Justia Securities Law Opinion Summaries
Articles Posted in Securities Law
Doyle v. UBS Financial Services, Inc.
The case involves plaintiffs-appellees, trustees of the Peter and Elizabeth C. Tower Foundation, who brought claims against UBS Financial Services, Inc. and Jay S. Blair (collectively, the "UBS Defendants") under the Investment Advisers Act of 1940 and New York state law. The plaintiffs allege that the UBS Defendants breached their fiduciary duties in managing the Foundation's investment advisory accounts. Specifically, they claim that John N. Blair, the father of Jay Blair, improperly used his position to place the Foundation’s assets with his son's investment firm, which later became affiliated with UBS.The United States District Court for the Western District of New York denied the UBS Defendants' motion to compel arbitration. The court found that the plaintiffs had presented sufficient evidence to question the validity of the arbitration agreement, warranting a trial on that issue. The UBS Defendants had previously moved to stay or dismiss the action under the Colorado River abstention doctrine, which was also denied.The United States Court of Appeals for the Second Circuit reviewed the case. The court applied the Supreme Court's 2022 decision in Morgan v. Sundance, Inc., which held that courts may not impose a prejudice requirement when evaluating whether a party has waived enforcement of an arbitration agreement. The Second Circuit concluded that the UBS Defendants waived their right to compel arbitration by seeking a resolution of their dispute in the District Court first, thus acting inconsistently with the right to arbitrate. Consequently, the Second Circuit affirmed the District Court’s denial of the UBS Defendants’ motion to compel arbitration on the alternative ground of waiver. View "Doyle v. UBS Financial Services, Inc." on Justia Law
United States v. Schena
Mark Schena operated Arrayit, a medical testing laboratory in Northern California, which focused on blood tests for allergies. Schena marketed these tests as superior to skin tests, despite their limitations, and billed insurance providers up to $10,000 per test. To maintain a steady flow of patient samples, Schena paid marketers a percentage of the revenue they generated by pitching Arrayit’s services to medical professionals, often misleading them about the tests' efficacy. During the COVID-19 pandemic, Schena transitioned to COVID testing, using similar deceptive marketing practices to bundle allergy tests with COVID tests.The United States District Court for the Northern District of California denied Schena’s motion to dismiss the EKRA counts, arguing that his conduct did not violate the statute as a matter of law. The jury convicted Schena on all counts, including conspiracy to commit healthcare fraud, healthcare fraud, conspiracy to violate EKRA, EKRA violations, and securities fraud. The district court sentenced Schena to 96 months in prison and ordered him to pay over $24 million in restitution.The United States Court of Appeals for the Ninth Circuit reviewed the case and affirmed Schena’s convictions. The court held that 18 U.S.C. § 220(a)(2)(A) of EKRA covers payments to marketing intermediaries who interface with those who do the referrals, and there is no requirement that the payments be made to a person who interfaces directly with patients. The court also concluded that a percentage-based compensation structure for marketing agents does not violate EKRA per se, but the evidence showed wrongful inducement when Schena paid marketers to unduly influence doctors’ referrals through false or fraudulent representations. The court affirmed Schena’s EKRA and other convictions, vacated in part the restitution order, and remanded in part. View "United States v. Schena" on Justia Law
AST & Science LLC v. Delclaux Partners SA
AST & Science LLC, a company in the satellite technology and communications business, hired Delclaux Partners SA to introduce it to registered broker-dealers for investment purposes. Delclaux introduced AST to LionTree Advisors LLC, which handled AST's Series A financing. Two contracts were involved: a Finder’s Fee Agreement between AST and Delclaux, and a separate agreement between AST and LionTree. After the Series B financing, Delclaux claimed it was owed fees from four transactions, which AST refused to pay, leading to AST suing Delclaux for breach of contract, alleging Delclaux acted as an unregistered broker-dealer.The United States District Court for the Southern District of Florida denied summary judgment on AST’s complaint and granted summary judgment to AST on Delclaux’s counterclaim. Delclaux appealed, but the appeal was voluntarily dismissed due to jurisdictional questions. The district court later held that it lacked diversity jurisdiction but claimed federal-question jurisdiction, asserting that the case involved a federal issue regarding the Securities Exchange Act.The United States Court of Appeals for the Eleventh Circuit reviewed the case and disagreed with the district court’s assertion of federal-question jurisdiction. The appellate court held that the breach-of-contract claim was governed by state law and did not meet the criteria for federal-question jurisdiction under the Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing test. The court found that the federal issue was not substantial enough to warrant federal jurisdiction. Consequently, the Eleventh Circuit vacated the district court’s judgment and remanded the case with instructions to dismiss it for lack of subject-matter jurisdiction. View "AST & Science LLC v. Delclaux Partners SA" on Justia Law
Institutional Shareholder Services, Inc. v. SEC
Institutional Shareholder Services, Inc. (ISS), a proxy advisory firm, challenged the Securities and Exchange Commission’s (SEC) interpretation of the term “solicit” under section 14(a) of the Exchange Act of 1934. The SEC had begun regulating proxy advisory firms by treating their voting recommendations as “solicitations” of proxy votes. ISS argued that its recommendations did not constitute “solicitation” under the Act.The United States District Court for the District of Columbia agreed with ISS and granted summary judgment in its favor. The court found that the SEC’s interpretation of “solicit” was overly broad and not supported by the statutory text. The National Association of Manufacturers (NAM), an intervenor supporting the SEC’s position, appealed the decision.The United States Court of Appeals for the District of Columbia Circuit reviewed the case. The court affirmed the district court’s decision, holding that the ordinary meaning of “solicit” does not include providing proxy voting recommendations upon request. The court concluded that “solicit” refers to actively seeking to obtain proxy authority or votes, not merely influencing them through advice. The SEC’s definition, which included proxy advisory firms’ recommendations as solicitations, was found to be contrary to the statutory text of section 14(a) of the Exchange Act. View "Institutional Shareholder Services, Inc. v. SEC" on Justia Law
United States v. Maike
The defendants, Richard Maike, Doyce Barnes, and Faraday Hosseinipour, were involved in a company called Infinity 2 Global (I2G), which the FBI determined to be a pyramid scheme. The company collected approximately $34 million from investors, most of whom lost money. After a 25-day trial, a jury convicted the defendants of conspiracy to commit mail fraud and conspiracy to commit securities fraud. The defendants appealed their convictions, presenting numerous arguments for reversal.The United States District Court for the Western District of Kentucky initially handled the case, where the jury found the defendants guilty on both counts. The defendants were sentenced to varying prison terms: Maike received 120 months, Barnes 48 months, and Hosseinipour 30 months. The defendants then appealed to the United States Court of Appeals for the Sixth Circuit, challenging the sufficiency of the evidence and the jury instructions, among other issues.The United States Court of Appeals for the Sixth Circuit reviewed the case and rejected all the defendants' arguments. The court found that there was sufficient evidence to support the jury's verdicts on both counts. The court also determined that the jury instructions were appropriate and did not mislead the jury. The court affirmed the criminal judgments of Maike and Barnes. For Hosseinipour, the court affirmed her criminal judgment but vacated the district court's denial of her Rule 33 motion for a new trial, remanding her case for reconsideration of that motion. View "United States v. Maike" on Justia Law
Xeriant, Inc. v. Auctus Fund LLC
In 2021, Xeriant, Inc., an aerospace company, sought financing for a joint venture and connected with Auctus Fund LLC, a hedge fund. Auctus agreed to lend approximately $5 million through a convertible promissory note, allowing Auctus to convert the debt into shares of Xeriant's common stock if the loan was not repaid in cash. When Xeriant failed to repay the loan, Auctus attempted to convert the debt into stock, but Xeriant rejected the request and filed a lawsuit seeking to void the contract under the Securities Exchange Act of 1934, claiming Auctus was not a registered securities dealer.The United States District Court for the Southern District of New York dismissed Xeriant's complaint, holding that the contract did not obligate Auctus to act as a dealer, and thus, the agreement was not void under Section 29(b) of the Exchange Act. The court found that the Securities and Exchange Commission (SEC), not private parties, enforces the registration requirement under Section 15(a) of the Exchange Act.The United States Court of Appeals for the Second Circuit reviewed the case and affirmed the district court's decision. The appellate court agreed that Xeriant failed to allege a sufficient claim for rescission under Section 29(b) because the contract did not require Auctus to engage in unlawful dealer activity. The court concluded that the contract could be performed lawfully and was not inherently illegal. Therefore, the contract could not be rescinded under Section 29(b) of the Exchange Act. The court also held that Xeriant's claim was timely filed, as the facts underlying Auctus's alleged status as an unregistered dealer were not appreciable until the SEC filed its complaint in June 2023. View "Xeriant, Inc. v. Auctus Fund LLC" on Justia Law
People v. Schnorenberg
In 2008, Kelly James Schnorenberg formed KJS Marketing, Inc. to secure funding and recruit agents for insurance companies. Between 2009 and 2015, KJS solicited over $15 million from approximately 250 investors, promising a 12% annual return. Schnorenberg failed to disclose to investors his past legal and financial troubles, including a lawsuit by the Colorado Division of Securities, a permanent injunction from selling securities in Colorado, a bankruptcy filing, and unpaid civil judgments.Schnorenberg was charged with twenty-five counts of securities fraud under section 11-51-501, with twenty-four counts based on materially false statements or omissions and one count based on a fraudulent course of business. He planned to defend himself by arguing that he acted in good faith reliance on the advice of his securities lawyer, Hank Schlueter. However, the trial court denied his motions for a continuance to secure Schlueter's testimony and excluded Schnorenberg's testimony about the specific advice he received, ruling it as hearsay.The Colorado Court of Appeals vacated seven of Schnorenberg's convictions as time-barred, reversed the remaining convictions, and remanded the case for further proceedings. The court concluded that the trial court erred in excluding Schnorenberg's testimony about his lawyer's advice and in not instructing the jury that good faith reliance on the advice of counsel could negate the mens rea element of the securities fraud charges.The Supreme Court of Colorado reviewed the case and held that the mens rea of "willfully," synonymous with "knowingly," applies to each element of securities fraud under subsections 11-51-501(1)(b) and (c). The court concluded that Schnorenberg's testimony about his lawyer's advice was relevant to whether he had the requisite mens rea and that the trial court erred in excluding this testimony. The court affirmed the judgment of the Court of Appeals and remanded the case for a new trial. View "People v. Schnorenberg" on Justia Law
PINO V. CARDONE CAPITAL, LLC
The case involves a putative class action filed by Christine Pino on behalf of herself and others against Grant Cardone and his associated entities, alleging violations of the Securities Act of 1933. Pino claims that Cardone made misleading statements and omissions on social media about the internal rate of return (IRR) and distribution projections for real estate investment funds, and misstated material facts regarding the funds' debt obligations.The United States District Court for the Central District of California initially dismissed the case under Federal Rule of Civil Procedure 12(b)(6), concluding that Cardone and his entities were not "sellers" under § 12(a)(2) of the Securities Act and that the statements in question were not actionable. Pino appealed, and the Ninth Circuit Court of Appeals reversed in part, holding that Cardone and his entities could be considered statutory sellers and that some of the statements were actionable. The case was remanded for further proceedings.Upon remand, Pino filed a second amended complaint, and the district court again dismissed the claims without leave to amend, holding that Pino had waived subjective falsity by disclaiming fraud and failed to plausibly allege subjective and objective falsity. The court also found that the omission of the SEC letter did not support a claim and that the debt obligation statement was not material.The United States Court of Appeals for the Ninth Circuit reviewed the case and reversed the district court's dismissal. The Ninth Circuit held that Pino did not waive subjective falsity by disclaiming fraud and sufficiently alleged that Cardone subjectively disbelieved his IRR and distribution projections, which were also objectively untrue. The court also held that Pino stated a material omission claim under § 12(a)(2) by alleging that Cardone failed to disclose the SEC letter. Additionally, the court found that Pino sufficiently alleged that Cardone misstated material facts regarding the funds' debt obligations, which could be considered material to a reasonable investor. The Ninth Circuit reversed the district court's dismissal and allowed the claims to proceed. View "PINO V. CARDONE CAPITAL, LLC" on Justia Law
Erste Asset Management GmbH v. Hees
In early 2020, Erste Asset Management GmbH filed a derivative action against Kraft Heinz Company’s fiduciaries, arising from an August 2018 stock sale by 3G Capital, Inc., a significant minority stockholder. The Court of Chancery dismissed the complaint under Rule 23.1, concluding that the plaintiffs failed to plead particularized facts creating a reasonable doubt that six of Kraft Heinz’s eleven directors were disinterested or lacked independence. One of those directors, John Cahill, was alleged to have ended his consulting relationship with Kraft Heinz before the derivative action was filed. However, it was later revealed that Cahill continued to serve as a consultant after July 2019, contrary to Kraft Heinz’s public disclosures.The Court of Chancery dismissed the derivative action, relying on the false representation that Cahill’s consulting agreement had terminated. Erste later discovered the ongoing consultancy and filed a new action seeking relief from the judgment under Rule 60(b) for fraud and newly discovered evidence. The Court of Chancery dismissed this new action, holding that the fraud must be extrinsic and that the new information was not newly discovered evidence because Erste could have learned it with reasonable diligence.The Supreme Court of Delaware reversed the Court of Chancery’s decision, holding that Rule 60(b)(3) applies to both intrinsic and extrinsic fraud and that Erste had pleaded a claim that Kraft Heinz’s misrepresentations prevented it from fairly presenting its case. The court remanded the case for further proceedings, including Rule 23.1 motion practice to reassess demand futility in light of the new evidence. The court also remanded Erste’s breach of fiduciary duty claim for further consideration. View "Erste Asset Management GmbH v. Hees" on Justia Law
Vuoncino v. Forterra
Raymond Vuoncino, a corporate-finance professional, worked for U.S. Pipe Fabrication, LLC (Fabrication). After Fabrication implemented new accounting practices for inter-company sales, Vuoncino objected to these practices as potentially fraudulent. Subsequently, he was fired by an executive of Fabrication’s parent company, Forterra, Inc. Vuoncino sued Fabrication, Forterra, and two Forterra executives, alleging violations of the Sarbanes-Oxley Act’s anti-retaliation provision.The United States District Court for the Northern District of Texas dismissed Vuoncino’s first amended complaint for failure to state a claim, denied his motion for leave to amend his complaint, and denied reconsideration of those orders. Vuoncino appealed these decisions.The United States Court of Appeals for the Fifth Circuit reviewed the case. The court affirmed the district court’s denial of Vuoncino’s motion for leave to file a second amended complaint, finding the proposed amendments were time-barred and did not relate back to the original complaint. The court also affirmed the district court’s denial of reconsideration, noting that Vuoncino’s motion rehashed previously rejected arguments and did not present newly discovered evidence.However, the Fifth Circuit reversed the district court’s dismissal of the Sarbanes-Oxley Act claim against Fabrication, concluding that Vuoncino’s first amended complaint plausibly alleged that Fabrication employed him. The court found that Vuoncino’s allegations, taken as true, were sufficient to raise a plausible inference that he was a Fabrication employee. The court affirmed the dismissal of the Sarbanes-Oxley Act claims against Forterra, Bradley, and Kerfin, as Vuoncino failed to sufficiently plead that these defendants were his employer’s alter ego or that he could sue Forterra directly without establishing an employment relationship.The Fifth Circuit affirmed in part, reversed in part, and remanded the case for further proceedings. View "Vuoncino v. Forterra" on Justia Law