Justia Securities Law Opinion Summaries

In a securities-fraud class action, plaintiffs won a verdict of $2.46 billion, apparently one of the largest to date, against Household International and three of its top executives. The suit was based on a dramatic increase (and subsequent collapse) in the price of Household’s stock that was driven by predatory lending practices and creative accounting to mask delinquencies. The Seventh Circuit ordered a new trial on two issues: whether plaintiffs failed to prove loss causation and instructional error concerning what it means to “make” a false statement in connection with the purchase or sale of a security. Plaintiffs’ expert’s testimony did not adequately address whether firm-specific, nonfraud factors contributed to the collapse in Household’s stock price during the relevant time period. View "Glickenhaus & Co. v. Household Int'l, Inc." on Justia Law

Zada sold fake investments in Saudi Arabian oil, raising about $60 million from investors in Michigan and Florida. Zada gave investors promissory notes that, on their face, say nothing about oil-investment. They say that Zada will pay a principal amount plus interest (at rates far lower than Zada had promised). Zada stated that the notes were necessary only to ensure that investors would be repaid by Zada’s family if something happened to him. Little of what Zada said was true. Zada paid actors to pose as a Saudi royalty. Zada never bought any oil; he used investors’ money to pay his personal expenses. When Zada paid investors anything, he used money raised from other victims. The SEC discovered Zada’s scheme and filed a civil enforcement action, alleging violation of the Securities Act of 1933 and the Securities Exchange Act of 1934, 15 U.S.C. 77. The district court granted the SEC summary judgment, ordering Zada to pay $56 million in damages and a civil penalty of $56 million more. The Sixth Circuit affirmed, rejecting arguments that the investments were not securities and that the civil penalty improperly punishes him for invoking his Fifth Amendment privilege against self-incrimination. View "Secs. & Exch. Comm'n v. Zada" on Justia Law

The State, by and through the State Treasurer of Wyoming and the State Retirement System (collectively, the State), filed this action against Appellees - rating agencies - alleging that the rating agencies were liable for hundreds of millions of dollars in investment losses on mortgage-backed securities during the 2007-2008 financial crisis. The district court granted the rating agencies’ motion to dismiss all claims against them for lack of personal jurisdiction, concluding that the rating agencies did not have sufficient contacts with Wyoming to rise to the level required by the due process clause. The Supreme Court affirmed, holding that the State failed to establish a prima facie case of personal jurisdiction over the rating agencies. View "State v. Moody’s Investors Serv., Inc." on Justia Law

At issue in these two separate cases was whether a life settlement agreement or viatical settlement agreement is an investment contract and thus a security under the Texas Securities Act. In one case, Plaintiffs filed a class action alleging that Life Partners, Inc. violated the Texas Securities Act (Act) by selling unregistered securities and misrepresenting to purchasers that they were not, in fact, securities. In the second case, the State filed suit alleging that Life Partners had committed fraud in connection with the sale of securities. The Both district courts entered judgments for Life Partners. Both courts of appeals reversed in part, concluding that the life settlement agreements were securities under the Texas Securities Act. The Supreme Court affirmed, holding that that the agreements at issue in these cases were investment contracts, and thus securities, under the Texas Securities Act. View "Life Partners Holdings, Inc. v. State" on Justia Law

Plaintiffs are individuals and entities that purchased shares in the Kingate funds and continued to hold their shares until the 2008 exposure of the Bernie Madoff Ponzi scheme, resulting in loss most of the funds’ assets. A purported class action was filed against persons and entities affiliated with the funds. The district court dismissed, citing the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 112 Stat. 3227, which bars certain state‐law‐based class actions alleging falsity in connection with transactions in six categories of “covered securities.” The Second Circuit vacated, noting the Supreme Court’s intervening ruling in Chadbourne & Parke LLP v. Troice, (2014). The alleged fraud in this case is “in connection with the purchase or sale of a covered security” and brings the case within SLUSA’s prohibition (assuming SLUSA’s 12 other elements are met). The state law claims that do not depend on false conduct are not within the scope of SLUSA, even if the complaint includes peripheral, inessential mentions of false conduct. Claims accusing the defendant of complicity in the false conduct that gives rise to liability are subject to SLUSA’s prohibition, while claims of false conduct in which the defendant is not alleged to have had any complicity are not. View "In re: Kingate Mgmt. Ltd. Litig." on Justia Law

Financial Guaranty Insurance Company (FGIC) sued Putnam Advisory for fraud, negligent misrepresentation, and negligence, claiming that Putnam misrepresented its management of a collateralized debt obligation called Pyxis to induce FGIC to provide financial guaranty insurance for Pyxis. According to FGIC’s complaint, Putnam stated that it would select the collateral for Pyxis independently and in the interests of long investors (i.e., investors who profit when the investment succeeds), but in fact permitted the collateral selection and acquisition process to be controlled by a hedge fund that maintained significant short positions in Pyxis (i.e., investments that would pay off if Pyxis defaulted). Essentially, FGIC alleged that Putnam misrepresented the independence of its management of a structured finance product, which, upon default, caused FGIC millions of dollars in losses. The district court dismissed FGIC’s fraud claim on the ground that the complaint did not adequately plead loss causation and dismissed FGIC’s negligence claims on the ground that the complaint failed to allege a special or privity‐like relationship between FGIC and Putnam. The Second Circuit vacated, holding that FGIC sufficiently alleged both its fraud and negligence‐based claims. View "Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC" on Justia Law

In a putative securities class action, investors who purchased or acquired American Depository Shares (ADSs) of The Royal Bank of Scotland (RBS), alleged that RBS and several of its top executives made false and misleading statements that inflated the ADSsʹ prices, in violation of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), 78t(a), and Rule 10b‐5, 17 C.F.R. 240.10b‐5. RBS had experienced rapid growth by repackaging residential subprime mortgages and leveraged loans into residential mortgage backed securities, collateralized debt obligations, and collateralized loan obligations. The housing market bubble burst in 2006, mortgage delinquencies soared, and subprime assets lost much of their value. The district court dismissed and denied plaintiffsʹ motions for reconsideration, to alter or amend the judgment, and for leave to amend. The Second Circuit affirmed, finding that many of the statements at issue were “inactionable puffery.” In light of the total mix of information available to the reasonable investor, RBSʹs statements were not a basis for a securities fraud claim. View "IBEW Local Union v. Royal Bank of Scotland" on Justia Law

Customers of a securities firm made claims against that firm based on real estate investments the firm’s broker-dealers recommended. An entity that had an interest in and operated each of the real estate investments filed for bankruptcy, and at least some of the real estate investments became debtors in that bankruptcy proceeding. The appointed examiner in the bankruptcy proceeding found that the entity was engaged in a fraudulent “Ponzi scheme.” When the securities firm applied for professional liability insurance, it disclosed one of the customer claims but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. The insurer refused to defend against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim. The court of appeal affirmed judgment in favor of the insurer: There was no insurance coverage because all of the undisclosed claims arose out of the same events as the disclosed claim. The securities firm was aware of facts and circumstances that might result in a claim or claims being made against it, which awareness it was required to disclose. View "Crown Capital Secs., L.P. v. Endurance Am. Specialty Ins. Co." on Justia Law

The Securities and Exchange Commission (SEC) brought a civil enforcement action against defendants Big Apple Consulting USA, Inc., MJMM Investments, LLC, Marc Jablon, and Mark Kaley (collectively, defendants) for violations of the Securities Act of 1933, and the Securities Exchange Act of 1934. The SEC's allegations stemmed from the defendants' relationship with CyberKey Solutions, Inc. and its CEO James Plant. CyberKey sold customizable USB drives that could be loaded with encryption software to secure content stored on the drives. CyberKey's stock traded on a website called "Pink Sheets." Kaley executed a consulting agreement with CyberKey on behalf of MJMM, in which MJMM agreed to provide services intended to promote CyberKey's business. At first, there was no demand for CyberKey stock, but that changed when Plant began reporting fabricated contracts. A fake contract purportedly with the Department of Homeland Security (DHS) "was a game changer." CyberKey publicized the DHS contract in several press released; MSI drafted the press release and Big Apple was listed as the primary contact. The National Association of Securities Dealers (NASD - now known as the Financial Industry Regulatory Authority (FINRA)), sent a fax to Plant informing him that it was reviewing CyberKey's trading activity. NASD requested that CyberKey provide it with the "documents and information" concerning: (1) the DHS contract; (2) an explanation of how the DHS contract was negotiated; (3) a list of CyberKey's contacts at DHS; and (4) details of CyberKey's relationship with Big Apple. Plant e-mailed the fax to Jablon and Kaley, and they advised Plant to have his securities attorney handle the matter. Jablon and Kaley did not follow up on the status of the inquiry. In early 2007, the SEC issued an order suspending the trading of CyberKey stock due to concerns as to the accuracy of assertions made by CyberKey and others in press releases and public statements to investors. Over the course of the defendants' relationship with CyberKey, Big Apple and MJMM sold more than a combined 720 million CyberKey shares for approximately $7.8 million. During the time that CyberKey was a client, it was one of the top five most actively traded stocks on Pink Sheets. The SEC filed its complaint in federal court and alleged that the defendants "knew, or were severely reckless in not knowing, that CyberKey did not have a $25 million purchase order from the DHS or any other [f]ederal government agency, and thus had very little legitimate revenue at all." Nonetheless, the defendants "persisted in promoting CyberKey and selling hundreds of millions of unregistered CyberKey shares to unsuspecting investors." The district court granted summary judgment in favor of the SEC as to some of the claims, and the remainder of the claims proceeded to trial. A jury found in favor of the SEC as to the remaining claims against all defendants. Defendants raised six errors on appeal to the Eleventh Circuit. But finding no reversible error, the Court affirmed the trial court's decision and the jury's verdict. View "U.S. Securities & Exchange Comm'n v. Big Apple Consulting USA, Inc." on Justia Law

Patipan Nakkhumpun, lead plaintiff in a securities class action, represented investors who purchased securities in Delta Petroleum Corporation. Defendants were former officers and a board member of Delta who allegedly violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission by misleading investors through statements about (1) a proposed transaction with Opon International, LLC and (2) Delta’s financial condition. The district court granted the defendants’ motion to dismiss, holding that Nakkhumpun had failed to allege: (1) loss causation regarding the statement about the Opon deal; and (2) falsity regarding the statements about Delta’s financial condition. Nakkhumpun moved for leave to amend, and the district court denied the motion on the ground of futility. On appeal, the parties disputed whether Nakkhumpun adequately pleaded falsity, scienter and loss causation with regard to the Opon transaction, and falsity and scienter with regard to Delta's financial condition. Upon further review, the Tenth Circuit affirmed in part and reversed in part. The Court concluded Nakkhumpun adequately alleged falsity, scienter and loss causation on the Opon transaction, but failed to adequately plead regarding Delta's financial condition. The case was remanded for further proceedings. View "Nakkhumpun v. Taylor" on Justia Law