Justia Securities Law Opinion Summaries

To safeguard investors and restore trust in financial markets after the Enron collapse, Congress passed the Sarbanes-Oxley Act of 2002, which provides that no public company nor any contractor or subcontractor of such a company, may discharge, demote, suspend, threaten, harass, or discriminate against an employee in the terms and conditions of employment because of whistleblowing activity, 18 U. S. C. 1514A(a). Plaintiffs are former employees of FMR, private companies that contract to advise or manage mutual funds. As is common in the industry, those mutual funds are public companies with no employees. Plaintiffs allege that they blew the whistle on putative fraud relating to the mutual funds and suffered retaliation by FMR. FMR argued that the Act protects only employees of public companies, and not employees of private companies that contract with public companies. The district court denied FMR’s motion to dismiss. The First Circuit reversed, concluding that the term “an employee” refers only to employees of public companies. The Supreme Court reversed and remanded, concluding that section 1514A’s whistleblower protection includes employees of a public company’s private contractors and subcontractors. FMR’s interpretation would shrink the protection against retaliation by contractors to insignificance. The Court stated that its reading fits the goal of warding off another Enron debacle; fear of retaliation was the primary deterrent to reporting by the employees of Enron’s contractors. FMR’s reading would insulate the entire mutual fund industry from section 1514A. Virtually all mutual funds are structured to have no employees of their own and are managed, instead, by independent investment advisors. View "Lawson v. FMR LLC" on Justia Law

Walsh and Martin, principals of a futures and foreign currency trading company that acted as a “futures commission merchant” and as a “forex dealer member,” used customer funds for personal expenses, then concealed the company’s insolvency and their criminal conduct by misleading customers about the company’s ability to meet its obligations. Existing customers got account statements that falsely stated their available margin funds, and they solicited new customers by making false statements. They also used a Ponzi-like scheme for redemptions. Shortly before it was shut down, the company had $17,654,486 in unpaid customer liabilities and only $677,932 in assets. Walsh and Martin pleaded guilty to wire fraud, tax evasion, and to making false statements in a report to the Commodities Futures and Trading Commission, a Commodities Exchange Act (7 U.S.C. 6d(a)) violation. The district court sentenced them to terms of imprisonment of 150 and 204 months, respectively, and ordered each to pay $16,976,554 in restitution. The Seventh Circuit affirmed, rejecting challenges to a finding as to the amount of loss and restitution and to application of a sentencing enhancement based upon a finding that each was an officer or director of a futures commission merchant. View "United States v. Walsh" on Justia Law

This is an adversary proceeding arising out of the bankruptcy of debtor (Derivium). Plaintiff (Grayson), assignee of the Chapter 7 bankruptcy trustee, appealed from a district court judgment affirming the bankruptcy court's decision to grant summary judgment for defendants (Wachovia). The court concluded that the district court did not err in affirming the grant of summary judgment for Wachovia on Grayson's Customer Transfers claim; summary judgment for Wachovia on Grayson's Cash Transfers claim; the bankruptcy court's determinations that the stockbroker defense applied to commissions; and the bankruptcy court's ruling that in pari delicto barred Grayson's tort claims against Wachovia. View "Grayson Consulting, Inc. v. Wachovia Securities, LLC" on Justia Law

Plaintiffs are investors who purchased Omnicare securities in a 2005 public offering. They sold their securities a few weeks later and sought relief under the Securities Act of 1933,15 U.S.C. 77k, alleging that the registration statement was materially misleading. Omnicare is the nation’s largest provider of pharmaceutical care services for the elderly and other residents of long-term care facilities in the U.S. and Canada. Plaintiffs claimed that Omnicare was engaged in a variety of illegal activities including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid. The Registration Statement stated “that [Omnicare’s] therapeutic interchanges were meant to provide [patients with] . . . more efficacious and/or safer drugs than those presently being prescribed” and that its contracts with drug companies were “legally and economically valid arrangements that bring value to the healthcare system and patients that we serve.” The district court dismissed the suit against Omnicare, its officers, and directors, holding that plaintiffs had not adequately pleaded knowledge of wrongdoing. The Sixth Circuit reversed with regard to claims of material misstatements or omissions of legal compliance, but affirmed with respect to claims that revenue was substantially overstated in violation of Generally Accepted Accounting Principles. View "IN State Dist. Counsel v. Omnicare, Inc." on Justia Law

The Kepleys owned 30% of ATA’s outstanding capital stock. Lanz bought one share of Series A Convertible Preferred Stock in the corporation and a right to purchase common stock. At that time, Lanz, ATA, and its shareholders entered into an agreement, prohibiting sale of restricted shares (including Lanz’s share) to ATA’s competitors. In 2010, the Kepleys learned that Lanz sought to sell his share and purchase option to Crimson, an ATA competitor, for $2,799,000. The Kepleys sued, contending that Crimson’s president told them that they could not afford the Lanz shares or litigation and that Crimson would “shut it down or squeeze them out.” The Kepleys sold their shares to Crimson. Lanz did not complete the sale of his stock and remained a shareholder in ATA, 30 percent of which Crimson then owned. The Kepleys sought the difference between the sale price and the fair market value of the shares. The district court dismissed, finding that the Kepleys lacked standing because their alleged injury amounted to diminution in stock value, suffered by the corporation, and only derivatively shared by the Kepleys. The Sixth Circuit reversed, holding that the Kepleys, who are no longer shareholders and cannot pursue derivative claims, have standing for a direct suit. View "Kepley v. Lanz" on Justia Law

The Securities and Exchange Commission filed a civil enforcement action against 12 defendants, alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law, in connection with a “reverse merger” that involved creation of a shell company for the purpose of OTC trading, followed my merger of a private company into the shell, with an exchange of stock. A reverse merger enables a private company to access public markets without undertaking the expensive process of an initial public offering. One of the defendants, Tsai, has formed more than 100 shell companies.The district court granted the SEC partial summary judgment and granted permanent injunctions against the defendants. Tsai appealed. The Sixth Circuit affirmed entry of the injunction. Tsai’s failure to challenge findings with respect to his industry experience and education means the court did not abuse its discretion in finding he had at least some degree of scienter. View "Secs. & Exch. Comm'n v. Sierra Brokerage Servs, Inc." on Justia Law

National Elevator, lead plaintiff on behalf of investors who purchased VeriFone stock, appealed the dismissal of its securities fraud class action. National Elevator alleged that VeriFone, the CEO and former Chairman of the Board of Directors, and the company's former CFO and Executive Vice President, violated sections 10(b), 20(a), and 20A of the Securities and Exchange Act of 1934, 15 U.S.C. 78j(b), 78t-1(a), and 78t(a), and Securities and Exchange Commission Rule 10-b, 17 C.F.R. 240.10b-5(b), in connection with a December 2007 restatement of financial results. The court held that National Elevator adequately pleaded violations of section 10B and Rule 10b as to all defendants; its section 20A claim against the individual defendants was sufficiently pled; but the section 20(a) claim was properly dismissed. Accordingly, the court affirmed in part and dismissed in part. View "National Elevator Industry Pension Fund v. VeriFone Holdings, Inc., et al" on Justia Law

Plaintiffs are five pension funds operated by the State of Ohio for public employees that invested hundreds of millions of dollars in 308 mortgage-backed securities (MBS) between 2005 and 2008, all of which received a “AAA” or equivalent credit rating from one of the three major credit-rating agencies. The value of MBS collapsed during this period, leaving the Funds with estimated losses of $457 million. The Funds sued under Ohio’s “blue sky” laws and a common-law theory of negligent misrepresentation, alleging that the Agencies’ ratings were false and misleading and that the Funds’ reasonable reliance on those ratings caused their losses. The district court dismissed. The Sixth Circuit affirmed. Even if a credit rating can serve as an actionable misrepresentation, the Agencies owed no duty to the Funds and the Funds’ allegations of bad business practices did not establish a reasonable inference of wrongdoing View "OH Police & Fire Pension Fund v. Standard & Poor's Fin. Servs., LLC" on Justia Law

Terex manufactures equipment. Apuzzo was its Chief Financial Officer. URI is an equipment rental company. Nolan was URI’s Chief Financial Officer. URI and Nolan, carried out fraudulent “sale-leaseback” transactions, to allow URI to recognize revenue prematurely and inflate profits. URI sold used equipment to GECC, a financing corporation, and leased it back. To obtain GECC’s participation, URI convinced Terex to agree to resell the equipment after the lease periods. Terex guaranteed that GECC would receive at least 96 percent of the purchase price for the equipment. URI secretly agreed to indemnify Terex for losses from the guarantee and to purchase new equipment from Terex. Apuzzo knew that if the extent of the transactions was transparent, URI would not be able to claim increased revenue under Generally Accepted Accounting Principles. Apuzzo disguised URI’s risks and obligations, and approved inflated invoices to conceal indemnifications. Following transactions under the scheme, the SEC charged that Apuzzo aided and abetted securities laws violations through his role in a fraudulent accounting scheme. The district court dismissed; the complaint plausibly alleged that Apuzzo had actual knowledge of the primary violation, but did not allege “substantial assistance.” The Second Circuit reversed, holding that Apuzzo associated himself with the venture, participated in it as in something that he wished to bring about, sought by his action to make it succeed. . View "Sec. & Exch. Comm'n v. Apuzzo" on Justia Law

A corporation that wants its shares to be traded on an exchange or through broker-dealers that make national markets must register the securities under the Securities Act of 1933, 15 U.S.C. 77j. Section 13(a) of the 1934 Act, 15 U.S.C. 8m(a), requires the issuer to file periodic reports. Plaintiff registered securities and persuaded broker-dealers to make markets in them, but fell behind with its filings. After eight years, during which plaintiff fell farther behind, the SEC opened a formal proceeding. After a hearing and disclosure that plaintiff could not pay an auditor to certify recent financial statements, the SEC revoked plaintiff's registration; trading in its shares came to a halt. While judicial review was pending, plaintiff filed a new registration, which has not been revoked despite plaintiff's failure to catch up on reports. The Seventh Circuit dismissed the case as moot. To commence trading in any newly registered stock, a broker-dealer needs approval from the Financial Industry Regulatory Authority. When a potential market-maker sought approval, it noted SEC comments on plaintiff's new registration. Setting aside the SEC revocation decision would not oblige FINRA to allow trading to resume. View "Tara Gold Resources Corp. v. Sec. & Exch. Comm'n" on Justia Law