Justia Securities Law Opinion SummariesArticles Posted in US Court of Appeals for the Fourth Circuit
Selwyn Karp v. First Connecticut Bancorp, Inc.
Plaintiff contends that First Connecticut Bancorp, Inc. and its directors violated the securities laws by misleading shareholders like him about the true value of their shares ahead of a stock-for-stock merger. To comply with Section 14(a) of the Securities Exchange Act of 1934, Plaintiff claims, First Connecticut needed to disclose specific cashflow projections—and particularly an earlier, rosier set of projections—in the proxy statement, it circulated to investors. The district court granted First Connecticut’s motion for summary judgment, holding that Plaintiff hadn’t shown that (1) the cash-flow projections were material; (2) their omission caused him any economic loss, or (3) the directors acted negligently in approving the proxy statement. The Fourth Circuit affirmed. The court explained that Plaintiff’s evidence doesn’t establish that he or any other shareholder suffered an economic loss because the cash-flow projections weren’t in the proxy statement. So the district court correctly granted summary judgment on this basis as well. Further, the court reasoned that Section 20(a) of the Exchange Act provides that “controlling persons” can be vicariously liable for violations of the securities laws. But a claim “under Section 20(a) must be based upon a primary violation of the securities laws,” and the court agreed that Plaintiff has established no such violation here. View "Selwyn Karp v. First Connecticut Bancorp, Inc." on Justia Law
Employees’ Retirement System of the City of Baton v. Macrogenics, Inc.
The Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge represents the class of persons and entities who acquired shares of common stock in MacroGenics, Inc. (“MacroGenics”) between February 6, 2019, and June 4, 2019 (the “Class Period”). Plaintiffs initiated an action against MacroGenics, its president and CEO, and its senior vice president and CFO (collectively “Defendants”) for alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Securities and Exchange Commission (“SEC”) Rule 10b–5, and sections 11, 12(a), and 15 of the Securities Act of 1933. In their Amended Complaint, Plaintiffs alleged that after purchasing MacroGenics’ stock, they experienced economic harm proximately caused by Defendants’ material misrepresentations, misleading statements, or omissions concerning MacroGenics’ clinical trial drug, Margetuximab. The district court granted Defendants’ motion to dismiss after concluding that Plaintiffs had failed to sufficiently allege any actionable misrepresentations or omissions that would give rise to Defendants’ duty to disclose and that most of Defendants’ statements were also immunized from suit. The Fourth Circuit affirmed. The court explained that Plaintiffs have failed to demonstrate any materially false, misleading representations or omissions in Defendants’ statements. Because Plaintiffs’ Sections 11 and 12(a)(2) claims are inextricably intertwined with the alleged misstatements and omissions raised under their Exchange Act claims, their Securities Act claims cannot prevail. Further, because Plaintiffs have failed to plead a primary violation of the Securities Act, they have consequently failed to plead a Section 15 violation View "Employees' Retirement System of the City of Baton v. Macrogenics, Inc." on Justia Law
SEC v. Christopher Clark
The Securities and Exchange Commission sued Defendant for trading Corporate Executive Board, Inc. (“CEB”) stock using inside information. The Commission alleged that Defendant aggressively traded CEB stock after he received inside information about a potential merger from co-Defendant, Defendant’s brother-in-law and CEB’s Corporate Controller. At trial, Defendant moved for judgment as a matter of law under Rule 50(a)1 at the conclusion of the Commission’s case. He argued the Commission failed to present evidence that co-Defendant possessed inside information about the merger at the time Defendant began the relevant trading. And if co-Defendant had no such information at that time, Defendant contended, co-Defendant could not have passed it on to Defendant The district court agreed and granted judgment for Defendant. The Fourth Circuit reversed and remanded. The court explained the right to a trial by jury is enshrined by the Seventh Amendment. And the Federal Rules of Civil Procedure require that juries, not judges, decide cases so long as there is evidence from which a reasonable decision can be made. Here, evidence existed from which a reasonable jury could infer that Defendant engaged in prohibited insider trading beginning on December 9, 2016. View "SEC v. Christopher Clark" on Justia Law
James Boykin v. K12, Inc.
This securities fraud lawsuit arises from a series of statements made by K12, Inc., and two of its executives over the spring and summer of 2020. Plaintiffs, a class of K12 shareholders who acquired stock during that time, allege that the statements fraudulently misrepresented the state of K12’s business, thereby artificially inflating the cost of their shares. To survive dismissal under the Private Securities Litigation Reform Act (PSLRA), however, they must plead a “strong inference” of scienter, which requires establishing an inference of fraud to be “cogent and at least as compelling as any opposing inference.” The Fourth Circuit affirmed the district court’s dismissal of Plaintiffs claims because Plaintiffs do not satisfy the “heightened pleading instruction”. The court explained by including the language of “we believe,” the statement reflected not an incontestable fact but an individual perspective. The statement was couched as opinion, not as fact. While it is true that the prefatory clause contains an embedded assertion—that K12 is “an innovator in K-12 online education”— plaintiffs do not seriously contest this point. Nor do Plaintiffs deny, in more than conclusory fashion, that K12 “actually holds” its stated belief. Finally, Plaintiffs fail to show that K12’s opinion omitted necessary context. The company’s opinion was not simply emitted into the ether. It was made within the framework of a 10-K filing, where investors could have parsed the ample disclosures at their fingertips before succumbing to K12’s stated view. View "James Boykin v. K12, Inc." on Justia Law
SEC v. Mark Johnson
Defendant challenged the district court’s disgorgement order against him and Owings Group, LLC, the entity he founded and controlled. Together, Defendant, Owings, and three codefendants perpetrated a fraudulent scheme in violation of federal securities laws. After Defendant consented to an entry of judgment, the court ordered him to disgorge $681,554 and imposed a monetary penalty in the same amount.Defendant argued that the disgorgement order violates Liu v. SEC, 140 S. Ct. 1936 (2020) and that the district court erroneously premised the associated monetary penalty on joint-and-several liability. The Fourth Circuit affirmed the district court’s disgorgement order and its monetary penalty.The court explained that it agreed with the district court that Defendant and Owings were “partners engaged in concerted wrongdoing". The court wrote that Owings’s conduct in the scheme generated its ill-gotten gains—and Defendant controlled that conduct. Further, the district court didn’t order a joint-and-several penalty. It ordered a penalty equal to Defendant's disgorgement, which happened to be joint and several.Finally, the court concluded that it found no abuse of discretion. Though the district court didn’t explicitly discuss Defendant's financial situation, it’s clear to the court that the district court considered it, along with the remaining factors. The district court understood that all the defendants were insolvent but decided that Defendant's substantially more serious role in the scheme warranted a penalty all the same. View "SEC v. Mark Johnson" on Justia Law
Construction Laborers Pension Trust Southern CA v. Marriott International, Inc.
Following a data breach targeting servers owned by Defendant, Plaintiffs alleged that Defendant violated federal securities laws by omitting material information about data vulnerabilities in their public statements.The Fourth Circuit affirmed the district court’s dismissal of the complaint, finding that the investors did not adequately allege that any of Defendant’s statements were false or misleading when made.The court explained that to state a claim under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must first allege a “material misrepresentation or omission by the defendant.” However, not all material omissions give rise to a cause of action. Here, Plaintiffs focus on statements about the importance of protecting customer data; privacy statements on Defendant's website; and cybersecurity-related risk disclosures. The court found that Plaintiffs failed to allege that any of the challenged statements were false or rendered Defendant's public statement misleading. Although Defendant could have disseminated more information to the public about its vulnerability to cyberattacks, federal securities law does not require it to do so. View "Construction Laborers Pension Trust Southern CA v. Marriott International, Inc." on Justia Law
Robert F. Anderson v. Morgan Keegan & Company, Inc.
Infinity Business Group used an accounting practice that artificially inflated its accounts receivable and therefore its revenues. The company’s CEO, board of directors, and outside auditors affirmed the wrongdoing. Appellant, the company’s trustee, alleges that the true mastermind was a financial services company and an adviser of the company (“Defendants”) that Infinity contracted with to unsuccessfully solicit investments.The Fourth Circuit held that even assuming that the financial services company played some role in creating or perpetuating the flawed accounting technique, Appellant still cannot succeed in holding Defendants liable. Infinity engaged Defendant for the limited purpose of assisting with “a private placement of” Infinity stock. Defendants’ task was to help prepare a confidential information memorandum for potential investors, which was to include Infinity’s financial information from 2003 to 2005. Infinity’s CEO prepared and provided the relevant information for all three years. The accounting practice the company used was inconsistent with the generally accepted accounting principles endorsed by the Securities and Exchange Commission.Appellant first contends that he represents Infinity as well as Infinity’s creditors. Thus, when he was acting on behalf of the presumptively blameless creditors, Appellant insists he is immune from in pari delicto. The court held that when a trustee pursues a right of action that ultimately derives from the debtor—even if the trustee is nominally exercising a creditor’s powers when doing so—the trustee remains subject to the same defenses as the debtor. The court ultimately found that Infinity’s officers and auditors were the authors of the company’s demise—not Defendants. View "Robert F. Anderson v. Morgan Keegan & Company, Inc." on Justia Law
KBC Asset Management NV v. DXC Technology Co.
DXC, a publicly-traded company formed in 2017 from a merger of Computer Science and Hewlett Packard, initially met its strategic financial goals by instituting costcutting measures. In February 2018, it issued a press release announcing its continued financial success. Soon, DXC had to revise its projected revenue guidance to shareholders downward by an estimated $800 million, which it announced in November 2018. DXC’s shareholders incurred losses when its stock price subsequently fell.Plaintiffs represent a class of shareholders who acquired DXC stock from February 8 through November 6, 2018, alleging violations of the Securities Exchange Act, 15 U.S.C. 78j(b), 78t(a), and Rule 10b-5. They claim that Defendants knew the cost-cutting measures implemented in 2018 undermined DXC’s ability to generate revenue and that this was contrary to information released to the public so that the Defendants fraudulently induced them to acquire DXC stock by making material misstatements and omissions regarding DXC's financial health and that they did so with the requisite scienter. The Fourth Circuit affirmed the dismissal of the suit. The statements issued by DXC were either forward-looking statements protected under the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. 78u-5, safe-harbor provision, or non-actionable puffery and that the complaint, viewed as a whole, did not contain factual allegations sufficient to give rise to the “strong inference” of scienter required by the PSLRA. View "KBC Asset Management NV v. DXC Technology Co." on Justia Law
LifeWise Family Financial Security, Inc. v. Triangle Capital Corp.
LifeWise, a shareholder in Triangle, filed a securities fraud class action against Triangle, alleging that defendants knew or should have known of the risks of certain investments but defrauded them by failing to disclose such alleged risks. The district court dismissed the amended complaint and subsequently denied leave to amend as futile.The Fourth Circuit affirmed, concluding that LifeWise has not satisfied the Private Securities Litigation Reform Act of 1995's (PSLRA) heightened burden of pleading scienter and this failure is fatal to both its securities fraud claim against Triangle and its director liability claims against Defendants Poole, Lilly, and Tucker. The court considered LifeWise's allegations holistically and in their proper context and held that Lifewise failed to allege a strong inference of scienter. Rather, the court explained that the much stronger inference is that defendants had an honest debate about the merits of a subjective business judgment, and in hindsight, simply made the wrong choice with some investments. View "LifeWise Family Financial Security, Inc. v. Triangle Capital Corp." on Justia Law
Interactive Brokers LLC v. Saroop
Investors filed a claim with FINRA's arbitration division seeking to recover substantial losses from Broker, alleging nine causes of action. Broker counterclaimed, seeking payment of the debt and attorneys' fees. The arbitration panel found in favor of Investors and dismissed Broker's counterclaim. The arbitrators then issued a modified award on remand. The district court subsequently granted Broker's motion to vacate the modified award in favor of the Investors and remanded Broker's counterclaim to a new panel of arbitrators. Investors timely appealed.The Fourth Circuit held that the district court erred in vacating the modified award where the arbitrators' imposition of liability against Broker is not in manifest disregard to the law. The court explained that imposing liability based on a contractual obligation to comply with the FINRA rules is, at the very least, an arguable interpretation of the parties' contracts. In this case, Broker executed trades of iPath S&P 500 VIX Short-Term Futures (VXX) on Investors' portfolio margin accounts, in clear violation of FINRA Rule 4210. Rule 4210 prohibits trades of certain high-risk securities through portfolio margin accounts, including trades of VXX. The court also held that the arbitration panel did not manifestly disregard the law by imposing damages in the amount of Investors' accounts on August 19, 2015. In light of Connecticut law, the court reasoned that the award placed Investors in the position they would have been if the contracts had been properly performed after August 19. Finally, the arbitration panel did not manifestly disregard the law by awarding Investors attorneys' fees. Accordingly, the court vacated and remanded with instructions to confirm the modified arbitration award. View "Interactive Brokers LLC v. Saroop" on Justia Law