Justia Securities Law Opinion SummariesArticles Posted in US Court of Appeals for the Seventh Circuit
Divane v. Northwestern University
Participating employees can contribute a portion of their salary to their Retirement Plan account and Northwestern makes a matching contribution. Employees participating in the Voluntary Savings Plan also contribute a portion of their salary, but Northwestern does not make a matching contribution. Both plans allow participants to choose the investments for their accounts from options assembled by the plans’ fiduciaries. Northwestern is the administrator and designated fiduciary of both plans. The plaintiffs sued Northwestern under the Employee Retirement Income Security Act, 29 U.S.C. 1001 (ERISA).The Seventh Circuit affirmed the dismissal of the suit in 2020. The Supreme Court rejected the Seventh Circuit's reliance on a “categorical rule” that providing some low-cost options eliminates concerns about other investment options being imprudent. On remand, the Seventh Circuit reinstated claims that Northwestern failed to monitor and incurred excessive recordkeeping fees and failed to swap out retail shares for cheaper but otherwise identical institutional shares. The court again affirmed the dismissal of other claims, including a claim that Northwestern retained duplicative funds. View "Divane v. Northwestern University" on Justia Law
Joy Global Inc. v. Columbia Casualty Co.
Joy Global and Komatsu agreed to merge. Joy sent its investors disclosures required under the Securities Exchange Act, 15 U.S.C. 78n. Subsequent suits contended that Joy violated the Act by not disclosing some internal projections of Joy’s future growth that could have been used to negotiate a higher price, rendering the proxy statements fraudulent, and that Joy’s directors violated their state law duties by not maximizing the price for the shareholders. The suits settled for $21 million.The district court held that the $21 million loss is not covered by insurance. The policies do not require indemnification for “any amount of any judgment or settlement of any Inadequate Consideration Claim other than Defense Costs.” An “inadequate consideration claim” is that part of any Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate.The Seventh Circuit affirmed. The suits assert the wrongful act of failing to disclose documents that could have been used to seek a higher price and are within the definition of “inadequate consideration claim.” The claims do not identify any false or deficient disclosures about anything other than the price. The only objection to this merger was that Joy should have held out for more money, and that revealing this would have induced the investors to vote “no.” View "Joy Global Inc. v. Columbia Casualty Co." on Justia Law
Daneshrad v. Trean Group, LLC
Traders set up accounts with Trean, a Chicago Mercantile Exchange introducing broker, managing the customer side of the futures-trading business. Stone handled the trading side. The traders engaged in naked trading—speculating rather than hedging. Stone set a high margin accordingly. Stone was a principal in all trades and, with the clearing house bore, the immediate economic risk; Trean guaranteed Stone’s positions and shared in its commissions. The market did not cooperate. Trean learned that the traders had not met Stone’s margin call and were not cooperating with Stone. Trean told the traders that it would close their accounts but that they were free to deal directly with Stone. Stone thereafter prohibited any trades that would increase the holdings’ net risk. The traders liquidated. Of the $1,020,000 with which they began, they lost $548,000.The traders sued, contending that their contract with Trean did not allow it to cease dealing with them for the reason given and that Trean’s decision led Stone to impose unacceptable conditions. The Seventh Circuit affirmed summary judgment for Trean. Regardless of whether Trean was entitled to end its dealings with the traders, no reasonable jury could find that Trean injured them. Trean’s decision did not affect the value of their futures contracts; they did not have a greater loss than they would have by moving their accounts to a different introducing broker and retaining Stone. View "Daneshrad v. Trean Group, LLC" on Justia Law
United States v. Armbruster
Armbruster, a CPA with experience working at a Big Four accounting firm, began serving as the controller for Roadrunner's predecessor in 1990 and became Roadrunner’s CFO. Roadrunner grew rapidly, acquiring transportation companies and going public in 2010. In 2014, Roadrunner’s then‐controller recognized shortcomings in a subsidiary's (Morgan) accounting and began investigating. In 2016, many deficiencies in Morgan’s accounting remained unresolved. The departing controller found that Morgan had inflated its balance sheet by at least $2 million and perhaps as much as $4–5 million. Armbruster filed Roadrunner's 2016 third quarter SEC Form 10‐Q with no adjustments of the carrying values of Morgan balance sheet items and including other misstatements. Roadrunner’s CEO learned of the misstatements and informed Roadrunner’s Board of Directors. Roadrunner informed its independent auditor. Roadrunner’s share price dropped significantly. Roadrunner filed restated financial statements, reporting a decrease of approximately $66.5 million in net income over the misstated periods.Criminal charges were brought against Armbruster and two former departmental controllers. A mixed verdict acquitted the departmental controllers on all counts but convicted Armbruster on four of 11 charges for knowingly falsifying Roadrunner‘s accounting records by materially misstating the carrying values of Morgan's receivable and prepaid taxes account, 15 U.S.C. 78m(b)(2), (5), i78ff(a), 18 U.S.C. 2, fraudulently influencing Roadrunner’s external auditor, and filing fraudulent SEC financial statements, 18 U.S.C.1348. The Seventh Circuit affirmed. While the case against Armbruster may not have been open‐and‐shut, a rational jury could have concluded that the government presented enough evidence to support the guilty verdicts. View "United States v. Armbruster" on Justia Law
Barry v. Cboe Global Markets, Inc.
The Seventh Circuit affirmed the judgment of the district court dismissing Plaintiffs' amended complaint against Cboe with prejudice and entering a judgment under Fed. R. Civ. P. 54(b) wrapping up litigation against Cboe involving claims under the Securities Exchange Act and the Commodity Exchange Act, holding there was no error.At issue was whether Cboe violated either Act by trading options and futures based on a number, called VIX, which was designed to estimate the near-term volatility in the Standard & Poors 500 Index of stocks. Plaintiff-traders argued that the Cboe knew that unknown entities could take advantage of the formula for determining VIX on the settlement dates and failed to enforce rules forbidding manipulation. The district court dismissed the amended complaint with prejudice. The Seventh Circuit affirmed, holding that remedies, if any were appropriate, lay with administrative agencies rather than the judiciary at the behest of private litigants. View "Barry v. Cboe Global Markets, Inc." on Justia Law
Securities and Exchange Commission v. Goulding
Goulding, an accountant and lawyer, has a history of mail fraud and tax fraud. Goulding formed 15 funds that hired Nutmeg’s advisory services, which he managed. The funds invested in illiquid securities, many of which were close to insolvent. Gould wrote all of the disclosure documents, which overvalued the funds. Goulding made baseless statements about increases in value. Goulding did not use outside advisors and engaged in commingling, holding some securities in his own name.The Securities and Exchange Commission charged Goulding under the Investment Advisers Act of 1940, 15 U.S.C. 80b, with running Nutmeg through a pattern of fraud, including touting his supposed financial expertise while failing to disclose his crimes, in addition to violating the Act’s technical rules. The district court issued an injunction removing Goulding from the business and appointing a receiver. A magistrate judge enjoined Goulding from violating the securities laws, required him to disgorge $642,422 (plus interest), and imposed a $642,422 civil penalty. The Seventh Circuit affirmed the finding of liability and the financial awards. The extent of Goulding’s wrongdoing makes it hard to determine his net unjustified withdrawals; as the wrongdoer, he bears the consequence of uncertainty. The restitution reflects a conservative estimate of Goulding’s ill-got gains. Nor did the judge err by declining to trace funds from their source to Goulding’s pocket. View "Securities and Exchange Commission v. Goulding" on Justia Law
United States v. Weller
Weller was convicted of insider trading, Securities Exchange Act, 15 U.S.C. 78j(b). Fleming, a vice president of Life Time Fitness, had learned that his company was likely to be acquired by a private equity firm at an above-market price. Fleming told a friend, Beshey, who told Clark and Kourtis (who knew that the information had been misappropriated), who told others, including Weller. Most of them profited by trading on the information and showed their appreciation by “kickbacks.”Weller unsuccessfully argued that he did not know that Fleming violated a duty to his employer by passing the information to Beshey and that the government did not prove a financial benefit to Fleming. The Seventh Circuit affirmed his convictions. Although Weller did not interact with all of the others, he did conspire with at least Kourtis to misuse material non-public information for their own benefit. The court upheld Weller’s 366-day below-Guidelines sentence, noting that Weller profited more than the others. View "United States v. Weller" on Justia Law
Arbitrage Event-Driven Fund v. Tribune Media Co.
Tribune and Sinclair announced an agreement to merge. Tribune abandoned the merger and sued Sinclair, accusing it of failing to comply with its contractual commitment to “use reasonable best efforts” to satisfy the demands of the Antitrust Division of the Justice Department and the FCC, both of which could block the merger. Sinclair settled that suit for $60 million; the settlement disclaims liability. While the merger agreement was in place, investors bought and sold Tribune’s stock. In this class action investors alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 by failing to disclose that Sinclair was “playing hardball with the regulators,” increasing the risk that the merger would be stymied.The Seventh Circuit affirmed the dismissal of the suit. The principal claims, which rest on the 1934 Act, failed under the Private Securities Litigation Reform Act of 1995. Questionable statements, such as predictions that the merger was likely to proceed, were forward-looking and shielded from liability because Tribune expressly cautioned investors about the need for regulatory approval and the fact that the merging firms could prove unwilling to do what regulators sought, 15 U.S.C. 78u–5(c)(1)..With respect to the 1933 Act, the registration statement and prospectus through which the shares were offered stated all of the material facts. The relevant “hardball” actions occurred after the plaintiffs purchased shares. “Plaintiffs suppose that, during a major corporate transaction, managers’ thoughts must be an open book." No statute or regulation requires that. View "Arbitrage Event-Driven Fund v. Tribune Media Co." on Justia Law
Petri v. Stericycle, Inc.
Following a False Claims Act lawsuit against Stericycle, customers were leaving and the price of Stericycle’s common stock dropped. On behalf of the company’s investors, Florida pension funds filed a securities fraud class action against Stericycle, its executives, board members, and the underwriters of its public offering, alleging that the defendants had inflated the stock price by making materially misleading statements about Stericycle’s fraudulent billing practices. The parties agreed to settle for $45 million. Lead counsel moved for a fee award of 25 percent of the settlement, plus costs. Petri, a class member, objected to the fee award, arguing that the amount was unreasonably high given the low risk of the litigation and the early stage at which the case settled. Petri moved to lift the stay the court had entered while the settlement agreement was pending so that he could seek discovery regarding class counsel’s billing methods, the fee allocation among firms, and counsel’s political and financial relationship with a lead plaintiff, a public pension fund.The district court approved the settlement and the proposed attorney fee and denied Petri’s discovery motion. The Seventh Circuit vacated. The district court did not give sufficient weight to evidence of ex-ante fee agreements, all the work that class counsel inherited from earlier litigation against Stericycle, and the early stage at which the settlement was reached. The court upheld the denial of the objector’s request for discovery into possible pay-to-play arrangements. View "Petri v. Stericycle, Inc." on Justia Law
Seafarers Pension Plan v. Bradway
In October 2018, a Boeing 737 MAX airliner crashed in the sea near Indonesia, killing everyone on board. In March 2019, a second 737 MAX crashed in Ethiopia, again killing everyone on board. Within days of the second crash, all 737 MAX airliners around the world were grounded. The FAA kept the planes grounded until November 2020, when it was satisfied that serious problems with the planes’ flight control systems had been corrected. The Pension Plan, a shareholder of the Boeing Company, filed a derivative suit on behalf of Boeing under the Securities Exchange Act of 1934, 15 U.S.C. 78n(a)(1), alleging that Boeing officers and board members made materially false and misleading public statements about the development and operation of the 737 MAX in Boeing’s 2017, 2018, and 2019 proxy materials.The district court dismissed the suit without addressing the merits, applying a Boeing bylaw that gives the company the right to insist that any derivative actions be filed in the Delaware Court of Chancery. The Seventh Circuit reversed. Because the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that the derivative action could not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. 78cc(a). View "Seafarers Pension Plan v. Bradway" on Justia Law