Justia Securities Law Opinion SummariesArticles Posted in US Court of Appeals for the Sixth Circuit
Mohlman v. Financial Industry Regulatory Authority
Mohlman became a licensed securities professional in 2001. The Financial Industry Regulatory Authority, a not-for-profit member organization, regulates practice in the securities industry and enforces disciplinary actions against its members. In 2012, Mohlman had conversations with several individuals concerning WMA. Mohlman did not attempt to sell WMA investments and did not receive compensation from WMA. Mohlman learned in 2014 that WMA was a Ponzi scheme and immediately informed all persons who had invested in WMA. Mohlman appeared for testimony as part of FINRA’s investigation. Another day of testimony was scheduled but instead of appearing, Mohlman and his counsel signed a Letter of Acceptance, Waiver, and Consent, agreeing to a permanent ban from the securities industry. FINRA agreed to refrain from filing a formal complaint against him. Mohlman waived his procedural rights under FINRA’s Code of Procedure and the Securities Exchange Act, 15 U.S.C. 78a and agreed to “not take any position in any proceeding brought by or on behalf of FINRA, or to which FINRA is a party, that is inconsistent with any part of [the Letter].” FINRA accepted the Letter in 2015.In 2019, Mohlman filed suit, alleging that FINRA fraudulently avoided considering mitigating factors in administering the sanction. The Sixth Circuit affirmed the dismissal of the suit without addressing the merits. Mohlman failed to exhaust administrative remedies under the Exchange Act by appealing to the National Adjudicatory Council and petitioning the SEC for review. View "Mohlman v. Financial Industry Regulatory Authority" on Justia Law
Campbell Family Trust v. J.P. Morgan Investment Management, Inc.
The plaintiffs are shareholders in mutual funds. JPMIM is paid a fee for managing the Funds’ securities portfolio and researching potential investments. The plaintiffs sued under the Investment Company Act (ICA), 15 U.S.C. 80a-1, which allows mutual fund shareholders to bring a derivative suit against their fund’s investment adviser on behalf of their fund. The plaintiffs claimed that JPMIM charged excessive fees in violation of section 36(b), which imposes a fiduciary duty on advisers with respect to compensation for services.The Sixth Circuit affirmed summary judgment in favor of JPMIM. Under section 36(b), a shareholder must prove that the challenged fee “is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” The district court considered the relevant factors in making its determination: the nature, extent, and quality of the services provided by the adviser to the shareholders; the profitability of the mutual fund to the adviser; “fallout” benefits, such as indirect profits to the adviser; economies of scale achieved by the adviser as a result of growth in assets under the fund’s management and whether savings generated from the economies of scale are shared with shareholders; comparative fee structures used by other similar funds; and the level of expertise, conscientiousness, independence, and information with which the board acts. View "Campbell Family Trust v. J.P. Morgan Investment Management, Inc." on Justia Law
Olagues v. Timken
Olagues is a self-proclaimed stock options expert, traveling the country to file pro se claims under section 16(b) of the Securities and Exchange Act of 1934, which permits a shareholder to bring an insider trading action to disgorge “short-swing” profits that an insider obtained improperly. Any recovery goes only to the company. In one such suit, the district court granted a motion to strike Olagues’ complaint and dismiss the action, stating Olagues, as a pro se litigant, could not pursue a section 16(b) claim on behalf of TimkenSteel because he would be representing the interests of the company. The Sixth Circuit affirmed that Olagues cannot proceed pro se but remanded to give Olagues the opportunity to retain counsel and file an amended complaint with counsel. View "Olagues v. Timken" on Justia Law
United States v. Dyer
From 2008-2016, Brennan and Dyer (Defendants) operated Broad Street, to incorporate Tennessee corporations (Scenic City). They claimed that once Scenic City was appropriately capitalized, Defendants would register its common stock with the SEC using Form 10, would publicly trade Scenic City, and would acquire small businesses as a legal reverse merger. Investors sent money by mail and electronic wire from other states. Defendants moved the funds through Broad Street’s bank accounts, diverting significant funds to their personal bank accounts. They issued stock certificates and mailed them to investors, but never filed Form 10 nor completed any reverse mergers. Investors lost $4,942,070.18. Defendants reported the embezzled funds as long-term capital gains, substantially reducing their personal tax liability and treated payments to themselves from Broad Street as nontaxable distributions. For 2010-2014, Dyer owed an additional $312,799 in taxes; Brennan owed $164,542. The SEC began a civil enforcement suit under 15 U.S.C. 77(q)(a)(1), 77(q)(a)(2), 77(q)(a)(3), and 78j(b), and Rule 10b-5. Defendants pleaded guilty to conspiracy to commit mail and wire fraud, 18 U.S.C. 371, 1341 and tax evasion, 26 U.S.C 7201. The court sentenced them to prison, ordered restitution ($4,942,070.18), and ordered payments for their tax evasion. The SEC sought and the court entered a disgorgement order to be offset by the restitution ordered in the criminal case. The Sixth Circuit affirmed, rejecting an argument that the disgorgement violates the Double Jeopardy Clause under the Supreme Court’s 2017 “Kokesh” holding that disgorgement, in SEC enforcement proceedings, "operates as a penalty under [28 U.S.C.] 2462.” SEC civil disgorgement is not a criminal punishment. View "United States v. Dyer" on Justia Law
Dougherty v. Esperion Therapeutics, Inc.
Esperion has never generated any revenue, relying solely upon investor funding. Esperion’s sole focus is the development of ETC-1002, a first-in-class oral medication for lowering LDL “bad cholesterol,” a significant risk factor in cardiovascular disease. Esperion hopes to market ETC-1002 as an alternative treatment for statin-intolerant patients and as an add-on for patients are unable to reach their recommended levels using statins alone. In 2015, Esperion had completed several clinical studies and reported that ETC-1002 was well-tolerated and demonstrated significant average LDL-cholesterol reductions. After a meeting with FDA officials regarding Phase 3 of the approval process, Esperion published a press release, stating that “[b]ased upon feedback from the FDA, approval of ETC-1002 in [specific] patient populations will not require the completion of a cardiovascular outcomes trial,” with cautionary language, suggesting that “Esperion may need to change the design of its Phase 3 program once final minutes from the FDA meeting are received.” Market reaction was mostly positive. Following its receipt of the final FDA minutes, Esperion published another press release, indicating that the “FDA has encouraged the Company to initiate a cardiovascular outcomes trial promptly.” Esperion’s stock dropped 48% the next day. Plaintiffs, the purchasers of Esperion common stock between the two press releases, brought a class action under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. The Sixth Circuit reversed the district court holding that Plaintiffs failed to adequately plead a strong inference that Esperion’s CEO willfully or recklessly made misleading statements. Plaintiffs adequately alleged scienter. View "Dougherty v. Esperion Therapeutics, Inc." on Justia Law
Norfolk County Retirement System v. Community Health Systems, Inc.
Community, the nation’s largest for-profit hospital system, obtained about 30 percent of its revenue from Medicare reimbursement. Instead of using one of the systems commonly in use for determining whether Medicare patients need in-patient care, Community used its own system, Blue Book, which directed doctors to provide inpatient services for many conditions that other hospitals would treat as outpatient cases. Community paid higher bonuses to doctors who admitted more inpatients and fired doctors who did not meet quotas. Community’s internal audits found that its hospitals were improperly classifying many patients; its Medicare consultant told management that the Blue Book put the company at risk of a fraud suit. Community attempted a hostile takeover of a competitor, Tenet. Tenet publicly disclosed to the SEC, expert analyses and other information suggesting that Community’s profits depended largely on Medicare fraud. Community issued press releases, denying Tenet’s allegations, but ultimately corroborated many of Tenet’s claims. Community’s shareholders sued Community and its CFO and CEO, alleging that the disclosure caused a decline in stock prices. The district court rejected the claim. The Sixth Circuit reversed. The Tenet complaint at least plausibly presents an exception to the general rule that a disclosure in the form of a complaint would be regarded, by the market, as comprising mere allegations rather than truth. The plaintiffs plausibly alleged that the value of Community’s shares fell because of revelations about practices that Community had previously concealed. View "Norfolk County Retirement System v. Community Health Systems, Inc." on Justia Law