Justia Securities Law Opinion SummariesArticles Posted in Professional Malpractice & Ethics
Oetting v. Norton
After the merger of NationsBank and BankAmerica, shareholders filed class actions alleging violations of securities laws. The district court appointed Oetting as lead plaintiff and the Green law firm, as lead counsel. The litigation resulted in a $333 million settlement for the NationsBank class. The Eighth Circuit affirmed approval of the settlement over Oetting’s objection. On the recommendation of Green, the court appointed Heffler as claims administrator. A Heffler employee conspired to submit false claims, resulting in fraudulent payment of $5.87 million. The court denied Green leave to file a supplemental complaint against Heffler. Oetting filed a separate action against Heffler that is pending. After distributions, $2.4 million remained. Green moved for distribution cy pres and requested an additional award of $98,114.34 in attorney’s fees for post-settlement work. Oetting opposed both, argued that Green should disgorge fees for abandoning the class, and filed a separate class action, alleging malpractice by negligently hiring and failing to supervise Heffler and abandonment of the class. The court granted Green’s motion for a cy pres distribution and for a supplemental fee award and denied disgorgement. The Eighth Circuit reversed the cy pres award, ordering additional distribution to the class, and vacated the supplemental fee award as premature. The district court then dismissed the malpractice complaint, concluding that Oetting lacked standing. The Eighth Circuit affirmed that collateral estoppel precluded the rejected disgorgement and class-abandonment claims; pendency of an appeal did not suspend preclusive effects. View "Oetting v. Norton" on Justia Law
Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co.
Municipal Workers Compensation Fund, Inc. ("the Fund"), appealed a circuit court's order denying the Fund's motion to vacate a judgment entered on an arbitration award. The Fund entrusted the management and investment of approximately $50 million in assets to Morgan Asset Management, Inc. ("MAM"), and Morgan Keegan & Company, Inc. ("Morgan Keegan"). MAM served as an investment advisor for a managed account and certain mutual funds owned by the Fund. Morgan Keegan served as the broker-dealer for the Fund's managed account and had the authority as the broker-dealer to execute transactions in that account as directed by the Fund. A second account at Morgan Keegan held the mutual funds that had been sold to the Fund through a Morgan Keegan broker. The Fund stated that it directed MAM and Morgan Keegan to invest its funds conservatively and that it relied on MAM and Morgan Keegan for sound financial advice and management. However, according to the Fund, MAM and Morgan Keegan disregarded this mandate by recommending that the Fund purchase and hold what the Fund says were unsuitable investments, by overconcentrating the Fund's assets in investments that had undue exposure to the sub-prime mortgage market and in other risky investments, and by misrepresenting and failing to disclose material facts pertaining to the investments. The Fund claims that it sustained losses in excess of $15 million in 2007 and 2008 as a result of the actions of MAM and Morgan Keegan. The Fund initiated arbitration proceedings against MAM and Morgan Keegan by filing a statement of claim with the Financial Industry Regulatory Authority ("FINRA") pursuant to the arbitration provision contained in its contracts with MAM and Morgan Keegan, asserting claims of breach of fiduciary duty; breach of contract; negligence; fraud; violations of NASD and NYSE Rules; and violations of the Alabama Securities Act. Upon review, the Supreme Court concluded from the admissible evidence entered at trial, the Fund established an evident partiality on the part of one of the arbitrators, and that the Fund was entitled to have the judgment entered on the arbitration award vacated. The Court remanded the case for further proceedings. View "Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co." on Justia Law
In re: Advanced Battery Techs., Inc.
The district court dismissed a suit brought by Sanderson, individually and on behalf of all others similarly situated, alleging that auditors (defendants) committed securities fraud by falsely representing that they performed their audits of Advanced Battery Technologies in accordance with professional standards and that the company’s filings accurately reflected its financial condition from the 2007 through the 2010 fiscal years. The court found that the complaint failed adequately to plead scienter as required by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u‐4. Sanderson sought to correct these deficiencies by moving to file an amended complaint. The court denied the motion, concluding that even the new allegations failed to “rise to the level of recklessness.” The Second Circuit affirmed, finding that the factual allegations did not give rise to a strong inference of either fraudulent intent or conscious recklessness, rather than mere negligence. View "In re: Advanced Battery Techs., Inc." on Justia Law
Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman
Plaintiffs purchased FCH stock through Shearson’s broker, Steinberg, between 1987 and 1990. FCH filed for bankruptcy in 1991. Plaintiffs retained the law firm to represent them in claims under the Illinois Securities Law. At that time, they had a viable claim for rescission. The firm failed to serve the required rescission notice. In 1992, plaintiffs hired new counsel to pursue their claims against Shearson, which were later dismissed as time-barred. In 1994 plaintiffs filed a malpractice action against the law firm. The appellate court affirmed the dismissal of the Illinois Securities Law claim, but reversed as to common law fraud and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. In 2007, plaintiffs settled those claims for $3.2 million. Later, the trial court found the law firm liable and calculated damages: plaintiffs’ $3.2 million settlement would be deducted from the total they paid for their 11 stock purchases, and 10% interest would be calculated on the remaining amount based on the dates of the stock purchases, for a total award of $4,091,752.19 plus attorney fees of $1,636,700.80, and $207,167.28 in costs and expenses. The appellate court affirmed, but remanded for recalculation of damages and attorney fees. The Illinois Supreme Court remanded for calculation of statutory interest damages on the full amount paid for each security from the date of purchase to the 2007 date of settlement, then deducting the $3.2 million recovery.View "Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman" on Justia Law
Birkelbach v. Sec. & Exch. Comm’n
In 1983, Birkelbach founded Birkelbach Investment Securities (BIS) and served as its president. Birkelbach was registered as a general securities representative and principal, a municipal securities representative and principal, an options principal, and a financial and operations principal. Birckelbach supervised Murphy’s control of one account held by an unsophisticated investor with assets of $1.7 million, while Murphy generated more than a million dollars in commissions, incurred substantial losses, and engaged in transactions that were not part of the investor-authorized strategy. The investor was unable to understand her statements, many of which included errors that overvalued the account. Lowry similarly mishandled, and Birkelbach supervised, the management of the smaller account of a college student/member of the U.S. military. Birkelbach knew that Murphy had been previously censured, suspended, and fined by the Chicago Board Options Exchange, for trading without authorization and had a history of customer complaints. Birkelbach also had a previous disciplinary history. He had been sanctioned by the Illinois Securities Department and, in 2005, additional supervision of Murphy had been requested by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization formed under the Securities Exchange Act, 15 U.S.C. 78o-3. Birkelbach did not do so. After FINRA investigated BIS and recommended sanctions, the Securities and Exchange Commission barred Birkelbach from participation in the securities industry for life. The Seventh Circuit denied a petition for review, rejecting arguments that the original disciplinary complaint was untimely and the lifetime bar was an excessive punishment.View "Birkelbach v. Sec. & Exch. Comm'n" on Justia Law
Lamm v. State Street Bank and Trust
Plaintiff (the customer) filed suit against State Street (the custodian bank), alleging in essence that it had a duty to notify him that the securities in his account were worthless. The district court granted State Street's motion to dismiss the contract claims on the ground that State Street had a merely administrative role in managing plaintiff's accounts and thus owed him no duty to guard against his investment advisor's misconduct. The district court concluded that plaintiff's negligence claims were barred by Florida's economic loss rule and plaintiff had not sufficiently alleged knowledge on the part of State Street in regards to the aiding and abetting claims. The court affirmed, holding that, under these facts, the custodian bank breached no duty, contractual or otherwise, by accepting on behalf of its customer securities that later turn out to be fraudulent and listing those securities on monthly account statements issued to the customer. Plaintiff's allegations failed to state claims for breach of contract; plaintiff failed to establish that State Street owed him an independent duty to monitor the investments in his account, verify their market value, or ensure they were in valid form; therefore, he failed to state valid negligence claims; plaintiff's allegations were insufficient to state a claim for aiding and abetting; and plaintiff's claims for breach of fiduciary duty and negligent misrepresentation also failed. View "Lamm v. State Street Bank and Trust" on Justia Law
Peterson v. Winston & Strawn, LLP
After the mutual funds, known as the Lancelot or Colossus group, folded in 2008, the trustee in bankruptcy filed independent suits or adversary actions seeking to recover from solvent third parties, including the Funds’ auditor, law firm, and some of the Funds’ investors, which the Trustee believes received preferential transfers or fraudulent conveyances. The Funds had invested in notes issued by Thousand Lakes, which was actually a Ponzi scheme, paying old investors with newly raised money. In these proceedings the trustee contends that investors who redeemed shares before the bankruptcy received preferential transfers, 11 U.S.C. 547, or fraudulent conveyances, 11 U.S.C. 548(a)(1)(B) and raised a claim under the Illinois fraudulent-conveyance statute, using the avoiding power of 11 U.S.C. 544. The bankruptcy court dismissed the claims against the law firm that prepared circulars for the Firms. The Seventh Circuit affirmed. No Illinois court has held that failure to report a corporate manager’s acts to the board of directors exposes a law firm to malpractice liability. The complaint does not plausibly allege that alerting the directors would have made a difference.View "Peterson v. Winston & Strawn, LLP" on Justia Law
First Ark. Bank & Trust v. Gill Elrod Ragon Owen & Sherman, P.A.
Developers purchased forty acres with the intent to develop it. Appellants secured a mortgage on the property with a bank. Later Developers formed a municipal property owners' district (the District). Law Firm was retained by the District as legal counsel for the proposed issuance of improvement bonds to finance public improvements in the development. At issue in this case were certain bonds issued by the District that were sold to several banks (Appellants). Developer defaulted on payment of the capital improvement use fees on the bonds and subsequently defaulted on the original mortgage, and the property was sold. Appellants sued Law Firm, alleging that Law Firm had a duty to inform Appellants of the mortgage on the real property and that it failed to inform them. The circuit court granted summary judgment for Law Firm. The Supreme Court affirmed in part and reversed and remanded in part, holding that the circuit court (1) correctly found Law Firm was not liable under the Arkansas Security Act; (2) erred in granting judgment on the issue of attorney malpractice; and (3) correctly found Law Firm had no duty to Appellants under contract, negligence, or breach of a fiduciary duty.View "First Ark. Bank & Trust v. Gill Elrod Ragon Owen & Sherman, P.A." on Justia Law
Paron Capital Mgmt., LLC, et al. v. Crombie
This action involved claims of fraud and breach of fiduciary against an individual defendant, a former investment professional accused of having committed a massive fraud related to a quantitatively-based trading program that he allegedly developed to trade futures contracts. Plaintiffs, as a result of their association with defendant and Paron, the firm they founded with defendant, claimed that they have been stigmatized and thus face dismal prospects of finding employment in the financial services industry. The court found that defendant committed fraud and breached his fiduciary duties to plaintiff and Paron by making false statements of fact about his program, his investment track record, and his personal financial situation. As a result, plaintiffs were entitled to extensive damages against defendant based on their lost future earnings and other costs associated with the formation and operation of Paron. The court also awarded plaintiffs limited injunctive relief requiring defendant to destroy or return copies of Paron's trading program and to stop marketing any versions of that trading program.View "Paron Capital Mgmt., LLC, et al. v. Crombie" on Justia Law
Sullivan v Harnisch
Plaintiff was a 15% partner in defendant Peconic Partners (hedge fund), as well as Chief Compliance Officer. Plaintiff alleged that he was subsequently fired after a dispute with Peconic Partners' CEO and President (Defendant Harnisch). The gist of plaintiff's claim was that the legal and ethical duties of a securities firm and its compliance officer justified recognizing a cause of action for damages when the compliance officer was fired for objecting to misconduct. The court held in Murphy v American Home Prods. Corp that New York common law did not recognize a cause of action for the wrongful discharge of an at-will employee. Therefore, the court declined in this case to make an exception to that rule for the compliance of a hedge fund.View "Sullivan v Harnisch" on Justia Law