Justia Securities Law Opinion Summaries

Reading, a Pennsylvania not-for-profit health system, issued auction rate securities (ARSs) to finance capital projects. J.P. Morgan was the underwriter and broker-dealer. Reading claims that J.P. Morgan and others artificially propped up the ARS market through undisclosed support bidding; when they stopped in 2008, the market collapsed. Reading filed state law claims and demanded arbitration with the Financial Industry Regulatory Authority (FINRA). The 2005 and 2007 broker-dealer agreements state “all actions and proceedings arising out of” the agreements or ARS transactions must be filed in the Southern District of New York. Reading filed a claim under FINRA Rule 12200, which requires a FINRA member (J.P. Morgan) to arbitrate any dispute at the customer’s request. J.P. Morgan refused, arguing that the forum-selection clauses in the 2005 and 2007 broker-dealer agreements constituted a waiver of Reading’s right to arbitrate under Rule 12200. The Third Circuit affirmed the Eastern District of Pennsylvania, which resolved the transfer dispute before the arbitrability dispute, declined to transfer the action, and required J.P. Morgan to submit to arbitration. Reading’s right to arbitrate is not contractual but arises out of a binding, regulatory rule, adopted by FINRA and approved by the SEC. Condoning an implicit waiver of Reading’s regulatory right to arbitrate would erode investors’ ability to use a cost-effective means of resolving allegations of misconduct and undermine FINRA’s ability to oversee and remedy such misconduct. View "Reading Health System v. Bear Stearns & Co., Inc." on Justia Law

The issue this appeal presented for the Tenth Circuit’s review centered on the district court’s dismissal of Plaintiff-Appellant David Hampton’s securities-fraud class action against Defendants-Appellees root9B Technologies, Inc. (“root9B”), Joseph Grano, Jr., the Chief Executive Officer and Chairman, and Kenneth T. Smith, the former Chief Financial Officer. Hampton filed suit claiming root9B made false or misleading statements in connection with the purchase or sale of securities. Hampton identified two statements he alleged were false or misleading and material: (1) a letter from Grano to investors attesting that root9B was differentiated from competitors by its “proprietary hardware and software;” and (2) a press release and associated report published by root9B in which the company claimed to have detected a planned cyber attack against a number of international financial institutions. He further alleged that the individual defendants were jointly and severally liable under section 20(a) of the Securities Exchange Act of 1934. The district court dismissed Hampton’s claims, finding that he had failed to sufficiently plead that the identified statements were false or misleading. The Tenth Circuit concurred with the district court’s findings and affirmed its judgment. View "Hampton v. Root9B Technologies" on Justia Law

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 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”) for $28.5 in cash per share. Apollo publicly filed a Schedule TO, which included its own narrative of the background to the transaction. The 14D-9 incorporated Apollo’s Schedule TO by reference. After reading these disclosures, as the tender offer was still pending, plaintiff-stockholder 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 on April 21 with 68.2% of outstanding shares validly tendered. This case calls into question the integrity of a stockholder vote purported to qualify for “cleansing” pursuant to Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015). In reversing the Court of Chancery's judgment in favor of the Company, the Delaware Supreme Court held "'partial and elliptical disclosures' cannot facilitate the protection of the business judgment rule under the Corwin doctrine." View "Morrison, et al. v. Berry, et al." on Justia Law

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

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

Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

The Securities Act of 1933 creates private rights of action pertaining to securities offerings, grants both federal and state courts jurisdiction over those suits, and bars their removal from state to federal court. The 1995 Private Securities Litigation Reform Act includes substantive reforms, applicable in all courts, and procedural reforms, applicable only in federal court. To avoid the new obstacles, plaintiffs began filing securities class actions under state law. The 1998 Securities Litigation Uniform Standards Act (SLUSA), 15 U.S.C. 77p, disallows, in state and federal courts, “covered class actions,” in which damages are sought under state law on behalf of more than 50 persons,” alleging dishonest practices in the purchase or sale of a "covered security,” listed on a national stock exchange. Section 77v(a) (the “except clause”) now provides that state and federal courts shall have concurrent jurisdiction over 1933 Act cases, “except as provided in section 77p . . . with respect to covered class actions.” Investors brought a class action in state court, alleging 1933 Act violations. A unanimous Supreme Court affirmed the denial of a motion to dismiss, rejecting arguments that SLUSA’s “except clause” stripped state courts of jurisdiction over 1933 Act claims in “covered class actions.” The “except clause” ensures that in any case in which sections 77v(a) and 77p conflict, 77p controls. Section 77p bars certain state law securities class actions but does not deprive state courts of jurisdiction over federal law class actions. The alternative construction would prevent state courts from deciding any 1933 Act large class suits, even suits raising no particular national interest, which would be inconsistent with SLUSA’s "purpose to preclude certain vexing state-law class actions.” Wherever 1933 Act class suits proceed, the substantive protections necessarily apply. SLUSA does not permit defendants to remove class actions alleging only 1933 Act claims from state to federal court. View "Cyan, Inc. v. Beaver County Employees Retirement Fund" on Justia Law

SPV, the assignee of Optimal Strategic, filed suit against UBS and its affiliated entities and individuals (collectively, Access), alleging that UBS and Access aided and abetted the Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff by sponsoring and providing support for two European-based feeder funds. The district court subsequently denied SPV's motion to remand the matter to state court and then granted separate motions to dismiss the complaint. The Second Circuit held that it had jurisdiction over this appeal; this litigation was "related to" the Madoff/BLMIS bankruptcies; the USB defendants lacked sufficient contacts with the United States to allow the exercise of general jurisdiction; the connections between the USB Defendants, SPV's claims, and its chosen New York forum were too tenuous to support the exercise of specific jurisdiction; and the court rejected SPV's two different theories of proximate cause. View "SPV OSUS Ltd. v. UBS AG" on Justia Law

The Court of Chancery initially found that Wal-Mart stockholders who were attempting to prosecute derivative claims in Delaware could no longer do so because a federal court in Arkansas had reached a final judgment on the issue of demand futility first, and the stockholders were adequately represented in that action. But the derivative plaintiffs in Delaware asserted that applying issue preclusion in this context violated their Due Process rights. The Delaware Supreme Court surmised this dispute implicated complex questions regarding the relationship among competing derivative plaintiffs (and whether they may be said to be in “privity” with one another); whether failure to seek board-level company documents renders a derivative plaintiff’s representation inadequate; policies underlying issue preclusion; and Delaware courts’ obligation to respect the judgments of other jurisdictions. The Delaware Chancellor reiterated that, under the present state of the law, the subsequent plaintiffs’ Due Process rights were not violated. Nevertheless, the Chancellor suggested that the Delaware Supreme Court adopt a rule that a judgment in a derivative action could not bind a corporation or other stockholders until the suit has survived a Rule 23.1 motion to dismiss The Chancellor reasoned that such a rule would better protect derivative plaintiffs’ Due Process rights, even when they were adequately represented in the first action. The Delaware Supreme Court declined to adopt the Chancellor’s recommendation and instead, affirmed the Original Opinion granting Defendants’ motion to dismiss because, under the governing federal law, there was no Due Process violation. View "California State Teachers' Retirement System, et al. v. Alvarez, et al." on Justia Law