Justia Securities Law Opinion Summaries

Customers of a securities firm made claims against that firm based on real estate investments the firm’s broker-dealers recommended. An entity that had an interest in and operated each of the real estate investments filed for bankruptcy, and at least some of the real estate investments became debtors in that bankruptcy proceeding. The appointed examiner in the bankruptcy proceeding found that the entity was engaged in a fraudulent “Ponzi scheme.” When the securities firm applied for professional liability insurance, it disclosed one of the customer claims but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. The insurer refused to defend against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim. The court of appeal affirmed judgment in favor of the insurer: There was no insurance coverage because all of the undisclosed claims arose out of the same events as the disclosed claim. The securities firm was aware of facts and circumstances that might result in a claim or claims being made against it, which awareness it was required to disclose. View "Crown Capital Secs., L.P. v. Endurance Am. Specialty Ins. Co." on Justia Law

The Securities and Exchange Commission (SEC) brought a civil enforcement action against defendants Big Apple Consulting USA, Inc., MJMM Investments, LLC, Marc Jablon, and Mark Kaley (collectively, defendants) for violations of the Securities Act of 1933, and the Securities Exchange Act of 1934. The SEC's allegations stemmed from the defendants' relationship with CyberKey Solutions, Inc. and its CEO James Plant. CyberKey sold customizable USB drives that could be loaded with encryption software to secure content stored on the drives. CyberKey's stock traded on a website called "Pink Sheets." Kaley executed a consulting agreement with CyberKey on behalf of MJMM, in which MJMM agreed to provide services intended to promote CyberKey's business. At first, there was no demand for CyberKey stock, but that changed when Plant began reporting fabricated contracts. A fake contract purportedly with the Department of Homeland Security (DHS) "was a game changer." CyberKey publicized the DHS contract in several press released; MSI drafted the press release and Big Apple was listed as the primary contact. The National Association of Securities Dealers (NASD - now known as the Financial Industry Regulatory Authority (FINRA)), sent a fax to Plant informing him that it was reviewing CyberKey's trading activity. NASD requested that CyberKey provide it with the "documents and information" concerning: (1) the DHS contract; (2) an explanation of how the DHS contract was negotiated; (3) a list of CyberKey's contacts at DHS; and (4) details of CyberKey's relationship with Big Apple. Plant e-mailed the fax to Jablon and Kaley, and they advised Plant to have his securities attorney handle the matter. Jablon and Kaley did not follow up on the status of the inquiry. In early 2007, the SEC issued an order suspending the trading of CyberKey stock due to concerns as to the accuracy of assertions made by CyberKey and others in press releases and public statements to investors. Over the course of the defendants' relationship with CyberKey, Big Apple and MJMM sold more than a combined 720 million CyberKey shares for approximately $7.8 million. During the time that CyberKey was a client, it was one of the top five most actively traded stocks on Pink Sheets. The SEC filed its complaint in federal court and alleged that the defendants "knew, or were severely reckless in not knowing, that CyberKey did not have a $25 million purchase order from the DHS or any other [f]ederal government agency, and thus had very little legitimate revenue at all." Nonetheless, the defendants "persisted in promoting CyberKey and selling hundreds of millions of unregistered CyberKey shares to unsuspecting investors." The district court granted summary judgment in favor of the SEC as to some of the claims, and the remainder of the claims proceeded to trial. A jury found in favor of the SEC as to the remaining claims against all defendants. Defendants raised six errors on appeal to the Eleventh Circuit. But finding no reversible error, the Court affirmed the trial court's decision and the jury's verdict. View "U.S. Securities & Exchange Comm'n v. Big Apple Consulting USA, Inc." on Justia Law

Patipan Nakkhumpun, lead plaintiff in a securities class action, represented investors who purchased securities in Delta Petroleum Corporation. Defendants were former officers and a board member of Delta who allegedly violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission by misleading investors through statements about (1) a proposed transaction with Opon International, LLC and (2) Delta’s financial condition. The district court granted the defendants’ motion to dismiss, holding that Nakkhumpun had failed to allege: (1) loss causation regarding the statement about the Opon deal; and (2) falsity regarding the statements about Delta’s financial condition. Nakkhumpun moved for leave to amend, and the district court denied the motion on the ground of futility. On appeal, the parties disputed whether Nakkhumpun adequately pleaded falsity, scienter and loss causation with regard to the Opon transaction, and falsity and scienter with regard to Delta's financial condition. Upon further review, the Tenth Circuit affirmed in part and reversed in part. The Court concluded Nakkhumpun adequately alleged falsity, scienter and loss causation on the Opon transaction, but failed to adequately plead regarding Delta's financial condition. The case was remanded for further proceedings. View "Nakkhumpun v. Taylor" on Justia Law

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

Greyfield Capital was a defunct Canadian company. Two "con-men" found a signature stamp belonging to the company's former president, and used it as an officially-sanctioned "seal" to appoint themselves corporate officers, issue millions of unregistered shares in their names. The men then took the unregistered, issued shares to create a penny stock "pump-and-dump" scheme. Regulators began looking for those who had helped facilitate the sale of Greyfield's unregistered shares. Regulators were led to petitioners ACAP and Gary Hume. ACAP was a penny stock brokerage firm in Salt Lake City, and Gary Hume was its head trader and compliance manager. Petitioners did not dispute their liability stemming from the Greyfield scheme, rather, they disputed the sanctions they received. FINRA decided to fine ACAP $100,000 and Mr. Hume $25,000, and to suspend Hume from the securities industry for six months. The Securities and Exchange Commission (SEC) reviewed and sustained these sanctions. ACAP and Hume then petitioned the Tenth Circuit to appeal the SEC's decision. After review, the Tenth Circuit could not "see how [it] might overturn the agency's decision." Accordingly, the Court affirmed the SEC's decision. View "ACAP Financial v. Securities & Exchange Comm'n" on Justia Law

In 2011, Eminence Investors, LLLP (Plaintiff) brought suit against against The Bank of New York Mellon (Defendant). Nearly two years later, Plaintiff filed an amended complaint adding class allegations on behalf of more than 100 class members and requesting compensatory damages expected to exceed $10 million. Within thirty days of the filing of the complaint, Defendant removed the action to federal court pursuant to the Class Action Fairness Act (CAFA). Plaintiff moved to remand the case to state court. The district court remanded the case to state court, concluding that removal was untimely. Defendant appealed. A panel of the Ninth Circuit dismissed for lack of subject matter jurisdiction the appeal, holding that the securities exception from CAFA removal applied to this case. View "Eminence Investors, LLLP v. Bank of New York Mellon" on Justia Law

The plaintiffs in this case, Carlos Zelaya and George Glantz, were victims of one of the largest Ponzi schemes in American history: the Ponzi scheme orchestrated by R. Allen Stanford. Plaintiffs were taken by surprise, yet, according to Plaintiffs, the federal agency entrusted with the duty of trying to prevent, or at least reveal, Ponzi schemes was not all that surprised. To the contrary, the United States Securities and Exchange Commission (“SEC”), had been alerted over a decade before that Stanford was likely running a Ponzi operation. According to Plaintiffs, notwithstanding its knowledge of Stanford’s likely nefarious dealings, the SEC dithered for twelve years, "content not to call out Stanford and protect future investors from his fraud." And though the SEC eventually took action in 2009, many people lost most of their investments. Pursuant to the Federal Tort Claims Act, Plaintiffs sued the United States in federal court, alleging that the SEC had acted negligently. The federal government moved to dismiss, arguing that it enjoyed sovereign immunity from the lawsuit. The district court agreed, and dismissed Plaintiffs’ case. Plaintiffs appealed that dismissal to the Eleventh Circuit Court of Appeals. In reviewing the district court’s dismissal, the Court reached no conclusions as to the SEC’s conduct, or whether the latter’s actions deserved Plaintiffs’ condemnation. The Court did, however, conclude that the United States was shielded from liability for the SEC’s alleged negligence in this case. The Court therefore affirmed the district court’s dismissal of the Plaintiffs’ complaint. View "Zelaya v. United States" on Justia Law

Defendant was convicted for failure to register as a securities salesperson, failure to register a security, and fraudulent practices, all felonies. The district court sentenced him to three concurrent ten-year sentences with all but ninety days suspended, plus restitution and court costs. The Supreme Court reversed Defendant’s conviction for fraudulent practices and otherwise affirmed, holding (1) the term “security” was adequately defined for the jury; (2) the State provided sufficient evidence to prove Defendant sold a security; (3) the district court correctly instructed the jury in accordance with the statutory definition of “willfully”; (4) sufficient evidence existed to support the jury’s finding that Defendant had the requisite mental state to violate the Securities Act, and because Defendant was not convicted of a strict liability offense, his ten-year sentence did not violate his due process rights; (5) the district court erred by instructing the jury that the willful omission of a prospectus constituted fraudulent practices; and (6) Defendant was properly sentenced. Remanded for a new trial on the fraudulent practices charge. View "State v. Himes" on Justia Law

An interlocutory appeal before the Eleventh Circuit centered on an order granting motions to dismiss by two defendants in a securities class action against Jiangbo Pharmaceuticals, Inc., its principal officers, and its audit firm. Jiangbo came into existence as a U.S. corporation in 2007 when its Chinese operational arm, Laiyang Jiangbo, executed a reverse merger with a Florida shell company. Jiangbo's tenure as a public company "was short and fraught with suspicion of misconduct." Shares began trading on NASDAQ on June 8, 2010 and traded on that exchange for just under a year. Only six months after trading began, the Securities and Exchange Commission (SEC) initiated an informal, non-public investigation into Jiangbo. The company's fortunes unraveled quickly soon thereafter, and the SEC formalized its investigation, which remained non-public. Jiangbo made two significant disclosures in late May 2011 that marked the culmination of its decline: it publicly acknowledged the formal SEC investigation for the first time and reported that the company had defaulted on a relatively small principal payment toward debt from its initial financing. Trading ended days later on May 31, 2011, by which time the share price had fallen from a class-period high of $10.49 per share to $3.08. By November 2011, after Jiangbo had moved to another exchange, its shares were trading for just $0.14. The investors' consolidated amended complaint alleged, inter alia, that Elsa Sung (the former Chief Financial Officer) and Frazer LLP (the external auditor) misrepresented the company's cash balances and failed to disclose a material related-party transaction in statements within or appurtenant to those filings, in violation of Section 10(b) of the Securities Exchange Act. The district court found that the investors failed to sufficiently plead their allegations of fraud against defendants Sung and Frazer LLP ("Frazer"). Applying the heightened pleading standard imposed by the Private Securities Litigation Reform Act ("PSLRA"), the Eleventh Circuit Court of Appeals affirmed the district court. View "Brophy v. Jiangbo Pharmaceuticals, Inc." on Justia Law

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