Justia Securities Law Opinion SummariesArticles Posted in US Court of Appeals for the Second Circuit
Murray v. UBS Securities
Plaintiff claimed that UBS Securities, LLC and UBS AG (together “UBS”) fired him in retaliation for reporting alleged fraud on shareholders to his supervisor. Plaintiff sued UBS under the whistleblower protection provision of the Sarbanes-Oxley Act (“SOX”), 18 U.S.C. Section 1514A, and he ultimately prevailed at trial. The Second Circuit vacated the jury’s verdict and remanded to the district court for a new trial. The court explained that the district court did not instruct the jury that a SOX anti-retaliation claim requires a showing of the employer’s retaliatory intent. Section 1514A prohibits publicly traded companies from taking adverse employment actions to “discriminate against an employee . . . because of” any lawful whistleblowing act. 18 U.S.C. Section 1514A(a). Accordingly, the court held that this provision requires a whistleblower-employee, like Plaintiff, to prove by a preponderance of the evidence that the employer took the adverse employment action against the whistleblower-employee with retaliatory intent—i.e., an intent to “discriminate against an employee . . . because of” lawful whistleblowing activity. The district court’s legal error was not harmless. View "Murray v. UBS Securities" on Justia Law
Hong v. Securities and Exchange Commission
Petitioner worked at a subsidiary of the Royal Bank of Scotland Group PLC (“RBS” or “the Bank”) for six weeks in the fall of 2007 before resigning, prompted by what he believed to be unlawful practices engaged in by the Bank in connection with its portfolio of residential mortgage-backed securities (“RMBS”). Petitioner later formally submitted information to the SEC about the Bank’s misconduct. The SEC itself took no action against the Bank but gave the information to the Department of Justice (“DOJ”) and the Federal Housing Finance Agency (“FHFA”), each of which had already begun RMBS-related investigations into the Bank. Petitioner n applied to the SEC for an award under its whistleblower program (the “Program”), established in 2010 by Section 21F of the Securities Exchange Act. The SEC denied his claim. Petitioner petitioned for judicial review. The Second Circuit denied the petition holding that it found no error in the SEC’s construction of Section 21F to require an action “brought by the Commission” to support a whistleblower award. The court further decided that, contrary to Petitioner’s arguments, investigative and information-sharing activities engaged in by the SEC are not “covered judicial or administrative action[s] brought by the Commission under the securities laws” or “actions” as to which the DOJ and FHFA settlements can be considered “related.” Thus, the court adopted the Commission’s determination that Petitioner was not entitled to an award under the Program because the Commission did not bring a covered action. View "Hong v. Securities and Exchange Commission" on Justia Law
SEC v. Rio Tinto
The Securities and Exchange Commission (“SEC”) brought scheme liability claims in a 2017 enforcement action against Rio Tinto plc, Rio Tinto Limited, and its CEO and CFO, pursuant to Rule 10b-5(a) and (c), promulgated under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and pursuant to Section 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”). Citing Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (“Lentell”), the district court dismissed the scheme liability claims in a March 2019 order (the “Dismissal Order”) on the ground that the conduct alleged constituted misstatements and omissions only, and is, therefore, an insufficient basis for scheme liability. On appeal, the SEC contended that Lorenzo abrogates Lentell. The Second Circuit affirmed the district court’s ruling finding that Lentell remains sound. The question on appeal was whether misstatements and omissions--without more--can support scheme liability pursuant to Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) promulgated thereunder, and Securities Act Section 17(a)(1) and (3). The court explained that while Lorenzo acknowledges that there is leakage between and among the three subsections of each provision, the divisions between the subsections remain distinct. Until further guidance from the Supreme Court, Lentell binds: misstatements and omissions can form part of a scheme liability claim, but an actionable scheme liability claim also requires something beyond misstatements and omissions, such as dissemination. View "SEC v. Rio Tinto" on Justia Law
Noto v. 22nd Century Grp.
Plaintiffs, investors in 22nd Century Group, alleged on behalf of an investor class that (1) Defendants engaged in an illegal stock promotion scheme in which they paid authors to write promotional articles about the company while concealing the fact that they paid the authors for the articles; and (2) Defendants failed to disclose an investigation by the Securities and Exchange Commission (“SEC”) into the company’s financial control weaknesses. Plaintiffs alleged they were harmed after public articles revealed the promotion scheme and stock prices fell. The district court dismissed the complaint for failing to state a claim. On appeal, Plaintiffs argued (1) they adequately alleged material misrepresentations sufficient to sustain claims under SEC Rule 10b-5; (2) their claim under Section 20(a) of the Securities Exchange Act was premised on a valid predicate violation of Section 10(b); and (3) the district court erred in dismissing the complaint with prejudice. The Second Circuit affirmed in part and vacated in part. On the first and second points, the court agreed that the allegation that Defendants failed to disclose the SEC investigation states a material misrepresentation and could also support Section 20(a) liability. However, the court found no merit in the remaining challenges. The court reasoned that because the complaint does not adequately allege that Defendants had a duty to disclose that they paid for the articles’ publication, Plaintiffs fail to state a claim that the existence of the stock promotion scheme constituted a materially misleading omission. View "Noto v. 22nd Century Grp." on Justia Law
Arkansas Public Employees Retirement System v. Bristol-Myers Squibb Co.
The Second Circuit affirmed the district court's grant of Bristol-Myers's motion to dismiss for failure to state a claim in a securities class action brought by investors. This securities class action arose from a failed clinical trial conducted to ascertain whether a cancer drug in development would be more effective than chemotherapy in treating a specific type of lung cancer. The second amended complaint alleged that the drop in stock price was attributable to the study's failure, and that Bristol-Myers had obscured the risk of such failure by declining to disclose the precise PD-L1 expression threshold in cancer cells and by misrepresenting that the study focused on patients "strongly" expressing PD-L1.The court concluded that the investors failed to adequately allege a material misstatement or omission or facts giving rise to a strong inference of scienter. In this case, rates of PDL1 expression remained a topic of research throughout the putative class period; there was no generally understood meaning of "strong" expression that contradicted Bristol-Myers’s use of the term to mean 5%; and some observers correctly predicted Bristol-Myers's use of a 5% threshold before it was publicly disclosed. Furthermore, the complaint alleges no facts indicating that Bristol-Myers had an obligation to disclose the precise threshold; Bristol-Myers cautioned the public that it would not do so; and the complaint fails to allege facts giving rise to a strong inference of scienter. View "Arkansas Public Employees Retirement System v. Bristol-Myers Squibb Co." on Justia Law
United States v. Afriyie
The Mandatory Victims Restitution Act requires defendants convicted of certain crimes to reimburse their victims for “lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense,” 18 U.S.C. 3663A(b)(4). The Second Circuit previously held that “other expenses” could include attorneys’ fees incurred by victims while helping the government investigate and prosecute the defendant and costs incurred while privately investigating the defendant. The Supreme Court subsequently held that “the words ‘investigation’ and ‘proceedings’ are limited to government investigations and criminal proceedings.”Afriyie was convicted of securities fraud after trading on inside information he misappropriated from his employer, MSD. The district court entered the restitution order, covering the fees MSD paid its law firm to guide MSD’s compliance with investigations by the U.S. Attorney’s Office and the SEC; to help prepare four MSD witnesses to testify at Afriyie’s criminal trial; and to represent MSD during the post-verdict restitution proceedings.The Second Circuit held that attorneys’ fees can sometimes be “other expenses” but a victim cannot recover expenses incurred while participating in an SEC investigation. Restitution is appropriate only for expenses associated with criminal matters; civil matters, including SEC investigations, even if closely related to a criminal case do not qualify. View "United States v. Afriyie" on Justia Law
In re: The Hain Celestial Group, Inc. Securities Litigation
The Second Circuit vacated the district court's grant of Hain's motion to dismiss a class action alleging securities fraud for failure to state a claim. Plaintiffs alleged that Hain violated Section 10(b) and section 20(a) of the Securities Exchange Act of 1934 by asserting in public statements that Hain's favorable sales figures were attributable to strong consumer demand for its products while failing to disclose that demand for its products was declining and that a significant percentage of sales was in fact attributable to the practice of channel stuffing.The court held that the district court erred in granting Hain's motion because the district court relied on the erroneous assumption that plaintiffs' Rule 10b-5(b) claim was contingent on plaintiffs successfully pleading a fraudulent business scheme or practice in violation of Rules 10b-5(a) or (c). The court also concluded that the district court erred in failing to consider the cumulative weight of all of plaintiffs' scienter allegations. Accordingly, the court remanded for further proceedings. View "In re: The Hain Celestial Group, Inc. Securities Litigation" on Justia Law
Altimeo Asset Mgmt. v. Qihoo 360 Technology Co. Ltd.
The Second Circuit vacated the district court's dismissal of a putative class action on behalf of investors who traded Qihoo 360 Technology securities between December 18, 2015, and July 15, 2016. The investors alleged that defendants violated the Exchange Act by, among other things, deceiving investors about the plan to relist the company. The court concluded that the allegations in the complaint were sufficient to survive a motion to dismiss on that ground. In this case, plaintiffs alleged, and provided supporting evidence, that defendants represented to shareholders that there were no plans to relist the company following a shareholder buyout, when in fact the company had such a plan at the time of the buyout. Therefore, plaintiffs adequately alleged a misstatement or omission of material fact. The court remanded for further proceedings. View "Altimeo Asset Mgmt. v. Qihoo 360 Technology Co. Ltd." on Justia Law
Securities and Exchange Commission v. Romeril
The Second Circuit affirmed the district court's order denying defendant's motion pursuant to Federal Rule of Civil Procedure 60(b)(4) for relief from judgment. In 2003, the SEC brought a civil enforcement action against defendant and, to resolve the matter, defendant consented to the entry of a final judgment against him, agreeing not to deny any of the factual allegations of the complaint. Almost 16 years later, defendant sought to invalidate the judgment on the basis that it incorporated a "gag order" that violated the First Amendment and his right to due process. The court agreed with the district court that defendant's motion fails on the merits because it does not allege either a jurisdictional or due process violation that would permit relief under Rule 60(b)(4). View "Securities and Exchange Commission v. Romeril" on Justia Law
IWA Forest Industry Pension Plan v. Textron Inc.
IWA filed a putative securities fraud class action against Textron, a manufacturer of aircraft and recreational vehicles, and two of its executives, alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The district court dismissed the action for failure to allege any actionable misstatements.The Second Circuit vacated the portion of the district court's judgment dismissing IWA's securities fraud claims arising from the inventory statements. The court concluded that IWA sufficiently alleged the materially misleading nature of the 2018 statements at issue regarding Textron's inventory, and that Federal Rule of Civil Procedure 9(b)'s demand for particularity is satisfied in this case. The court affirmed the district court's ruling as to the other categories of statements. View "IWA Forest Industry Pension Plan v. Textron Inc." on Justia Law