Broker-Dealer Litigation - Greenberg Traurig LLP

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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