Justia Securities Law Opinion Summaries
INTL FCStone Financial Inc. v. Farmer
Defendants, commodities futures investors, maintained trading accounts with FCStone, a clearing firm that handled the confirmation, settlement, and delivery of transactions. In 2018, extraordinary volatility in the natural gas market wiped out the defendants’ account balances with FCStone, leaving some defendants in debt. The defendants alleged Commodity Exchange Act violations against FCStone and initiated arbitration proceedings before the Financial Industry Regulatory Authority (FINRA). FCStone sought a declaratory judgment, claiming the parties must arbitrate their disputes before the National Futures Association (NFA), and that FINRA lacks jurisdiction over the underlying disputes. The district court ruled for FCStone, ordered arbitration and designated an arbitration forum, then stayed the case to address related issues, including the arbitration venue. The Seventh Circuit dismissed an appeal for lack of jurisdiction under 28 U.S.C. 1291 or the Federal Arbitration Act, ” 9 U.S.C. 16(a)(3). The district court’s decisions were non-final and no exception to the rule of finality applies. The court rejected an argument that the order amounted to an injunction prohibiting FINRA arbitration. A pro‐arbitration decision, coupled with a stay (rather than a dismissal) of the suit, is not appealable. The court noted that the district court did not decide whether the parties’ arbitration agreements relinquished defendants’ purported rights to FINRA arbitration. View "INTL FCStone Financial Inc. v. Farmer" on Justia Law
ISN Software Corporation v. Richards, Layton & Finger, P.A.
For tax reasons ISN Software Corporation wanted to convert from a C corporation to an S corporation. But four of its eight stockholders, representing about 25 percent of the outstanding stock, could not qualify as S Corporation stockholders. ISN sought advice from Richards, Layton & Finger, P.A. (RLF) about its options. RLF advised ISN that before a conversion ISN could use a merger to cash out some or all of the four stockholders. The cashed-out stockholders could then accept ISN’s cash-out offer or exercise appraisal rights under Delaware law. ISN did not proceed with the conversion, but decided to use a merger to cash out three of the four non-qualifying stockholders. After ISN completed the merger, RLF notified ISN that its advice might not have been correct. All four stockholders, including the remaining stockholder whom ISN wanted to exclude, were entitled to appraisal rights. ISN decided not to try and unwind the merger, instead proceeding with the merger and notified all four stockholders they were entitled to appraisal. ISN and RLF agreed that RLF would continue to represent ISN in any appraisal action. Three of the four stockholders, including the stockholder ISN wanted to exclude, eventually demanded appraisal. Years later, when things did not turn out as ISN had hoped (the appraised value of ISN stock ended up substantially higher than ISN had reserved for), ISN filed a legal malpractice claim against RLF. The Superior Court dismissed ISN’s August 1, 2018 complaint on statute of limitations grounds. The court found that the statute of limitations expired three years after RLF informed ISN of the erroneous advice, or, at the latest, three years after the stockholder ISN sought to exclude demanded appraisal. On appeal, ISN argued its legal malpractice claim did not accrue until after the appraisal action valued ISN’s stock because only then could ISN claim damages. Although it applied a different analysis, the Delaware Supreme Court agreed with the Superior Court that the statute of limitations began to run in January 2013. By the time ISN filed its malpractice claim on August 1, 2018, the statute of limitations had expired. Thus, the Superior Court’s judgment was affirmed. View "ISN Software Corporation v. Richards, Layton & Finger, P.A." on Justia Law
United States v. Fishoff
Fishoff began trading securities in the 1990s. By 2009, he had earned enough money to establish his own firm, with one full-time employee and several independent contractors. Fishoff had no formal training in securities markets, regulations, or compliance. Nor did he hold any professional license. He operated without expert advice. Fishoff engaged in short-selling stock in anticipation of the issuer making a secondary offering. Secondary offerings are confidential but a company, through its underwriter, may contact potential buyers to assess interest. When a salesperson provides confidential information, such as the issuer's name, the recipient is barred by SEC Rule 10b-5-2, from trading the issuer’s securities or disclosing the information before the offering is publicly announced. Fishoff’s associates opened accounts at investment banking firms in order to receive solicitations to invest in secondary offerings. They agreed to keep the information confidential but shared it with Fishoff, who would short-sell the company’s shares. Fishoff pled guilty to securities fraud (15 U.S.C. 78j(b), 78ff; 17 C.F.R. 240.10b-5 (Rule 10b-5); 18 U.S.C. 2), stipulating that he and his associates made $1.5 to $3.5 million by short-selling Synergy stock based on confidential information. Fishoff unsuccessfully claimed that he had no knowledge of Rule 10b5-2 and was entitled to the affirmative defense against imprisonment under Securities Exchange Act Section 32, as a person who violated a Rule having “no knowledge of such rule or regulation”. The Third Circuit affirmed his 30-month sentence. Fishoff adequately presented his defense. The court’s ruling was sufficient; the government never agreed that the non-imprisonment defense applied. Fishoff did not establish a lack of knowledge. His attempts to conceal his scheme suggests that he was aware that it was wrong. View "United States v. Fishoff" on Justia Law
Employees Retirement System v. Andalusian Global Designated, Employees Retirement System
The First Circuit affirmed the judgment of the Title III court granting summary judgment against Bondholders, who owned bonds issued in 2008 by the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (the System), and in favor of the Financial Oversight and Management Board for Puerto Rico (the Board), holding that the Bondholders did not have security interest in certain of the System's assets. In 2016, the System filed Title III petitions for bankruptcy protections offered under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), 48 U.S.C. 2101-2241, and PROMESA's Title III, 2161-2177. The System subsequently filed two lawsuits against the Bondholders seeking declaratory relief on the validity, priority, extent and enforceability of the Bondholders' asserted security interest in the System's postpetition assets, including employer contributions to the System received postpetition. The Title III court granted summary judgment against the Bondholders. The First Circuit affirmed, holding (1) 11 U.S.C. 552(a) prevents the Bondholders' security interest from attaching to postpetition employers' contributions; (2) the Bondholders did not have special revenue bonds under 11 U.S.C. 902(2)(A) or (D); and (3) Congress intended section 552 to apply retroactively. View "Employees Retirement System v. Andalusian Global Designated, Employees Retirement System" on Justia Law
Jensen v. iShares Trust
Investors purchased shares of BlackRock iShares Exchange-Traded Funds (ETFs) and suffered financial losses when their shares were sold pursuant to “market orders” or “stop-loss orders” during a “flash crash” in August 2015, when ETF trading prices fell dramatically. The investors claim that BlackRock’s registration statements, prospectuses, and amendments thereto issued or filed between 2012 and 2015, were false or misleading in that they failed to sufficiently disclose the risks associated with flash crashes. The investors sued, alleging violations of disclosure requirements under the Securities Act of 1933. 15 U.S.C. 77k. The court of appeal affirmed that the investors lacked standing. Liability under sections 11 and 12(a)(2) of the 1933 Act applies only to initial offerings; the investors purchased their ETF shares on the secondary market. The court rejected claims citing section 11, under which a plaintiff has standing if shares purchased in the secondary market can be traced back to an offering made under a misleading registration statement. Given the greater availability of information about potential investments to secondary market investors, limiting the stricter liability imposed by the 1933 Act to primary market transactions is not necessarily unreasonable. In contrast to the “catchall” provisions of the Exchange Act, 15 U.S.C. 77j(b)[ 22]—sections 11 and 12(a)(2) of the Securities Act “apply more narrowly but give rise to liability more readily.” View "Jensen v. iShares Trust" on Justia Law
Retirement Plans Committee of IBM v. Jander
In 2014, the Supreme Court held that a claim for breach of the duty of prudence imposed on plan fiduciaries by the Employee Retirement Income Security Act (ERISA) on the basis of inside information, must plausibly allege an alternative action that would have been consistent with securities laws and that a prudent fiduciary would not have viewed as more likely to harm the fund than to help it. The ERISA duty of prudence does not require a fiduciary to break the law and cannot require the fiduciary of an Employee Stock Ownership Plan (ESOP) “to perform an action—such as divesting the fund’s holdings of the employer’s stock on the basis of inside information—that would violate the securities laws.” In 2018, the Second Circuit reinstated a claim for breach of fiduciary duty under ERISA brought by participants in IBM’s 401(k) plan who suffered losses from their investment in IBM stock. The Supreme Court vacated and remanded, characterizing the question as what it takes to plausibly allege an alternative action “that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it” and whether that pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” The Court concluded that the Second Circuit did not address those questions and noted that the views of the Securities and Exchange Commission might “well be relevant” to discerning the content of ERISA’s duty of prudence in this context. View "Retirement Plans Committee of IBM v. Jander" on Justia Law
Jalbert v. U.S. Securities & Exchange Commission
The First Circuit affirmed the judgment of the district court granting the Securities and Exchange Commission's (SEC) motion to dismiss Plaintiff's complaint for lack of subject matter jurisdiction and failure to state a claim, holding that Plaintiff's claims were not entitled to judicial review. Plaintiff, in his capacity as trustee for the F2 Liquidating Trust, filed a complaint against the SEC asserting two claims under the Administrative Procedure Act (APA), 5 U.S.C. 551 et seq. The district court dismissed the case, determining (1) the right to judicial review of the SEC order at issue had been waived as part of a settlement between the SEC and F-Squared Investments, Inc., a former investment advisory firm; and (2) in any event, the court lacked subject matter jurisdiction because Congress vested the courts of appeals with exclusive jurisdiction over challenges to SEC orders. The First Circuit affirmed, holding that the district court correctly decided that the complaint failed to state a claim inasmuch as F-Squared waived judicial review by any court. View "Jalbert v. U.S. Securities & Exchange Commission" on Justia Law
SEC v. Stanford International Bank
The Fifth Circuit treated the Petition for Rehearing En Banc as a petition for panel rehearing, granted the petition, withdrew its prior opinions, and substituted the following opinions. These consolidated cases stemmed from an SEC complaint against Robert Allen Stanford, the Stanford International Bank, and other Stanford entities, alleging a massive, ongoing fraud. The receiver subsequently filed suit against two of Stanford's insurance brokers as participants in the fraudulent scheme. The district court entered bar orders and approved settlements after the insurance brokers ultimately agreed to settle conditioned on bar orders enjoining related Ponzi-scheme suits filed against the brokers. Objectors appealed. The court held that the district court had subject matter jurisdiction over the Willis and BMB bar orders enjoining third-party investors' claims; the bar orders enjoining the investors' third-party claims fell well within the broad jurisdiction of the district court to protect the receivership res; and thus the district court did not abuse its discretion by entering the bar orders to effectuate and preserve the coordinating function of the receivership. The court also held that the bar orders negotiated here were legitimate exercises of the receiver's authority; they prevented Florida and Texas state-court proceedings from interfering with the res in custody of the federal district court; and aided the district court's jurisdiction over the receivership entities. Finally, the court held that there was no illicit class settlement and the orders did not offend Federal Rule of Civil Procedure 23; objectors were not entitled to a jury trial; and the district court did not abuse its discretion in approving the BMB and Willis settlement agreements. View "SEC v. Stanford International Bank" on Justia Law
Frye v. Anadarko Petroleum Corp.
Plaintiff appealed the district court's dismissal of her claims against her former employer, Anadarko, alleging that the company retaliated against her in violation of the Dodd-Frank Act's whistleblower protections. Plaintiff also sought a declaratory judgment stating that her non-disclosure agreement with Anadarko does not cover a letter she wrote to the SEC detailing Anadarko's alleged misconduct. The Fifth Circuit held that plaintiff failed to present her whistleblower retaliation claim as a continuing violation to the district court, and thus she waived her argument. In this case, the retaliation that plaintiff alleged in the short time between plaintiff's SEC report and her decision to resign was insufficient to state a claim for constructive discharge. Therefore, the court affirmed the district court's judgment in part. However, the court reversed the district court's determination that plaintiff's claim under the Declaratory Judgment Act was nonjusticiable. The court explained that plaintiff's only options were to stay silent or to disclose the SEC letter and risk liability under the Proprietary Information and Inventions Agreement. Consequently, plaintiff presented a justiciable declaratory-judgment claim. Accordingly, the court remanded for further proceedings on that claim. View "Frye v. Anadarko Petroleum Corp." on Justia Law
Gamm v. Sanderson Farms, Inc.
The Second Circuit affirmed the district court's grant of defendants' motion to dismiss the complaint for failure to plead, with the requisite particularity, securities fraud under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. In light of the Private Securities Litigation Reform Act (PSLRA) and binding circuit precedent, the court held that the district court correctly dismissed the complaint. The court held that the law is well established that a party, when making securities fraud allegations on information and belief, must plead material misstatements and omissions with particularity. The court further clarified that if statements were rendered false or misleading through the nondisclosure of illegal activity, the facts of those underlying illegal acts must also be pleaded with particularity. In this case, the complaint alleged that defendants, producers of chicken, engaged in an illegal antitrust conspiracy, the nondisclosure of which rendered various statements and SEC filings false and misleading. The court held that plaintiffs have failed to allege the details of the underlying antitrust conspiracy with particularity. View "Gamm v. Sanderson Farms, Inc." on Justia Law