Justia Securities Law Opinion Summaries

In this civil enforcement action, a jury found appellant aided and abetted a securities fraud by his former employer in violation of 15 U.S.C. 78t(e). At issue was whether the district court erred in allowing appellant's trial to proceed in the District of Columbia pursuant to the "co-conspirator theory of venue." The court held that the SEC failed to lay venue in the District of Columbia under the "straightforward language of [section 78aa]." Accordingly, the court reversed the judgment of the district court on the basis of improper venue in light of Olberling v. Illinois Central and the district court was instructed to dismiss the case without prejudice. View "SEC v. Johnson, Jr., et al." on Justia Law

The borrowers, former high-level employees, participated in the company’s shared investment program by purchasing company stock. The entire purchase price was funded by personal loans from banks. The company guaranteed the loans, received loan proceeds directly from the banks, and held the shares. Some participants made a profit, but in 2001 the company filed for bankruptcy. After settling with the lenders, the bankruptcy trustee filed actions against the borrowers. The district court ruled in favor of the trustee. The Seventh Circuit vacated and remanded. The borrowers may have enough evidence to satisfy the "in the business of supplying information" element of a negligent misrepresentation defense. The borrowers may raise margin Regulations G and U as an affirmative excuse-of-nonperformance defense; it is not clear whether the borrowers, the banks, the company, or the plan violated those regulations. Summary judgment on the Securities and Exchange Act Section 10(b) and Section 17(a) illegality defenses was also in error.View "Costello v. Grundon" on Justia Law

This is the second appeal arising from the failed prosecution of defendants for securities and investment fraud. At issue was whether the district court abused its discretion in denying defendants' motion to reopen under Fed. R. Civ. P. 60(b)(3) based on an internal government memorandum (memo) written shortly after the district court dismissed the indictment. The court held that the district court acted within its discretion in finding that the memo did not show fraud on the court or provided a basis to reopen the case to allow discovery into that issue where the memo was not a revelation of new information about the discovery misconduct during trial and where the memo was consistent with the court's prior conclusion that the government's misconduct during trial was a mixture of intentional and negligent pretrial and trial acts and omissions. Accordingly, the judgment of the district court was affirmed. View "United States v. Chapman, et al." on Justia Law

The SEC brought suit against senior officers of Gateway Incorporated ("Gateway") claiming that they unlawfully misrepresented Gateway's financial condition in the third quarter of 2000 in order to meet financial analysts' earnings and revenue expectations. After a three week trial, a jury found former Gateway financial executives, John J. Todd and Robert D. Manza, liable on all claims by the SEC. All parties appealed the district court's order in part. The court reversed the district court's order granting in part Todd's and Manza's motions for judgment as a matter of law on the antifraud claims under the Securities and Exchange Act of 1934, 15 U.S.C. 78a et seq., because substantial evidence supported the jury's verdict that Todd and Manza at least recklessly misrepresented revenue related to the Lockheed transaction, and that Todd recklessly misrepresented revenue as to the VenServ transaction, in the third quarter of 2000. The court also reversed the district court's order granting Jeffrey Weitzen's, former Gateway President and CEO, motion for summary judgment as to the Section 10(b) and Rule 10b-5 violations because there were genuine issues of material fact regarding whether Weitzen knowingly misrepresented Gateway's financial growth as "accelerated" given his knowledge of the unusual Lockheed and AOL transactions. There were also issues of material fact as to whether Weitzen was a "control person" under Section 20(a). The court affirmed Weitzen's motion for summary judgment as to the Rule 13b2-2 claim because there was no evidence that Weitzen signed a letter to Gateway's auditors knowing that it misrepresented Gateway's financial position. The court also affirmed the district court's order denying in part Todd's and Manza's motions for judgment as a matter of law on the aiding and abetting claims and their motions for a new trial.

After a bench trial, the district court entered a judgment for plaintiffs concluding that on seventeen occasions, defendant had infringed plaintiffs' copyrights in their research reports, and that by collecting and disseminating to its own subscribers the summary recommendations with respect to securities trading contained in plaintiffs' reports, defendant had committed the New York state law tort of "hot news" misappropriation. Defendant appealed the judgment and injunction against it on the "hot news" misappropriation claim. The court held that plaintiffs' claim against defendant for "hot news" misappropriation of the plaintiff financial firms' recommendations to clients and prospective clients as to trading in corporate securities was preempted by federal copyright law. Based upon principles explained and applied in National Basketball Association v. Motorola ("NBA"), the court held that because plaintiffs' claim fell within the "general scope" of copyright, 17 U.S.C. 106, and involved the type of works protected by the Copyright Act, 17 U.S.C. 102 and 103, and because defendant's acts at issue did not meet the exceptions for a "hot news" misappropriation claim as recognized by NBA, the claim was preempted. Accordingly, the court reversed the judgment of the district court with respect to that claim.

Lead plaintiff in this consolidated, but uncertified, class action securities lawsuit sued defendants alleging violations of section 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. 78j(b) and 78t(a). At issue was whether the district court properly dismissed plaintiff's lawsuit, reasoning that defendants did not have a duty to announce production failures to defendant's investors immediately and, in any event, plaintiff failed to allege "facts giving rise to a strong inference" of scienter as required by section 21D(b) of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4(b)(2). The court held that plaintiff did not sufficiently allege an actionable omission or scienter for his claim and therefore, the complaint must be dismissed. The court also held that, because it affirmed the district court's dismissal of plaintiff's section 10(b)/Rule 10b-5 claim, the court affirmed the district court's dismissal of plaintiff's section 20(a) claim. The court further held that the district court did not abuse its discretion in denying plaintiff's motion to amend. Accordingly, the court affirmed the judgment of the district court.

Defendant appealed from a judgment of conviction for securities fraud and conspiracy to commit securities fraud and wire fraud. At issue, among other things, was whether venue was proper in the Eastern District of New York. The court held that venue in the Eastern District was proper for the conspiracy counts where defendant committed overt acts in furtherance of the conspiracies in the Eastern District. Accordingly, the court did not find venue for the conspiracy charges to be unfair or prejudicial. The court held, however, that venue in the Eastern District was improper for the substantive securities fraud count where no conduct that constituted the offense took place in the Eastern District. Accordingly, nothing in United States v. Svoboda called into question the principle that preparatory acts alone were insufficient to establish venue. Therefore, the court affirmed in part and reversed in part.

Respondent, First Derivative Traders, representing a class of stockholders in petitioner Janus Capital Group, Inc. ("JCG"), filed a private action under the Securities and Exchange Commission ("SEC") Rule 10b-5, alleging that JCG and its wholly owned subsidiary, petitioner Janus Capital Management LLC ("JCM"), made false statements in mutual funds prospectuses filed by Janus Investment Fund, for which JCM was the investment adviser and administrator, and that those statements affected the price of JCG's stock. Although JCG created Janus Investment Fund, it was a separate legal entity owned entirely by mutual fund investors. At issue was whether JCM, a mutual fund investment adviser, could be held liable in a private action under Rule 10b-5 for false statements included in its client mutual funds' prospectuses. The Court held that, because the false statements included in the prospectuses were made by Janus Investment Fund, not by JCM, JCM and JCG could not be held liable in a private action under Rule 10b-5. The Court found that, although JCM could have been significantly involved in preparing the prospectuses, it did not itself "make" the statements at issue for Rule 10b-5 purposes where its assistance in crafting what was said was subject to Janus Investment Fund's ultimate control. Accordingly, respondent had not stated a claim against JCM under Rule 10b-5 and the judgment of the Fourth Circuit was reversed.

Defendants entered a plea of guilty to conspiracy to commit securities fraud, based on trading on material, nonpublic information and tipping others. The SEC instituted a civil enforcement action, alleging that defendants violated section 10(b) of the Exchange Act and Rule 10b-5 and section 17(a) of the Securities Act of 1933 by engaging in insider trading. The district court imposed civil penalties under section 21(d)(3) of the Exchange Act, 15 U.S.C. 78u(d)(3): a penalty of $600,000 on one defendant for five violations and a penalty of $120,000 on another for two tips The Second Circuit vacated in part, holding that civil monetary penalties for insider trading are not available under section 21(d)(3). The section refers to penalties for violations, "other than by committing a violation subject to a penalty pursuant to section 78u-1;" the referenced section states that penalties shall not exceed three times profit gained or loss avoided. The court held that 21(d)(3) is intended to deal with violations other than insider trading. Although the defendants did not make a profit or avoid a loss and were not penalized under 78u-1, they committed insider trading and are "subject to" penalty even if the penalty was not assessed.

Defendant appealed from two judgments of conviction related to his involvement in "pump and dump" stock schemes. At issue was whether the first judgment of conviction, entered upon a jury verdict, should be overturned, either because the evidence was insufficient to permit a jury to find a fiduciary duty, or because the jury was improperly instructed about how to determine the existence of a fiduciary duty. Also at issue was whether the second judgment of conviction should be overturned because defendant's guilty plea, entered after his conviction in the first trial, was premised on the outcome of that trial. The court held that, upon reviewing the jury instructions for plain error and taking the evidence in the light most favorable to the Government, the jury was entitled to find that the brokers in this case had a duty to disclose their exorbitant commissions, just as they had a duty to refrain from making affirmative misrepresentations regarding the size of their commissions, and thus, the district court properly instructed the jury on the elements of that duty. The court also held that, because it found no principled basis on which to distinguish this case from United States v. Szur, the court concluded that there was no error in the charge, and affirmed defendant's first conviction. Therefore, the court's conclusion necessarily defeated defendant's argument challenging his subsequent guilty plea and the second judgment of conviction was also affirmed.