Justia Securities Law Opinion Summaries

The case involves codefendant brothers Joshua and Jamie Yafa, who were convicted of securities fraud and conspiracy to commit securities fraud for their involvement in a "pump-and-dump" stock manipulation scheme. They promoted the stock of Global Wholehealth Products Corporation (GWHP) through various means, including a "phone room" and social media, to inflate its price. Once the stock price rose significantly, they sold their shares, earning over $1 million. Following the sale, the stock price plummeted, causing significant losses to individual investors. A grand jury indicted the Yafas, along with their associates Charles Strongo and Brian Volmer, who pled guilty and testified against the Yafas at trial.The United States District Court for the Southern District of California sentenced the Yafas, applying the United States Sentencing Guidelines (U.S.S.G.) § 2B1.1. The court used Application Note 3(B) from the commentary to § 2B1.1, which allows courts to use the gain from the offense as an alternative measure for calculating loss when the actual loss cannot be reasonably determined. The district court found it difficult to calculate the full amount of investor losses and thus relied on the gain as a proxy. This resulted in a fourteen-level increase in the offense level for both brothers, leading to sentences of thirty-two months for Joshua and seventeen months for Jamie.The United States Court of Appeals for the Ninth Circuit reviewed the case. The court held that the term "loss" in § 2B1.1 is genuinely ambiguous and that Application Note 3(B)'s instruction to use gain as an alternative measure is a reasonable interpretation. The court concluded that the district court did not err in using the gain from the Yafas's offenses to calculate the loss and affirmed the district court's decision. View "USA V. YAFA" on Justia Law

In 2006, Cabot Oil & Gas Company began fracking in Dimock Township, Pennsylvania. By 2009, their operations caused a residential water well explosion, leading to methane gas contamination in local water supplies. The Pennsylvania Department of Environmental Protection (DEP) found Cabot in violation of environmental laws, resulting in the 2009 Consent Order, which mandated corrective actions and a $120,000 penalty. Cabot violated this order by 2010, leading to another consent order and additional fines. Over the next decade, Cabot received numerous violation notices and faced lawsuits, including a 2020 grand jury finding of long-term indifference to remediation efforts, resulting in criminal charges and a nolo contendere plea.Shareholders filed a derivative suit against Cabot’s directors, alleging breaches of fiduciary duties, including failure to oversee operations, issuing misleading statements, and insider trading. The United States District Court for the Southern District of Texas dismissed the claims, finding no serious oversight failure or bad faith by the directors, and insufficient particularized allegations to support claims of material misrepresentation or insider trading.The United States Court of Appeals for the Fifth Circuit reviewed the case de novo. The court affirmed the district court’s dismissal, agreeing that the directors had implemented and monitored compliance systems, and that the shareholders failed to demonstrate bad faith or conscious disregard of duties. The court also found that the statements in Cabot’s disclosures were not materially misleading and that the shareholders did not adequately plead demand futility regarding the insider trading claim. Thus, the court upheld the dismissal of all claims with prejudice. View "Ezell v. Dinges" on Justia Law

The plaintiffs, representing nine closed-end mutual funds, sued Ocean Capital LLC and several individuals and firms for allegedly committing securities violations. The plaintiffs claimed that the defendants misled their shareholders by failing to make complete and accurate disclosures, violating Sections 13(d), 14(a), and 20(a) of the Securities and Exchange Act of 1934 and other applicable SEC rules. The district court granted the defendants' motions for judgment on the pleadings and to dismiss, leading the plaintiffs to appeal.The United States District Court for the District of Puerto Rico initially reviewed the case. U.S. Magistrate Judge Giselle Lépez-Soler recommended dismissing the plaintiffs' complaint on grounds of failure to state a claim and mootness. The district court adopted this recommendation, dismissing the plaintiffs' claims but retaining jurisdiction over the defendants' counterclaims. The plaintiffs then moved for a stay of the proceedings on the counterclaims, which was denied. The district court granted the defendants' requested relief on their counterclaims, ordering the plaintiffs to seat the defendants' nominees for the board of directors of three funds. The plaintiffs timely appealed these decisions.The United States Court of Appeals for the First Circuit reviewed the case. The court affirmed the district court's dismissal of the plaintiffs' Sections 13(d), 14(a), and 20(a) claims. The court found that the plaintiffs failed to state a Section 13(d) claim for the non-PRRTFF IV funds and did not demonstrate irreparable harm for PRRTFF IV. The court also concluded that the plaintiffs' Section 14(a) claims were insufficient, as the statements in question were not materially misleading. Consequently, the court upheld the district court's judgment on the defendants' counterclaims, ordering the plaintiffs to seat the defendants' nominees. View "Tax-Free Fixed Income Fund for Puerto Rico Residents, Inc. v. Ocean Capital LLC" on Justia Law

In early 2020, Robert Goodrich liquidated his stock portfolio due to concerns about the financial market's reaction to the COVID-19 pandemic, resulting in significant financial losses. Goodrich had an investment account with U.S. Trust Bank of America Private Wealth Management, managed by Matthew Lettinga. Despite advice from Lettinga to avoid liquidation, Goodrich insisted on selling his portfolio. Goodrich later sued Lettinga and Bank of America, claiming gross negligence, breach of fiduciary duty, and violations of the D.C. Securities Act, arguing that he was not adequately informed of the risks involved in liquidating his portfolio.The U.S. District Court for the District of Columbia dismissed Goodrich's claims of gross negligence and violations of the D.C. Securities Act, finding them implausibly pleaded. The court allowed the breach of fiduciary duty claim to proceed but later granted summary judgment in favor of the defendants, concluding that Goodrich had explicitly instructed the sale of his portfolio, which precluded liability under the terms of the investment agreement.The United States Court of Appeals for the District of Columbia Circuit reviewed the case and affirmed the District Court's decisions. The appellate court held that the investment agreement's exculpatory clauses were enforceable and that Goodrich's explicit instruction to liquidate his portfolio shielded the defendants from liability. The court also agreed that Goodrich failed to plausibly allege scienter, a necessary element for his claims under the D.C. Securities Act, and found no abuse of discretion in the District Court's limitation of discovery to the dispositive issue of whether Goodrich instructed the sale. View "Goodrich v. Bank of America N.A." on Justia Law

Defendants, alleged victims of a Ponzi scheme perpetrated by John Woods, sought to bring claims against Woods's employer, Oppenheimer & Co. Inc., in a FINRA arbitration forum. Defendants claimed they were customers of Oppenheimer because they transacted with Woods, an associated person of Oppenheimer. Oppenheimer filed a federal action seeking a declaration that Defendants were not its customers and a permanent injunction to prevent arbitration.The United States District Court for the Western District of Washington granted summary judgment in favor of Oppenheimer, concluding that Defendants were not customers of Oppenheimer or Woods. The court found that Defendants had no direct relationship with Oppenheimer and that their investments were facilitated by Michael Mooney, not Woods. The court also issued a permanent injunction prohibiting Defendants from arbitrating their claims.The United States Court of Appeals for the Ninth Circuit reviewed the case and affirmed the district court's decision. The Ninth Circuit held that a "customer" under FINRA Rule 12200 includes any non-broker and non-dealer who purchases commodities or services from a FINRA member or its associated person. However, the court agreed with the district court that Defendants did not transact with Woods, as their investments were facilitated by Mooney. The court also rejected Defendants' "alter ego" theory, which suggested that their investments in an entity controlled by Woods made them Woods's customers.The Ninth Circuit concluded that Defendants were not entitled to arbitrate their claims against Oppenheimer under FINRA Rule 12200 and upheld the permanent injunction. The court found no errors in the district court's analysis or factual findings and affirmed the decision in full. View "OPPENHEIMER & CO. INC. V. MITCHELL" on Justia Law

Timothy Barton was involved in a scheme to develop underutilized land with loans from Chinese nationals. The Securities and Exchange Commission (SEC) and the Department of Justice initiated parallel civil and criminal proceedings against Barton and his associates, alleging violations of antifraud provisions of the Securities Act and the Exchange Act. The SEC sought a receivership to preserve lenders' assets, leading to various district court orders imposing and administering a receivership and freezing Barton’s assets. Barton appealed these orders and requested reassignment of the case on remand.The United States District Court for the Northern District of Texas initially imposed a receivership, which Barton appealed. The United States Court of Appeals for the Fifth Circuit vacated the receivership order, finding that the district court used the wrong standard and that the receivership's scope was too broad. On remand, the district court applied the correct standard from Netsphere, Inc. v. Baron and reimposed a receivership, including entities that received or benefited from assets traceable to Barton’s alleged fraudulent activities. Barton again appealed, challenging the district court’s jurisdiction, the decision to appoint the receiver, the scope of the receivership, the administration of the receivership, and the preliminary injunction.The United States Court of Appeals for the Fifth Circuit affirmed the district court’s imposition and scope of the receivership and the grant of a preliminary injunction. The court found no abuse of discretion in the district court’s actions and dismissed Barton’s appeal of certain orders administering the receivership for lack of jurisdiction. The court also denied Barton’s request to reassign the case to another district-court judge, finding no basis for reassignment. View "Securities and Exchange Commission v. Barton" on Justia Law

A publicly traded company, CoreCivic, which operates private prisons, faced scrutiny after the Bureau of Prisons raised safety and security concerns about its facilities. Following a report by the Department of Justice's Inspector General highlighting higher rates of violence and other issues in CoreCivic's prisons compared to federal ones, the Deputy Attorney General recommended reducing the use of private prisons. This led to a significant drop in CoreCivic's stock price and a subsequent shareholder class action lawsuit.The United States District Court for the Middle District of Tennessee, early in the litigation, issued a protective order allowing parties to designate discovery materials as "confidential." This led to many documents being filed under seal. The Nashville Banner intervened, seeking to unseal these documents, but the district court largely maintained the seals, including on 24 deposition transcripts, without providing specific reasons for the nondisclosure.The United States Court of Appeals for the Sixth Circuit reviewed the case. The court emphasized the strong presumption of public access to judicial records and the requirement for compelling reasons to justify sealing them. The court found that the district court had not provided specific findings to support the seals and had not narrowly tailored the seals to serve any compelling reasons. The Sixth Circuit vacated the district court's order regarding the deposition transcripts and remanded the case for a prompt decision in accordance with its precedents, requiring the district court to determine if any parts of the transcripts meet the requirements for a seal within 60 days. View "Grae v. Corrections Corp. of Am." on Justia Law

IonQ, Inc., a public company developing quantum computers, experienced a significant drop in its stock price from $7.86 on May 2, 2022, to $4.34 on May 12, 2022. A group of investors claimed this decline was due to the Scorpion Report, published on May 3, 2022, which alleged that IonQ had been committing widespread fraud regarding the value of its company. The investors filed a securities fraud lawsuit against IonQ, asserting that the report revealed the truth about IonQ's misrepresentations, causing their financial losses.The United States District Court for the District of Maryland dismissed the investors' first amended complaint for failing to state a claim, particularly for not adequately pleading loss causation. The court found that the Scorpion Report, authored by a short-seller with financial incentives, was not a reliable source of information. The court also noted that the investors failed to show that the report or IonQ's response revealed any new, truthful information to the market. The investors then sought reconsideration and leave to file a second amended complaint, which the district court denied, again citing the failure to plead loss causation.The United States Court of Appeals for the Fourth Circuit reviewed the case and affirmed the district court's decision. The appellate court agreed that the Scorpion Report, given its disclaimers and the financial motivations of its authors, could not plausibly be seen as revealing the truth about IonQ's alleged fraud. Additionally, IonQ's response to the report did not concede any truth to the allegations but rather dismissed them as inaccurate. Therefore, the investors failed to establish the necessary element of loss causation, making their proposed amendments futile. The court affirmed the district court's judgment. View "Defeo v. IonQ, Inc." on Justia Law

The Securities and Exchange Commission (SEC) brought a civil enforcement action against Commonwealth Equity Services, LLC, alleging that from 2014 to 2018, Commonwealth failed to adequately disclose potential conflicts of interest related to its revenue-sharing agreement with National Financial Services, LLC (NFS). The SEC claimed this omission violated Sections 206(2) and (4) of the Investment Advisers Act of 1940 and SEC Rule 206(4)-7. Commonwealth's representatives, who provided investment advice to clients, were unaware of the revenue-sharing arrangement, which the SEC argued created a conflict of interest by incentivizing Commonwealth to direct clients to higher-cost mutual fund share classes that generated revenue-sharing income.The United States District Court for the District of Massachusetts granted the SEC's motion for summary judgment on liability, finding that Commonwealth's disclosures were inadequate as a matter of law and that the firm acted negligently. The court also denied Commonwealth's cross-motion for summary judgment and its motion to reconsider. Subsequently, the district court entered final judgment against Commonwealth, ordering disgorgement of $65,588,906 in revenue-sharing income, $21,185,162 in prejudgment interest, and a civil penalty of $6,500,000. The court struck Commonwealth's expert declaration proposing an alternative disgorgement calculation and adopted the SEC's proposed amount.The United States Court of Appeals for the First Circuit vacated the district court's grant of summary judgment and the disgorgement order, remanding for further proceedings. The appellate court held that the issue of materiality should have been decided by a jury, as reasonable minds could differ on whether the additional disclosures would have significantly altered the total mix of information available to investors. The court also found that the SEC had not adequately shown a reasonable approximation or causal connection between Commonwealth's profits and the alleged violations, and that the district court must consider whether Commonwealth is entitled to deduct its expenses from any disgorgement awarded. View "Securities and Exchange Commission v. Commonwealth Equity Services, LLC" on Justia Law

An imposter posing as investment advisor Daniel Corey Payne of Lifetime Financial, Inc. stole over $300,000 from Mark Frank Harding. Prior to this, Lifetime had received several inquiries about a potential imposter posing as Payne but did not post a warning or take significant action. Harding sued Lifetime and others for negligence, arguing that as registered investment advisors, they had a duty to post a warning about the imposter on their website and report the complaints to the Financial Industry Regulatory Authority (FINRA). Harding claimed that had they done so, he would not have transferred funds to the imposter.The Superior Court of Orange County granted summary judgment in favor of the defendants, finding that they owed no duty to Harding. The court noted that Harding was not a client of the defendants and that there was no fiduciary relationship between them. The court also found that there was no statutory or case authority imposing a duty on the defendants to warn nonclients about an imposter.The California Court of Appeal, Fourth Appellate District, Division Three, reviewed the case de novo and affirmed the trial court's judgment. The appellate court agreed that the defendants did not owe a duty to Harding to report the imposter on their website or to FINRA. The court found that FINRA Rule 4530 did not apply because the defendants were not the subject of any written customer complaint involving allegations of theft or misappropriation of funds. The court also found that FINRA Rule 2210 did not impose an affirmative duty to warn the general public about a third-party impersonator. The court concluded that the defendants did not owe a duty to Harding and affirmed the summary judgment. View "Harding v. Lifetime Financial, Inc." on Justia Law