Justia Securities Law Opinion Summaries
Articles Posted in Business 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
Bergus v. Florian
Boris Bergus and Agustin Florian, both doctors, were colleagues and later co-investors in a company managed by Florian's brother-in-law, Edgardo Jose Antonio Castro Baca. Bergus invested in the company in 2012 and 2014, purchasing stock. Years later, after their relationship deteriorated, Bergus sued Florian, alleging that Florian had omitted material information about the investments, violating the Massachusetts Uniform Securities Act (MUSA). The trial featured testimony from Bergus, Florian, and Baca. The district court precluded Florian from cross-examining Bergus about a 2013 state medical board finding that Bergus had misrepresented his medical credentials. The jury found in favor of Bergus regarding the 2012 investment but not the 2014 investment.The United States District Court for the District of Massachusetts ruled in favor of Bergus for the 2012 investment, awarding him $125,000 plus interest, totaling $202,506.85, and additional attorney's fees and costs, bringing the total judgment to $751,234.86. The court dismissed Florian's counterclaim for abuse of process, suggesting it be litigated in state court.On appeal, the United States Court of Appeals for the First Circuit reviewed several issues, including the district court's limitation on Florian's cross-examination of Bergus. The appellate court found that the district court abused its discretion by precluding cross-examination about Bergus's misrepresentations of his medical credentials, which were probative of his character for truthfulness. The court concluded that this error was not harmless, as the case hinged on the credibility of the witnesses.The First Circuit vacated the judgment regarding the 2012 investment and remanded for a new trial on that issue. The jury's verdict on the 2014 investment remained intact. The appellate court did not address Florian's other arguments due to the need for a new trial. View "Bergus v. Florian" on Justia Law
In re: Overstock Securities Litigation
The case involves an institutional investor, The Mangrove Partners Master Fund, Ltd., which sued Overstock.com, Inc. and three of its executives, alleging violations of securities laws. Overstock, a publicly traded e-commerce company, announced a digital dividend that would be issued as unregistered securities, which led to a short squeeze, causing Overstock’s stock price to spike. The plaintiff, a short seller, claimed that the defendants manipulated the market to inflate the stock price artificially, allowing the CEO to sell his shares at a high price.The United States District Court for the District of Utah dismissed the plaintiff’s claims, finding that the allegations did not meet the heavy pleading burden required for securities fraud. The court held that the plaintiff failed to demonstrate that the defendants' actions were deceptive or manipulative under the Securities Exchange Act. The plaintiff then appealed the decision.The United States Court of Appeals for the Tenth Circuit reviewed the case and affirmed the district court’s dismissal. The appellate court held that the plaintiff failed to plausibly allege reliance on the defendants' misstatements, as the plaintiff admitted that it bought shares to avoid breaching lending contracts, not because of the defendants' statements. The court also found that the fully disclosed dividend did not constitute manipulative conduct, as it did not deceive investors about the market value of Overstock’s shares. Additionally, the court dismissed the plaintiff’s claims of material omissions, finding no evidence that the defendants intended to register the dividend all along or that issuing the unregistered dividend was illegal. The court also affirmed the dismissal of the plaintiff’s control-person claims and insider trading claims due to the lack of a predicate violation of the Exchange Act. View "In re: Overstock Securities Litigation" on Justia Law
Gulden v. Exxon Mobil Corp
Two employees of a publicly traded company raised concerns internally that the company had overstated its earnings by not accounting for slower-than-expected drilling speeds. Subsequently, an article in The Wall Street Journal reported similar allegations, and within three months, the company terminated both employees. The employees then filed a complaint with the Secretary of Labor, claiming their termination violated whistleblower protections under the Sarbanes-Oxley Act (SOX). An administrative proceeding resulted in a preliminary order for their reinstatement, which the company ignored.The employees sought to enforce the reinstatement order in the United States District Court for the District of New Jersey. The District Court dismissed the case for lack of subject-matter jurisdiction, interpreting the relevant statute as not granting it the power to enforce the preliminary order. The employees appealed this decision.While the appeal was pending, the employees chose to abandon the administrative process and filed a separate civil action in federal court. Consequently, the administrative proceedings were terminated. The company then moved to dismiss the appeal on mootness grounds.The United States Court of Appeals for the Third Circuit reviewed the case and determined that the employees' request to enforce the preliminary reinstatement order no longer satisfied the redressability requirement for Article III standing. The preliminary order was extinguished with the dismissal of the administrative proceedings, and a federal court cannot enforce a non-existent order. Therefore, the employees lost Article III standing during the litigation, and no exception to mootness applied. The Third Circuit vacated the District Court’s judgment and remanded the case with instructions to dismiss it on mootness grounds. View "Gulden v. Exxon Mobil Corp" on Justia Law
United States v. Smith
The case involves defendants Aghee William Smith II and David Alcorn, who were convicted in the Eastern District of Virginia for their roles in fraudulent schemes that defrauded investors of millions of dollars. The schemes included marketing and selling phony investments in a dental services marketing program and fraudulent spectrum investments. The fraudulent activities primarily targeted elderly victims, resulting in significant financial losses.In the district court, Smith and Alcorn were tried together before a jury in February 2022. They raised three main issues on appeal: a joint constitutional challenge to the district court’s COVID-19 trial protocol under the Public Trial Clause of the Sixth Amendment, Smith’s separate challenge to the admission of videotaped depositions under the Confrontation Clause, and Alcorn’s challenge to the imposition of supervised release conditions.The United States Court of Appeals for the Fourth Circuit reviewed the case. The court rejected Smith and Alcorn’s joint contention that the COVID-19 trial protocol violated their rights under the Public Trial Clause, finding that the protocol did not constitute a partial courtroom closure and was justified by substantial public health reasons. The court also rejected Smith’s Confrontation Clause challenge, concluding that the government had made a good faith effort to secure the witnesses’ presence at trial and that the witnesses were unavailable due to health concerns.However, the court found merit in Alcorn’s challenge regarding the imposition of supervised release conditions. The district court had failed to properly incorporate the standard conditions of supervised release during the oral pronouncement of Alcorn’s sentence, leading to a Rogers error. As a result, the Fourth Circuit vacated Alcorn’s sentences and remanded for resentencing.In summary, the Fourth Circuit affirmed Smith’s convictions and sentences, affirmed Alcorn’s convictions, but vacated Alcorn’s sentences and remanded for resentencing. View "United States v. Smith" on Justia Law