Litig.,
2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) .............................................................. 210, 225
In re Kobayashi,
Release No. 64508, 2011 SEC LEXIS 1735 (May 17, 2011)............................................... 406
In re Konaxis,
Release No. 64298, 2011 SEC LEXIS 1334 (Apr. 13, 2011)............................................... 402
In re Kraus,
Release No. 64221, 2011 SEC LEXIS 1200 (Apr. 7, 2011), In re Levine, Release No.
64222, 2011 SEC LEXIS 1201 (Apr. 7, 2011)..................................................................... 437
In re Kummerfeld,
44 B.R. 28 (Bankr. S.D.N.Y. 2011)........................................................................................ 31
In re LeBouef,
Release No. 65216, 2011 SEC LEXIS 3013 (Aug. 29, 2011).............................................. 436
In re Legend Sec. Inc.,
Release No. 64502, 2011 SEC LEXIS 1726 (May 16, 2011)............................................... 414
In re Lehman Bros. Mortgage-Backed Sec. Litig.,
650 F.3d 167 (2d Cir. 2011).............................................................................................. 4, 239
In re Lehman Bros. Sec. and ERISA Litig.,
799 F. Supp. 2d 258 (S.D.N.Y. 2011)......................................................................... 9, 30, 136
In re Lehman Bros. Secs. & ERISA Litig.,
800 F. Supp. 2d 477 (S.D.N.Y. 2011)................................................................................... 322
In re Lincoln Educ. Srvs. Corp. Sec. Litig.,
2011 WL 3912832 (D. N.J. Sept. 6, 2011) ............................................................. 87, 196, 251
In re Lindsey,
Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin. Serv.,
Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin.
Serv., Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011). ................... 412, 426
In re Lopez-Tarre,
Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011)...................................... 292, 432
In re Malin,
Release No. 64302, 2011 SEC LEXIS 1349 (Apr. 14, 2011)............................................... 417
xx

In re Manulife Financial Corporation Securities Litigation,
276 F.R.D. 87 (S.D.N.Y. 2011). ........................................................................................... 136
In re Massey Energy Co. Sec. Litig.,
2011 WL 4528509 (S.D. W. Va. Sept. 28, 2011)................................................................. 376
In re Melhado, Flynn & Associates, Inc.,
Release No. 64467, 2011 SEC LEXIS 1662 (May 11, 2011); In re Melhado, Flynn &
Associates, Inc., Release No. 64468, 2011 SEC LEXIS 1663 (May 11, 2011); In re
Melhado, Flynn & Associates, Inc., Release No. 64469, 2011 SEC LEXIS 1664 (May
11, 2011). .............................................................................................................................. 427
In re Merck & Co. Sec., Derivative, & ERISA Litig.,
2011 WL 3444199 (D.N.J. Aug. 8, 2011) ........................................................ 16, 37, 148, 251
In re Merkin and BDO Seidman Sec. Litig.,
2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011)...................................................................... 212
In re Merrill Lynch Auction Rate Securities Litigation,
2011 WL 1330847 (S.D.N.Y. Mar. 30, 2011) ........................................................ 85, 138, 195
In re Merrill Lynch Auction Rate Securities Litigation,
765 F. Supp. 2d 375 (S.D.N.Y. 2011)............................................................................. 75, 132
In re Merrill Lynch,
Release No. 63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).................................................. 285
In re Meta Financial Group, Inc., Securities Litigation,
2011 WL 2893625 (N.D. Iowa July 18, 2011) ............................................................. 158, 254
In re MMR Inv. Bankers, LLC,
Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re MMR Investment
Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In re
MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8,
2011); In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS
1966 (June 8, 2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011
SEC LEXIS 1967 (June 8, 2011).................................................................................. 402, 410
In re Moody’s Corp. Sec. Litig.,
274 F.R.D. 480 (S.D.N.Y. 2011). ......................................................................................... 363
In re Morgan Stanley Mortg. Pass-Through Certificates Litig.,
2011 WL 4089580 (S.D.N.Y. Sept. 15, 2011).......................................................... 14, 35, 323
In re MRU Holdings Securities Litigation,
769 F. Supp. 2d 500 (S.D.N.Y. 2011)............................................................................. 97, 134
xxi

In re Mutascio,
Release No. 65351, 2011 SEC LEXIS 3254 (Sep. 19, 2011)............................................... 407
In re Mutual Funds Inv. Litig.,
767 F. Supp. 2d 542 (D. Md. 2011)...................................................................................... 213
In re Neaton,
Release No. 65863, 2011 SEC LEXIS 4232 (Dec. 1, 2011). ............................................... 448
In re Nicholson,
Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011)................................. 406, 423, 436
In re Novatel Wireless Securities Litigation,
2011 WL 5873113 (S.D. Cal. Nov. 23, 2011) ................................................................ 93, 170
In re Nuveen Funds/City of Alameda Securities Litigation,
2011 WL 1842819 (N.D.Cal. May 16, 2011)....................................................................... 162
In re NVIDIA Corporation Securities Litigation,
2011 WL 4831192 (N.D. Cal. Oct. 12, 2011)....................................................................... 164
In re Oldham,
Release No. 64491, 2011 SEC LEXIS 1705 (May 13, 2011)............................................... 424
In re Oppenheimer Rochester Funds Grp. Sec. Litig.,
2011 WL 5042066 (D.Colo. Oct. 24, 2011) ............................................................. 23, 47, 262
In re Optimal U.S. Litig.,
2011 U.S. Dist. LEXIS 119141 (S.D.N.Y. Oct. 14, 2011) ..................................................... 98
In re Optimal U.S. Litig.,
2011 WL 6424988 (S.D.N.Y. Dec. 21, 2011) ...................................................................... 369
In re Osborn,
Release No. 64145, 2011 SEC LEXIS 1055 (Mar. 29, 2011). ............................................. 442
In re Paganes,
Release No. 65957, 2011 SEC LEXIS 4401 (Dec. 15, 2011) .............................................. 408
In re Pagliarini,
Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011)......................................... 288, 430
In re Peperno,
Release No. 65018, 2011 SEC LEXIS 2649 (Aug. 3, 2011)................................................ 414
In re Picozzi,
Release No. 65569, 2011 SEC LEXIS 3609 (Oct. 14, 2011). .............................................. 444
xxii

In re Platinum & Palladium Commodities Litig.,
2011 U.S. Dist. LEXIS 105040 (S.D.N.Y. Sept. 13, 2011).................................................. 236
In re QA3 Fin. Corp.,
2011 WL 2678591 (Bankr. D. Neb. July 7, 2011)................................................................ 455
In re Refco Inc. Sec. Litig,
2011 WL 1219265 (S.D.N.Y. Mar. 30, 2011). ..................................................................... 299
In re Refco Inc. Sec. Litig.,
2011 WL 4035819 (S.D.N.Y. Sept. 6, 2011)........................................................................ 212
In re Richard Goble,
2011 SEC LEXIS 3492, SEC Initial Decision Release No. 435 (October 5, 2011)............. 112
In re Rodriguez,
Release No. 66056, 2011 SEC LEXIS 4546 (Dec. 23, 2011). ............................................. 404
In re Royal Bank of Scotland Group PLC Sec. Litig.,
765 F. Supp. 2d 327 (S.D.N.Y. 2011)..................................................................................... 30
In re Ryan,
Release No. 65173, 2011 SEC LEXIS 2930 (Aug. 19, 2011).............................................. 411
In re Sabado,
Release No. 64890, 2011 SEC LEXIS 2434 (July 14, 2011). .............................................. 413
In re Sadia S.A. Secs. Litig.,
2011 WL 6825235 (S.D.N.Y. Dec. 28, 2011). ..................................................................... 313
In re Sam P. Douglass and Anthony R. Moore,
Securities and Exchange Commission, Administrative Proceeding File No. 3-13934
(Feb. 24, 2011)...................................................................................................................... 108
In re Sanofi-Aventis Securities Litigation,
774 F. Supp. 2d 549 (S.D.N.Y. 2011)..................................................................... 75, 134, 245
In re Sarnicola,
Release No. 63924, 2011 SEC LEXIS 651 (Feb. 17, 2011)................................................. 405
In re Sawyers,
Release No. 64759, 2011 SEC LEXIS 2214 (June 28, 2011); In re Harrison, Release
No. 64965, 2011 SEC LEXIS 2558 (July 26, 2011)............................................................. 413
In re Schaefer,
Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011)......................................... 407, 425
In re Sec. Capital Assur. Ltd. Sec. Litig.,
2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011)........................................................ 15, 141, 248
xxiii

In re Shankar,
Release No. 64714, 2011 SEC LEXIS 2185 (June 21, 2011)............................................... 418
In re Sharemaster,
Release No. 65570, 2011 SEC LEXIS 3610 (Oct. 14, 2011). .............................................. 445
In re Shaw,
Release No. 9174, 2011 SEC LEXIS 251 (Jan. 14, 2011).................................................... 426
In re Shereshevsky,
Release No. 64704, 2011 SEC LEXIS 2098 (June 20, 2011)............................................... 406
In re Skowron,
Release No. 65783, 2011 SEC LEXIS 4065 (Nov. 17, 2011).............................................. 419
In re Smith & Wesson Holding Corp. Sec. Litig.,
2011 WL 6089727 (D. Mass. Mar. 25, 2011)....................................................................... 129
In re Smith Barney Transfer Agent Litig.,
2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011). ..................................................................... 184
In re Smith Barney Transfer Agent Litigation,
765 F. Supp. 2d 391 (S.D.N.Y. 2011)............................................................... 80, 85, 132, 324
In re Smith,
Release No. 63834, 2011 SEC LEXIS 390 (Feb. 3, 2011)................................................... 429
In re Smith,
Release Nos. 63834 & 3152, 2011 SEC LEXIS 390 (Feb. 3, 2011). ................................... 286
In re Spartis,
Release No. 64489, 2011 SEC LEXIS 1693 (May 13, 2011)............................................... 440
In re St. Jude Med., Inc. Sec. Litig.,
2011 WL 6755008 (D. Minn. Dec. 23, 2011)............................................... 159, 201, 237, 255
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig.,
774 F.Supp.2d 584 (S.D.N.Y. 2011)................................................................................. 10, 30
In re STEC Inc. Sec. Litig.,
2011 WL 2669217 (C.D. Cal. June 17, 2011) .................................................. 19, 91, 166, 201
In re STEC Inc. Sec. Litig.,
2011 WL 4442822 (C.D. Cal. Jan. 10, 2011) ................................................................. 18, 165
In re STEC Inc. Sec. Litig.,
Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx), SACV 09–1320–
JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011 WL
2669217 (C.D. Cal. June 17, 2011). ................................................................................. 42, 43
xxiv

In re Sturm, Ruger & Company, Inc. Securities Litigation,
2011 WL 494753 (D. Conn. Feb. 7, 2011) ................................................................... 130, 192
In re Suarez,
Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011). ............................................. 412
In re Sweat,
Release No. 65117, 2011 SEC LEXIS 2814 (Aug. 11, 2011).............................................. 443
In re TD Ameritrade, Inc.,
Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011)........................................... 286, 430
In re Textron, Inc.,
2011 U.S. Dist. LEXIS 103775 (D.R.I. Sept. 13, 2011)....................................................... 242
In re Thornburg Mortg., Inc. Sec. Litig.,
2011 WL 2429189 (D.N.M. June 2, 2011)....................................................... 23, 47, 174, 262
In re Torrey Pines Sec. Inc.,
Release Nos. 63835 & 3153, 2011 SEC LEXIS 391 (Feb. 3, 2011). ................................... 287
In re Torrey Pines Sec. Inc.,
Release Nos. 64317 & 3188, 2011 SEC LEXIS 1394 (Apr. 20, 2011)................ 289, 387, 431
In re Toyota Motor Corp. Securities Litigation,
2011 WL 2675395 (C.D.Cal. July 7, 2011).................................................................. 166, 257
In re Tronox, Inc. Sec. Litig.,
769 F. Supp. 2d 202 (S.D.N.Y. 2011)........................................................................... 236, 245
In re Tudor,
Release No. 65009, 2011 SEC LEXIS 2616 (Aug. 2, 2011)................................................ 419
In re UBS Sec. LLC,
Release No. 65733, 2011 SEC LEXIS 3985 (Nov. 10, 2011).............................................. 428
In re United Health Gr. Shareholder Derivative Litig.,
631 F.3d 913 (8th Cir. 2011). ............................................................................................... 312
In re Verifone Holdings Inc. Securities Litigation,
2011 WL 1045120 (N.D. Cal. Mar. 22, 2011)........................................................ 91, 161, 259
In re Vivendi Universal, S.A. Sec. Litig.,
765 F. Supp. 2d 52 (S.D.N.Y. 2011)......................................................................... 75, 97, 194
In re Wachovia Equity Sec. Litig.,
753 F.Supp.2d 326 (S.D.N.Y. 2011)......................................................... 10, 31, 131, 245, 324
xxv

In re Wash. Mut. Mortgage-Backed Sec. Litig.,
2011 WL 5027725 (W.D. Wash. Oct. 21, 2011). ........................................................... 22, 365
In re Wash. Mut., Inc.,
2011 Bankr. LEXIS 5008 (Bankr. D. Del. Dec. 20, 2011)................................................... 250
In re Weatherford Int’l Sec. Litig.,
2011 WL 2652443 (S.D.N.Y. Jul. 6, 2011). ......................................................................... 180
In re Wells Fargo Sec. LLC,
Release No. 64182, 2011 SEC LEXIS 1202 (Apr. 5, 2011)................................................. 404
In re Xenoport, Inc. Securities Litigation,
2011 WL 6153134 (N.D. Cal. Dec. 12, 2011)...................................................................... 164
In re Zaino,
Release No. 64398, 2011 SEC LEXIS 1574 (May 4, 2011)................................................. 438
In re Zangari,
Release No. 63923, 2011 SEC LEXIS 650 (Feb. 17, 2011)................................................. 405
Indah v. SEC,
661 F.3d 914 (6th Cir. 2011) ................................................................................ 311, 360, 367
Indiana State Dist. Council of Laborers v. Omnicare, Inc.,
2011 WL 2786301 (E.D. Ky. July 14, 2011).......................................................................... 17
Indus. Enters. of Am., Inc. v. Brandywine Consultants,
2011 Bankr. LEXIS 3560 (Bankr. Del. Sept. 16, 2011). ...................................................... 299
Ingham v. Thompson,
931 N.Y.S.2d 306 (N.Y. App. Div. 2011). ........................................................................... 328
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech.,
2011 WL 915115 (D. Nev. Mar. 15, 2011) .................................................................. 171, 203
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc.,
788 F. Supp.2d 609 (S.D. Ohio 2011) .................................................................... 90, 153, 199
Int’l Fund Mgmt. S.A., v. Citigroup Inc.,
2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30, 2011)............................ 36, 118, 248, 323
Inter-Local Pension Fund GCC/IBT v. GE,
2011 U.S. App. LEXIS 19271 (2d Cir. 2011) .............................................................. 122, 240
International Fund Management S.A. v. Citigroup, Inc.,
2011 WL 4529640 (S.D.N.Y. Sept. 30, 2011)................................................................ 78, 143
xxvi

J.P. Morgan Sec. Inc. v. Vigilant Ins. Co.,
2011 N.Y. App. Div. LEXIS 8829 (N.Y. App. Div. Dec. 13, 2011).................................... 232
Janus Capital Group, Inc. v. First Derivative Traders,
131 S. Ct. 2296 (2011)........................................................................ 54, 62, 94, 238, 267, 276
Janvey v. Alguire,
647 F.3d 585 (5th Cir. 2011) ................................................................................................ 449
Jasin v. Kozlowski,
2011 U.S. Dist. LEXIS 91802 (M.D. Pa., Nov. 3, 2010). .................................................... 104
Javitch v. Prudential Sec. Inc.,
2011 U.S. Dist. LEXIS 6925 (N.D. Ohio Jan. 25, 2011)...................................................... 231
Johnson v. Siemens AG,
2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011)................................................................ 84, 131
Jorling v. Anthem,
2011 WL 6755157 (S.D. Ind. Dec. 23, 2011)....................................................................... 215
Kadel v. Flood,
2011 WL 2015379 (11th Cir. May 24, 2011) ....................................................................... 127
Katyle v. Penn National Gaming, Inc.,
637 F.3d 462 (4th Cir. 2011) .................................................................................. 64, 124, 351
Katz v. China Century Dragon Media, Inc.,
2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).................................................................. 20, 44
Katz v. Gerardi,
655 F.3d 1212 (10th Cir. 2011). ......................................................................................... 6, 26
Katz v. Pershing, LLC,
2011 U.S. Dist. LEXIS 94107 (D. Mass. Aug. 23, 2011)..................................................... 230
Katz v. SEC,
647 F.3d 1156, 2011 U.S. App. LEXIS 16141 (DC Cir. 2011)............................................ 113
KBR, Inc. v. Chevedden,
2011 U.S. Dist. LEXIS 36431 (S.D. Tex. Apr. 4, 2011). ..................................................... 104
KBR, Inc. v. Chevedden,
776 F.Supp.2d 415 (S.D.Tex. 2011) ............................................................................. 104, 371
Kexuan Yao v. Crisnic Fund, S.A.,
2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).............................................................. 167, 373
xxvii

KeyBank, N.A. v. Bingo, Coast Guard Official No. 1121913,
No. C09-849RSM, 2011 WL 1559829 (W.D. Wash. Apr. 22, 2011). ............................. 46, 59
King County v. Merrill Lynch & Co.,
2011 U.S. Dist. LEXIS 16483 (W.D. Wash. Feb. 18, 2011)................................................ 261
Kingsley Capital Mgmt., LLC v. Sly,
2011 WL 5008520 (D. Ariz. Sept. 30, 2011)........................................................................ 314
Kinnett v. Strayer Educ., Inc.,
2011 WL 317758 (M.D. Fla. Jan. 31, 2011)......................................................................... 191
Klawonn v. YA Global Investments, L.P.,
2011 U.S. Dist. LEXIS 88535 (D. N.J., Aug. 10, 2011)....................................................... 116
Kokkinis v. Aegean Marine Petroleum Network,
2011 WL 2078010 (S.D.N.Y. May 19, 2011). ..................................................................... 180
Krieger v. Atheros Communc’n, Inc.,
2011 WL 6153154 (N.D. Cal. Dec. 12, 2011)...................................................................... 188
Kuriakose v. Federal Home Loan Mortgage Corp.,
2011 WL 1158028 (S.D.N.Y. Mar. 30, 2011). ..................................................................... 138
Lane v. Page,
272 F.R.D. 558 (D.N.M. 2011)............................................................................................. 366
Lapiner v. Camtek, Ltd.,
2011 WL 445849 (N.D. Cal. Feb. 2, 2011). ................................................................. 160, 163
Ledford v. Peeples,
657 F.3d 1222 (11th Cir. 2011)....................................................................................... 67, 235
Leibholz v. Hariri,
2011 WL 1466139 (D.N.J. Apr. 15, 2011). .......................................................................... 299
Lewis v. UBS Fin. Servs. Inc.,
2011 WL 4727795 (N.D. Cal. Sept. 30, 2011). .................................................................... 457
Lifschitz v. Nextwave Wireless Inc.,
2011 WL 5839682 (S.D. Cal. Nov. 21, 2011). ..................................................................... 169
Litchfield Capital, LLC v. BNY Clearing Services LLC,
2011 U.S. Dist. LEXIS 120207 (S.D.N.Y. Oct. 14, 2011). .................................................. 231
Litwin v. Blackstone Group, L.P.,
634 F.3d 706 (2d Cir. 2011).......................................................................................... 5, 26, 63
xxviii

Litwin v. Oceanfreight, Inc.,
2011 WL 5223022 (S.D.N.Y., Nov. 2, 2011)............................................................... 101, 375
LNB Bancorp, Inc. v. Osborne,
2011 U.S. Dist. LEXIS 137705 (E.D.Ohio, Nov. 30, 2011)................................................. 105
Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson,
2011 WL 2444675 (D.Del. June 14, 2011)........................................................... 147, 196, 250
Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
2011 U.S. Dist. LEXIS 29601 (D. Nev. Mar. 9, 2011)................................................. 343, 459
Louisiana Municipal Police Employees Retirement System, v. KPMG LLP,
2011 WL 4629299 (N.D. Ohio Sept. 30, 2011)...................................................... 78, 153, 325
Louisiana-Paific. Corp. v. Money Market 1 Institutional Investment Dealer,
2011 WL 1152568 (N.D. Cal. Mar. 28, 2011)........................................................ 59, 224, 229
Loumiet v. Office of Comptroller of Currency,
650 F.3d 796 (D.C. Cir. 2011).............................................................................................. 317
Love v. Alfacell Corp.,
2011 WL 4915874 (D. N.J. Oct. 17, 2011)............................................................. 87, 149, 197
Luciani v. Luciani ,
2011 WL 3859707 (S.D. Cal. Sept. 1, 2011)........................................................................ 169
Luther v. Countrywide Fin. Corp.,
195 Cal. App. 4th 789 (Cal. Ct. App. 2011). ........................................................................ 221
Lynch v. Whitney,
419 F. App’x 826 (10th Cir. 2011) ....................................................................................... 312
M & B Assocs., Inc. v. Wells Fargo Bank, N.A.,
2011 Tex. App. LEXIS 2873 (Tex. App. Amarillo Apr. 15, 2011)...................................... 336
Mallen v. Alphatec Holding, Inc.,
2011 WL 175687 (S.D. Cal. Jan. 19, 2011).......................................................................... 188
Mandelbaum v. Fiserv, Inc.,
2011 WL 1225549 (D. Colo. Mar. 29, 2011). ...................................................................... 219
Mandell v. Reeve,
2011 U.S. Dist. LEXIS 114804 (S.D.N.Y. Oct. 4, 2011). .................................................... 249
Mannkind Securities Actions,
2011 WL 6327089 (C.D. Cal. Dec. 16, 2011) ...................................................... 168, 201, 258
xxix

Marini v. Adamo,
2011 WL 4442710 (E.D.N.Y. Sept. 26, 2011). .................................................................... 298
Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-A Sec.,
273 F.R.D. 363 (E.D.N.Y. 2011)...................................................................................... 7, 321
Matrixx Initiative, Inc. v. Siracusano,
131 S.Ct. 1309 (2011)............................................................................................... 61, 62, 121
Matter of Bloomfield,
Admin. Proc. File No. 3-13871, SEC Initial Dec. Release No. 416-A, 2011 SEC
LEXIS 1457 (April 26, 2011). .............................................................................................. 386
Matter of Blue Point Securities, Inc.,
NYSE Hearing Panel Decision 11-NYSE-7; 2011 NYSE Disc. Action LEXIS 7
(Sept. 27, 2011)..................................................................................................................... 398
Matter of BNY Mellon Securities LLC,
Admin. Proc. File No. 3-14191, SEC Release No. 34-63724, 2011 SEC LEXIS 252
(Jan. 14, 2011)....................................................................................................................... 391
Matter of Clifton,
Admin. Proc. File No. 3-14266, SEC Init. Dec. Release No. 443, 2011 SEC LEXIS
4185 (Nov. 29, 2011)............................................................................................................ 379
Matter of Credit Suisse Securities (USA) LLC,
NYSE Hearing Panel Decision 11-NYSE-5; 2011 NYSE Disc. Action LEXIS 5
(Sept. 14, 2011)..................................................................................................................... 399
Matter of Ellis,
Admin. Proc. File No. 3-14328, SEC Release No. 34-64220, 2011 SEC LEXIS 1199
(April 7, 2011). ..................................................................................................................... 388
Matter of Gallardo,
Admin. Proc. File No. 3-14139, SEC Release No. 34-65658, 2011 SEC LEXIS 3848
(Oct. 31, 2011). ..................................................................................................................... 380
Matter of Gilford Securities Inc.,
Admin. Proc. File No. 3-14574, SEC Release No. 34-65450, 2011 SEC LEXIS 3419
(Sept. 30, 2011)..................................................................................................................... 381
Matter of Investment Placement Group,
Admin. Proc. File No. 3-14677, SEC Release No. 34-66055, 2011 SEC LEXIS 4547
(Dec. 23, 2011). .................................................................................................................... 378
Matter of KCCI, Ltd.,
NYSE Hearing Panel Decision 11-NYSE-8; 2011 NYSE Disc. Action LEXIS 8 (Nov.
1, 2011). ................................................................................................................................ 398
xxx

Matter of Keybanc Capital Markets, Inc.,
NYSE Hearing Panel Decision 2011-1; 2011 NYSE Disc. Action LEXIS 1 (Jan. 31,
2011). .................................................................................................................................... 401
Matter of Lombardi & Co., Inc.,
NYSE Hearing Panel Decision 2011-4; 2011 NYSE Disc. Action LEXIS 4 (May 25,
2011). .................................................................................................................................... 399
Matter of Lopez-Tarre,
Admin. Proc. File No. 3-14562, SEC Release No. 34-65391, 2011 SEC LEXIS 3311
(Sept. 23, 2011)..................................................................................................................... 382
Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Admin. Proc. File No. 3-14204, SEC Release No. 34-63760, 2011 SEC LEXIS 280
(Jan. 25, 2011)....................................................................................................................... 390
Matter of Pagliarini,
Admin. Proc.File No. 3-14273, SEC Release No. 34-63964, 2011 SEC LEXIS 682
(Feb. 24, 2011)...................................................................................................................... 389
Matter of SG Americas Securities, LLC,
NYSE Hearing Panel Decision 2011-3; 2011 NYSE Disc. Action LEXIS 3 (May 13,
2011). .................................................................................................................................... 400
Matter of Smith,
Admin. Proc. File No. 3-14229, SEC Release No. 34-63834, 2011 SEC LEXIS 390
(Feb. 3, 2011)........................................................................................................................ 387
Matter of TD Ameritrade, Inc.,
Admin. Proc. File No. 3-14225, SEC Release No. 34-63829, 2011 SEC LEXIS 389
(Feb. 3, 2011)........................................................................................................................ 389
Matter of the Application of Kaminski,
Admin. Proc. File No. 3-14054, SEC Release No. 34-65347, 2011 SEC LEXIS 3225
(Sept. 16, 2011)..................................................................................................................... 383
Matter of UBS Securities LLC,
NYSE Hearing Panel Decision 2011-2; 2011 NYSE Disc. Action LEXIS 2 (Feb. 2,
2011). .................................................................................................................................... 400
Maverick Fund, L.D.C. v. Comverse Tech. Inc.,
801 F. Supp.2d 41 (E.D.N.Y. 2011). ............................................................ 117, 131, 193, 243
MBIA Inc. v. Fed. Ins. Co.,
652 F.3d 152 (2d Cir. 2011).................................................................................................. 317
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC,
927 N.Y.S.2d 517 (N.Y. Sup. Ct. 2011) ....................................................................... 311, 319
xxxi

McCafferty v. A.G. Edwards & Sons, Inc.,
2011 U.S. Dist. LEXIS 89437 (D.N.J. Aug. 11, 2011)......................................................... 341
McCann v. Hy-Vee,
2011 WL 250262 (N.D. Ill. 2011) .......................................................................................... 81
McCann v. Hy-Vee, Inc.,
663 F.3d 926 (7th Cir. 2011)........................................................................................... 65, 320
McCoy-McMahon v. Godlove,
2011 WL 4820185 (E.D. Pa. Sept. 30, 2011). ...................................................................... 300
McDonald v. Compellent Technologies, Inc.,
805 F. Supp. 2d 725 (D. Minn. Aug. 1, 2011)...................................................................... 158
McIntyre Mach., Ltd. v. Nicastro,
131 S.Ct. 2780 (2011)........................................................................................................... 366
Me. State Retirement Sys. v. Countrywide Fin. Corp.,
No. 2:10–CV–0302 MRP (MANx), 2011 WL 4389689 (C.D. Cal. May 5, 2011) ................ 42
Meram v. Citizens Title & Trust, Inc.,
2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011).......................................................... 260
Merkin v. Gabriel Capital, L.P.,
2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011).................................................. 273
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Whitney,
419 Fed. App’x. 826, (10th Cir. 2011). ................................................................................ 347
Metz v. Unizan Bank,
649 F.3d 492 (6th Cir. 2011). ............................................................................................... 327
Meyer v. St. Joe Company ,
2011 WL 3750324 (N.D. Fla. Aug. 24, 2011)...................................................................... 174
Michael S. Rulle Family Dynasty Trust v. AGL Life Assurance Company,
2011 WL 3510285 (3d Cir. July 14, 2011)........................................................................... 123
Mid-Ohio Sec. Corp. v. Estate of Burns,
790 F. Supp. 2d 1263 (D. Nev. 2011)........................................................................... 337, 343
Milo v. Galante,
2011 WL 1214769 (D. Conn. Mar. 28, 2011). ............................................................. 297, 329
Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc.,
2011 WL 6962826 (D. Minn. Dec. 12, 2011)....................................................................... 365
xxxii

Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc. ,
641 F.3d 1023 (8th Cir. 2011). ............................................................................................. 125
Mishkin v. Zynex Inc.,
2011 WL 1158715 (D.Colo. Mar. 30, 2011) ................................................................ 173, 205
Mississippi Pub. Emps.’ Ret. Sys. v. Boston Scientific Corp.,
649 F.3d 5 (1st Cir. 2011)..................................................................................................... 122
MLSMK Inv. Co. v. JP Morgan Chase & Co.,
651 F.3d 268 (2d Cir. 2011).......................................................................................... 267, 297
Monk v. Johnson and Johnson ,
2011 WL 6339824 (D.N.J. Dec. 19, 2011)................................................................... 149, 357
Moomjy v. HQ Sustainable Maritime Indus., Inc.,
2011 WL 4048796 (W.D. Wash. Sept. 12, 2011)......................................................... 190, 378
Moorehead v. Deutsche Bank AG,
2011 WL 4496221 (N.D. Ill. Sept. 26, 2011). ...................................................................... 303
Moradi v. Adelson,
2011 WL 5025155 (D. Nev. Oct. 20, 2011). ........................................................................ 189
Morgan Keegan & Co. v. Jindra,
2011 U.S. Dist LEXIS 135464 (W.D. Wash. Nov. 22, 2011). ............................................. 335
Morgan Keegan & Co. v. Shadburn,
2011 WL 5244696 (M.D. Ala. Nov. 3, 2011)......................................................................... 49
Morgan Keegan & Co., Inc. v. Smythe,
2011 Tenn. App. LEXIS 613 (Tenn. Ct. App. Jan. 19, 2011). ............................................. 345
Mori v. Saito,
802 F. Supp. 2d 520 (S.D.N.Y. 2011)................................................................................... 375
Moriarty v. Equisearch Services, Inc.,
2011 WL 4485176 (6th Cir. Sept. 29, 2011). ....................................................................... 305
Morris v. Zimmer,
2011 WL 5533339 (S.D.N.Y. Nov. 10, 2011)...................................................................... 298
Moss v. Kroner,
197 Cal. App. 4th 860 (2011). .............................................................................................. 266
Murphy v. Reynolds,
2011 WL 4502523 (Tex. App. Sept. 29, 2011). ........................................................... 279, 296
xxxiii

Murray v. Citigroup Global Mkts., Inc.,
2011 U.S. Dist. LEXIS 131197 (N.D. Ohio, Nov. 14, 2011). .............................................. 349
Muthukamatchi v. Citigroup Global Markets, Inc.,
2011 WL 5025062 (FINRA Oct. 9, 2011)............................................................................ 461
N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc.,
2011 WL 3874821 (S.D.N.Y. Aug. 16, 2011)...................................................................... 364
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc.,
2011 WL 1338195 (S.D.N.Y. Mar. 31, 2011) .......................................................... 12, 33, 307
N.J. Carpenters Health Fund v. Residential Capital, LLC,
2011 Fed. Sec. L. Rep. (CCH) 96, 303 (S.D.N.Y. Apr. 28, 2011). ................................... 246
N.J. Carpenters Health Fund v. Residential Capital, LLC,
2011 WL 2020260 (S.D.N.Y. May 19, 2011) .................................................................. 13, 34
N.J. Carpenters Health Fund v. Residential Capital, LLC,
272 F.R.D. 160 (S.D.N.Y. 2011). ................................................................................... 31, 363
Narnia Investments Ltd. v. Harvestons Sec. Inc.,
2011 Tex. App. LEXIS 6182 (Tex. Civ. App. Aug. 9, 2011)....................................... 265, 279
NECA-IBEW Pension Trust Fund v. Bank of Am. Corp.,
2011 WL 6844456 (S.D.N.Y. Dec. 29, 2011). ..................................................................... 376
Negrete v. Allianz Life Ins. Co. of N. America,
2011 WL 4852314 (C.D. Cal. Oct. 13, 2011)....................................................................... 304
New Mexico State Investment Council v. Ernst & Young, LLP,
641 F.3d 1089 (9th Cir. 2011). ............................................................................................. 125
New Orleans Employees’ Retirement System v. Celestica, Inc,
2011 WL 6823204 (2d Cir. Dec. 29, 2011). ......................................................... 123, 192, 351
New York State Teachers’ Ret. Sys. v. Fremont General Corporation ,
2011 WL 5930459 (9th Cir., Nov. 29, 2011)........................................................................ 126
Nexbank, SSB v. BAC Home Loan Servicing, LP,
2011 WL 5182118 (N.D. Tex. Oct. 28, 2011)................................................................ 39, 371
Nguyen v. Radient Pharmaceuticals Corporation,
2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011)................................... 167, 257, 359
Niederklein v. PCS Edventures!.com, Inc.,
2011 WL 759553 (D. Idaho Feb. 24, 2011).......................................................................... 190
xxxiv

Northstar Fin. Advisors, Inc. v. Schwab Invs.,
781 F. Supp. 2d 926 (N.D. Cal. 2011). ................................................................................. 217
Northumberland Cty. Ret. Sys. v. GMX Resources, Inc.,
2011 WL 5578963 (W.D. Okla. Nov. 16, 2011). ................................................................. 220
Orr v. Calvert,
2011 WL 6130799 (N.C. Dec. 9, 2011)................................................................................ 329
Oughtred v. E*Trade Financial Corporation,
2011 WL 1210198 (S.D.N.Y. Mar. 31, 2011). ..................................................................... 139
Owens v. Gaffken & Barringer Fund, LLC,
2011 WL 1795310 (S.D.N.Y. May 5, 2011). ......................................................................... 58
Patel v. Patel,
761 F. Supp. 2d 1375 (N.D. Ga. 2011)........................................................................... 70, 175
Pension Trust Fund for Operating Eng’rs v. Mortgage Asset Securitization Trans., Inc.,
2011 WL 4550191 (D.N.J. Sept. 29, 2011). ..................................................................... 17, 38
Perfecting Church v. Royster, Carberry, Goldman & Assocs., Inc.,
2011 WL 4407439 (E.D. Mich. Sept. 22, 2011)................................................................... 223
Perlmutter v. Intuitive Surgical, Inc.,
2011 WL 566814 (N.D. Cal. Feb. 15, 2011). ....................................................................... 187
Pet Quarters, Inc. v. Ladenburg Thalmann and Company, Inc.,
2011 WL 1135902 (E.D.Ark. Mar. 28, 2011). ..................................................................... 157
Petrie v. Elec. Game Card Inc.,
2011 U.S. Dist. LEXIS 6203 (C.D. Cal. Jan. 12, 2011). ...................................................... 256
Pezza v. Investors Capital Corp.,
767 F. Supp. 2d 225 (D. Mass. 2011). .................................................................................. 340
PFS Invs., Inc. v. Imhoff,
2011 U.S. Dist. LEXIS 31417 (E.D. Mich. Mar. 25, 2011). ................................................ 342
Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enterprises, Inc.,
2011 WL 4591541 (S.D. Fla. Sept. 30, 2011) .............................................................. 175, 264
Philco Investments, LTD., v. Martin,
2011 WL 4595247 (N.D. Cal. Oct. 4, 2011)......................................................................... 164
Picard v. Kohn,
2011 U.S. Dist. LEXIS 101261 (S.D.N.Y. Sept. 6, 2011).................................................... 298
xxxv

Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC),
458 B.R. 87 (Bankr. S.D.N.Y. 2011).................................................................................... 310
Pipefitters Local No. 636 Defined Benefit Plan v. Bank of Am. Corp.,
275 F.R.D. 187 (S.D.N.Y. 2011). ......................................................................................... 179
Pipino v. Onuska,
4:11CV00129 (N.D. Ohio Apr. 29, 2011). ....................................................................... 57, 59
Plichta v. SunPower Corporation,
790 F.Supp.2d 1012 (N.D. Cal. 2011) ...................................................................... 21, 68, 160
Plumbers and Pipefitters Local Union No. 12 Pension-Annuity Fund v. Nomura Asset
Acceptance Corp.,
632 F.3d 762 (1st Cir. Mass. 2011) .................................................................................... 3, 24
Plumbers and Pipefitters Local Union No. 200 Pension-Annuity Trust Fund v.
Washington Post Co.,
274 F.R.D. 33 (D.D.C 2011)................................................................................................. 176
Plumbers and Pipefitters Local Union No. 562 Supplemental Plan & Trust v. J.P.
Morgan Acceptance Corp. I,
2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011) ............................................................ 7, 28, 321
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-
Misys Healthcare,
778 F. Supp. 2d 858 (N.D. Ill. 2011) ...................................................................... 71, 154, 200
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-
Misys In re Immucor, Inc. Sec. Litig.,
2011 WL 2619092 (N.D. Ga. June 30, 2011)....................................................................... 207
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Arbitron,
Inc.,
2011 WL 5519840 (S.D.N.Y. Nov. 14, 2011)...................................................................... 375
Plumbers and Pipefitters Local Union No. 719 Pension-Annuity Trust Fund v. Conseco
Inc.,
2011 WL 1198712 (S.D.N.Y. Mar. 30, 2011) ...................................................................... 138
Plumbers and Pipefitters Local Union No. 719 Pension-Annuity Trust Fund v. Zimmer
Holdings, Inc.,
2011 WL 338865 (S.D. Ind. Jan. 28, 2011).......................................................................... 156
Plumbers, Pipefitters & MES Local Union No. 392 Pension-Annuity Fund v. Fairfax Fin.
Holdings Ltd.,
2011 WL 4831209 (S.D.N.Y. Oct. 12, 2011)....................................................................... 182
xxxvi

Police Retirement System of St. Louis v. Intuitive Surgical, Inc.,
2011 WL 3501733 (N.D. Cal. Aug. 10, 2011). ............................................................ 162, 202
Pope Investments II LLC v. Deheng Law Firm,
2011 WL 5837818 (S.D.N.Y. Nov. 21, 2011)...................................................................... 144
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC,
792 F. Supp.2d 328 (D. Conn. 2011)............................................................................ 242, 353
Prestwick Capital Mgmt. Ltd. v. Peregerine Fin. Group, Inc.,
2011 U.S. Dist. LEXIS 95324 (N.D. Ill. Aug. 25, 2011)...................................................... 232
Prime Mover Capital Partners L.P. v. Elixir Gaming Technologies, Inc.,
793 F.Supp. 2d 651 (S.D. N.Y. 2011)..................................................... 85, 135, 177, 353, 368
Probate Court of Warwick v. Bank of America, N.A.,
2011 WL 3740478 (D.R.I. Aug. 24, 2011)........................................................................... 306
Prud’homme v. Merrill Lynch, Pierce, Fenner, & Smith Inc.,
FINRA Case No. 09-05271 Sep. 19, 2011.............................................................................. 60
PT Bank Negara Indonesia (Persero) Tbk v. Barclays Bank PLC,
2011 WL 4717360 (S.D.N.Y. Sept. 28, 2011)...................................................................... 354
Public Employees Retirement Ass’n of N.M. v. Clearlend Secs.,
798 F. Supp. 2d 1265 (D.N.M. 2011) ................................................................................... 314
Public Employees Retirement Sys. of Miss. v. Goldman Sachs Grp.
2011 WL 135821 (S.D.N.Y. Jan. 12, 2011). .................................................................... 11, 32
Public Employees Retirement Sys. of Miss. v. Merrill Lynch & Co.,
2011 WL 3652477 (S.D.N.Y. Aug. 22, 2011)................................................................ 34, 364
Purvis v. Arizona Corp. Comm’n,
No. 1 CA-CV 10-0311, 2011 WL 662842 (Ariz. Ct. App, Div. 1 Feb. 24, 2011). .................. 3
Puskala v. Koss Corp.,
799 F. Supp.2d 941 (E.D. Wis. 2011)............................................................. 79, 157, 236, 254
Quail Cruises Ship Mgmt, Ltd. v. Agencia de Viagens CVC Tur Limitada,
2011 WL 5057203 (S.D. Fla. Oct. 24, 2011)........................................................................ 374
Quan v. Advanced Battery Tech., Inc.,
2011 WL 4343802 (S.D.N.Y. Sept. 9, 2011)........................................................................ 181
Rafton v. Rydex Series Funds,
2011 WL 1642588 (N.D. Cal. May 2, 2011).......................................................................... 46
xxxvii

Rafton v. Rydex Series Funds,
2011 WL 31114 (N.D. Cal. Jan. 5, 2011)................................................................. 21, 45, 259
Rai v. Barclays Capital, Inc.,
2011 U.S. App. LEXIS 22365 (2d Cir., Nov. 2, 2011)......................................................... 348
Raymond James Fin. Servs., Inc. v. Phillips,
2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16, 2011). .............................................. 330, 338
Reese v. BP Exploration (Alaska) Inc.,
643 F.3d 681 (9th Cir. 2011). ......................................................................................... 66, 126
Reljic v. Tullett Prebon Americas Corp.,
2011 WL 2491342 (D.N.J. June 21, 2011)........................................................................... 453
Rentea v. Janes,
2011 WL 5822255 (C.D. Cal. Nov. 16, 2011)...................................................................... 168
Resnik v. Boskin,
2011 U.S. Dist. LEXIS 16634 (D.N.J. Feb. 17, 2011) ......................................................... 103
Resnik v. Woertz,
744 F. Supp. 2d 614 (D. Del. 2011)........................................................................ 69, 101, 146
Reynolds v. Parklane Inv., Inc.,
2011 Mich. App. LEXIS 1610 (Sept. 20, 2011). .................................................................. 337
RGH Liquidating Trust v. Deloitte & Touche LLP,
955 N.E.2d 329 (N.Y. 2011)................................................................................................. 220
Rich v. Shrader ,
2011 WL 4434852 (S.D. Cal. Sept. 22, 2011)...................................................................... 169
Richard v. Nw. Pipe Co.,
2011 U.S. Dist. LEXIS 96200 (W.D. Wash. Aug. 26, 2011). .............................................. 261
Richek v. Bank of Am.,
2011 WL 3421512 (N.D. Ill. Aug. 4, 2011). ........................................................................ 214
Richman v. Goldman Sachs Group, Inc.,
274 F.R.D. 473 (S.D.N.Y. 2011). ......................................................................................... 178
Ridley v. Sullivan,
2011 WL 1900156 (Ky. Ct. App. May 20, 2011)................................................................. 318
Ritchie Capital Mgmt., L.L.C. v. Jeffries,
653 F.3d 755 (8th Cir. 2011). ............................................................................................... 297
xxxviii

Roseville Emps. Ret. Sys. v. EnergySolutions, Inc.,
2011 U.S. Dist. LEXIS 113630 (S.D.N.Y. Sept. 30, 2011).................................................. 249
Roseville Emps. Ret. Sys. v. Nokia Corp.,
2011 U.S. Dist. LEXIS 101264 (S.D.N.Y. Sept. 6, 2011).................................................... 248
RS-ANB Fund, LP, v. KMS SPE LLC ,
2011 WL 5352433 (D. Idaho Nov. 7, 2011)......................................................................... 170
Russo v. Bruce,
777 F. Supp. 2d 505 (S.D.N.Y. 2011)............................................................................. 76, 135
Russo v. Finisar Corp.,
2011 WL 5117560 (N.D. Cal. Oct. 27, 2011)....................................................................... 188
Sacks v. Dietrich,
663 F.3d 1065 (9th Cir. 2011). ............................................................................................. 339
Salameh v. Tarsadia Hotels,
2011 WL 1044129 (S.D. Cal. Mar. 22, 2011) ........................................................................ 46
Salzman v. KCD Financial, Inc.,
2011 U.S. Dist. LEXIS 147170 (S.D.N.Y. Dec. 21, 2011). ................................................. 350
San Franciso Residence Club, Inc. v. Amado,
773 F. Supp. 2d 822 (N.D.Cal. 2011). .................................................................... 41, 237, 305
Sanders v. Forex Capital Mkts., LLC,
2011 U.S. Dist. LEXIS 137961 (S.D.N.Y. Nov. 29, 2011).................................................. 341
Saunders v. Morton,
2011 WL 1135132 (D. Vt. Feb. 17, 2011)............................................................................ 146
Sawabeh Information Services, Co. v. Brody,
2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011). ....................................................... 76, 145, 355
Scala v. Citicorp Inc.,
2011 WL 900297 (N.D. Cal. Mar. 15, 2011)........................................................ 161, 218, 275
Schueneman v. Arena Pharms., Inc.,
2011 WL 3475380 (S.D. Cal. Aug. 8, 2011). ....................................................................... 189
Scottrade, Inc. v. Broco Investments,
774 F. Supp. 2d 573 (S.D.N.Y. 2011)..................................................................................... 80
SEC v Mannion,
789 F. Supp. 2d 1321 (N.D. Ga. 2011)................................................................................... 70
xxxix

SEC v. Aragon Capital Advisors, LLC,
2011 WL 3278907 (S.D.N.Y. July 26, 2011). .............................................................. 272, 354
SEC v. Badian,
Litig. Release No. 22070, 2011 SEC LEXIS 2931 (S.D.N.Y. Aug. 19, 2011); In re
Drillman, Release No. 65172, 2011 SEC LEXIS 2929 (Aug. 19, 2011); In re Spinner,
Release No. 65171, 2011 SEC LEXIS 2928, (Aug. 19, 2011)............................................. 422
SEC v. Betta, Jr.,
2011 WL 4369012 (S.D. Fla. Sept. 19, 2011) .................................................................. 56, 60
SEC v. Big Apple Consulting U.S.A., Inc.,
2011 U.S. Dist. LEXIS 95292 (M.D. Fla. Aug. 25, 2011) ................................................... 278
SEC v. Carroll,
2011 WL 5880875 (W.D. Ky. Nov. 23, 2011) ..................................................................... 358
SEC v. Carroll,
2011 WL 6141227 (W.D. Ky. Dec. 9, 2011)........................................................................ 372
SEC v. Citigroup Global Markets Inc.,
2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011)........................................................................ 53
SEC v. Compania Internacional Financiera S.A.,
2011 WL 3251813 (S.D.N.Y. July 29, 2011) ....................................................................... 368
SEC v. Daifotis,
2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011)..................................................... 260
SEC v. Daifotis,
2011 WL 2183314 (N.D. Cal. June 6, 2011)........................................................ 275, 276, 360
SEC v. Daifotis,
2011 WL 3295139 (N.D. Cal. Aug. 1, 2011). ........................................................................ 54
SEC v. Devlin,
Litig. Release No. 21854, 2011 SEC LEXIS 539 (S.D.N.Y. Feb. 14, 2011); In re
Bowers, Release No. 63901, 2011 SEC LEXIS 632 (Feb. 14, 2011); In re Faulhaber,
Release No. 63902, 2011 SEC LEXIS 633 (Feb. 14, 2011); In re Glover, Release No.
63903, 2011 SEC LEXIS 634 (Feb. 14, 2011). .................................................................... 417
SEC v. Espuelas,
767 F. Supp. 2d 467 (S.D.N.Y. 2011)................................................................................... 270
SEC v. Fareri,
Litig. Release No. 21874, 2011 SEC LEXIS 819 (S.D. Fla. Mar. 7, 2011); In re
Fareri, Release No. 64413, 2011 SEC LEXIS 1591 (May 5, 2011). ................................... 421
xl

SEC v. Ficeto, Homm, Heatherington, Hunter World Markets, Inc., and Hunter Advisors,
LLC,
2011 SEC LEXIS 716, SEC Litigation Release No. 21865 (February 25, 2011) ................ 109
SEC v. Finger and Black Diamond Securities LLC,
2011 SEC LEXIS 3132, SEC Litigation Release No. 22087 (September 8, 2011).............. 111
SEC v. Gabelli,
653 F.3d 49 (2d Cir. 2011)...................................................................................... 50, 267, 320
SEC v. Galleon Mgmt. LP,
Litig. Release No. 22021, 2011 SEC LEXIS 2258 (S.D.N.Y. June 30, 2011)..................... 418
SEC v. Geiger,
Litig. Release No. 21831, 2011 SEC LEXIS 349 (D. Colo. Jan. 31, 2011); In re
Geiger, Release No. 63849, 2011 SEC LEXIS 752 (Feb. 7, 2011); In re Geiger,
Release No. 65265, 2011 SEC LEXIS 3096 (Sept. 6, 2011)................................................ 423
SEC v. Geswein,
2011 WL 4541308 (N.D. Ohio Aug. 2, 2011)........................................................................ 89
SEC v. Goldman Sachs & Co.,
790 F. Supp. 2d 147 (S.D.N.Y. 2011)..................................................................................... 52
SEC v. J.P. Morgan Securities LLC,
2011 SEC LEXIS 2329, SEC Litigation Release No. 22031 ............................................... 110
SEC v. Kelly,
2011 WL 44331161 (S.D.N.Y. Sept. 22, 2011)...................................................................... 53
SEC v. Koji Goto,
Litig. Release No. 22123, 2011 SEC LEXIS 3565 (Oct. 12, 2011). .................................... 435
SEC v. Kovzan,
2011 U.S. Dist. LEXIS 85794 (D. Kan. Aug. 4, 2011) ........................................................ 107
SEC v. Locke Capital Mgmt. Inc.,
794 F. Supp. 2d 355 (D.R.I. 2011)........................................................................................ 269
SEC v. Mercury Interactive, LLC,
2011 WL 5871020 (N.D. Cal. Nov. 22, 2011). .............................................................. 54, 106
SEC v. Monterosso,
768 F. Supp. 2d 1244 (S.D. Fla. Mar. 31, 2011)............................................................... 55, 69
SEC v. Morgan Keegan & Co., Inc.,
806 F. Supp. 2d 1253 (N.D. Ga. 2011)............................................................................. 70, 71
xli

SEC v. N. Am. Clearing, Inc.,
Litig. Release No. 21960, 2011 SEC LEXIS 1608 (M.D. Fla. May 5, 2011). ..................... 438
SEC v. Retail Pro, Inc.,
2011 U.S. Dist. LEXIS 68863 (S.D. Cal. June 23, 2011)..................................................... 277
SEC v. Shanahan,
646 F.3d 536 (8th Cir. 2011). ......................................................................................... 50, 269
SEC v. Smith,
798 F. Supp. 2d 412 (N.D.N.Y. 2011).......................................................................... 313, 361
SEC v. Sponge Tech. Delivery Sys. Inc.,
2011 Fed. Sec. L. Rep. (CCH) 96, 246 (E.D.N.Y. Mar. 14, 2011).................................... 269
SEC v. Steffes,
2011 WL 3418305 (N.D. Ill. Aug. 3, 2011) ......................................................................... 358
SEC v. Stifel, Nicolaus & Co., Inc. and David Noack,
2011 SEC LEXIS 2767, SEC Litigation Release No. 22064 (August 10, 2011) ................. 111
SEC v. Tambone,
802 F. Supp. 2d. 299 (D. Mass. 2011) .................................................................................. 320
SEC v. Tecumseh Holdings Corp.,
765 F. Supp. 2d 340 (S.D.N.Y. 2011)............................................................... 51, 97, 116, 194
SEC v. Todd,
642 F.3d 1207 (9th Cir. 2011) .............................................................................................. 240
SEC v. UBS Financial Services Inc.,
2011 SEC LEXIS 1555, SEC Litigation Release No. 21956 (May 4, 2011) ....................... 110
SEC v. Vianna,
Litig. Release No. 21905, 2011 SEC LEXIS 1039 (S.D.N.Y. Mar. 28, 2011)..................... 401
SEC v. Vitesse Semiconductor Corp.,
771 F. Supp. 2d 304 (S.D.N.Y. 2011)..................................................................................... 51
SEC v. Weintraub,
2011 U.S. Dist. LEXIS 14999 (S.D. Fla. Dec. 30, 2011) ..................................................... 107
SEC v. Woodruff,
778 F. Supp. 2d 1073 (D. Colo. March 31, 2011). ................................................................. 55
SEC v. Wyly,
788 F. Supp. 2d 92 (S.D.N.Y. 2011)................................................................................. 1, 325
xlii

SEC v. Zhenyu Ni,
SEC Litig. Rel. No. 21859 (N.D.Cal. Feb. 16, 2011)........................................................... 106
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,
454 B.R. 307 (S.D.N.Y. 2011).............................................................................................. 210
Seinfeld v. Connor,
774 F.Supp.2d 660 (D. Del. 2011)........................................................................................ 101
Self v. Chase Bank, N.A.,
2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).................................................................. 45, 58
Shaffer v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
779 F. Supp.2d 1085 (N.D. Cal. 2011). ........................................................................ 455, 456
Shammami v. Allos,
2011 WL 4805931 (E.D. Mich. Oct. 11, 2011) ...................................................... 57, 253, 335
Sheedy v. Lehman Bros. Holdings Inc.,
2011 U.S. Dist. LEXIS 131003 (D. Mass. 2011). ................................................................ 347
Shenk v. Karmazin ,
2011 WL 5148667 (S.D.N.Y Oct. 28, 2011)........................................................................ 144
Shepard v. S3 Partners, LLC,
2011 U.S. Dist. LEXIS 117957 (N.D. Cal. Oct. 12, 2011)................................................... 260
Silverman v. Motorola, Inc.,
772 F. Supp. 2d 923 (N.D. Ill. 2011). ................................................................................... 253
Silverstrand Investments v. AMAG Pharm., Inc.,
2011 WL 3566990 (D.Mass. Aug. 11, 2011). .................................................................... 7, 28
Simmonds v. Credit Suisse Securities (USA), LLC,
638 F.3d 1072 (9th Cir. 2011) .............................................................................................. 114
Simmons Investments, Inc. v. Conversational Computing Corporation,
2011 WL 673759 (D. Kan. Feb. 17, 2011) ................................................................... 173, 206
Slaughter v. Laboratory Medicine Consultants, Ltd.,
2011 WL 1486228 (D. Nev. 2011). ........................................................................................ 82
Smit v. Charles Schwab & Co.,
2011 WL 846697 (N.D. Cal. Mar. 8, 2011).......................................................................... 217
Smith v. Mpire Holdings, LLC,
2011 WL 3841676 (M.D. Tenn. Aug. 30, 2011) .................................................................... 40
xliii

Solow v. Citigroup, Inc. ,
2011 WL 5869599 (S.D.N.Y. Nov. 22, 2011)...................................................................... 145
Sparano v. Lief,
2011 WL 830109 (S.D. Cal. Mar. 3, 2011). ......................................................................... 189
Spaz Bev. Co. Defined Benefit Pension Plan v. Douglas,
2011 U.S. Dist. LEXIS 86019 (E.D. Pa. Aug. 4, 2011)........................................................ 333
Special Situations Fund III, L.P. v. American Dental Partners, Inc.,
775 F. Supp. 2d 227 (D. Mass. 2011) ............................................................. 72, 117, 128, 321
SRM Global Fund Ltd P’ship v. Countrywide Fin. Corp.,
2011 U.S. App. LEXIS 23526 (2d Cir. Nov. 23, 2011)........................................................ 117
St. Lucie County Fire District Fire-Fighters’ Pension Trust Fund v. Motorola, Inc.,
2011 WL 814932 (N.D. Ill. Feb. 28, 2011) .................................................................. 154, 200
Standard Inv. Chartered, Inc. v. National Assoc. of Sec. Dealers, Inc.,
637 F.3d 112 (2d. Cir. 2011)................................................................................................. 119
Steamfitters Local 449 Pension Fund v. Alter,
2011 WL 4528385 (E.D. Pa. Sept. 30, 2011) ................................................. 87, 149, 197, 252
Stephenson v. Pricewaterhousecoopers, LLP,
768 F. Supp. 2d 562 (S.D.N.Y. 2011)................................................................................... 133
Stevens v. Sembcorp Utilities PTE Ltd.,
2011 WL 3296063 (S.D.N.Y. Aug. 1, 2011)........................................................................ 361
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp.,
802 F. Supp.2d 1125 (C.D. Cal. 2011) ..................................................... 20, 44, 257, 326, 328
STMicroelectronics v. Credit Suisse Group,
775 F. Supp. 2d 525 (E.D.N.Y. 2011) .................................................................. 235, 243, 348
Stone v. Chicago Inv. Grp., LLC,
2011 WL 6841817 (N.D. Ill. Dec. 29, 2011)................................................................ 326, 327
Stoody-Broser v. Bank of Am.,
2011 WL 2181364 (9th Cir. June 6, 2011). .......................................................................... 208
Strategic Diversity, Inc. v. Alchemix Corp.,
666 F.3d 1197 (9th Cir. 2012). ............................................................................................... 66
Stratte-McClure v. Stanley,
784 F. Supp. 2d 373 (S.D.N.Y. 2011)................................................................................... 135
xliv

Strugala v. Riggio,
2011 U.S. Dist. LEXIS 115834 (S.D.N.Y. Oct. 4, 2011). .................................................... 100
Suess v. FDIC,
770 F. Supp. 2d 32 (D.D.C. 2011)........................................................................................ 312
Szulik v. TAG Virgin Islands, Inc.,
783 F. Supp. 2d 792 (E.D.N.C. 2011)................................................................................... 370
Szymborski v. Ormat Technologies, Inc.,
776 F. Supp. 2d 1191 (D.C. Nev. 2011) ................................................................. 73, 171, 203
Taddeo v. Am. Invsco Corp.,
2011 WL 4346380 (D. Nev. Sept. 15, 2011).......................................................................... 46
TAGC Mgmt. LLC v. Lehman,
2011 WL 3796350 (S.D.N.Y. Aug. 24, 2011)...................................................................... 369
Taylor v. AIA Servs. Corp.,
261 P.3d 829 (Idaho 2011).................................................................................................... 315
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc.,
2011 WL 1253250 (D.Ariz. Mar. 31, 2011)................................................................. 159, 358
Teran v. Subaye, Inc.,
2011 WL 4357362 (S.D.N.Y. Sept. 16, 2011)...................................................................... 181
The Ayco Company, L.P v. Becker,
2011 U.S. Dist. LEXIS 92380 (N.D.N.Y. Aug. 18, 2011) ................................................... 340
Tiberius Capital, LLC v. Petrosearch Energy Corporation,
2011 WL 1334839 (S.D.N.Y. Mar. 31, 2011) .............................................................. 100, 139
Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Company, Inc.,
2011 WL 4526517 (S.D.N.Y. Sept. 29, 2011)...................................................................... 142
Toussie v. Smithtown Bancorp, Inc.,
2011 WL 1155597 (E.D.N.Y. Feb. 7, 2011)......................................................................... 367
Turner v. Shengdatech, Inc.,
2011 WL 6110438 (S.D.N.Y. Dec. 6, 2011). ....................................................................... 183
Tuttle v. Sky Bell Asset Mgmt., LLC,
2011 WL 208060 (N.D. Cal. Jan. 21, 2011)......................................................................... 217
Tyler v. Liz Claiborne, Inc. ,
2011 WL 4498983 (S.D.N.Y. Sept. 29, 2011)...................................................................... 142
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U.S. Bank N.A. v. Cold Spring Granite Co.,
802 N.W.2d 363 (Minn. 2011).............................................................................................. 315
U.S. Education Loan Trust III, LLC v. RBC Capital Markets Corp.,
2011 WL 6778480 (S.D.N.Y. Dec. 21, 2011) ...................................................................... 145
U.S. v. Bachynsky,
415 F. App’x 167 (11th Cir. 2011). ...................................................................................... 281
U.S. v. Behrens,
2011 U.S. App. LEXIS 14294 (8th Cir. July 13, 2011).......................................................... 83
U.S. v. Bowdoin,
770 F. Supp. 2d 142 (D.D.C. 2011).......................................................................................... 1
U.S. v. Gushlak,
2011 WL 3159170 (E.D.N.Y. July 26, 2011)....................................................................... 307
U.S. v. McDonald,
2011 WL 1812782 (S.D.N.Y. May 10, 2011) .......................................................................... 2
U.S. v. Rajaratnam,
2011 U.S. Dist. LEXIS 91365 (S.D.N.Y. Aug. 16, 2011).................................................... 282
U.S. v. Reyes,
660 F.3d 454 (9th Cir. 2011). ............................................................................................... 235
U.S. v. Skilling,
638 F.3d 480 (5th Cir. 2011). ............................................................................................... 280
U.S. v. Speer,
419 F. App’x 562 (6th Cir. 2011). ........................................................................................ 281
U.S. v. Sumeru,
2011 U.S. App. LEXIS 18713 (9th Cir. Sept. 7, 2011). ....................................................... 281
U.S. v. Tzolov & Butler,
642 F.3d 314 (2nd Cir. 2011).................................................................................................. 95
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc.,
660 F.3d 643 (2d Cir. 2011).......................................................................................... 330, 339
Underland v. Alter,
2011 WL 4017908 (E.D. Pa. Sept. 9, 2011) ............................................................. 16, 38, 197
Urman v. Novelos Therapeutics, Inc.,
796 F. Supp. 2d 277 (D. Mass. 2011). .................................................................................. 128
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Valentini v. Citigroup, Inc.,
2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011) .................................. 86, 98, 146, 195, 284, 356
VanCook v. SEC,
653 F.3d 130 (2nd Cir. 2011).................................................................................. 95, 113, 268
Vandevelde v. China Natural Gas, Inc.,
2011 WL 2580676 (D. Del. Jun. 29, 2011) .......................................................................... 184
Vandevelde v. China Natural Gas, Inc.,
277 F.R.D. 126 (D. Del. 2011) ....................................................................................... 69, 185
Velez v. Perrin Holden & Davenport Capital Corp.,
769 F. Supp. 2d 445 (S.D.N.Y. 2011)........................................................................... 332, 452
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd.,
661 F.3d 164 (2d Cir. 2011).................................................................................................. 331
Walker v. Morgan Stanley Smith Barney LLC,
2011 WL 1603490 (E.D. Pa. Apr. 28, 2011) ........................................................................ 454
Wanken v. Wanken,
2011 WL 4495597 (5th Cir. Sept. 29, 2011) ........................................................................ 450
Waterford Inv. Servs. v. Bosco,
2011 U.S. Dist. LEXIS 96046 (E.D. Va. July 29, 2011). ..................................................... 334
Waterford Twp. Police & Fire Ret. Sys. v. Smithtown Bancorp, Inc.,
2011 WL 3511057 (E.D.N.Y. May 31, 2011) ...................................................................... 177
Wehrs v. Benson York Group, Inc.,
2011 WL 4435609 (N.D. Ill. Sept. 23, 2011) ............................................................... 155, 308
Wells Fargo Advisors, LLC v. Shaffer,
2011 WL 2669479 (N.D. Cal. July 7, 2011)......................................................................... 456
Wells Fargo Advisors, LLC v. Stifel Nicolaus, LLC,
2011 WL 4695369 (Cal. App. Ct. Oct. 7, 2011)................................................................... 460
Wells Fargo Bank, N.A. v. WMR e-Pin, LLC,
653 F.3d 702 (8th Cir. 2011). ............................................................................................... 346
West Palm Beach Police Pension Fund v. Cardionet, Inc.,
2011 WL 1099815 (S.D. Cal. Mar. 24, 2011). ..................................................................... 218
West v. State of Indiana,
942 N.E.2d 862 (Ind. Ct. App. 2011)........................................................................................ 3
xlvii

West Va. Laborers Trust Fund v. STEC Inc.,
2011 WL 6156945 (C.D. Cal. Oct. 7, 2011)......................................................................... 216
Westley v. Oclaro, Inc.,
2011 WL 4079178 (N.D. Cal. Sept. 12, 2011). .................................................................... 188
White v. Kolinsky,
2011 WL 1899307 (D.N.J. May 18, 2011)........................................................................... 148
Wilamowsky v. Take-Two Interactive Software, Inc.,
2011 WL 4542754 (S.D.N.Y. Sept. 30, 2011).............................................................. 143, 249
Wilson v. Merrill Lynch & Co., Inc.,
2011 WL 5515958 (2nd Cir. 2011)......................................................................................... 83
Wirth v. Taylor,
2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).............................................. 263, 277
Wolfe v. Aspenbio Pharma, Inc.,
2011 WL 2726019 (D. Colo. Jul. 11, 2011). ........................................................................ 191
Wozniak v. Align Technologies, Inc.,
2011 WL 2269418 (N.D.Cal. June 8, 2011)................................................................. 162, 202
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc.,
655 F.3d 1039 (9th Cir. 2011) ........................................................................................ 66, 126
Wu v. Tang,
2011 WL 145259 (N.D. Tex. Jan. 14, 2011) .................................................. 38, 151, 273, 282
Wyatt v. Inner City Broadcasting Corporation ,
2011 WL 4484071 (S.D.N.Y. Sept. 28, 2011)...................................................................... 142
Wynns v. Citigroup Global Markets, Inc.,
FINRA Case No. 10-00278 (Sep. 14, 2011)........................................................................... 60
Wyo. State Treasurer v. Moody’s Investors Serv.,
2011 Fed. Sec. L. Rep. (CCH) 96, 310 (2d Cir. May 11, 2011) ........................................ 239
Yary v. Voight,
2011 WL 6781003 (D. Minn Dec. 27, 2011)........................................................ 158, 255, 326
Yuan v. Getco, LLC,
2011 U.S. Dist. LEXIS 89991 (N.D. Ill. August 12, 2011).......................................... 337, 342
xlviii