Justia Securities Law Opinion Summaries

Several investment funds based in the British Virgin Islands invested heavily in Bernard L. Madoff Investment Securities and were forced into liquidation after the Madoff Ponzi scheme was exposed in 2008. Liquidators were appointed in the BVI insolvency proceedings. Before the collapse, certain investors redeemed their shares in the funds for cash, receiving over $6 billion in payments. The liquidators, seeking to recover these redemption payments for equitable distribution among all investors, initiated approximately 300 actions in the United States, alleging that the payments were inflated due to fictitious Net Asset Value (NAV) calculations based on Madoff’s fraudulent statements.The U.S. Bankruptcy Court for the Southern District of New York consolidated the actions after recognizing the BVI proceedings under Chapter 15 of the Bankruptcy Code. The bankruptcy court dismissed most claims, finding it lacked personal jurisdiction over some defendants, that the liquidators were bound by the NAV calculations, and that the safe harbor for securities transactions under § 546(e) of the Bankruptcy Code barred the claims. However, it allowed constructive trust claims to proceed against certain defendants alleged to have known the NAVs were inflated. The U.S. District Court for the Southern District of New York affirmed the bankruptcy court’s judgment, leaving only the constructive trust claims.On appeal, the United States Court of Appeals for the Second Circuit held that all of the liquidators’ claims, including the constructive trust claims, should have been dismissed under the safe harbor provision of § 546(e), which applies extraterritorially via § 561(d) in Chapter 15 cases. The court concluded that the safe harbor bars both statutory and common-law claims seeking to avoid covered securities transactions, regardless of the legal theory or proof required. The Second Circuit reversed the district court’s judgment allowing the constructive trust claims and otherwise affirmed the dismissal of the remaining claims. View "In re Fairfield Sentry Ltd." on Justia Law

Michael Hild, the Defendant-Appellant, was convicted by a jury in 2021 of securities fraud, wire fraud, bank fraud, and conspiracy. Hild, as the CEO of Live Well Financial, Inc., engaged in a scheme to inflate the value of a bond portfolio used as collateral for loans. This scheme allowed Live Well to grow its bond portfolio significantly from 2014 to 2016. Hild appealed his conviction, arguing that the evidence was insufficient and that a new trial was warranted due to a Supreme Court decision invalidating one of the fraud theories used in his jury instructions.The United States District Court for the Southern District of New York denied Hild's post-trial motions for acquittal and a new trial. Hild then appealed to the United States Court of Appeals for the Second Circuit, challenging the sufficiency of the evidence and the jury instructions.The Second Circuit reviewed the case and found that sufficient evidence supported Hild's conviction. The court noted that Hild misrepresented the value of the bonds to secure loans and acted with fraudulent intent. The court also addressed Hild's argument regarding the jury instructions, acknowledging that the instructions included an invalid right-to-control theory of fraud as per the Supreme Court's decision in Ciminelli v. United States. However, the court concluded that this error did not affect Hild's substantial rights because the jury would have convicted him based on a valid theory of fraud.Ultimately, the Second Circuit affirmed the judgment of the district court, upholding Hild's conviction on all counts. View "United States v. Hild" on Justia Law

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

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

Plaintiff Andrew Roth, a shareholder of Estée Lauder Companies Inc. and Altice USA, Inc., filed suits alleging that controlling shareholders of these companies engaged in transactions that violated Section 16(b) of the Exchange Act. Roth claimed that the controlling shareholders sold shares of the companies while the companies repurchased their own shares, and sought to pair these transactions to impose liability for short-swing profits.In the Southern District of New York, Roth's complaint against LAL Family Corporation and LAL Family Partners L.P. was dismissed. The court held that issuer repurchases cannot be paired with insiders' sales of outstanding shares to create Section 16(b) liability. Similarly, in the Eastern District of New York, Roth's complaint against Patrick Drahi and other defendants was dismissed. The court relied in part on the analysis from the Southern District of New York, concluding that Roth's legal theory was invalid.The United States Court of Appeals for the Second Circuit reviewed the cases and affirmed the judgments of dismissal. The court held that Section 16(b) does not impose liability for pairing sales by controlling shareholders with share repurchases by corporations they control. The court reasoned that under applicable state law, repurchased shares are transformed into treasury shares, which are different in kind from outstanding shares and cannot be paired. Therefore, Roth's theory of liability was rejected, and the judgments dismissing his complaints were affirmed. View "Roth v. LAL Family Corp." on Justia Law

Shanda Games Limited, a video game company registered in the Cayman Islands, issued proxy materials as part of a freeze-out merger. The lead plaintiff, David Monk, alleged that these materials were materially misleading, causing him to accept the merger price instead of exercising his appraisal rights. The United States District Court for the Southern District of New York dismissed Monk’s claims, stating he failed to properly allege loss causation.The district court found that Monk had adequately pleaded that Shanda made two material misstatements but ruled that Monk had failed to plead reliance because the market in ADS was not efficient after the merger announcement. The court also held that the statements about the merger's fairness were inactionable opinions. Monk's motion for reconsideration was denied in part and granted in part, and his motion to add another lead plaintiff was denied. Monk filed a second amended complaint, which was again dismissed for failure to state a claim.The United States Court of Appeals for the Second Circuit reviewed the case and held that the district court erred in dismissing Monk’s claims. The appellate court concluded that Monk adequately alleged material misstatements, including the preparation of financial projections, the projections themselves, and the fairness of the merger. The court also found that Monk adequately pleaded scienter, reliance, and loss causation. The court affirmed in part, vacated in part, and remanded the case for further proceedings. View "In re Shanda Games Ltd. Securities Litigation" on Justia Law

After Lehman Brothers filed for Chapter 11 bankruptcy, thousands of its employees were holding restricted stock units (RSUs) that had been awarded over the preceding five years, but that had not yet vested and had thus been rendered worthless by the bankruptcy filing. The employees filed proofs of claim in the Chapter 11 proceeding and Lehman Brothers filed omnibus objections to the claims. The Second Circuit noted that it need not determine whether an RSU is an "equity security" under 11 U.S.C. 101(16), because, even if it is, RSU holders are not barred from asserting proofs of claim—such as the breach‐of‐contract claims asserted here—inasmuch as at least some of their claims are not duplicative of proofs of interest. However, the Second Circuit affirmed and concluded that Lehman Brothers' omnibus objections must nonetheless be sustained on the alternative ground that, pursuant to section 510(b) of the Bankruptcy Code, 11 U.S.C. 510(b), the claims must be subordinated to the claims of general creditors because, for purposes of this statute, (1) RSUs are securities, (2) the claimants acquired them in a purchase, and (3) the claims for damages arise from those purchases or the asserted rescissions thereof. View "In re: Lehman Bros." on Justia Law

EDMC challenges the district court's holding that a series of transactions meant to restructure EDMC’s debt over the objections of certain noteholders violated Section 316(b) of the Trust Indenture Act of 1939, 15 U.S.C. 77ppp(b). The district court ordered EDMC to continue to guarantee Marblegate's notes and pay them in full. The court agreed with EDMC that EDMC complied with Section 316(b) because the transactions did not formally amend the payment terms of the indenture that governed the notes. The court concluded that Section 316(b) prohibits only non‐consensual amendments to an indenture’s core payment terms. Accordingly, the court vacated the district court's judgment and remanded for further proceedings. View "Marblegate Asset Management v. Education Management Finance Corp." on Justia Law

Plaintiffs, trustees of an Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq., pension fund, filed suit against its investment manager and principals alleging that defendants knew by 1998 that investing with Bernard L. Madoff Investment Securities LLC (BLMIS) was imprudent; that these defendants breached their fiduciary duty by failing to warn the fund of this fact; that if warned, the fund would have withdrawn the full sum appearing on its 1998 BLMIS account statements; and that prudent alternative investment of that sum would have earned more than the fund’s actual net withdrawals from its BLMIS account between 1999 and 2008. Plaintiffs also filed suit against Bank of New York Mellon Corporation, which acquired the investment manager in 2000, alleging that it knowingly participated as a non‐fiduciary in the fiduciary breach. The district court dismissed the complaint for failure to state a claim under Rule 12(b)(6) and for failure to allege an actual injury sufficient to establish Article III standing under Rule 12(b)(1). The court concluded that plaintiffs failed to allege facts sufficient to show Article III standing where plaintiffs have not plausibly alleged losses in excess of their profits; the increase in pension funds does not constitute a cognizable loss; the court rejected plaintiffs' claim of disgorgement of Simon and Wohl; and the complaint fails to state a claim against BNY Mellon for participation in a breach of fiduciary duty by Ivy, Simon, and Wohl. Accordingly, the court affirmed the judgment. View "Trustees of the Upstate New York Engineers Pension Fund v. Ivy Asset Management" on Justia Law

In these consolidated appeals, defendant Virginia K. Sourlis challenges the district court's judgment in an enforcement action brought by the SEC in connection with public offerings of unregistered shares of stock of defendant Greenstone. The district court granted a motion by the SEC for summary judgment on issues of liability, holding Sourlis--an attorney who wrote a January 11, 2006 opinion letter ("Sourlis Letter") relating to one of the offerings--liable for violating section 5 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. 77e; violating 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5; and aiding and abetting violations of section 10(b) and Rule 10b-5, in violation of section 20(e) of the Exchange Act, 15 U.S.C. 78t(e). The Superseding Final Judgment orders Sourlis to pay a total of $57,284.83 as a civil penalty, disgorgement, and prejudgment interest, and permanently bars her from participating in so-called "penny stock" offerings. The court found no error in the district court's determinations of liability and no abuse of discretion in its remedial order. Accordingly, the court affirmed the judgment in Nos. 14-2301 and 15-3978. The court dismissed as moot the SEC's cross-appeal in No. 14-2937. View "SEC v. Sourlis" on Justia Law