Justia Securities Law Opinion Summaries
Articles Posted in Business Law
Black v. Securities and Exchange Commission
Frank Harmon Black and his securities investment firm, Southeast Investments, N.C., Inc., are involved in an ongoing disciplinary proceeding initiated by the Financial Industry Regulatory Authority, Inc. (FINRA) in September 2015. The proceedings were based on allegations that Black and Southeast failed to establish and maintain an adequate broker supervisory system, failed to preserve business-related electronic correspondence, and submitted false documents and testimony to FINRA examiners, violating FINRA rules and federal securities laws. In March 2017, a FINRA hearing panel found Black and Southeast in violation of these rules and imposed fines and sanctions, including barring Black from associating with other FINRA member firms.Black and Southeast appealed the FINRA decision to the National Adjudicatory Council (NAC), which affirmed the findings but reduced the fines in May 2019. They then petitioned the Securities and Exchange Commission (SEC) for review. On December 7, 2023, the SEC affirmed the NAC's decision regarding the supervisory and record retention violations but remanded the false testimony and fabricated documents issues to FINRA for further proceedings, determining that FINRA's failure to produce certain investigatory notes was not a harmless error.The United States Court of Appeals for the Fourth Circuit reviewed the SEC's decision. The court concluded that the SEC's decision was not a final order because it remanded part of the case to FINRA for further proceedings. As a result, the court determined that it lacked jurisdiction to review the petition and dismissed it. The court emphasized that a final order must mark the consummation of the agency's decision-making process and result in legal consequences, which was not the case here. View "Black v. Securities and Exchange Commission" on Justia Law
In re CVS Health Corporation Securities Litigation
The plaintiffs, City of Warren Police and Fire Retirement System and David Freundlich, filed a consolidated securities action against CVS Health Corporation. They alleged that CVS's offering documents related to its 2018 merger with Aetna contained false statements and omissions, violating sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The plaintiffs claimed that CVS overstated the value of its goodwill and failed to disclose significant issues with its Long Term Care (LTC) business, which it acquired through Omnicare, Inc. in 2015.The Superior Court of Rhode Island dismissed the plaintiffs' Revised Amended Consolidated Complaint (RACC), finding that the plaintiffs failed to state a claim under the Securities Act. The court also noted that similar claims had been dismissed in related cases in New York and the First Circuit. The plaintiffs appealed the dismissal, arguing that the Superior Court improperly applied collateral estoppel and failed to consider the merits of their claims.The Rhode Island Supreme Court reviewed the case and affirmed the Superior Court's dismissal. The Supreme Court held that the plaintiffs waived their right to challenge the merits of the dismissal by not adequately addressing it in their initial brief. The court also found that the Superior Court's decision to dismiss the case was supported by principles of judicial economy and comity, given the similar rulings in related cases. The Supreme Court concluded that the plaintiffs' appeal was without merit and upheld the lower court's judgment. View "In re CVS Health Corporation Securities Litigation" on Justia Law
Coinbase Inc v. Securities and Exchange Commission
Coinbase Global, Inc., a trading platform for digital assets, petitioned the Securities and Exchange Commission (SEC) to create rules clarifying the application of federal securities laws to digital assets like cryptocurrencies and tokens. Coinbase argued that the current securities-law framework does not account for the unique attributes of digital assets, making compliance economically and technically infeasible. The SEC denied Coinbase’s rulemaking petition, stating that it disagreed with the petition’s concerns and had higher-priority agenda items. Coinbase’s U.S. subsidiary, Coinbase, Inc., then petitioned the United States Court of Appeals for the Third Circuit to review the SEC’s denial.The SEC’s denial of Coinbase’s petition was challenged on the grounds that it was arbitrary and capricious. Coinbase argued that the SEC’s decision to apply securities laws to digital assets through enforcement actions constituted a significant policy change that required rulemaking. Coinbase also contended that the emergence of digital assets represented a fundamental change in the factual premises underlying existing securities regulations, necessitating new rules. Additionally, Coinbase claimed that the SEC’s explanation for its decision was conclusory and insufficiently reasoned.The United States Court of Appeals for the Third Circuit reviewed the case and found that the SEC’s order was conclusory and insufficiently reasoned, making it arbitrary and capricious. The court granted Coinbase’s petition in part and remanded the case to the SEC for a more complete explanation. However, the court declined to order the SEC to institute rulemaking proceedings at this stage. The court emphasized that the SEC must provide a reasoned explanation for its decision, considering all relevant factors and providing a discernible path for judicial review. View "Coinbase Inc v. Securities and Exchange Commission" on Justia Law
USA V. HACKETT
Andrew Hackett, a stock promoter, was convicted of conspiracy to commit securities fraud and securities fraud related to the manipulative trading of a public company's stock. Hackett engaged in a pump-and-dump scheme, promoting the stock of First Harvest (later renamed Arias Intel) and recruiting others to do the same. He used call rooms to solicit investors and artificially inflate the stock price before selling his shares. The scheme was exposed by an FBI informant, leading to Hackett's conviction.The United States District Court for the Southern District of California sentenced Hackett to forty-six months of imprisonment, applying a sixteen-level sentencing enhancement under U.S.S.G. § 2B1.1(b)(1)(I) for a loss exceeding $1.5 million. The court calculated an intended loss of $2.2 million based on Hackett's ownership of 550,000 shares and his intent to sell them at four dollars per share. Hackett's counsel objected to the loss calculation but did not argue that intended loss was an improper measure of loss.The United States Court of Appeals for the Ninth Circuit reviewed the case and affirmed the district court's judgment. The Ninth Circuit held that the district court did not plainly err in relying on the guideline commentary defining "loss" as the greater of actual loss or intended loss. The court noted that any error was not clear or obvious given the precedent recognizing both actual and intended loss and the lack of consensus among circuit courts on this issue. The court applied plain error review because Hackett's objection to the loss calculation was not sufficiently specific to preserve de novo review. View "USA V. HACKETT" on Justia Law
Hansen v. Musk
Karl Hansen sued Tesla, Inc., its CEO Elon Musk, and U.S. Security Associates (USSA), alleging retaliation for reporting misconduct at Tesla. Hansen, initially hired by Tesla, was later employed by USSA. He reported thefts, narcotics trafficking, and improper contracts at Tesla, and filed a report with the SEC. After Musk saw Hansen at the Gigafactory and demanded his removal, USSA reassigned Hansen, which he claimed was retaliatory.The United States District Court for the District of Nevada ordered most of Hansen’s claims to arbitration, except his Sarbanes-Oxley Act (SOX) claim. The arbitrator dismissed Hansen’s non-SOX claims, finding no contractual right to work at the Gigafactory and no reasonable belief of securities law violations. The district court confirmed the arbitration award and dismissed Hansen’s SOX claim, holding that the arbitrator’s findings precluded relitigation of issues essential to the SOX claim.The United States Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal. The court held that while an arbitrator’s decision cannot preclude a SOX claim, a confirmed arbitral award can preclude relitigation of issues underlying such a claim. The court found that the arbitrator’s decision, which concluded Hansen had no reasonable belief of securities law violations, precluded his SOX claim. The court also held that the arbitrator’s findings on Hansen’s state law claims had a preclusive effect, as they were confirmed by the district court. Thus, the Ninth Circuit affirmed the dismissal of Hansen’s complaint. View "Hansen v. Musk" on Justia Law
Alpine Securities Corporation v. Financial Industry Regulatory Authority, Inc.
Alpine Securities Corporation, a securities broker-dealer and member of the Financial Industry Regulatory Authority (FINRA), faced sanctions from FINRA in 2022 for violating its rules. FINRA imposed a cease-and-desist order and sought to expel Alpine from membership. Alpine challenged the constitutionality of FINRA in federal court, arguing that FINRA's expedited expulsion process violated the private nondelegation doctrine and the Appointments Clause.The United States District Court for the District of Columbia denied Alpine's request for a preliminary injunction to halt FINRA's expedited proceeding. The court held that FINRA is a private entity, not subject to the Appointments Clause, and that the SEC's ability to review FINRA's decisions satisfied the private nondelegation doctrine.The United States Court of Appeals for the District of Columbia Circuit reviewed the case. The court found that Alpine demonstrated a likelihood of success on its private nondelegation claim, as FINRA's expulsion orders take effect immediately without prior SEC review, effectively barring Alpine from the securities industry. The court held that this lack of governmental oversight likely violates the private nondelegation doctrine. The court also found that Alpine faced irreparable harm if expelled before SEC review, as it would be forced out of business.The court reversed the district court's denial of a preliminary injunction, instructing it to enjoin FINRA from expelling Alpine until the SEC reviews any expulsion order or the time for Alpine to seek SEC review lapses. However, the court did not grant a preliminary injunction on Alpine's Appointments Clause claims, as Alpine did not demonstrate irreparable harm from participating in FINRA's expedited proceeding itself. The case was remanded for further proceedings consistent with the appellate court's findings. View "Alpine Securities Corporation v. Financial Industry Regulatory Authority, Inc." on Justia Law
IN RE: MARIUSZ KLIN V. CLOUDERA, INC.
Mariusz Klin, the lead plaintiff, purchased Cloudera stock between its initial public offering (IPO) and a subsequent price drop following the company's announcement of negative quarterly earnings. Klin alleged that Cloudera, Inc. and its officers and directors made materially false and misleading statements and omissions about the technical capabilities of its products, particularly regarding their "cloud-native" nature.The United States District Court for the Northern District of California dismissed Klin's first amended complaint for failure to state a claim, noting that Klin did not adequately explain what "cloud-native" meant at the time the statements were made. The court allowed Klin to file a second amended complaint, instructing him to provide a contemporaneous definition of "cloud-native" and explain why Cloudera's statements were false when made. Klin's second amended complaint was also dismissed for failing to meet the heightened pleading standards required for fraud claims, as it did not provide sufficient factual support for the definitions of the cloud-related terms.The United States Court of Appeals for the Ninth Circuit reviewed the case and affirmed the district court's dismissal. The appellate court held that Klin did not adequately plead the falsity of Cloudera's statements with the particularity required under Rule 9(b) and the Private Securities Litigation Reform Act (PSLRA). The court noted that Klin's definitions of cloud-related terms lacked evidentiary support and that the cited blog post did not substantiate his claims. Additionally, the court found that Klin's reliance on later statements and product developments did not establish the falsity of the earlier statements.The Ninth Circuit also affirmed the district court's decision to deny further leave to amend, concluding that additional amendments would be futile. Klin had not identified specific facts that could remedy the deficiencies in his complaint, and the court saw no reason to believe that another amendment would succeed. The court's decision to dismiss the case with prejudice was upheld. View "IN RE: MARIUSZ KLIN V. CLOUDERA, INC." on Justia Law
Hafen v. Howell
Les and Gretchen Howell invested in a silver-trading scheme called the Silver Pool, operated by Gaylen Rust through Rust Rare Coin. Les invested about $1.2 million and received $3.2 million in profits, while Gretchen invested $96,450 but lost $74,450. Les used his profits to buy land and build a house in Kingman, Arizona, and made Gretchen a joint tenant. The Silver Pool was later exposed as a Ponzi scheme, and the Commodity Futures Trading Commission (CFTC) brought an enforcement action against Rust. Jonathan O. Hafen was appointed as the receiver to recover assets fraudulently transferred through the scheme.The United States District Court for the District of Utah granted Hafen summary judgment against Les and Gretchen on fraudulent-transfer claims under Utah’s Uniform Voidable Transactions Act (UVTA), ordering them to return Les’s $3.2 million profit. The court also awarded Hafen prejudgment interest at a 5% rate. The Howells sought reconsideration and clarification of the judgment, particularly regarding Gretchen’s liability. The district court clarified that Gretchen was liable for $1.5 million, representing half of the $3 million Les invested in the Kingman property.The United States Court of Appeals for the Tenth Circuit reviewed the case. The court affirmed the district court’s application of the Ponzi presumption under the UVTA and the reliance on expert reports. However, it found that the district court erred in calculating the judgment against Gretchen. The appellate court held that the judgment should reflect the value of Gretchen’s interest in the Kingman property at the time of transfer, not the amount Les invested. The case was reversed and remanded for further proceedings to determine the correct amount of the judgment against Gretchen. The court otherwise affirmed the district court’s rulings. View "Hafen v. Howell" on Justia Law
USSEC v. Mediatrix Capital
The case involves an interlocutory appeal arising from a Securities and Exchange Commission (SEC) enforcement action against Michael Young and others, alleging a fraudulent investment scheme. The SEC claimed that the defendants raised over $125 million from investors by falsely representing the use of a profitable algorithmic trading strategy, misappropriating funds for personal gain, and misrepresenting the profitability of their trading scheme. The parties agreed to a preliminary injunction freezing the defendants' assets, with the defendants retaining the right to request relief from the freeze.The United States District Court for the District of Colorado denied the Youngs' motions to unfreeze assets on three occasions. In April 2020, the court denied their first motion. In November 2020, the court denied their second motion, and the Youngs appealed. The Tenth Circuit affirmed the district court's decision, holding that the Youngs had forfeited their arguments by not raising them properly in the lower court. In March 2023, the Youngs filed a third motion to unfreeze assets, which the district court also denied, citing the law of the case doctrine and improper reconsideration.The United States Court of Appeals for the Tenth Circuit reviewed the appeal and dismissed it for lack of jurisdiction. The court held that the March 2023 motion was a successive motion raising the same issues that could have been raised in the November 2020 motion. The court emphasized that there was no change in circumstances, evidence, or law since the prior motion that would warrant jurisdiction under 28 U.S.C. § 1292(a)(1). The court concluded that the Youngs failed to demonstrate a close nexus between any change and the issues raised on appeal, thus affirming the district court's denial of the motion to unfreeze assets. View "USSEC v. Mediatrix Capital" on Justia Law
Zhou v. Desktop Metal, Inc.
Sophia Zhou and other investors filed a federal securities fraud class action against Desktop Metal, Inc. and several of its corporate officers after the company's stock price dropped in late 2021. The stock lost value following Desktop Metal's disclosure of an internal investigation that revealed corporate mismanagement and necessitated the recall of two key products. Zhou alleged that the defendants engaged in fraudulent schemes, including manufacturing Flexcera resin at non-FDA-registered facilities and marketing the PCA 4000 curing box for use with Flexcera without FDA certification.The United States District Court for the District of Massachusetts dismissed Zhou's complaint for failure to state a claim. Zhou appealed, arguing that the district court erred in dismissing her "scheme liability" claim and that she adequately stated a securities fraud claim based on material misrepresentations and omissions. The district court had found that Zhou did not preserve her scheme liability claim and that her complaint failed to plead any materially false or misleading statement or omission.The United States Court of Appeals for the First Circuit reviewed the case de novo. The court concluded that Zhou did not preserve her scheme liability claim because she failed to adequately argue it in her opposition to the motion to dismiss or in her supplemental briefing. The court also determined that the district court correctly found that Zhou's complaint did not allege any materially false or misleading statements. Specifically, the court held that statements about Flexcera's FDA clearance, regulatory compliance, and product qualities were not rendered misleading by the alleged omissions. Consequently, the court affirmed the district court's dismissal of Zhou's complaint. View "Zhou v. Desktop Metal, Inc." on Justia Law