Justia Securities Law Opinion Summaries

A group of individuals with large social media followings was charged with securities fraud and conspiracy to commit securities fraud. The government alleged that these individuals engaged in a “pump and dump” scheme: they would purchase securities, then use their social media platforms to post false or misleading information about those securities to induce their followers to buy, thereby artificially inflating the price. After the price increased, the defendants would sell their holdings for a profit. The indictment claimed that the defendants collectively profited $114 million from this scheme.After indictment in the United States District Court for the Southern District of Texas, one defendant pleaded guilty while the others moved to dismiss the indictment. The district court granted the motion to dismiss, reasoning that the indictment failed to allege a scheme to deprive victims of a traditional property interest, instead only alleging deprivation of valuable economic information. The district court relied on the Supreme Court’s decision in Ciminelli v. United States, which held that deprivation of economic information alone does not constitute fraud under federal law.On appeal, the United States Court of Appeals for the Fifth Circuit reviewed the sufficiency of the indictment de novo. The Fifth Circuit concluded that the indictment adequately alleged both a scheme to defraud and an intent to defraud, as required by the securities fraud statute. The court distinguished the case from Ciminelli, finding that the indictment alleged a fraudulent-inducement theory—whereby the defendants used misrepresentations to induce followers to part with money by purchasing securities—not merely a deprivation of information. The court also held that the fraud statutes do not require proof that the defendants intended to cause economic harm, only that they intended to obtain money or property by deceit. The Fifth Circuit reversed the district court’s dismissal of the indictment and remanded the case for further proceedings. View "USA v. Constantinescu" on Justia Law

The case concerns allegations by investors against a company that markets and sells organic and natural products, as well as several of its current and former executives. The investors claim that, during a specified period, the company engaged in “channel stuffing”—offering distributors significant incentives to purchase more product than they could sell, in order to meet financial projections. The investors allege that these practices were not adequately disclosed to the public or properly accounted for, and that the company made misleading statements about its financial health, internal controls, and compliance with accounting standards. The company later restated its financial results, admitted to deficiencies in its internal controls, and settled with the Securities and Exchange Commission, which did not bring charges but found violations of recordkeeping and internal control requirements.The United States District Court for the Eastern District of New York initially dismissed the investors’ complaint, finding that they had not sufficiently alleged that the defendants acted with scienter, or wrongful intent. After a prior appeal resulted in a remand for further consideration, the district court again dismissed the complaint, concluding that the plaintiffs failed to adequately plead scienter and actionable misstatements or omissions.The United States Court of Appeals for the Second Circuit reviewed the case and determined that the plaintiffs had adequately alleged that the defendants made actionable misstatements and omissions regarding the company’s financial results, internal controls, and the use of channel stuffing. The court also found that the plaintiffs sufficiently alleged scienter, loss causation, and control-person liability under the relevant securities laws. The Second Circuit vacated the district court’s dismissal and remanded the case for further proceedings. The main holding is that the plaintiffs’ allegations were sufficient to survive a motion to dismiss and that the case should proceed. View "Gimpel v. Hain Celestial Group, Inc." on Justia Law

A group of shareholders in seven small-to-mid cap companies brought coordinated class actions against two major financial institutions, alleging that these institutions enabled Archegos Capital Management to amass large, nonpublic, and highly leveraged positions in the companies’ stocks through total return swaps and margin lending. When the value of these stocks declined and Archegos was unable to meet margin calls, the financial institutions quickly sold off their related positions before the public became aware of Archegos’ impending collapse. The shareholders claimed that this conduct constituted insider trading, arguing that the institutions used confidential information to avoid losses at the expense of ordinary investors.The United States District Court for the Southern District of New York first dismissed the shareholders’ complaints, finding insufficient factual allegations to support claims under both the classical and misappropriation theories of insider trading. The court allowed the shareholders to amend their complaint, but after a second amended complaint was filed, the court again dismissed the claims with prejudice. The district court concluded that the complaint did not plausibly allege that Archegos was a corporate insider or that the financial institutions owed a fiduciary duty to Archegos. It also found the allegations of tipping preferred clients to be unsupported by sufficient facts. The court dismissed the related claims under Sections 20A and 20(a) of the Securities Exchange Act for lack of an underlying securities violation.On appeal, the United States Court of Appeals for the Second Circuit affirmed the district court’s judgment. The Second Circuit held that the shareholders failed to plausibly allege that the financial institutions engaged in insider trading under either the classical or misappropriation theories. The court found no fiduciary or similar duty owed by Archegos to the issuers or by the financial institutions to Archegos, and determined that the complaint lacked sufficient factual allegations to support a tipping theory. The court also affirmed dismissal of the Section 20A and 20(a) claims. View "In Re: Archegos 20A Litigation" on Justia Law

A group of former executives from an investment management company were prosecuted after the company collapsed and was placed in receivership. The company, which raised hundreds of millions of dollars from private investors, primarily through promissory notes and other investment vehicles, experienced severe financial distress following the default of a major asset. Despite this, the executives continued to solicit investments, representing to investors that their funds would be used to purchase secure receivables and that the company was financially healthy. In reality, most new investor funds were used to pay prior investors and cover operating expenses. The executives were accused of making material misrepresentations and misleading half-truths about the use of investor funds, the security of investments, and the company’s financial health.The United States District Court for the District of Oregon presided over the trial. The jury found all three defendants guilty of conspiracy to commit mail and wire fraud and multiple counts of wire fraud; one defendant was also convicted of making a false statement on a loan application. The defendants argued that they were improperly convicted on an omissions theory of fraud and that they were prevented from presenting a complete defense based on disclosures in offering documents and financial statements. They also challenged the sufficiency of the evidence and the materiality of their statements.The United States Court of Appeals for the Ninth Circuit reviewed the case. The court held that the government’s theory at trial was based on affirmative misrepresentations and misleading half-truths, not mere omissions, and that the jury instructions fairly stated the law. The court found that evidence of what was not disclosed was relevant to materiality, and that disclaimers in offering documents did not render other representations immaterial in a criminal fraud prosecution. The convictions were affirmed. View "USA V. JESENIK" on Justia Law

The Securities and Exchange Commission (SEC) initiated a civil enforcement action against Ongkaruck Sripetch and several other defendants, alleging that they engaged in fraudulent schemes involving at least 20 penny stock companies. The SEC claimed that the defendants obtained over $6 million in illicit proceeds through violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, including securities fraud and the sale of unregistered securities. The SEC sought various remedies, including an order requiring the defendants to disgorge all ill-gotten gains.The United States District Court for the Southern District of California presided over the case. Sripetch consented to the entry of judgment, agreeing that the court could order disgorgement and prejudgment interest, and that the complaint’s allegations would be accepted as true for the purposes of the SEC’s motion. The district court ordered Sripetch to disgorge $2,251,923.16 in net profits, plus prejudgment interest. Sripetch appealed, arguing that disgorgement under 15 U.S.C. § 78u(d)(5) and (d)(7) requires a showing of pecuniary harm to investors, which he claimed the SEC had not demonstrated.The United States Court of Appeals for the Ninth Circuit reviewed the district court’s disgorgement order for abuse of discretion. The Ninth Circuit held that the SEC is not required to show that investors suffered pecuniary harm as a precondition to a disgorgement award under § 78u(d)(5) or (d)(7). The court reasoned that disgorgement is a profits-based remedy focused on depriving wrongdoers of ill-gotten gains, not compensating victims for losses. Accordingly, the Ninth Circuit affirmed the district court’s judgment. View "UNITED STATES SECURITIES AND EXCHANGE COMMISSION V. SRIPETCH" on Justia Law

Walmart, a national pharmacy operator, was investigated by the U.S. Attorney’s Office for the Eastern District of Texas from 2016 to 2018 regarding its opioid dispensing practices. The investigation included raids, subpoenas, and meetings where prosecutors indicated a possible indictment, but ultimately, the Department of Justice declined to prosecute criminally, though a civil investigation continued. In 2020, a news article revealed the investigation, causing Walmart’s stock price to drop. Later that year, the DOJ filed a civil lawsuit against Walmart for alleged violations of the Controlled Substances Act.Investors who owned Walmart stock during the relevant period filed a putative securities fraud class action in the United States District Court for the District of Delaware. They alleged that Walmart’s public filings failed to adequately disclose the government investigation, violating Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, and that Walmart’s statements about its “reasonably possible” liabilities and compliance with accounting rules (ASC 450) were misleading. The District Court granted Walmart’s motion to dismiss, finding no actionable misrepresentation or omission, and denied plaintiffs’ request to further amend their complaint.The United States Court of Appeals for the Third Circuit reviewed the case de novo. The court held that Walmart’s omission of the investigation from its disclosures before June 4, 2018, was not misleading because the investigation did not constitute a “reasonably possible” material liability at that stage. After June 4, 2018, Walmart’s disclosures sufficiently informed investors about the existence and potential impact of government investigations. The court also found no violation of ASC 450 and affirmed the District Court’s denial of leave to amend, concluding that further amendment would be futile. The Third Circuit affirmed the dismissal of all claims. View "In re Walmart Inc. Securities Litigation" on Justia Law

Robinhood Markets, Inc., an online brokerage firm, experienced a surge in business during early 2021 due to increased trading in “meme stocks” and Dogecoin. This activity declined sharply in the second quarter of 2021, leading to significant drops in key financial metrics and performance indicators. In July 2021, Robinhood conducted an initial public offering (IPO) and issued a registration statement that included limited information about its second-quarter performance. After the IPO, Robinhood released its full second-quarter results, which revealed substantial declines and led to a drop in its stock price. Plaintiffs, representing a class of investors, alleged that Robinhood’s registration statement omitted material information about these declines, violating Sections 11, 12, and 15 of the Securities Act of 1933.The United States District Court for the Northern District of California dismissed the plaintiffs’ claims with prejudice. The district court found that Robinhood and its co-defendants were not liable under the Securities Act for failing to disclose the pre-IPO declines in key performance indicators and certain revenue sources. The court also held that there was no actionable omission regarding the increased percentage of Robinhood’s revenue attributable to speculative trading.On appeal, the United States Court of Appeals for the Ninth Circuit reviewed the district court’s decision de novo. The Ninth Circuit held that the district court applied incorrect legal standards to the plaintiffs’ theories under Section 11’s “misleading” prong and Item 303 of Regulation S-K. The appellate court clarified that, in this context, Sections 11 and 12 require disclosure of all material information, and rejected the “extreme departure” test used by the district court. The court vacated the dismissal as to these theories and remanded for further proceedings. However, the Ninth Circuit affirmed the district court’s dismissal of the claim based on Item 105 of Regulation S-K, finding no duty to provide a breakdown of revenue sources for the relevant period. View "Sodha v. Golubowski" on Justia Law

Armistice Capital, LLC and its client fund held warrants to purchase shares in Vaxart, Inc., a biotech company developing an oral COVID-19 vaccine. Stephen J. Boyd, Armistice’s Chief Investment Officer, served on Vaxart’s board. The warrants included “blocker provisions” limiting Armistice’s ownership to 4.99% and 9.99% of Vaxart’s shares. Boyd requested that Vaxart’s board amend these provisions to allow Armistice to own up to 19.99%. The board, with full knowledge that Boyd and another director were Armistice representatives, unanimously approved the amendment. Shortly after Vaxart announced its vaccine’s selection for a federal study, Armistice exercised the warrants and sold its shares, allegedly realizing an $87 million profit.Andrew E. Roth, a Vaxart shareholder, filed suit in the United States District Court for the Southern District of New York, alleging that Armistice and Boyd, as statutory insiders, violated Section 16(b) of the Securities Exchange Act by engaging in a prohibited short-swing transaction. Roth sought disgorgement of the profits to Vaxart. The defendants moved for summary judgment, arguing that even if a short-swing transaction occurred, they were exempt from liability under SEC Rule 16b-3(d) because the Vaxart board had approved the transaction with knowledge of all material facts. The District Court granted summary judgment for the defendants, finding the exemption applied.On appeal, the United States Court of Appeals for the Second Circuit reviewed the District Court’s decision de novo. The Second Circuit held that the exemption under SEC Rule 16b-3(d) applied because the transaction involved the acquisition of issuer equity securities by insiders, those insiders were directors at the time, and the transaction was approved in advance by the issuer’s board with full knowledge of the relevant relationships. The court affirmed the District Court’s judgment, holding that the defendants were exempt from Section 16(b) liability under Rule 16b-3(d). View "Roth v. Armistice Capital, LLC" on Justia Law

Earl Miller, who owned and operated several real estate investment companies under the 5 Star name, was responsible for soliciting funds from investors, primarily in the Amish community, with promises that their money would be used exclusively for real estate ventures. After becoming sole owner in 2014, Miller diverted substantial investor funds for personal use, unauthorized business ventures, and payments to friends’ companies, all in violation of the investment agreements. He also misled investors about the nature and use of their funds, including issuing false statements about new business activities. The scheme continued even as the business faltered, and Miller ultimately filed for bankruptcy.A federal grand jury in the Northern District of Indiana indicted Miller on multiple counts, including wire fraud and securities fraud. At trial, the government presented evidence, including testimony from an FBI forensic accountant, showing that Miller misappropriated approximately $4.5 million. The jury convicted Miller on one count of securities fraud and five counts of wire fraud, acquitting him on one wire fraud count and a bankruptcy-related charge. The United States District Court for the Northern District of Indiana sentenced Miller to 97 months’ imprisonment, applying an 18-level sentencing enhancement based on a $4.5 million intended loss, and ordered $2.3 million in restitution to victims.The United States Court of Appeals for the Seventh Circuit reviewed Miller’s appeal, in which he challenged the district court’s loss and restitution calculations. The Seventh Circuit held that the district court reasonably estimated the intended loss at $4.5 million, as this amount reflected the funds Miller placed at risk through his fraudulent scheme, regardless of when the investments were made. The court also upheld the restitution award, finding it properly included all victims harmed by the overall scheme. The Seventh Circuit affirmed the district court’s judgment. View "USA v Miller" on Justia Law

Investors who purchased shares of a fitness equipment company between February 2021 and January 2022 alleged that the company and several executives misled the public about the ongoing demand for its products and the state of its inventory following the COVID-19 pandemic. During the pandemic, demand for the company’s products surged, but plaintiffs claimed that by early 2021, demand had declined as gyms reopened. Plaintiffs asserted that the company concealed this decline and continued to assure investors that demand remained strong and that supply chain investments were necessary. Their allegations were supported by statements from numerous former employees who described declining sales, missed quotas, and growing excess inventory.The United States District Court for the Southern District of New York reviewed the case after the plaintiffs filed an amended complaint. The district court dismissed the complaint, finding that the plaintiffs failed to allege any actionable material misstatements or omissions. The court determined that most statements were either protected forward-looking statements, non-actionable puffery, or consistent with the company’s actual financial results. The court also found that the confidential witness accounts were anecdotal and did not reflect the company’s overall performance.The United States Court of Appeals for the Second Circuit reviewed the district court’s decision. The appellate court agreed that most of the challenged statements were not actionable, either because they were not materially false or misleading, or because they constituted non-actionable puffery. However, the Second Circuit found that the plaintiffs plausibly alleged actionable misstatements or omissions regarding the company’s characterization of a price reduction as “absolutely offensive” and its risk disclosures about excess inventory in certain SEC filings, which may have been misleading because the risks had already materialized. The Second Circuit vacated the district court’s dismissal as to these statements and remanded for further proceedings, while affirming the dismissal of claims based on other statements. View "City of Hialeah Employees' Retirement System v. Peloton Interactive, Inc." on Justia Law