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Kohl’s operates more than 1000 stores, 65 percent of which are leased. In 2011, Kohl’s announced that it was correcting several years of its financial filings because of multiple lease accounting errors. Plaintiffs, led by the Pension Fund, filed suit under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), SEC Rule 10b-5, and the “controlling person” provisions of 15 U.S.C. 78t(a), alleging that Kohl’s and two executives defrauded investors by publishing false and misleading information prior to the corrections. The Fund argued that one can infer that the defendants knew that these statements were false or recklessly disregarded that possibility because Kohl’s recently had made similar lease accounting errors. Despite those earlier errors, it was pursuing aggressive investments in leased properties, and at the same time, company insiders sold considerable amounts of stock. The district court dismissed the complaint with prejudice for failure to meet the enhanced pleading requirements for scienter imposed by the Private Securities Litigation Reform Act. The Seventh Circuit affirmed, reasoning that the complaint fell short and the Fund did not suggest how an amendment might help. The Fund made a strong case that many of Kohl’s disclosures regarding its lease accounting practices were false but that is not enough. The Fund provided very few facts that would point either toward or away from scienter. View "Pension Trust Fund for Operating Engineers v. Kohl's Corp." on Justia Law

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The Ninth Circuit affirmed the dismissal of an action alleging that when Yahoo! invested in Alibaba.com, a Chinese retail website, Yahoo! violated the conditions of its exemption, granted by the SEC, from the registration requirements of the Investment Company Act (ICA). Plaintiff brought derivative claims against Yahoo!'s board of directors and certain corporate officers, as well as one direct claim against Yahoo!, under the ICA. The panel held that plaintiff failed to state a claim because the ICA does not establish a private right of action for challenging the continued validity of an ICA exemption. View "UFCW Local 1500 Pension Fund v. Mayer" on Justia Law

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The Eleventh Circuit vacated its original opinion in this case and issued the following opinion in its place. The CFTC begain investigating defendants in response to a customer's complaint of commodities fraud. The NFA also opened an investigation, which proceeded in tandem with the CFTC's, but ended in a settlement. The CFTC then filed suit alleging that defendants violated the Commodities Exchange Act (CEA) when they failed to register as futures commission merchants, transacted the purchase and sale of contracts for the future delivery of a commodity (futures) outside of a registered exchange, and promised to invest customers' money in precious metals (metals) but instead invested the funds in so-called "off-exchange margined metals derivatives" (metals derivatives). The court affirmed the district court's judgment except as to the restitution award for the group of investors whose losses were associated solely with the registration violations. In regard to the restitution award, the court vacated and remanded with instructions to consider other equitable remedies. View "U.S. Commodity Futures Trading Commission v. Southern Trust Metals, Inc." on Justia Law

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In March 2016, soon after The Fresh Market (the “Company”) announced plans to go private, the Company publicly filed certain required disclosures under the federal securities laws. Given that the transaction involved a tender offer, the required disclosures included a Solicitation/Recommendation Statement on Schedule 14D-9 (together with amendments, the “14D-9”), which articulated the Board’s reasons for recommending that stockholders accept the tender offer—from an entity controlled by private equity firm Apollo Global Management LLC (“Apollo”). The 14D-9 incorporated certain required schedules by reference. After reading these disclosures, as the tender offer was still pending, stockholder-plaintiff Elizabeth Morrison suspected the Company’s directors had breached their fiduciary duties in the course of the sale process, and she sought Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company denied her request, and the tender offer closed as scheduled. Litigation over the Section 220 demand ensued, and Plaintiff obtained several key documents, such as board minutes and a crucial e-mail from Ray Berry’s counsel to the Company’s lawyers. Plaintiff then filed this action, including a breach of fiduciary duty claim against all ten of the Company’s directors, including Ray Berry, and a claim for aiding and abetting the breach against Ray Berry’s son, Brett Berry, who did not serve on the Board. The thrust of Plaintiff’s breach of fiduciary duty claim was that Ray and Brett Berry teamed up with Apollo to buy The Fresh Market at a discount by deceiving the Board and inducing the directors to put the Company up for sale through a process that “allowed the Berrys and Apollo to maintain an improper bidding advantage” and “predictably emerge[] as the sole bidder for Fresh Market” at a price below fair value. Plaintiff also alleged the Board and the stockholders were misled into believing that Ray Berry would openmindedly consider partnering with any private equity firm willing to outbid Apollo, but, instead, “[t]he reality of the situation was that Ray Berry (a) had already formed the belief that Apollo was uniquely well situated to buy Fresh Market; (b) had already entered into an undisclosed agreement with Apollo; and (c) was incentivized not to create price competition for Apollo.” In moving to dismiss, Defendants argued that Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015) applied. The Court of Chancery stated that this matter “presents an exemplary case of the utility of th[e] ratification doctrine, as set forth in Corwin and [In re Volcano Corp. S’holder Litig., 143 A.3d 727 (Del. Ch. 2016)].” The Delaware Supreme Court disagreed, finding defendants did not show under Corwin, that the vote was fully informed. Thus, “the business judgment rule is not invoked.” The Supreme Court reversed the Court of Chancery’s decision and remanded for further proceedings. View "Morrison, et al. v. Berry, et al." on Justia Law

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The Securities and Exchange Commission (SEC) has authority to enforce securities laws by instituting an administrative proceeding against an alleged wrongdoer, typically overseen by an administrative law judge (ALJ). Other staff members, rather than the Commission, selected all of the five current ALJs, who have “authority to do all things necessary and appropriate” to ensure a “fair and orderly” adversarial proceeding, 17 CFR 201.111, 200.14(a). After a hearing, the ALJ issues an initial decision. The Commission can review that decision, but if it opts against review, it issues an order that the initial decision is “deemed the action of the Commission,” 15 U.S.C. 78d–1(c). The SEC charged Lucia and assigned ALJ Elliot to adjudicate the case. Following a hearing, Elliot issued an initial decision concluding that Lucia had violated the law and imposing sanctions. Lucia argued that the proceeding was invalid because SEC ALJs are “Officers of the United States,” subject to the Appointments Clause. Under that Clause, only the President, “Courts of Law,” or “Heads of Departments” can appoint “Officers.” The SEC and the D. C. Circuit rejected Lucia’s argument. The Supreme Court reversed. SEC ALJs are subject to the Appointments Clause. To qualify as an officer, rather than an employee, an individual must occupy a “continuing” position established by law, and must “exercis[e] significant authority pursuant to the laws of the United States,” SEC ALJs hold a continuing office established 5 U.S.C. 556–557, 5372, 3105, and exercise “significant discretion." The ALJs have nearly all the tools of federal trial judges: they take testimony, conduct trials, rule on the admissibility of evidence, can enforce compliance with discovery orders, and prepare proposed findings and an opinion including remedies. Judge Elliot heard and decided Lucia’s case without a constitutional appointment. View "Lucia v. Securities and Exchange Commission" on Justia Law

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The Second Circuit vacated the district court's dismissal of a securities action based on lack of subject matter jurisdiction. In this case, the district court concluded that plaintiffs failed to sufficiently allege a "domestic transaction" under section 10(b) of the Securities Exchange Act of 1934. The court held, however, that plaintiffs plausibly alleged a domestic transaction cognizable under section 10(b) because the agreement at issue was entered into in New York and irrevocable liability was incurred in the United States. The court rejected the argument that the areement was so predominately foreign as to be impermissibly extraterritorial. Therefore, the court remanded for further proceedings. View "Giunta v. Dingman" on Justia Law

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Claims brought under the Martin Act, N.Y. Gen. Bus. Law 23-A, 352 et seq., are governed by the three-year statute of limitations in N.Y. C.P.L.R. 214(2) rather than the six-year limitations period in either N.Y. C.P.L.R. 213(1) or 213(8). The Attorney General commenced this action asserting that the issuance of residential mortgage-backed securities by Defendants violated the Martin Act. Defendants moved to dismiss the complaint, arguing that the action was time-barred because the operative statute of limitations was the three-year period found in N.Y. C.P.L.R. 214(2), which covers actions to recover upon a liability, penalty or forfeiture created or imposed by statute. Supreme Court denied the motion to dismiss, concluding that the six-year limitations period in N.Y. C.P.L.R. 213 applied because Plaintiff sought to impose liability on Defendants based on the common-law tort of investor fraud. The Appellate Division affirmed. The Court of Appeals reversed, holding that because the Martin Act expands liability for fraudulent practices beyond that recognized under the common law, section 214(2) controls. View "People v. Credit Suisse Securities (USA) LLC" on Justia Law

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The Eleventh Circuit reversed the district court's dismissal of plaintiff's putative class action complaint alleging state law claims for breach of contract and negligence. Plaintiff claimed that because Passport Account customers had agreed only to pay for "expenses incurred in facilitating the execution and clearing" of their trades, RJA's undisclosed profit built into the Processing Fees breached the Passport Agreement. The court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) did not prohibit plaintiff's putative class action because RJA's alleged failure to disclose the hidden profit built into the Processing Fee was not a misrepresentation of a material fact for purposes of SLUSA. Accordingly, the court remanded for further proceedings. View "Brink v. Raymond James & Associates, Inc." on Justia Law

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The Eleventh Circuit vacated a cease and desist order issued by the FTC against LabMD. The FTC brought an enforcement action against LabMD, alleging that LabMD's data-security program was inadequate and thus constituted an "unfair act or practice" under Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. 45(a). The court agreed with LabMD that the order was not enforceable because it did not direct LabMD to cease committing an unfair act or practice within the meaning of Section 5(a). Assuming arguendo that LabMD's negligent failure to design and maintain a reasonable data-security program invaded consumers' right of privacy and thus constituted an unfair act or practice, the court held nonetheless that the cease and desist order was not enforceable where it contained no prohibitions, but rather commanded LabMD to overhaul and replace its data-security program to meet an indeterminable standard of reasonableness. View "LabMD, Inc. v. Federal Trade Commission" on Justia Law

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Defendant Williams Companies, Inc. (Williams) was an energy company; its president and chief executive officer (CEO) was Defendant Alan Armstrong and its chief financial officer (CFO) was Defendant Donald Chappel. Armstrong also served on its board of directors. Defendant Williams Partners GP LLC (Williams Partners GP) was a limited-liability company owned by Williams. Armstrong was chairman of the board and CEO; and Chappel was CFO and a director. Defendant Williams Partners L.P. (WPZ) was a master limited partnership, whose general partner was Williams Partners GP. Williams owned 60% of WPZ’s limited-partnership units. Plaintiff’s case centered on merger discussions between Williams and Energy Transfer Equity L.P. (ETE), a competing energy firm. The members of the putative class purchased units of WPZ between May 13, 2015 (when Williams announced that it planned to merge with WPZ) and June 19, 2015 (when ETE announced that, despite having been rebuffed by Williams, it would seek to merge with Williams and that such a merger would preclude the merger with WPZ). The value of the units dropped significantly after this announcement. Ultimately, ETE merged with Williams and the proposed WPZ merger was not consummated. The Complaint alleged the class members paid an excessive price for WPZ units because Williams had not disclosed during the class period its merger discussions with ETE. Employees’ Retirement System of the State of Rhode Island (Plaintiff) appealed the dismissal of its amended complaint in a putative class-action suit, alleging violations of federal securities law because of the failure to disclose merger discussions that affected the value of its investment. The Tenth Circuit concluded the complaint failed to adequately allege facts establishing a duty to disclose the discussions, the materiality of the discussions, or the requisite scienter in failing to disclose the discussions. View "Employees' Retirement System v. Williams Companies" on Justia Law