Broker-Dealer Litigation - Greenberg Traurig LLP
Broker-Dealer Litigation - Greenberg Traurig LLP
Broker-Dealer Litigation - Greenberg Traurig LLP
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<strong>Broker</strong>-<strong>Dealer</strong> <strong>Litigation</strong><br />
2011 Annual Survey<br />
Editor<br />
Terry R. Weiss<br />
GREENBERG TRAURIG <strong>LLP</strong><br />
Atlanta, Georgia<br />
© March 2012
This Survey identifies significant court decisions and administrative proceedings before<br />
the SEC and FINRA, which involve issues relevant to broker-dealers and investment banking<br />
firms during the year 2011. Although the Survey does not purport to necessarily be<br />
comprehensive, it is intended to include all notable decisions and proceedings during 2011.<br />
This Survey is an annual project of the ABA’s <strong>Broker</strong>-<strong>Dealer</strong> Subcommittee, conducted<br />
with the assistance and support of the full Securities <strong>Litigation</strong> Committee. Again this year, the<br />
Survey has been prepared in conjunction with the annual Compliance and Legal Seminar of the<br />
Securities Industry and Financial Markets Association. In addition to the Subcommittee<br />
members participating in the project listed below, we gratefully acknowledge the special<br />
assistance of Ellen Taylor, Andy Clark and Brenda McDonald of <strong>Greenberg</strong> <strong>Traurig</strong> in Atlanta,<br />
Georgia, for their efforts in editing, revising, and organizing the Survey.<br />
Dated: March 1, 2012<br />
Terry R. Weiss<br />
Atlanta, Georgia<br />
Co-Chair, <strong>Broker</strong>-<strong>Dealer</strong> Subcommittee,<br />
<strong>Litigation</strong> Section, American Bar Association<br />
Subcommittee Members Participating in the Project:<br />
Timothy P. Burke<br />
Bingham McCutchen<br />
Boston, MA<br />
Jeff G. Hammel<br />
Latham & Watkins<br />
New York, NY<br />
Christine M. Debevec<br />
Stradley Ronon Stevens & Young <strong>LLP</strong><br />
Philadelphia, PA<br />
Jeffrey W. Willis<br />
Rogers & Hardin<br />
Atlanta, GA<br />
Joseph D. Edmondson, Jr.<br />
Foley & Lardner, <strong>LLP</strong><br />
Washington, DC<br />
Michele R. Fron<br />
Keesal, Young & Logan<br />
Long Beach, CA<br />
H. Nicholas Berberian<br />
Neal Gerber & Eisenberg <strong>LLP</strong><br />
Chicato, IL<br />
Thomas C. Sand<br />
Miller Nash <strong>LLP</strong><br />
Portland, OR<br />
Bennett Falk<br />
Bressler, Amery & Ross<br />
Miramar, FL<br />
Peter S. Fruin<br />
Maynard Cooper & Gale PC<br />
Birmingham, AL<br />
Alyson M. Weiss<br />
Loeb & Loeb <strong>LLP</strong><br />
New York, NY<br />
Matthew R. Stammel<br />
Vinson & Elkins <strong>LLP</strong><br />
Dallas, TX
Rocky Pozza<br />
Miller, Canfield, Paddock and Stone PLC<br />
Detroit, MI<br />
Additional Contributors:<br />
The Subcommittee would also like to acknowledge the efforts of the following<br />
individuals on this year’s Annual Survey:<br />
Matthew C. Applebaum<br />
Brian M. Bohn<br />
Keith Cantrelle<br />
Alexander J. Casnocha<br />
Jonathan Cyprys<br />
Christina N. Davilas<br />
David DeVito<br />
Kirstin L. Ericson<br />
Justin Helsby<br />
Todd A. Holleman<br />
Julie M. Jarvis<br />
Kristin J. Jones<br />
Tyson W. Kovash<br />
Juliette B. McCullough<br />
Thomas J. Mew<br />
Daniel J. Moore<br />
Bryan Reyhani<br />
Adrian Rodriguez<br />
A.J. Rosenthal<br />
Inge Selden<br />
Melissa M. Smith<br />
James M. Walker<br />
Michael R. Weissmann<br />
Adrienne K. Eason Wheatley<br />
Sandra J. White-Hall<br />
Tina L. Winer
TABLE OF CONTENTS<br />
Page<br />
A. Definition of a Security........................................................................................................1<br />
B. Liabilities under the Securities Act of 1933 ........................................................................3<br />
1. Section 11.................................................................................................................3<br />
2. Section 12...............................................................................................................24<br />
3. Section 17...............................................................................................................50<br />
C. Liabilities under the Securities Exchange Act of 1934......................................................57<br />
1. Section 10(b) and Rule 10b-5 ................................................................................57<br />
a. Churning ....................................................................................................57<br />
b. Suitability...................................................................................................58<br />
c. Insider Trading...........................................................................................61<br />
d. Misrepresentations/Omissions ...................................................................61<br />
e. Standing .....................................................................................................79<br />
f. Affirmative Defenses.................................................................................83<br />
g. Other ..........................................................................................................94<br />
2. Section 14...............................................................................................................99<br />
3. Section 15(c) ........................................................................................................109<br />
4. Section 16(b)........................................................................................................113<br />
5. Section 17.............................................................................................................116<br />
6. Section 18.............................................................................................................117<br />
7. Section 19(b)........................................................................................................118<br />
8. Margin Violations ................................................................................................119<br />
D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995 ......................................121<br />
1. Pleading................................................................................................................121<br />
2. Appointment of Lead Plaintiff/Class Counsel .....................................................176<br />
i
3. Safe Harbor/Bespeaks Caution Defense ..............................................................192<br />
E. Liabilities under the Securities <strong>Litigation</strong> Uniform Standards Act of 1999 ....................207<br />
F. Liabilities under State Statutory and Common Law........................................................221<br />
1. Blue Sky Laws .....................................................................................................221<br />
2. Consumer Protection and Other Statutes .............................................................225<br />
3. Common Law Fraud ............................................................................................225<br />
4. Breach of Fiduciary Duty and Other Common Law Claims ...............................227<br />
G. Liabilities Involving Clearing <strong>Broker</strong>s ............................................................................230<br />
H. Secondary Liability..........................................................................................................234<br />
1. Respondeat Superior ............................................................................................234<br />
2. Control Person .....................................................................................................238<br />
3. Aiding & Abetting ...............................................................................................267<br />
4. Conspiracy ...........................................................................................................280<br />
5. Failure to Supervise .............................................................................................283<br />
I. Private Rights of Action for Violations of SRO Rules....................................................295<br />
J. RICO................................................................................................................................297<br />
K. Damages and Other Relief in Private Actions .................................................................305<br />
1. Damages as Element of Claim.............................................................................305<br />
2. Measure of Damages............................................................................................306<br />
3. Punitive Damages ................................................................................................310<br />
4. Attorneys’ Fees and Costs ...................................................................................311<br />
L. Contribution, Indemnification..........................................................................................317<br />
M. Statute of Limitations.......................................................................................................319<br />
1. Federal Securities Claims ....................................................................................319<br />
2. State Securities Claims ........................................................................................327<br />
3. RICO....................................................................................................................329<br />
ii
4. SRO Rules............................................................................................................329<br />
N. Arbitration........................................................................................................................330<br />
1. Scope....................................................................................................................330<br />
2. Eligibility/Limitations..........................................................................................337<br />
3. Jurisdiction/Estoppel............................................................................................339<br />
4. Motions to Vacate or to Enjoin............................................................................346<br />
a. Punitive Damages ....................................................................................346<br />
b. Attorneys’ Fees ........................................................................................346<br />
c. Other ........................................................................................................348<br />
O. Practice and Procedure.....................................................................................................350<br />
1. Rule 9(b) of the Fed. R. Civ. P. ...........................................................................350<br />
2. Rule 11 of the Fed. R. Civ. P. ..............................................................................360<br />
3. Rule 23 of the Fed. R. Civ. P. ..............................................................................362<br />
4. Venue, Pendent Jurisdiction Removal and Other Issues .....................................366<br />
5. Discovery .............................................................................................................375<br />
P. Failure to Supervise .........................................................................................................378<br />
1. SEC Enforcement Actions ...................................................................................378<br />
2. FINRA Enforcement Actions ..............................................................................392<br />
3. NYSE Enforcement Actions................................................................................398<br />
Q. SEC <strong>Litigation</strong> Affecting <strong>Broker</strong>-<strong>Dealer</strong>s .......................................................................401<br />
1. Direct SEC Proceedings.......................................................................................401<br />
a. Sales Practice Violations..........................................................................401<br />
b. Unfair/Fraudulent Markups or Commissions ..........................................403<br />
c. Other Fraudulent Practices.......................................................................404<br />
(i)<br />
(ii)<br />
Misappropriation..........................................................................404<br />
Misrepresentation.........................................................................409<br />
iii
(iii)<br />
Falsification of Documents..........................................................414<br />
(iv) Failure to Maintain Accurate Books and Records .......................414<br />
d. Mutual Fund Trading and Disclosure Violations.....................................414<br />
e. Trading Practice Violations .....................................................................416<br />
(i)<br />
Insider Trading.............................................................................416<br />
(ii) Market Manipulation ...................................................................420<br />
(iii) Securities Offering Violations .....................................................423<br />
(iv) Trading Rules Violations .............................................................426<br />
f. Failure to Supervise .................................................................................429<br />
g. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed...................................435<br />
h. Procedural Issues .....................................................................................435<br />
(i) Jurisdiction and Time Bars ..........................................................435<br />
(ii)<br />
(iii)<br />
Standard of Review......................................................................435<br />
Due Process..................................................................................435<br />
(iv) Prior Disciplinary Histories .........................................................435<br />
(v)<br />
(vi)<br />
Selective Prosecution...................................................................435<br />
Sanctions......................................................................................435<br />
i. <strong>Broker</strong>/<strong>Dealer</strong> Registration Violations ....................................................436<br />
j. Miscellaneous / MSSR Municipal Bond Offerings .................................437<br />
k. Regulation S-P .........................................................................................438<br />
2. SEC Review of SRO Proceedings .......................................................................439<br />
a. Sales Practice Violations..........................................................................439<br />
b. Unfair/Fraudulent Markups or Commissions ..........................................440<br />
c. Other Fraudulent Practices.......................................................................440<br />
(i)<br />
Misrepresentation.........................................................................440<br />
iv
(ii)<br />
Falsification of Documents..........................................................441<br />
(iii) Failure to Maintain Accurate Books and Records .......................441<br />
(iv)<br />
Selling Away................................................................................441<br />
d. Financial Responsibility Violations.........................................................441<br />
(i)<br />
(ii)<br />
Segregation of Customer Funds...................................................441<br />
Regulation T Violations...............................................................441<br />
e. Trading Practice Violations/Market Manipulation ..................................441<br />
f. Failure to Supervise .................................................................................441<br />
g. Registration Violations ............................................................................442<br />
h. Failure to Cooperate with FINRA Investigation/Failure to<br />
Comply with FINRA Requests for Financial Information ......................442<br />
i. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed...................................444<br />
j. Procedural Issues .....................................................................................445<br />
(i)<br />
(ii)<br />
Evidence.......................................................................................445<br />
Due Process..................................................................................445<br />
(iii) Jurisdiction and Time Bars ..........................................................445<br />
(iv) Discovery .....................................................................................445<br />
(v)<br />
Sanctions......................................................................................445<br />
(vi) Right to Counsel ..........................................................................446<br />
k. Statutory Disqualification ........................................................................446<br />
l. Reporting Violations................................................................................446<br />
m. Net Capital Violations..............................................................................448<br />
n. Trading Practice Violations/Market Manipulation ..................................448<br />
R. <strong>Broker</strong>-<strong>Dealer</strong> Employment <strong>Litigation</strong> and Arbitration ..................................................449<br />
v
SECURITIES LITIGATION<br />
A. Definition of a Security<br />
A.<br />
U.S. v. Bowdoin, 770 F. Supp. 2d 142 (D.D.C. 2011).<br />
Defendant challenged his indictment for sale of unregistered securities on ground that the<br />
definition of a security to include an investment contract was unconstitutionally vague. The<br />
court rejected the challenge because the Supreme Court in 1946 had held the term “investment<br />
contract” as used in the Securities Act of 1933 was not vague. Congress had defined securities to<br />
include “investment contracts” based on many years of enforcement of that term by various<br />
States under state laws. The court was bound by precedent and the lineage of the term being<br />
long and well-recognized so it held that the defendant’s challenge was without merit.<br />
Jacquemyns v. Spartan Mullen Et Cie, S.A., 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011).<br />
Defendant argued in support of a motion to dismiss a securities fraud claim under Section<br />
10(b) that the infusion of cash in a fund was a loan and not an investment. The court rejected the<br />
argument because the definition of a security under 15 U.S.C. § 77b(1) included a “note” and the<br />
contributions made were evidenced by a note. In addition, the court held that the investments<br />
were also securities because they were “investment contracts” under the test enunciated by the<br />
Supreme Court in S.E.C. v. Howey, 328 U.S. 293 (1946). The fact that defendants tried to dress<br />
up what is patently a security in the clothing of a loan did not, according to the court, change the<br />
fact that the arrangement they offered to the plaintiffs met every element of the Howey test for a<br />
security.<br />
A.<br />
SEC v. Wyly, 788 F. Supp. 2d 92 (S.D.N.Y. 2011).<br />
A.<br />
The S.E.C. pursued a claim of insider trading against the defendants. The defendants<br />
argued for dismissal of the claim because, when the conduct at issue occurred, a security-based<br />
swap agreement was not included in the 1934 Securities Exchange Act’s definition of a<br />
“security”. The court rejected the argument and held, regardless of whether security-based swap<br />
agreements were included in or are now excluded from the statutory definition of a “security”,<br />
section 10(b) and Rule 10b-5 apply to fraudulent devices undertaken in connection with the<br />
purchase or sale of securities, and the swap transaction at issue touched, coincided with and<br />
induced stock trading. It further held that the swap agreements were fraudulent devices used in<br />
connection with the purchase or sale of securities, and, thus, properly the subject of the S.E.C.’s<br />
claim.<br />
1
A.<br />
U.S. v. McDonald, 2011 WL 1812782 (S.D.N.Y. May 10, 2011).<br />
Defendant sought dismissal of an indictment charging him with securities fraud. He<br />
asserted that the preferred stock at issue was not a security as defined by the Securities Exchange<br />
Act. The court denied the defendant’s motion to dismiss because there was no reason to believe<br />
that the preferred shares were not stock within the definition of the Securities Exchange Act.<br />
Among other facts, the shares were designated “stock,” and the investor received stock<br />
certificates.<br />
In re Jamuna Real Estate, L.L.C., 460 B.R. 661 (Bankr. E.D. Pa. 2011)<br />
Defendant to a civil RICO claim asserted that his alleged conduct was not properly the<br />
subject of a RICO claim because the allegations were based on conduct that would be securities<br />
fraud, which is excluded from RICO by 18 U.S.C. § 1964(c). Notwithstanding the broad<br />
definition of a “note” as a security in 15 U.S.C. §§ 77b(1) and 78c(10), the court held that the<br />
notes at issue were not securities because the lender was not an investor, the return on the notes<br />
was limited to interest over the life of the loans, any risk of non-payment was addressed by<br />
collateral and the notes evidencing loans for real estate and equipment for the defendant’s fast<br />
food business were commercial rather than investment in character.<br />
In re Jensen-Ames, No. 10-10684, 2011 WL 1238929 (Bankr. W.D. Wash. March 30, 2011).<br />
Debtor sought to discharge debt owed under a consent order. The court determined that<br />
the debt was nondischargeable because it arose from a violation of state securities law when the<br />
debtor sold unregistered interests in a real estate development project to investors.<br />
Aventa Learning, Inc. v. K12, Inc., 2011 WL 5438960 (W.D. Wash. Nov. 8, 2011).<br />
Plaintiffs asserted claims under the Washington State Securities Act (“WSSA”) in<br />
connection with payments they allege were owed as part of an acquisition by the defendant,<br />
which resulted in a change of control. Defendants asserted that the asset purchase agreement on<br />
which the plaintiffs based their claim was not a “security” under the WSSA. The court agreed<br />
and dismissed the claim because the asset purchase agreement did not meet the definition of a<br />
“security” either as an investment contract or a risk capital investment when the individual<br />
plaintiffs became, post-acquisition, part of the executive team that made the operational and<br />
strategic decisions for the acquiring company.<br />
A.<br />
A.<br />
A.<br />
2
Purvis v. Arizona Corp. Comm’n, No. 1 CA-CV 10-0311, 2011 WL 662842 (Ariz. Ct. App, Div.<br />
1 Feb. 24, 2011).<br />
Appellant argued that promissory notes issued in connection with bridge loan<br />
transactions were not “securities” requiring registration under the 1933 Securities Act. The court<br />
held that a note is a “security” under Ariz. Rev. Stat. § 44-1801.26, and the appellant failed to<br />
carry his burden and establish that any statutory exemption applied. Accordingly, it affirmed the<br />
Commission’s decision holding appellant liable for violations of the Arizona Securities Act.<br />
West v. State of Indiana, 942 N.E.2d 862 (Ind. Ct. App. 2011).<br />
Defendant was convicted for using fraud in the offer or sale of a security and for selling<br />
unregistered securities. He argued that his conviction should be overturned because the term<br />
“investment contract” is undefined and, thus, the definition of a security under Indiana Code §<br />
23-2-1-1(k) is unconstitutionally vague. At trial, the State applied the test from American<br />
Fletcher Mort. Co. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7 th Cir. 1980), as adopted by<br />
Indiana courts in Manns v. Skolnik, 666 N.E.2d 1236 (Ind. Ct. App. 1996), to determine whether<br />
the transaction was an investment contract. According to the test, an investment contract arises<br />
whenever a person (1) invests money (2) in a common enterprise (3) premised upon a reasonable<br />
expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others.<br />
The court affirmed the conviction and held that, although a person of ordinary intelligence may<br />
not generally understand whether a particular document falls under the definition of a security,<br />
that lack of comprehension does not render the statute void when the jury was given sufficient<br />
information to determine under the American Fletcher test whether the investment contract was a<br />
security.<br />
A.<br />
A.<br />
B. Liabilities under the Securities Act of 1933<br />
1. Section 11<br />
B.1<br />
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762<br />
(1st Cir. Mass. 2011).<br />
The Court of Appeals for the First Circuit affirmed in part and vacated and remanded in<br />
part the district court’s dismissal of plaintiffs-appellants’ putative class action complaint alleging<br />
violation of, inter alia, Section 11 of the Securities Act of 1933 from plaintiffs-appellants’<br />
purchase of mortgage-backed securities. The Court affirmed the district court’s holding that<br />
plaintiffs-appellants lacked Article III standing to pursue claims based upon trusts from which<br />
they had not purchased securities. Following a de novo review regarding the sufficiency of<br />
alleged misstatements, the Court sustained alleged misstatements concerning lending guidelines,<br />
for which plaintiffs-appellants alleged a wholesale abandonment of underwriting standards. The<br />
3
Court rejected as the basis for a Section 11 claim allegations concerning appraisal standards<br />
(which amounted to insufficient and conclusory allegations that banking industry appraisers were<br />
generally subject to undue pressure, which may have distorted loan values) and credit ratings<br />
(which were insufficient to support a claim because they reflected inactionable opinions that<br />
were not alleged to be believed untrue at the time made, nor alleged to be unsupported by models<br />
regarding the quality of the securities being rated).<br />
Amorosa v. AOL Time Warner Inc., 409 Fed. App’x 412 (2d Cir. 2011).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of<br />
plaintiff-appellant’s complaint against an auditor defendant that alleged, inter alia, violation of<br />
Section 11 of the Securities Act of 1933 from allegedly false and misleading statements in an<br />
audit opinion that were incorporated by reference in a Merger Registration Statement.<br />
Reviewing de novo, the Court dismissed the Section 11 claim against the auditor because the<br />
claim was either made more than a year after plaintiff-appellant was on constructive notice, and<br />
therefore time-barred; or, if it was not time-barred, then the absence of loss causation would be<br />
apparent on the face of the complaint given that share prices went up between the time of the<br />
corrective disclosure that would remedy the statute of limitations problem and the date the<br />
complaint was filed.<br />
Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of<br />
plaintiffs-appellants’ amended putative class action complaint alleging violation of, inter alia,<br />
Section 11 of the Securities Act of 1933 in connection with allegedly false and misleading<br />
statements concerning goodwill and loan loss reserves. Reviewing de novo, the Court held that<br />
defendants-appellees’ subjective statements regarding the value of goodwill and adequacy of<br />
loan loss reserves were inactionable opinions that were not alleged to have falsely represented<br />
the speakers’ beliefs at the time they were made. The Court also dismissed plaintiffs-appellants’<br />
claims to the extent based upon Sarbanes-Oxley, generally accepted accounting principles, and<br />
generally accepted accounting standards on the ground that they were derivative of the primary<br />
allegations regarding goodwill and loan loss reserves, and thus similarly failed to state a claim.<br />
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of<br />
plaintiffs-appellants’ putative class action complaints alleging violation of, inter alia, Section 11<br />
of the Securities Act of 1933 based upon alleged misstatements and omissions about mortgage<br />
pass-through certificates. Reviewing de novo, the Court held that Rule 9(b) of the Federal Rules<br />
of Civil Procedure was not applicable because plaintiffs-appellants expressly disclaimed any<br />
B.1<br />
B.1<br />
B.1<br />
4
allegation of fraud. The complaint was premised on the argument that rating agencies can be held<br />
liable as underwriters for alleged violation of the Securities Act, which the Court rejected as<br />
“without merit” because “the text, case law, legislative history, and purpose of the statute” prove<br />
that Congress intended for the Securities Act only to apply to those who participate in statutory<br />
underwriting (including the purchase of securities with a view towards distribution), or in<br />
offering or selling securities in connection with a distribution, not in the structuring or creation of<br />
securities. Securities Act claims therefore cannot be brought against rating agencies, which do<br />
not engage in the underwriting procedures and distributional activities explicitly identified in the<br />
statute, and which more resemble “experts” under the Securities Act, given their role in assessing<br />
creditworthiness, rather than “underwriters”.<br />
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).<br />
The Court of Appeals for the Second Circuit vacated and remanded the district court’s<br />
dismissal of plaintiffs-appellants’ putative class action complaint alleging violation of, inter alia,<br />
Section 11 of the Securities Act of 1933 following an IPO in which the health of certain<br />
Blackstone portfolio companies and real estate fund investments was at issue. Reviewing de<br />
novo, the Court held that plaintiffs-appellants had plausibly alleged that downward trends in real<br />
estate were known at the time of the IPO, were reasonably likely to have a material impact on<br />
Blackstone’s financial condition, and were therefore material and subject to a duty to disclose<br />
under Item 303 and Section 11. The Court rejected Blackstone’s argument that its structure as a<br />
private equity firm required a finding of immateriality as a matter of law. Qualitative factors<br />
found to render material a quantitatively small misstatement included the importance of the subperforming<br />
portfolio companies to Blackstone’s overall operations, and that the omissions<br />
masked a reasonably likely change in earnings, and “doubtless” increase in management<br />
compensation. The disclosures regarding Blackstone’s real estate assets also were actionable<br />
(notwithstanding plaintiffs’ inability to establish a clear “link” between the declining residential<br />
real estate market and Blackstone’s investment in commercial real estate) because Blackstone<br />
had at least one residential real estate investment in its portfolio, because residential real estate<br />
allegedly constituted as much as $3 billion and 15% of real estate assets under management, and<br />
because “complex securitizations of residential mortgages” might reasonably be expected to<br />
have adverse effects on commercial real estate investments, as conceded in Blackstone’s<br />
disclosures.<br />
Hutchison v. Deutsche Bank Sec. Inc., 2011 WL 3084969 (2d Cir. July 26, 2011).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of<br />
plaintiff-appellant’s second amended class action complaint against a real estate financing<br />
company alleging violation of, inter alia, Section 11 of the Securities Act of 1933 resulting from<br />
allegedly false statements and omissions about the impairment of two mezzanine loans, which<br />
defendants-appellees allegedly had a duty to disclose under Item 303 of Regulation S-K.<br />
Reviewing de novo, the Court applied quantitative and qualitative analyses, holding that where<br />
B.1<br />
B.1<br />
5
plaintiff-appellant failed to allege why the product at issue (mezzanine loans) were of distinct<br />
interest to investors, any alleged impairment must be analyzed in relations to defendantsappellees’<br />
entire investment portfolio using a quantitative approach, pursuant to which the loans<br />
were not material. The Court held that plaintiff-appellant failed to establish qualitative<br />
materiality because (i) the stock price drop following disclosure of the loans’ impairment was an<br />
insufficient cause-and-affect allegation that was “too blunt an instrument to be depended on in<br />
considering whether a fact is material”; and (ii) the impairment had a quantitatively small impact<br />
on defendants’ business, and the loans were fully collateralized, which also suggests that the<br />
business was not threatened by the loans’ impairment.<br />
Katz v. Gerardi, 655 F.3d 1212 (10th Cir. 2011).<br />
The Court of Appeals for the Tenth Circuit affirmed the district court’s dismissal of<br />
plaintiffs-appellants’ putative class action complaint based upon lack of standing to assert claims<br />
under, inter alia, Section 11 of the Securities Act of 1933 because plaintiffs-appellants were not<br />
bona fide purchasers of securities. Plaintiffs-appellants argued that pursuant to the fundamental<br />
change doctrine – also known as the forced seller doctrine – the merger’s effect on their<br />
securities effectively required them to purchase new securities, thus satisfying standing<br />
requirements under Section 11. The Court rejected this argument because the forced seller<br />
doctrine only applies to claims under the Securities Exchange Act of 1934, and because, even in<br />
a forced sale, one is still a seller, not a purchaser, of securities.<br />
Hill v. State Street Corp., 2011 WL 3420439 (D.Mass. Aug. 3, 2011).<br />
The district court denied defendants’ motions to dismiss plaintiffs’ consolidated amended<br />
class action complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of<br />
1933 in connection with allegedly inconsistent application of foreign exchange rates and alleged<br />
misleading of the market regarding exposure to mortgage-backed securities. Applying American<br />
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the court held that plaintiffs’ claims were<br />
not time-barred because the statute of limitations had been tolled by one of the earlier-filed class<br />
actions that was eventually consolidated into the pending class action. Notwithstanding<br />
plaintiffs’ failure to offer good cause for their untimely service, the court extended the deadline<br />
for service against the underwriting defendants, who would otherwise be dismissed, because the<br />
underwriter defendants were on constructive notice of the claims, because they did not show<br />
even “remote” prejudice by the delay, and because justice would be best served by extension of<br />
the deadline for service.<br />
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Silverstrand Investments v. AMAG Pharm., Inc., 2011 WL 3566990 (D.Mass. Aug. 11, 2011).<br />
The district court granted defendants’ motions to dismiss a putative federal securities<br />
class action alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in<br />
connection with a securities offering for a pharmaceutical drug used to treat anemia. The Section<br />
11 claim was dismissed in its entirety and as to all defendants. The court held that defendants<br />
did not have a disclosure obligation under Item 303 of Regulation S-K because twenty-three<br />
serious adverse events (“SAEs”) from use of the drug was not a “known trend or uncertainty”<br />
requiring disclosure given the “repeated” disclosures in offering documents and other public<br />
filings that SAEs were observed during clinical trials. The 23 SAEs that occurred after launch of<br />
the drug but prior to the offering were therefore consistent with previously and publicly disclosed<br />
information. Although one person allegedly died from the drug, the court held that a single death<br />
does not constitute a “trend”. The court similarly held that defendants did not have a disclosure<br />
obligation under Item 503 of Regulation S-K, which requires discussion of risk factors, because<br />
they had satisfied that obligation. The court rejected plaintiffs’ argument that the offering<br />
documents omitted material information from (i) action letters from the FDA that twice declined<br />
to approve the drug (rejected because the drug was ultimately approved, suggesting that prior<br />
issues had been resolved), and (ii) an FDA warning letter regarding certain “illegal and<br />
misleading marketing practices (because the complaint failed to establish any connection<br />
between the warning letter and the time of the offering).<br />
Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-A Sec., 273 F.R.D. 363 (E.D.N.Y.<br />
2011).<br />
In a class action alleging violation of, inter alia, Section 11 of the Securities Act of 1933<br />
due to allegedly false and misleading disclosures about mortgage-backed securities, the district<br />
court denied a motion to intervene as of right where the proposed intervenor sought to represent<br />
a class of plaintiffs whose claims had been dismissed for lack of standing by the named<br />
plaintiffs. The court denied the intervenor’s motion as time-barred, finding that the equitable<br />
tolling principles of American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), could not<br />
apply where the intervenor had not purchased its securities during the time period identified in<br />
the originally defined class. As a non-class member, the intervenor also failed to satisfy the<br />
intervention requirement of Federal Rule of Civil Procedure 24 that an intervenor have an<br />
“interest relating to the property or transaction” that is the subject of the complaint.<br />
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance<br />
Corp. I, 2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
putative class action complaint which alleged violation of, inter alia, Section 11 of the Securities<br />
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7
Act of 1933, arising from the issuance and sale of $36.8 billion in mortgage-pass through<br />
certificates made in thirty-three separate offerings. The twenty-five offerings from which<br />
plaintiffs never purchased mortgage-backed securities were dismissed as the basis of a Section<br />
11 claim for lack of Article III standing. For the eight remaining offerings where plaintiffs had<br />
Article III standing, the court held that plaintiffs had statutory standing to sue only on the<br />
specific tranches from which plaintiffs had made a purchase. The court held that plaintiffs<br />
claims were timely because public news articles were insufficient to provide inquiry notice,<br />
particularly given that none of the articles related to defendants, or established that their offering<br />
documents contained misstatements and omissions. New certificates added to the existing<br />
Section 11 claim were sustained because they related back to the original complaint for statute of<br />
limitations purposes. The court also sustained the Section 11 claim to the extent the certificates<br />
were alleged to have declined in market value; plaintiff was not required to plead specific figures<br />
for cognizable economic loss. Where specific facts were pleaded, the court sustained the Section<br />
11 claim based upon material misstatements and omissions regarding appraisal standards and<br />
loan-to-value ratios and systematic deviations from underwriting guidelines. Where specific<br />
facts were not pleaded, the certificates were dismissed, including for originators’ alleged failure<br />
to follow appraisal and LTV ratios, the alleged insufficiency of credit enhancements supporting<br />
the offerings, the alleged insufficiency of credit ratings and conflicts of interest by rating<br />
agencies, and the deviation from underwriting guidelines. Certificates from originators against<br />
whom no facts were pleaded at all were dismissed on plausibility grounds. The court declined to<br />
enforce cure provisions in the offering documents on the ground that they “undermine the strict<br />
liability” created under Section 11.<br />
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F.Supp.2d 618 (S.D.N.Y. 2011).<br />
The district court granted defendants’ motion for summary judgment in a complaint<br />
alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in connection with<br />
public offerings of mortgage-backed securities. The court granted summary judgment to<br />
defendants on the ground that plaintiffs’ claims were barred by the three-year statute of repose –<br />
an absolute rule that begins when the offering is “bona fide offered to the public”, and which,<br />
under Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), is not<br />
subject to equitable tolling otherwise available under American Pipe & Construction Co. v. Utah,<br />
414 U.S. 538 (1974).<br />
In re IndyMac Mortgage-Backed Sec. Litig., 793 F.Supp.2d 637 (S.D.N.Y. 2011).<br />
In an action that alleged, inter alia, violation of Section 11 of the Securities Act of 1933<br />
arising from offerings for mortgage pass through certificates, the district court granted in part<br />
and denied in part motions to intervene as class representatives and denied a motion by lead<br />
plaintiff and several proposed intervenors to amend the amended consolidated complaint to name<br />
underwriting defendants. The court denied as time-barred the motion to intervene by a proposed<br />
intervenor who was on notice that both the consolidated complaint and the amended consolidated<br />
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8
complaint lacked named plaintiffs who had purchased certain certificates but who failed to<br />
intervene at that time, subsequently abandoned claims related to the certificate, and raised them<br />
again when action on the certificates was time-barred. The court also denied motions to<br />
intervene with respect to all offerings with expired statutes of repose, on the ground that, by their<br />
terms, statutes of repose do not permit any form of tolling or application of the relation back<br />
doctrine. Claims related to the sole offering that was not barred by the statute of repose were<br />
found to be tolled and subsequently filed within the remaining limitations period, thus rendering<br />
them timely under applicable statutes of limitation. Although the putative intervenors did not<br />
have standing to assert the claims at issue, the court nonetheless permitted the claims to proceed<br />
on the ground that holding otherwise would undermine the policies of efficiency and economy<br />
served by Federal Rule of Civil Procedure 23 and American Pipe & Construction Co. v. Utah,<br />
414 U.S. 538 (1974), which encourages parties like the putative intervenors to remain passive<br />
during early stages of the class action rather than making protective filings to preserve their<br />
claims (particularly where, as here, defendants were on notice of the claims sought to be asserted<br />
by the putative intervenors). Putative intervenors who did not seek intervention within the<br />
limitations period once the tolling period ended were time-barred and were not permitted to<br />
intervene in order to assert those claims. The court denied the motion for leave to amend to add<br />
certain underwriting defendants because the claims sought to be asserted related to time-barred<br />
offerings for which the limitations period had run.<br />
In re Lehman Bros. Sec. & Erisa Litig., 799 F.Supp.2d 258 (S.D.N.Y. 2011).<br />
The district court granted in part and denied in part defendants’ motions to dismiss a third<br />
amended class action complaint alleging violation of, inter alia, Section 11 of the Securities Act<br />
of 1933, arising from a 2006 shelf registration statement pursuant to which over $31 billion in<br />
debt and equity securities were issued. The court held that claims by twenty-four newly named<br />
plaintiffs were timely under the statute of limitations given recent constructions of American<br />
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), pursuant to which the filing of a class<br />
action suspends applicable statutes of limitations even where the putative class plaintiff does not<br />
have standing to assert the claims at issue. Although timely for statute of limitations purposes,<br />
the court held that the claims were time-barred to the extent the applicable statute of repose had<br />
run; the court rejected application of any relation back theory because, by its terms, the statute of<br />
repose has no exceptions. The court rejected valuation of commercial real estate as the basis for<br />
a Section 11 claim given plaintiffs’ failure to allege that Lehman did not believe its valuations to<br />
be true at the time they were issued, and given their failure to substantiate allegations that<br />
Lehman violated Statement of Financial Accounting Standards 157. The court sustained alleged<br />
misstatement and omissions for Section 11 claims to the extent such statements or omissions had<br />
sufficiently stated a claim under the Securities Exchange Act of 1934 (including for allegedly<br />
artificial reductions in net leverage, insufficient risk management practices, and significant<br />
concentration of credit risk). The court also sustained alleged misstatements related to principal<br />
protected notes because, at this stage of litigation, the court was unable to conclude as a matter of<br />
law that repeated and emphasized statements about principal protection were offset sufficiently<br />
by “inconspicuous and scattered warnings” in other SEC filings about Lehman’s solvency. The<br />
Section 11 claim was sustained against an individual defendant who did not sign the registration<br />
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statement at issue only to the extent the claim could be based upon statements made in other SEC<br />
filings that she did sign and that were incorporated by reference into the registration statement at<br />
issue. The court declined to apply the affirmative defenses of due diligence and reliance on an<br />
expert to dismiss the Section 11 claim because applicability of such defenses was not apparent<br />
on the face of the complaint. The court dismissed claims against auditor defendant E&Y because<br />
the only actionable misstatements it allegedly made were in unaudited interim financials, which<br />
fail as the basis of any Securities Act claim.<br />
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig., 774 F.Supp.2d 584<br />
(S.D.N.Y. 2011).<br />
The district court granted defendants’ motions to dismiss a second amended complaint,<br />
alleging violation of, inter alia, Section 11 of the Securities Act of 1933, arising from alleged<br />
misstatements and omissions concerning the impact of mortgage-backed securities in a fixed<br />
income investment fund. The court dismissed the Section 11 claim because defendants satisfied<br />
their burden of pleading facially apparent negative loss causation due to an insufficient<br />
connection between the alleged material misstatement and diminution in the security’s value.<br />
The court also agreed that, because there is no secondary market for shares in a mutual fund,<br />
statements by a fund’s issuer have no ability to “inflate” the price of the fund’s shares or<br />
otherwise affect net asset value, which does not react to misstatements in the fund’s prospectus.<br />
As a result, no connection between the alleged material misrepresentation and a diminution in<br />
the security’s value could be plausibly alleged.<br />
In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326 (S.D.N.Y. 2011).<br />
The district court granted in part and denied in part defendants’ motions to dismiss four<br />
complaints alleging violation of, inter alia, Section 11 of the Securities Act of 1933, in<br />
connection with the “financial disintegration” of Wachovia between 2006 and its 2008 merger<br />
with Wells Fargo. The court dismissed for lack of standing all Securities Act claims arising from<br />
sixteen offerings in which none of the named plaintiffs purchased securities. The court<br />
considered the impact of including three new plaintiffs, holding that their claims were<br />
appropriate because they were not under inquiry notice as defined in Merck & Co. v. Reynolds,<br />
130 S.Ct. 1784 (2010); their claims were not time-barred under American Pipe & Construction<br />
Co. v. Utah, 414 U.S. 538 (1974), and failure to toll their claims would undermine the policies of<br />
efficiency and economy of litigation underlying Federal Rule of Civil Procedure 23; and because<br />
general allegations that plaintiffs’ shares may be traced to the allegedly defective registration<br />
statement would suffice – there was no requirement to trace purchased shares to the specific<br />
supplemental offerings pleaded by the additional plaintiffs. The court applied the pleading<br />
standard of Federal Rule of Civil Procedure 8 because fraud was not specifically pleaded in<br />
connection with preparation of offering materials (notwithstanding that plaintiffs pleaded a<br />
“massive fraud” actionable under Section 10(b) of the Securities Exchange Act of 1934). The<br />
court sustained one complaint’s Section 11 claim based upon a material misrepresentation<br />
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10
egarding loan-to-value ratios reported in the offering documents. The court also sustained the<br />
Section 11 claim against the auditor defendant, for whom plaintiffs had sufficiently pleaded that<br />
the financial statements were false and misleading, and because the due diligence defense does<br />
not apply on a motion to dismiss. The court dismissed the Section 11 claim raised in another<br />
complaint because it was based upon alleged misstatements regarding corporate optimism, which<br />
was inactionable puffery, and because alleged omissions regarding certain financial accounting<br />
and underwriting standards were conclusory, unsupported, and not plausible.<br />
In re Barclays Bank PLC Sec. Litig., 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).<br />
The district court granted, in its entirety, defendants’ motion to dismiss a consolidated<br />
amended complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,<br />
arising from Barclays’ allegedly material misstatements and omissions related to certain<br />
mortgage-backed securities. The court held that the complaint failed adequately to state a<br />
Section 11 claim because it contained no allegations that Barclays did not believe its subjective<br />
valuations and write downs. Plaintiffs also failed to demonstrate Section 11 liability based upon<br />
Barclays’ failure to itemize its mortgage-related assets into subcategories, which it had no<br />
independent duty to provide, or upon the alleged misleading nature of statements lacking such<br />
itemization. Violation of applicable accounting standards and SEC regulations was insufficient<br />
to state a Section 11 claim in the absence of specific allegations regarding how Barclays’<br />
practices were improper. The court held that Barclays’ risk management disclosures were too<br />
general for a reasonable investor to rely upon, and were not alleged to be false at the time made<br />
or to reflect processes that were not followed. A Section 11 claim could not be stated based<br />
upon the purchase of securities after Barclays’ allegedly corrective disclosures in the absence of<br />
allegations that additional disclosures remained to be made.<br />
Public Emps. Ret. Sys. of Miss. v. Goldman Sachs Grp. 2011 WL 135821 (S.D.N.Y. Jan. 12,<br />
2011).<br />
The district court granted in part and denied in part defendants’ motions to dismiss<br />
plaintiffs’ second amended class action complaint, which alleged violation of, inter alia, Section<br />
11 of the Securities Act of 1933 in connection with three offerings of mortgage-backed pass<br />
through certificates. The court held as a threshold matter that plaintiffs lacked standing for<br />
certificates that they did not purchase (thus dismissing those securities), and that plaintiffs were<br />
not time-barred because publicly available documents and articles did not directly relate to the<br />
issuing trusts contested here (and, therefore, did not put plaintiffs on inquiry notice). The court<br />
sustained the Section 11 claim on the grounds that plaintiffs had sufficiently pleaded both<br />
cognizable loss (based upon the difference between the amount paid for the securities and the<br />
price at which the security was sold before the suit was filed) and material misrepresentations<br />
(by adequately alleging that the offering documents did not put investors on notice of the<br />
underwriting practices that loan originators were using, thus obscuring the risk exposure to<br />
certificate holders. The court rejected the argument that such disclosure was precluded by<br />
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11
Section 1111 of Regulation AB, which requires underwriting criteria to be described “to the<br />
extent known”, since knowledge is immaterial to Section 11). The court dismissed the Section<br />
11 claim against rating agency defendants on the ground that they are not “underwriters” as<br />
defined in the Securities Act.<br />
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2011 WL 1338195 (S.D.N.Y. Mar. 31,<br />
2011).<br />
The district court dismissed (with and without prejudice and leave to replead) various<br />
aspects of a consolidated second amended securities class action complaint alleging, inter alia,<br />
violation of Section 11 of the Securities Act of 1933, arising from the issuance of $7.75 billion of<br />
mortgage-backed securities issued in six separate offerings. The court held that plaintiff lacked<br />
standing to sue on the five offerings in which it had not purchased securities; claims based upon<br />
those offerings were dismissed with prejudice. For the sole offering where plaintiff had standing<br />
to sue, the court held that market value loss is sufficient to establish damages for a mortgagebacked<br />
securities claim, in part because prevention of such claim “would place severe limits” on<br />
application of the Securities Act to securities such as bonds. The court dismissed plaintiff’s<br />
Section 11 claims against the rating agency defendants, to whom underwriter liability does not<br />
apply. The court also dismissed without prejudice Section 11 claims against defendants who<br />
sponsored, sold, and acted as depositor for the securities because plaintiff’s allegations against<br />
them were conclusory, relied only on news articles and broad investigations into subprime<br />
mortgages, and were non-specific as to the origination practices and underwriting guidelines<br />
relevant to the security for which plaintiff had standing to sue.<br />
Employees’ Ret. Sys. of the Gov’t of the Virgin Islands v. J.P. Morgan Chase & Co., 2011 WL<br />
1796426 (S.D.N.Y. May 10, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
second amended securities fraud class action complaint, which alleged violation of, inter alia,<br />
Section 11 of the Securities Act of 1933 based upon statements made in connection with<br />
mortgage pass-through certificates for pools of residential real estate loans. The court dismissed<br />
Section 11 claims based upon ten of the eleven offerings at issue for lack of standing, given that<br />
plaintiff had failed to purchase securities in each of the challenged offerings. In the single<br />
offering where plaintiff had purchased securities, and therefore had standing to pursue the claim,<br />
allegations concerning credit ratings were insufficient to state a claim against rating agencies<br />
because there were no allegations that the agencies believed their standards to be too lax or<br />
inaccurate, nor any allegation that they knew the data was flawed. The court also dismissed<br />
Section 11 claims against sponsor and parent companies of the underwriters, despite their alleged<br />
participation in drafting offering documents, because such allegations are “statutorily irrelevant”<br />
to the definition of an underwriter. The court sustained the Section 11 claim based upon alleged<br />
deviations from underwriting standards, appraisal standards and LTV ratios (given that the<br />
appraisers allegedly did not believe the appraisals at the time made, and further given the<br />
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12
appraisers’ alleged acceptance of assignments that were contingent on predetermined results).<br />
The court sustained plaintiff’s arguments on materiality, holding that allegedly widespread<br />
abandonment of underwriting and appraisal guidelines “can hardly be held immaterial as a<br />
matter of law.” The court also found that the alleged decline in investment value was a<br />
sufficiently cognizable injury.<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 WL 2020260 (S.D.N.Y. May 19,<br />
2011).<br />
The district court granted in part and denied in part defendants’ motions to dismiss a<br />
consolidated second amended securities class action complaint alleging violation of, inter alia,<br />
Section 11 of the Securities Act of 1933, arising from alleged misrepresentations and omissions<br />
on whether proper guidelines and procedures were observed in the origination of certain<br />
mortgage-backed securities and their subsequent securitization. The court held that plaintiff’s<br />
claims were timely given the recent holding of Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010),<br />
that the limitations period begins when a reasonably diligent plaintiff would have discovered the<br />
facts constituting the violation, which, in this case, was not more than a year before the action<br />
was brought. The court held that increasing loan delinquency rates, the collapse of Bear Sterns,<br />
and the placement of the relevant securities on a “ratings watch” all were insufficient for plaintiff<br />
to have discovered the alleged violation. For similar reasons, the court held that plaintiff did not<br />
have knowledge of the alleged untruth or omission at the time it occurred, and that the Section 11<br />
claim would be sustained as a result. The court also sustained the Section 11 claim to the extent<br />
it was based upon diminution in market value and sale of the securities at a loss, both of which<br />
constituted cognizable losses notwithstanding the fact that plaintiffs-intervenors were warned of<br />
the risks of an illiquid secondary market. The court sustained the Section 11 claim over<br />
defendants’ argument that plaintiff failed to pursue the offering documents’ remedy of<br />
“repurchase, cure or substitute[ion]” of non-conforming loans, holding that such language was in<br />
the nature of contract which is inapposite in the context of Securities Act claims. The court also<br />
rejected defendants’ objections concerning plaintiffs’ failure to plead reliance, which is not<br />
required where, as here, earnings statements are not at issue. The court dismissed the Section 11<br />
claim to the extent it was founded upon securities sold at a profit.<br />
Bensinger v. Denbury Res. Inc., 2011 WL 3648277 (E.D.N.Y. Aug. 17, 2011).<br />
The district court denied defendant’s motion to dismiss an amended complaint alleging<br />
violation of, inter alia, Section 11 of the Securities Act of 1933 based upon allegedly material<br />
misrepresentations during defendant’s acquisition of a company for which plaintiff was a<br />
shareholder. The court sustained the Section 11 claim because the Proxy and Registration<br />
Statements misstated calculation of the merger consideration in several instances. Such<br />
misstatements were material because they directly related to compensation the target company’s<br />
shareholders were entitled to receive, thus having the potential to alter significantly the total mix<br />
of information available to a reasonable investor.<br />
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13
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In re Deutsche Bank AG Sec. Litig., 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
consolidated amended class action complaint alleging violation of, inter alia, Section 11 of the<br />
Securities Act of 1933 arising from Deutsche Bank’s involvement in structuring, trading and<br />
investing in residential mortgage-backed securities and collateralized debt obligations backed by<br />
U.S. residential subprime and nonprime mortgages. The court dismissed as the basis of the<br />
Section 11 claim certain alleged misstatements that were insufficient to show that, at the time of<br />
offering, (i) the subprime and nonprime holdings constituted a group concentration of credit risk,<br />
(ii) the extent of exposure to subprime and nonprime holdings made the offering particularly<br />
speculative or risky, or (iii) that risk management procedures were not applied as stated (it being<br />
insufficient to plead that the procedures were insufficient to prevent losses). The court also<br />
dismissed as the basis of the Section 11 claim alleged misstatements or omissions that were<br />
addressed by documents incorporated into the offering materials, which disclosed expansion into<br />
mortgage-backed securities and that trading losses might result. After finding that the Section 11<br />
claim was timely under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974),<br />
because it related to an offering raised in the initial class action complaint, the court sustained the<br />
Section 11 claims because (i) the court declined to find as a matter of law that defendants had no<br />
duty to disaggregate or quantify the specific types or quality of mortgage-related holdings; (ii)<br />
defendants made “no attempt” to argue that the allegedly omitted information was not material;<br />
and (iii) equities trading losses of $630 million were 700% above the “maximum exposure” and<br />
were therefore material and sufficient to state a claim.<br />
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.<br />
Sept. 15, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
second consolidated amended complaint, alleging violation of, inter alia, Section 11 of the<br />
Securities Act of 1933, arising from the marketing and sale of mortgage-backed security passthrough<br />
certificates. The court acknowledged that plaintiffs’ claims were insufficiently specific<br />
to show timeliness, but granted one additional opportunity for each plaintiff to replead the time<br />
and circumstances of discovery of the alleged misconduct to demonstrate compliance with<br />
applicable statutes of limitation. The court rejected arguments that plaintiffs were on inquiry<br />
notice due to ratings downgrades and negative watches, monthly disclosures of delinquency and<br />
foreclosure rates, and news reports questioning ratings integrity of subprime instruments,<br />
particularly since the underlying loans retained an investment grade rating into the limitations<br />
period. Although the parties agreed that the statute of repose ran prior to filing of the second<br />
amended complaint, the court held that the statute of repose was tolled pursuant to American<br />
Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), because the court construed the tolling<br />
principle in American Pipe to be legal (not equitable) in nature given that it derives from Federal<br />
Rule of Civil Procedure 23. As a legal tolling provision, the court concluded that the Supreme<br />
Court’s holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991),<br />
B.1<br />
14
that statutes of repose are not susceptible to equitable tolling, does not apply here. In furtherance<br />
of the policies of economy and efficiency that underpin American Pipe, its tolling principles<br />
were also deemed to apply here because the original plaintiffs lacked standing. The court also<br />
held that diminution in value of a security was sufficient to plead cognizable injury under the<br />
Securities Act, and that allegations concerning systematic disregard for underwriting and<br />
appraisal standards, or an effort to maximize loan origination without regard to loan quality,<br />
were actionable. The court dismissed the Section 11 claims to the extent they were based upon<br />
alleged misrepresentations concerning the derivation or integrity of the ratings, because plaintiffs<br />
had pleaded no duty to disclose any alleged flaws in the ratings process.<br />
In re Sec. Capital Assur. Ltd. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).<br />
The district court granted defendants’ motions to dismiss in their entirety, dismissed the<br />
first amended consolidated class action complaint with prejudice, and denied as futile plaintiffs’<br />
request for leave to amend the complaint, which alleged violation of, inter alia, Section 11 of the<br />
Securities Act of 1933 arising from exposure to subprime loans. The court dismissed the Section<br />
11 claim because the absence of loss causation was apparent on the face of the complaint, which<br />
did not sufficiently identify corrective disclosures that revealed any allegedly concealed facts.<br />
Because the “essence” of loss causation is that an alleged misstatement or omission concealed<br />
material information from the market that, when disclosed, negatively affected the value of the<br />
security, it is “essential” that plaintiffs allege concealed facts that were subsequently revealed.<br />
Having failed to do so, the absence of loss causation was apparent on the face of the complaint<br />
and therefore subject to dismissal.<br />
City of Roseville Employees’ Ret. Sys. v. EnergySolutions, Inc., 2011 WL 4527328 (S.D.N.Y.<br />
Sept. 30, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
second amended class action complaint, which alleged violation of, inter alia, Section 11 of the<br />
Securities Act of 1933 in connection with an initial public offering and a subsequent offering.<br />
The court sustained the Section 11 claim to the extent it was based upon statements that were<br />
false or that omitted facts necessary to make the disclosures not materially misleading. The court<br />
dismissed the Section 11 claim as not plausible under Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009),<br />
and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), to the extent it was based upon<br />
documents that refuted plaintiffs’ allegations. The court also dismissed the Section 11 claim to<br />
the extent it was based upon an alleged failure to make disclosures under Item 303 of Regulation<br />
S-K, which requires disclosure of known trends or uncertainties, because the information alleged<br />
to be in violation of Item 303 either did not reflect trends or uncertainties, or was sufficiently<br />
disclosed.<br />
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15
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
corrected consolidated fifth amended class action complaint alleging violation of, inter alia,<br />
Section 11 of the Securities Act of 1933, arising from stock purchased during a period that<br />
Merck sold the arthritis medication Vioxx, whose commercial viability was allegedly overstated.<br />
The court sustained the Section 11 claim, rejecting the “perfunctory” arguments that (i) plaintiffs<br />
could not pursue their securities law claims under the judicial estoppel doctrine (rejected because<br />
the doctrine applies only to “clearly inconsistent” legal positions from which plaintiffs would<br />
derive an unfair advantage, which did not occur here because the core of the complaint has<br />
remained the same); (ii) the market was “well aware” of the drug’s potential risks (rejected<br />
because of Merck’s “repeated reassurances” regarding the drug’s safety); and (iii) the allegedly<br />
misstated or omitted information was not material (rejected given internal analyses that Vioxx<br />
patients experienced a greater incidence of adverse cardiovascular events).<br />
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).<br />
The district court granted in its entirety the auditor defendant’s motion to dismiss, and<br />
granted in part the remaining defendants’ motion to dismiss the amended complaint, which<br />
alleged violation of, inter alia, Section 11 of the Securities Act of 1933, arising from a shelf<br />
registration statement by one of the largest credit card issuers in the United States. The Section<br />
11 claim against the auditor was dismissed as conclusory and insufficient to support a plausible<br />
claim for relief because plaintiffs did not allege that GAAP standards were, in fact, violated;<br />
which GAAP standards were violated, if any; or how the statements in the audit report were false<br />
or misleading at the time made. For the remaining defendants, the court held that plaintiffs did<br />
not establish a material misstatement or omission with respect to: (i) contingency plans to<br />
address reduced liquidity from an early amortization event (because the challenged statements<br />
did not put the adequacy of the company’s contingency plans “in play”, meaning there was no<br />
duty to disclose, and because the statements that were made were not alleged to have been untrue<br />
at the time made); (ii) assessment of capital levels as “strong” (a statement of belief that was not<br />
alleged to have been made without reasonable belief); (iii) the methodology for accessing and<br />
monitoring customer creditworthiness (because plaintiffs failed to explain why the statements<br />
were misleading); and (iv) maintaining and strengthening customer relationships (because those<br />
are inactionable, vague statements of opinion or expectation). The court held that plaintiffs did<br />
establish a material misstatement or omission with respect to calculation and adequacy of loan<br />
loss reserves and compliance with capital adequacy requirements – statements fact, not opinion,<br />
that were plausibly alleged to have been materially misstated.<br />
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16
Pension Trust Fund for Operating Eng’rs v. Mortgage Asset Securitization Trans., Inc., 2011<br />
WL 4550191 (D.N.J. Sept. 29, 2011).<br />
The district court granted (without prejudice) defendants’ motion to dismiss an amended<br />
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,<br />
arising from alleged misstatements and omissions concerning mortgage-backed securities<br />
(including alleged deviation from loan underwriting guidelines, loan-to-value ratios, debt-toincome<br />
ratios, appraisal standards and procedures, and income, employment and credit history<br />
verification processes). The court dismissed the amended class action complaint because<br />
plaintiffs failed to comply with the particularized pleading requirements of Section 13 of the<br />
Securities Act, which sets out the statutes of limitations and repose applicable to Securities Act<br />
claims. Plaintiffs were directed to replead with particularized facts concerning the timeliness of<br />
their claims, including but not limited to the time and circumstances of discovering the<br />
defendants’ allegedly actionable statements, the reason why discovery was not made earlier, or<br />
the diligent efforts undertaken in making such discovery. The court exercised its discretion to<br />
grant leave to amend because doing so would not be “futile”.<br />
In re Franklin Bank Corp. Sec. Litig., 782 F.Supp.2d 364 (S.D. Tex. 2011).<br />
The district court granted defendants’ motions to dismiss and dismissed with prejudice a<br />
consolidated class action lawsuit alleging violation of, inter alia, Section 11 of the Securities Act<br />
of 1933, arising from Franklin Bank’s management and strategy practices that allegedly resulted<br />
in its closure and liquidation. After applying the pleading standard of Federal Rule of Civil<br />
Procedure 8 (and rejecting defendant’s argument that allegations of recklessness are tantamount<br />
to fraud), the court dismissed with prejudice the Section 11 claim against the underwriter<br />
defendant because it was based on an SEC filing and its attendant public announcement that<br />
were not included in the registration statement at issue, and because the alleged misstatements<br />
and omissions were not alleged to have been known at the time the registration statement was<br />
issued and distributed. The Section 11 claim was also dismissed because an impact of .46% on<br />
total interest income, 1.4% on net interest income, and 1.78% on interest income after credit<br />
losses was insufficient to establish materiality as a matter of law. The court declined to consider<br />
financial impacts that were material for timeframes not relevant to the Section 11 claims. The<br />
court declined to find plaintiffs’ claims time-barred because the alleged “storm warnings”<br />
identified by defendants did not address the time period relevant to the Section 11 claim.<br />
Indiana State Dist. Council of Laborers v. Omnicare, Inc., 2011 WL 2786301 (E.D. Ky. July 14,<br />
2011).<br />
The district court disposed of a claim under Section 11 of the Securities Act of 1933 that<br />
was remanded from the Sixth Circuit (because the district court had improperly dismissed the<br />
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17
claim on grounds that plaintiffs had not shown loss causation, which is an affirmative defense,<br />
not an element of a Section 11 claim) by granting defendants’ renewed, uncontested motion to<br />
dismiss the Section 11 claim and by granting plaintiffs’ motion to file a second amended<br />
complaint to restate that claim. The district court held that the Section 11 claim was properly<br />
dismissed because the face of the complaint established a failure of loss causation by pleading<br />
about disclosures that did not address the alleged misrepresentations and omissions concerning<br />
GAAP. The court also sustained dismissal of the Section 11 claim because conclusory<br />
allegations of GAAP violations generally do not satisfy the requirements of Rule 9(b) of the<br />
Federal Rules of Civil Procedure. Plaintiffs were granted leave to replead the Section 11 claim<br />
because it was the first time they sought to amend the claim, and because they sought to do so<br />
based on newly available information. The court found the proposed amendment to be<br />
“arguably” viable with respect to loss causation because the proposed amendment did not<br />
suggest that lack of loss causation would be apparent on the face of the proposed amended<br />
complaint.<br />
City of New Orleans Employees’ Ret. Sys. v. PrivateBankcorp, Inc., 2011 WL 5374095 (N.D. Ill.<br />
Nov. 3, 2011).<br />
The district court granted, with prejudice, defendants’ motions to dismiss an amended<br />
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933 in<br />
connection with documents incorporated into materials supporting public offerings in 2008 and<br />
2009. The court held that the alleged failure to disclose deteriorating credit quality in legacy<br />
loan portfolios was not misleading because, even though disclosure was not made in the 10-K<br />
and 8-K, the disclosures were made in other documents incorporated by reference in the 2008<br />
offering materials. The alleged failure to maintain sufficient loan loss reserves was similarly not<br />
actionable given the failure to allege that defendants did not believe that loan loss reserves were<br />
adequate and the failure to allege that defendants lacked a reasonable basis for their beliefs. The<br />
alleged omission that loan portfolio increases were due to risky lending and an increasing<br />
number of bad loans was also deemed insufficient to state a claim given that companies are<br />
under no obligation to characterize their operations in a negative manner. The suggestion that<br />
quality in lending practices was deliberately sacrificed to increase loan quantities was rejected as<br />
conclusory.<br />
In re STEC Inc. Sec. Litig., 2011 WL 4442822 (C.D. Cal. Jan. 10, 2011).<br />
The district court granted without prejudice defendants’ motion to dismiss plaintiffs’<br />
consolidated amended complaint, which alleged violation of, inter alia, Section 11 of the<br />
Securities Act of 1933, arising from alleged misstatements and omissions about STEC’s<br />
financial performance and condition (which allegedly had the effect of artificially inflating the<br />
stock price, which allegedly collapsed when falsity of the statements was disclosed). The court<br />
applied Federal Rule of Civil Procedure 9(b) because plaintiffs’ Securities Act claims were based<br />
on a unified course of fraudulent conduct alleged in connection with plaintiffs’ claims under the<br />
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B.1<br />
18
Securities Exchange Act of 1934. The court held that the alleged misstatements at issue<br />
(concerning customer supply agreements, and the failure to file same pursuant to Item 601(b)(1)<br />
of Regulation S-K) were not material misstatements or omissions sufficient to state a claim under<br />
Section 11. To the extent statements concerning STEC’s customers did constitute a material<br />
misstatement, the court nonetheless dismissed the Section 11 claim on the ground that plaintiffs<br />
“ha[d] not alleged” loss causation.<br />
Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL 4389689 (C.D. Cal. May 5, 2011).<br />
The district court granted in part and denied in part motions to dismiss a second amended<br />
class action complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,<br />
arising from 427 separate offerings in which disclosures regarding Countrywide’s loan<br />
origination practices were alleged to be materially untrue or misleading. For tranches of<br />
mortgage-backed securities where none of the named plaintiffs had made a purchase, the Section<br />
11 claim was dismissed for lack of standing. Because “each tranche is indisputably a separate<br />
security,” the court held it was not enough to have purchased from a tranche issued pursuant to<br />
the same prospectus supplements; plaintiffs were required to have purchased from each tranche<br />
at issue. Failure to purchase from each tranche also deprived plaintiffs of constitutional standing<br />
under Article III (because they suffered no personal injury, and therefore had no standing to sue<br />
upon, tranche investments that they did not make); the interconnectedness of the tranches was<br />
deemed “largely irrelevant.” The Section 11 claim was otherwise sustained on the grounds that<br />
allegations concerning systematic deviations from and disregard for underwriting guidelines<br />
were sufficient to state a claim, and plaintiffs had sufficiently pleaded materiality and injury in<br />
that the allegations in the complaint did not conclusively demonstrate the absence of loss<br />
causation. The court reserved judgment on whether aftermarket purchasers had sufficiently<br />
pleaded reliance on the registration statement given its decision on standing, which may have<br />
mooted the reliance issue.<br />
In re STEC Inc. Sec. Litig., 2011 WL 2669217 (C.D. Cal. June 17, 2011).<br />
The district court denied the STEC defendants’ motion to dismiss and granted the motion<br />
to dismiss by the underwriter defendants, without prejudice to replead, in connection with a<br />
second consolidated amended complaint alleging violation of, inter alia, Section 11 of the<br />
Securities Act of 1933, arising from alleged misstatements and omissions that inflated the<br />
company’s stock price (which allegedly collapsed upon corrective disclosure of same). The<br />
court held that plaintiffs adequately alleged material misrepresentations in support of their<br />
Section 11 claim on the grounds that disclosures in the prospectus regarding a large customer<br />
sales order constituted misleading “half-truths” because they failed to disclose that the order was<br />
not truly reflective of product demand, was not an ordinary course contract, and could not be<br />
expected to drive ongoing sales at similar levels, all of which was revealed when the company<br />
later described the agreement as a “one-off”. Plaintiffs’ Section 11 claim against the underwriter<br />
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B.1<br />
19
defendants was dismissed due to lack of standing because the securities allegedly causing injury<br />
were not traceable to the secondary offering in which the underwriters were involved.<br />
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp.2d 1125 (C.D. Cal. 2011).<br />
The district court granted defendants’ motions to dismiss plaintiff’s first amended<br />
complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of 1933, in<br />
connection with residential mortgage-backed securities (“RMBS”) purchased by plaintiff in<br />
fifteen different offerings structured and sold by almost two dozen defendants. The court<br />
dismissed without prejudice the Section 11 claim against all defendants on the ground that the<br />
claims were time-barred under the applicable statute of repose, particularly given that neither the<br />
original nor the amended complaint set forth any basis for tolling the repose period. To the<br />
extent plaintiff repleaded the Section 11 claim, the court set forth the required allegations that<br />
must be pleaded, including that named plaintiffs have standing based upon their purchase of the<br />
specific RMBS at issue, and that their claims are timely under applicable statute of repose.<br />
Dean v. China Agritech, Inc., 2011 WL 5148598 (C.D. Cal. Oct. 27, 2011).<br />
The district court disposed of an amended class action complaint by, inter alia,<br />
dismissing the claim brought by one of the class representatives pursuant to Section 11 of the<br />
Securities Act of 1933 and arising from allegedly false financial statements included in a<br />
registration statement and prospectus. The court exercised subject matter jurisdiction on the<br />
Section 11 claim after rejecting defendants’ argument that the class representative lacked Article<br />
III standing for failing to plead an injury specifically traceable to defendants’ conduct. After<br />
determining that pleadings alleging fraudulent conduct to inflate the value of the class<br />
representative’s stock are sufficient to confer standing for an economic injury, the court<br />
nonetheless held that the Section 11 claim failed because it was apparent on the face of the<br />
amended class action complaint that plaintiff could not establish loss causation, having sold the<br />
stock at a loss several months before the first curative disclosure was disseminated in the<br />
marketplace.<br />
Katz v. China Century Dragon Media, Inc., 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).<br />
The district court granted (with leave to amend) defendant’s motion to dismiss a first<br />
amended complaint alleging violation of, inter alia, Section 11 of the Securities Act of 1933,<br />
arising from allegedly false statements during an IPO about the company’s earnings. Although<br />
plaintiffs disclaimed pleading in fraud, the court applied the heightened pleading standard of<br />
Federal Rule of Civil Procedure 9(b) because allegations in the complaint sounded more in fraud<br />
than in negligence, and because it was “implausible” that mere negligence caused deviations<br />
between numbers on the company’s profit and revenue reports reported to Chinese regulatory<br />
B.1<br />
B.1<br />
B.1<br />
20
authorities versus those reported in the prospectus. Plaintiffs satisfied Rule 9(b)’s heightened<br />
pleading standard with respect to identifying the allegedly false statements, who made them, and<br />
their materiality given that the statements concerned profits and revenues. Plaintiffs failed to<br />
meet the heightened pleading standard for the claim that profit and revenue reports reported to<br />
the SEC were false; although the numbers were different from those reported to Chinese<br />
regulatory authorities, Section 11 requires greater specificity to show that the SEC numbers were<br />
actually false, by pleading, for example, that Chinese and American accounting standards are<br />
similar or that the reports were made based on the same data. The court held that plaintiffs need<br />
not plead loss causation given that defendants bear the burden of proving the absence of loss<br />
causation (a burden the court found it unlikely to be met at the pleading stage because it seemed<br />
“evident” that the facts alleged could have caused the company’s delisting and plaintiffs’<br />
resulting injuries).<br />
Plichta v. SunPower Corp., 790 F.Supp.2d 1012 (N.D. Cal. 2011).<br />
The district court granted defendants’ motion to dismiss a putative class action complaint<br />
alleging violation of, inter alia, Section 11 of the Securities Act of 1933, in connection with<br />
accounting entries in financial statements filed with the Securities and Exchange Commission<br />
that allegedly understated the cost of goods sold. The court held that plaintiffs lacked standing to<br />
sue under Section 11 because they concededly did not purchase their stock in the public offering,<br />
and therefore could not allege facts sufficient to show that the stock purchased was traceable to<br />
the offering in dispute. The one named plaintiff who had purchased shares close in time to the<br />
offering had sold the securities in excess of the offering price, and therefore lacked recoverable<br />
damages. The court also dismissed the Section 11 claim based upon shares received by certain<br />
shareholders through a spinoff because those plaintiffs paid nothing for the shares, and therefore<br />
had no recoverable damages. Although the court said it was not clear how the pleading defects<br />
could be cured, plaintiffs were given leave to replead.<br />
Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).<br />
The district court granted in part and denied in part defendants’ motions to dismiss a<br />
putative securities class action complaint alleging violation of, inter alia, Section 11 of the<br />
Securities Act of 1933, in connection with alleged misrepresentations concerning a long bond<br />
strategy fund. The court denied the motion to dismiss the Section 11 claim brought by<br />
defendants responsible for issuing, managing, and distributing shares of the fund because<br />
plaintiffs sufficiently alleged a material misrepresentation (regarding suitability of the fund for<br />
certain investors) and an omission of material fact (regarding alleged failures adequately to<br />
disclose a “mathematical compounding effect” that caused the fund to deviate from its<br />
benchmark). The court granted the motion to dismiss the Section 11 claim brought by<br />
independent trustees to the extent plaintiffs lacked standing to sue on securities that they did not<br />
purchase. The trustees’ motion to dismiss the Section 11 claim was otherwise denied. The court<br />
held that plaintiffs claims were timely (because annual reports and “well-publicized” news<br />
B.1<br />
B.1<br />
21
articles were insufficient to provide inquiry notice), and that they suffered “compensable<br />
damages” (thus rejecting the trustees’ argument that only the fund’s investments affect its price,<br />
not its disclosures, which, if true, would foreclose all Securities Act claims against such funds,<br />
even if they intentionally misrepresented material facts). The court also held that plaintiffs had<br />
plausibly alleged loss causation in that their loss was allegedly caused, or worsened by,<br />
realization of the undisclosed risk.<br />
In re Century Aluminum Co. Sec. Lit., 2011 WL 830174 (N.D. Cal. Mar. 3, 2011).<br />
The district court granted with prejudice defendants’ motions to dismiss plaintiff’s third<br />
amended complaint, which alleged violation of, inter alia, Section 11 of the Securities Act of<br />
1933, arising from alleged false and misleading financial statements in connection with a<br />
secondary offering of common stock. The dismissal was based upon plaintiffs’ failure to plead<br />
facts sufficient to show how their purchases were traceable to the secondary offering. The court<br />
held that plaintiffs could not meet their pleading burden by stating that they had purchased shares<br />
solely in the aftermarket or through brokers and brokers’ third-parties, as opposed to purchasing<br />
shares from underwriters. The fact that the market already contained 49 million shares when<br />
11.3 million shares were made available to the public was also deemed insufficient to show how<br />
plaintiffs’ specific shares were specifically traceable to the secondary offering.<br />
In re Washington Mut. Mortgage-Backed Sec. Litig., 2011 WL 5027725 (W.D. Wash. Oct. 21,<br />
2011).<br />
The district court granted defendants’ motion for judgment on the pleadings and granted<br />
in part plaintiffs’ motion for class certification in a putative class action alleging, inter alia,<br />
violation of Section 11 of the Securities Act of 1933 arising from mortgage-backed securities<br />
(“MBS”) that were allegedly backed by “fundamentally impaired” residential mortgage loans,<br />
and for which plaintiffs had allegedly been misled about the quality of underwriting standards.<br />
The MBS at issue were sold through six offerings, including 110 tranches, with each tranche<br />
representing an individual security. Because the named plaintiffs had purchased securities from<br />
only thirteen tranches, defendants moved for judgment on the pleadings to dismiss plaintiffs’<br />
Section 11 claim for lack of standing to sue on the tranches from which plaintiffs had not<br />
purchased securities, and, therefore, suffered no personal injury. The court granted defendants’<br />
motion, notwithstanding the fact that the dismissed tranches were sold in the same offering as,<br />
and were therefore related to, tranches in the same offering from which plaintiffs did purchase<br />
MBS.<br />
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22
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 2011 WL 5042066 (D.Colo. Oct. 24,<br />
2011).<br />
The district court denied one defendant’s motion to dismiss and granted in part and<br />
denied in part defendants’ joint motion to dismiss consolidated class action complaints alleging<br />
violation of, inter alia, Section 11 of the Securities Act of 1933 in connection with funds that<br />
were allegedly marketed as stable, income-seeking, capital-preserving investments when, in fact,<br />
they allegedly used risky investment strategies fundamentally incompatible with stated<br />
objectives. The court held that defendants’ disclosure duties were not satisfied given their failure<br />
to disclose sufficient information to render not misleading statements on investment objectives,<br />
highly-leveraged derivative instruments, and the volatility, liquidity, risk, and valuation of the<br />
securities at issue. As such, those statements were sufficient to state a claim under Section 11.<br />
The court held that plaintiffs’ losses were adequately linked to the allegedly misleading<br />
statements and omissions, thus rejecting defendants’ loss causation arguments. The court also<br />
rejected defendants’ argument that plaintiffs’ claims were time-barred, holding that news articles<br />
and other press reports were insufficient to trigger inquiry notice.<br />
In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).<br />
The district court granted in part and denied in part plaintiff’s omnibus motion for leave<br />
to amend the consolidated class action complaint and for reconsideration of the court’s<br />
memorandum opinion and orders granting in part and denying in part defendant’s motion to<br />
dismiss the consolidated amended complaint, which had alleged violation of, inter alia, Section<br />
11 of the Securities Act of 1933 in connection with alleged failure to disclose certain business<br />
and financial conditions. The court agreed to reconsider whether Regulation S-K and Item 303<br />
imposed on defendants a duty to disclose adverse liquidity trends during the offering period. The<br />
court affirmed its prior decision to dismiss the underwriter defendants, holding that (i) the<br />
abstain-or-disclose rule applicable in the insider trading context does not apply to Section 11<br />
claims (because it would require disclosure of more information than required by the Securities<br />
Act, and would “render nugatory” laws that specify information issuers must disclose); and (ii)<br />
plaintiffs had not established violation of disclosure duties under Item 303 (because certain facts<br />
in support of the duty were not pleaded in the complaint; events occurring in a three-week period<br />
were insufficient as a matter of law to establish a trend; and allegations in support of a trend did<br />
not differentiate between defendants and were therefore implausible). The court also<br />
reconsidered, and rejected, (i) whether Item 303 requires disclosure of contractual provisions in<br />
offering materials (held not to be a material omission absent allegations that the provision was<br />
unique); (ii) the requirement of Regulation S-X that significant concentrations of credit risk be<br />
disclosed (rejected because the issuer made such disclosures); (iii) arguments that the issuer’s<br />
2007 10-K was actionable and that certain statements constituted inactionable puffery (because<br />
there was no basis given for reconsideration); and (iv) arguments that the issuer’s 2008 offering<br />
was actionable (because no named plaintiff purchased shares during that offering, thus depriving<br />
them of statutory standing to sue).<br />
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B.1<br />
23
Haarbauer v. Morgan Keegan & Co., 2011 WL 457971 (FINRA Feb. 1, 2011) (Gomez, Barrett,<br />
Dorsey, Arbs.).<br />
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted<br />
violation of, inter alia, Section 11 of the Securities Act of 1933, arising from respondent’s<br />
alleged failure to disclose the nature and extent of risk from investing in certain bond funds.<br />
After one pre-hearing session with a single arbitrator, four pre-hearing sessions with the panel,<br />
and ten hearing sessions, respondent was found liable for an award one $210,000 in<br />
compensatory damages and $375 in filing fees to one of the claimants. Issues raised by the<br />
remaining claimant, who had not settled with respondents, were dismissed in their entirety and<br />
with prejudice. All other relief not specifically addressed was denied, including requests for<br />
punitive/treble damages and attorneys’ fees.<br />
Clifford v. Morgan Keegan & Co., Inc., 2011 WL 5025045 (FINRA Oct. 11, 2011) (Pieroni,<br />
Arb.).<br />
In an arbitration before the Financial Industry Regulatory Authority, claimant asserted<br />
violation of, inter alia, Section 11 of the Securities Act of 1933, arising from claimant’s purchase<br />
of certain bond funds. After three pre-hearings and a recorded hearing with oral arguments<br />
before a single arbitrator, respondent’s motion to dismiss was granted, with the arbitrator<br />
dismissing all claims in their entirety and denying relief not specifically addressed therein,<br />
because (i) the funds were purchased by an experienced investor who made his own<br />
determinations and executed those decisions through brokerage firms; (ii) the funds were<br />
purchased through a secondary market instead of through an initial public offering; and (iii) there<br />
was no evidence that the claimant purchased the funds from respondent or relied on the<br />
respondent for advice and/or recommendations.<br />
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B.1<br />
2. Section 12<br />
B.2<br />
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762<br />
(1st Cir. 2011).<br />
The court of appeals affirmed in part and vacated in part the district court’s dismissal of<br />
the plaintiffs’ putative class action claims under Section 12(a)(2) of the Securities Act of 1933.<br />
Plaintiffs argued that three sets of allegations concerning material misrepresentations were<br />
adequately pled to survive 12(b)(6) dismissal: (1) that the defendants misrepresented their use of<br />
lending standards despite alleged practices of not verifying borrowers’ employment and ability to<br />
repay loans; (2) that the defendants did not comply with uniform appraisal standards in<br />
determining property values despite representing their compliance in a prospectus; and (3) that<br />
credit ratings were misleading because they were based on outdated models, lowered ratings, and<br />
inaccurate loan information. The court affirmed the district court’s judgment that the plaintiffs’<br />
24
claims as to the appraisal standards and the credit ratings were not sufficient to survive a motion<br />
to dismiss. The court vacated the district court’s judgment on the issue of the lending standards<br />
holding that the plaintiffs had sufficiently alleged that the defendants misrepresented the lending<br />
standards used in its prospectus because the allegations were specific as to particular lenders and<br />
the practices used were widely understood to have been used in the industry. The court also held<br />
that the district court erred in dismissing the plaintiffs’ claims for failure to allege that defendants<br />
sold the certificates to or solicited the sales from plaintiffs.<br />
Fait v. Regions Fin. Corp., 655 F.3d 105 (2d. Cir. 2011).<br />
The court of appeals affirmed the district court’s 12(b)(6) dismissal of plaintiffs’ claims<br />
under Section 12(a)(2) of the Securities Act of 1933 because defendant’s statements concerning<br />
goodwill and loan loss reserves in a prospectus for a securities offering were statements of<br />
subjective opinion rather than statements of objective fact. Plaintiffs also failed to allege that<br />
defendants did not believe the statements when they were made. Plaintiffs, purchasers of<br />
securities offered by defendants, filed a putative class action lawsuit under Section 12, alleging<br />
that defendants failed to write down goodwill and increase loan loss reserves to account for<br />
deterioration of the mortgage and housing markets in its prospectus for a securities offering in<br />
2008. The court of appeals affirmed the district court’s holding that statements concerning<br />
goodwill and loan loss reserves were statements of subjective opinion rather than statements of<br />
objective fact. The court also affirmed the district court’s dismissal of the plaintiffs’ complaint<br />
because the plaintiffs did not allege that the defendants knew the statements were untrue at the<br />
time they made them. Plaintiffs argued that the court was imposing a scienter requirement for<br />
Section 12 claims, but the court rejected this argument distinguishing a misstatement of a truly<br />
held belief from a misstatement made with fraudulent intent.<br />
Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479 (2d Cir. 2011).<br />
The court of appeals affirmed the district court’s dismissal of the plaintiffs’ claims under<br />
Section 12 of the Securities Act of 1933, but on different grounds than the district court. The<br />
plaintiffs alleged that the defendants made false statements and omissions of material facts in a<br />
registration statement and prospectus for its initial public offering concerning the impairment of<br />
two mezzanine loans. Plaintiffs appealed the court’s dismissal of their complaint alleging that<br />
defendants failed to disclose that two loans in its portfolio of loans were impaired and that<br />
defendants knew that the loans were impaired at the time that they issued the registration<br />
statement and incorporated prospectus. The district court dismissed the plaintiffs’ second<br />
amended complaint on the ground that the alleged misstatements and omissions in the prospectus<br />
were not material because the subordinated loans were adequately collateralized at the time of<br />
the defendants’ IPO. The court of appeals ultimately rejected this ground as the sole basis for<br />
dismissal given the diminished role of collateralization in the registration statement. Instead, it<br />
affirmed the dismissal on the ground that the omission was not quantitatively material since the<br />
loans were a small part of the defendants’ full portfolio of investments and because the plaintiffs<br />
failed to allege that the two loans were of distinct interest to investors other than as another<br />
B.2<br />
B.2<br />
25
component of defendants’ full portfolio of investments. The court also found that the omissions<br />
were not qualitatively material because although the price of the defendants’ stock dropped<br />
significantly after its announcement of the impairment of the loans, other unfavorable<br />
announcements were included in that press release and could have caused the price to fall.<br />
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).<br />
The court of appeals vacated the district court’s dismissal of the plaintiffs’ putative<br />
securities class action complaint, alleging that defendants violated Section 12(a)(2) of the<br />
Securities Act of 1933 and remanded it for further proceedings. Plaintiffs alleged claims against<br />
an asset management company and its officers that they knew of problems in their real estate<br />
investments and in two of their portfolio companies yet failed to disclose these problems and the<br />
known possibility of a clawback and reduced performance fees in their registration and<br />
prospectus statements filed for their IPO. Defendants argued on appeal that plaintiffs did not<br />
adequately plead that the defendants should have disclosed a presently existing trend, event, or<br />
uncertainty, and that the omission was not material. The court disagreed. The court held: that<br />
the district court erred in evaluating materiality in the aggregate noting that the defendants were<br />
not permitted to omit disclosure of negative information if poor performance would be offset by<br />
positive performance elsewhere in the portfolio; that the structure of defendants’ organization<br />
was still subject to the same disclosure requirements when going public as those companies that<br />
are already public; that the district court erred in finding that the alleged loss of an exclusive<br />
contract by a company in which defendants invested significantly was immaterial; and that the<br />
district court erred in failing to consider that the defendants’ omissions masked a reasonably<br />
likely change in earnings.<br />
Gerstner v. Sebig, LLC, 426 Fed. App’x. 470 (8th Cir. 2011).<br />
The court of appeals affirmed the district court’s dismissal of plaintiffs’ unregisteredsecurities<br />
claims under Section 12 of the Securities Act of 1933 as untimely and not entitled to<br />
equitable tolling.<br />
Katz v. Gerardi, 655 F.3d 1212 (10th Cir. 2011).<br />
The court of appeals affirmed the district court’s dismissal of plaintiffs’ class action<br />
securities claims under Section 12(a)(2) the Securities Act of 1933 where plaintiffs lacked<br />
standing to sue. The court of appeals also affirmed the district court’s dismissal of claims by<br />
class members who exchanged stock for new units for improper claim-splitting. Plaintiffs who<br />
cashed out their stock in a merger argued that they were purchasers under Section 12 because the<br />
merger fundamentally changed their investment units in a real estate investment trust and that<br />
they were forced to purchase new, altered investment units. The court rejected this argument,<br />
noting that the plaintiffs merely had to sell or exchange the units during the merger. It held that<br />
an investor who was forced to sell his shares as a result of a merger does not have standing to sue<br />
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under Section 12 and declined to extend the fundamental change doctrine (or forced seller<br />
doctrine) to claims brought under the 1933 Act.<br />
Hudes v. Aetna Life Ins. Co., 2011 WL 3805679 (D.D.C. Aug. 30, 2011).<br />
The court dismissed plaintiff’s Sarbanes-Oxley claims because the alleged violating<br />
entity had no securities registered under Section 12 of the Securities Exchange Act of 1933. The<br />
court held securities issued by the World Bank are explicitly “deemed to be exempted securities”<br />
under Section 12.<br />
In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 275 F.R.D. 382 (D. Mass. 2011)<br />
The court granted plaintiffs’ motion to certify a class for its claims arising under Section<br />
12(a) of the Securities Act of 1933 against a mutual fund and persons and entities associated with<br />
the fund. Plaintiffs alleged that defendants violated Section 12 by making false and misleading<br />
statements in offering documents for a fund comprised of high-risk securities. Plaintiffs moved<br />
for certification of a class comprising all persons who purchased shares of the defendant fund<br />
during the proposed class period and who were damaged as a result. The court rejected<br />
defendants’ arguments against certification, holding that it was immaterial that none of the lead<br />
plaintiffs purchased the securities during the first fifteen months of the proposed class period,<br />
that the potential conflicts between the lead plaintiffs and absent putative class members who<br />
benefited from the misinformation did not render the lead plaintiffs inadequate representatives,<br />
and that the lead plaintiffs’ acquisition of interests in the defendant fund through a merger with<br />
the defendant fund and another fund did not render their claims atypical.<br />
Hill v. State Street Corp., No. 09cv12146–NG, 2011 WL 3420439 (D. Mass. Aug 3, 2011).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)<br />
of the Securities Act of 1933 because plaintiffs had stated a valid prima facie claim. Plaintiffs<br />
alleged that the defendant violated Section 12(a)(2) by conducting an offering pursuant to a<br />
registration statement and prospectus that contained untrue and misleading statements of material<br />
fact. Defendant moved to dismiss, claiming that the complaint did not allege sufficient facts to<br />
show that plaintiffs had standing to bring a Section 12 claim. The court denied the motion. It<br />
held that plaintiffs’ assertion that “during the class period, plaintiffs purchased stock in the<br />
defendant pursuant and/or traceable to the offering and suffered substantial damages as a result<br />
of the violations of the securities laws alleged herein.” combined with the lead plaintiff’s<br />
inclusion of a certification showing all of its purchases with a particular defendant satisfied the<br />
Section 12 pleading requirement—even though plaintiffs had not completely identified the<br />
circumstances and sellers in all of the transactions.<br />
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Silverstrand Investments v. AMAG Pharm., Inc., 2011 WL 3566990 (D. Mass. Aug. 11, 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section<br />
12(a) of the Securities Act of 1933. Plaintiffs alleged that defendant drug manufacturer omitted<br />
material information in its offering documents. The omissions included twenty-three serious<br />
adverse events in patients taking the drug, two declinations by the FDA to approve the drug, and<br />
a warning letter from the FDA issued after the offering regarding the manufacturer’s practices in<br />
marketing the drug to consumers. The defendants moved to dismiss the Section 12 claims,<br />
arguing that the omissions were not material and that there was no duty to disclose this<br />
information. The court held that the defendants were under no duty to disclose the FDA’s<br />
previous disapprovals of the drug because the agency subsequently approved it, and that the<br />
FDA warning letter was irrelevant because it was sent after the offering period. The court also<br />
concluded that the defendants were under no duty to disclose the serious adverse events because<br />
the frequency of such events was not materially different than a warning in the offering<br />
documents that noted such risks and the documents disclosed similar serious adverse events<br />
observed in clinical trials.<br />
Ambert v. Caribe Equity Group, Inc., 2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011).<br />
The court denied the individual defendant’s motion to dismiss plaintiffs’ claims under<br />
Section 12(a) of the Securities Act of 1933 for sale of an unregistered security and for failure to<br />
provide a prospectus. Plaintiffs were investors who alleged that they were defrauded by<br />
defendants in seeking to create a new HMO. Defendants instead took their investments and<br />
purchased an existing HMO in financial distress. Upon learning of the fraud, plaintiffs filed suit<br />
alleging, inter alia, various federal securities violations. The court found the plaintiffs’ amended<br />
petition adequately explained the alleged claims for sale of unregistered securities and sale of<br />
securities without a prospectus.<br />
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance<br />
Corp. I, 2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011).<br />
The court granted in part and denied in part defendants’ motion to dismiss the plaintiffs’<br />
securities class action complaint alleging, among other things, a violation of Section 12(a)(2) of<br />
the Securities Act of 1933. The court dismissed the lead plaintiff’s claims for lack of Article III<br />
and Section 12(a)(2) statutory standing because it did not allege that it held the certificates at<br />
issue and thus could not have been injured and because it failed to allege that the certificates<br />
were purchased in the initial public offering; however, the court granted leave to replead. The<br />
court held that an allegation of decline in value in the certificates due to the decline in value of<br />
the underlying mortgages was a sufficient pleading of Section 12(a)(2) economic loss but<br />
dismissed the allegations concerning certificates that were allegedly sold by plaintiff for a profit<br />
or no loss. Defendants moved to dismiss plaintiffs’ Section 12(a)(2) claims as time-barred,<br />
arguing that plaintiffs had constructive notice of the decline in value through many news stories;<br />
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however, the court found that the stories did not tie back to defendants and thus the claims were<br />
not time-barred. Finally, the defendants moved to dismiss plaintiffs’ claims for failure to allege<br />
a material misrepresentation concerning lending standards, appraisal standards, statement of risk,<br />
and credit ratings; the court found: that the plaintiffs adequately pled a material<br />
misrepresentation or omission with regard to appraisal standards against some of the originators<br />
listed and dismissed the allegations against those inadequately pled; that plaintiffs failed to allege<br />
that defendants knew the credit enhancement statement was false when it was made; that<br />
plaintiffs failed to allege that credit rating agencies knew the ratings were false when given; and<br />
that plaintiffs adequately pled a misrepresentation or omission concerning underwriting<br />
guidelines as they pertain to certain listed originators but dismissed the allegations as to any<br />
other.<br />
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F. Supp. 2d 618 (S.D.N.Y. 2011).<br />
The court granted defendants’ motion for summary judgment on plaintiffs’ claim under<br />
Section 12 of the Securities Act of 1933. The court found that plaintiffs’ claims were barred by<br />
the Securities Act’s statute of repose. The statute of repose provides that no action shall “be<br />
brought to enforce a liability created . . . under [Section 12(a)(2)] more than three years after the<br />
sale” of the security at issue. Plaintiffs had brought a Section 12(a)(2) claim based on sales that<br />
occurred in 2006 and argued that class actions filed on these issues in 2007 and 2008 tolled this<br />
limitations period. The court rejected this argument because of the language of the statute<br />
indicating that an action may be commenced after the limitations period “in no event” and<br />
because it is settled that a federal statute of repose is not subject to equitable tolling.<br />
In re IndyMac Mortg.-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011).<br />
The court granted in part three motions to intervene and denied plaintiff’s motion for<br />
leave amend its complaint for claims including alleged violations of Section 12(a)(2) of the<br />
Securities Act of 1933. Investors in mortgage pass-through certificates filed putative class action<br />
against issuer, former officers and directors for allegedly making misrepresentations and<br />
omissions in connection with the sale of the issuer’s mortgage pass-through securities. In<br />
previous litigation (“IndyMac I”), the court consolidated two cases involving the same violations<br />
of the 1933 Act by the defendant issuer. Without opposition, the court named a single plaintiff<br />
to represent the class. In IndyMac I, the court then dismissed all claims arising out of securities<br />
that the named plaintiff had not purchased. Three other parties then made separate motions to<br />
intervene since they purchased additional securities that the named plaintiff had not. The court<br />
dismissed one party’s motion to intervene and assert certain claims because, although the party<br />
had originally filed suit within the statute of repose, the party had allowed the court to<br />
consolidate its case and name a single plaintiff to represent the class. The court, therefore,<br />
considered the party’s motion to intervene and assert claims for misstatements occurring more<br />
than three years prior barred by the three-year statute of repose. The two other parties were<br />
likewise able to intervene only as to Section 12(a)(2) claims occurring within the three-year<br />
statute of repose. The court did find, however, that the one-year statute of limitations had been<br />
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tolled by the filing of IndyMac I until the date that the court ruled that the plaintiff named in<br />
IndyMac I lacked standing to assert claims for securities that the plaintiff had not directly<br />
purchased. The court then denied plaintiff’s motion for leave to amend to add two additional<br />
defendants since all claims against the prospective defendants would be barred by the three-year<br />
statute of repose.<br />
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011).<br />
The court granted in part defendants’ motion to dismiss plaintiffs’ claim arising under<br />
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs brought a putative securities fraud class<br />
action against a financial services corporation and its former officers, directors, auditors, and<br />
underwriters, alleging that defendants made materially false and misleading statements and<br />
omissions regarding the corporation’s liquidity risk and value of its real estate holdings.<br />
Additional plaintiffs were added over one year from the filing of the initial complaint. The court<br />
granted dismissal of some Section 12(a)(2) claims because none of the named plaintiffs in the<br />
class action had purchased the securities at issue and, therefore, did not have standing. The court<br />
also dismissed certain Section 12 claims as time-barred by the applicable statute of repose,<br />
finding American Pipe tolling does not apply to a statute of repose where, as here, the offering of<br />
the securities occurred more than three years prior to the added plaintiffs’ claims. The court did<br />
rule, however, that certain Section 12 claims were not time-barred because a class action suit had<br />
been filed within the statute of limitations. The court applied American Pipe tolling even though<br />
the plaintiffs who brought the original class action lacked standing.<br />
In re Royal Bank of Scotland Group PLC Sec. Litig., 765 F. Supp. 2d 327 (S.D.N.Y. 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a) of<br />
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit claiming defendants<br />
violated Section 12 by making misleading statements in offering materials concerning the<br />
volume of the defendants’ subprime exposure. Defendants moved to dismiss, arguing, among<br />
other things, that the Section 12 claims must be dismissed under the Supreme Court’s decision in<br />
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), for the proposition that the<br />
Securities Act does not have extraterritorial reach. The court held that because plaintiff did not<br />
allege that the purchases took place in the United States and it was clear that the shares were<br />
listed on a foreign rather than domestic exchange, the claim should be dismissed under Morrison.<br />
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig., 774 F. Supp. 2d 584<br />
(S.D.N.Y. 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the<br />
Securities Act of 1933. Plaintiffs alleged that defendants had misrepresented the investments,<br />
objectives, and risk exposure of a mutual fund. Defendants moved to dismiss the Section 12<br />
claim, arguing the affirmative defense of failure to state a claim for loss causation. They argued<br />
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that a mutual fund’s share price is determined by a statutorily defined formula that would not be<br />
affected by the alleged misrepresentations. The loss suffered by plaintiffs was, therefore, not at<br />
all due to a correction for the alleged misrepresentations, but solely due to a decline in the<br />
economy at large. The court agreed and dismissed plaintiffs’ claim for failure to show loss<br />
causation.<br />
In re Wachovia Equity Sec. Litig., 753 F. Supp.2d 326 (S.D.N.Y. 2011).<br />
The court denied defendants’ motion to dismiss under Section 12 of the Securities Act of<br />
1933. Defendants argued that plaintiffs had failed to allege an actionable misstatement or<br />
omission of fact under Section 12. Plaintiffs alleged that defendants had misrepresented loan-tovalue<br />
ratios for a residential mortgage portfolio reported by defendants in offering documents.<br />
According to plaintiffs, appraisers used by defendants reported inflated appraisal values that<br />
resulted in the misrepresentations. The court acknowledged that appraisals are arguably<br />
subjective opinions rather than facts. But because the appraisals affected the loan-to-value ratios<br />
that were featured in the offering documents as facts, the court held that plaintiffs sufficiently<br />
alleged a material misrepresentation of fact, declining to dismiss the claims under a “blanket<br />
subjective opinion rule.”<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011).<br />
The court denied plaintiffs’ motions for class certification for purchasers of mortgagebacked<br />
securities. Plaintiffs claimed violations of Section 12(a)(2) of the Securities Exchange<br />
Act of 1933, among other claims, alleging that the offering documents were misleading as to<br />
whether the residential mortgages comprising the securities were built in conformity with proper<br />
underwriting guidelines. In finding the Rule 23(a) requirements met for class certification, the<br />
court rejected the defendants’ argument that there could be no typicality for class members who<br />
purchased different tranches of certificates. The court held that the “heart” of plaintiffs’ Section<br />
12 claims was the alleged disregard of the loan underwriting guidelines, which impacted all<br />
proposed class members in the same manner, irrespective of which tranche they purchased. The<br />
court also held that even though some class members had only Section 11 claims and not Section<br />
12(a) claims because the purchases had not been made from an initial public offering, the class<br />
could still be certified to represent all members. Nevertheless, the court denied class certification<br />
on the grounds that plaintiffs did not meet the Rule 23(b)(3) predominance requirement because<br />
class members had different levels of knowledge with regard to whether loan originators were<br />
“loosening and lowering” underwriting guidelines depending on the class members’<br />
sophistication and when they purchased the certificates.<br />
In re Kummerfeld, 44 B.R. 28 (Bankr. S.D.N.Y. 2011)<br />
The bankruptcy court issued an order on the parties’ cross motions for summary<br />
judgment, finding that the debtor’s primary violation of the securities laws, including a violation<br />
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of Section 12(a) of the Securities Act of 1933, and his status as a control person were not in<br />
dispute. The debtor had a prior securities judgment entered against him after a jury trial found<br />
that the corporate veil should be pierced, and he subsequently filed for bankruptcy. The creditor<br />
challenged the bankruptcy on the grounds that the debt was not dischargeable under Section<br />
523(a) of the Bankruptcy Code, which prohibits discharging obligations arising out of fraud.<br />
The court held that the debtor failed to meet his burden to show that other purchasers were not<br />
solicited for the offering and that the investor had access to the information the registration<br />
would have disclosed. The court also held that where a determination is made that a corporation<br />
was a primary violator of the securities laws, a person who is deemed a control person of that<br />
corporation may not discharge the debt from the judgment in bankruptcy unless he can establish<br />
an affirmative defense to control-person liability. The court did, however, note that issues of fact<br />
existed as to whether the debtor could avail himself of the affirmative defenses to control-person<br />
liability.<br />
In re Barclays Bank PLC Sec. Litig., No. 09-cv-1989, 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)<br />
of the Securities Exchange Act of 1933. Plaintiffs filed suit claiming defendants violated Section<br />
12 by making misleading statements in offering materials and making misleading and inadequate<br />
disclosures concerning the defendants’ exposure to subprime mortgage and credit markets. The<br />
court dismissed plaintiffs’ claims on three separate grounds. First, that plaintiffs lacked standing<br />
to bring their Section 12(a)(2) claims because they failed to allege that they purchased the<br />
relevant shares directly from defendants. Second, the claims were time barred by the one year<br />
limitations period because plaintiffs were on inquiry notice after defendants had issued a trading<br />
update in 2007. And third, plaintiffs failed to adequately state Section 12(a)(2) claims on the<br />
basis of failing to disclose credit market exposures during the offering period because plaintiffs<br />
failed to allege that the defendants did not truly believe their subjective valuations.<br />
Public Emps. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 2011 WL 135821 (S.D.N.Y. Jan.<br />
12, 2011).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a)(2)<br />
of the Securities Exchange Act of 1933. Defendants argued that the Section 12(a)(2) claims<br />
must be dismissed as to the mortgage backed pass-through certificates that plaintiffs purchased<br />
because plaintiffs failed to plead that the purchases were made directly from defendants or in a<br />
public offering as required by Section 12(a)(2). The court denied defendants’ motion because<br />
plaintiffs provided sufficient information by alleging that “Plaintiff and other Class members<br />
purchased their Certificates directly from” defendants. Defendants also argued that plaintiffs’<br />
claims should be dismissed under the statute of limitations because plaintiffs were on inquiry<br />
notice more than a year prior to the filing of the lawsuit. The court rejected this argument,<br />
finding that a downgrading of the certificates and publicly-available information about the<br />
deterioration of the mortgage market did not relate directly to the alleged misrepresentations and<br />
omissions in plaintiffs’ complaint. The defendants also argued that plaintiffs did not adequately<br />
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allege a material misrepresentation or omission because the offering documents put plaintiffs on<br />
notice that the originators would deviate from underwriting standards. The court held that the<br />
allegations were sufficient because the offering documents did not put investors on notice as to<br />
the actual level of risk faced by investors and whether originators applied underwriting standards<br />
to account for borrowers’ ability to pay.<br />
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2011 WL 1338195 (S.D.N.Y. Mar. 31,<br />
2011).<br />
The court granted defendants’ motion to dismiss a class-action plaintiff’s claims under<br />
Section 12(a) of the Securities Exchange Act of 1933. The plaintiff lacked standing to sue on<br />
five of the six offerings pled in its complaint because, as the only named plaintiff in the suit,<br />
plaintiff failed to allege that it purchased securities traceable to any of those offerings. As to the<br />
sole offering in which plaintiff did purchase securities, the court nevertheless found dismissal<br />
was warranted since plaintiff’s allegations were wholly conclusory in nature. Instead of pointing<br />
to specific factual statements to support its allegations, the plaintiff instead pointed to<br />
voluminous news articles and broad investigations concerning the subprime mortgage crisis,<br />
which standing on its own, was not enough.<br />
Employees’ Retirement Sys. of the Government of the Virgin Islands v. J.P. Morgan Chase &<br />
Co., No. 09 Civ. 3701(JGK), 2011 WL 1796426 (S.D.N.Y. May 10, 2011).<br />
The court granted the defendants’ motion to dismiss plaintiff’s claims under Section<br />
12(a) of the Securities Exchange Act of 1933, finding that the plaintiff lacked standing as to<br />
certain claims and failed to sufficiently plead others. With respect to ten sets of Certificates the<br />
plaintiff did not purchase, the court dismissed for lack of standing, stating that a Section 12<br />
plaintiff cannot sue over a broad course of conduct, rather their suit is limited to only “the<br />
specific registration statement and prospectus that cover the specific security that it purchased.”<br />
With respect to the one set of Certificates the plaintiff did have standing to sue upon, the court<br />
found that plaintiff nevertheless had failed to state a plausible claim, as plaintiff did not purchase<br />
the Certificates in the initial public offering, in fact making the purchase nearly a full year after<br />
the first offering. The court concluded that even if a party could base its Section 12 claim on “an<br />
aftermarket sale,” plaintiff had failed to include any factual allegations to support its legal<br />
contention that the defendants “promoted and sold” the Certificates and “solicited sales” for<br />
financial gain.<br />
Huelbig v. Aurora Loan Servs., LLC, 2011 WL 4348281 (S.D.N.Y. May 18, 2011).<br />
The magistrate judge recommended that the court grant defendants’ motions to dismiss<br />
plaintiff’s claims under Section 12(a) of the Securities Exchange Act of 1933, finding that<br />
plaintiff had failed to plausibly allege that he purchased a security from any defendant in the<br />
case. The plaintiff failed to “explain what securities were allegedly purchased, in what amount,<br />
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or at what price, and from whom.” The court found the plaintiff’s claims further implausible<br />
because none of the alleged defendants were licensed securities broker/dealers.<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 WL 2020260 (S.D.N.Y. May 19,<br />
2011).<br />
The court granted defendants’ motion to dismiss the intervenor–plaintiffs’ claims under<br />
Section 12(a) of the Securities Exchange Act of 1933, finding that plaintiffs had failed to<br />
adequately allege a direct purchase from any defendant. The fact that plaintiffs’ complaint<br />
contained the exact security purchased and the date of the purchase was not enough. Nor was the<br />
fact that certain defendants “underwrote” unspecified offerings. While the court intimated that<br />
its holding might be different if the purchase dates corresponded with the offering dates, the<br />
purchase dates provided in the complaint occurred months or even years after the offering.<br />
In re Deutsche Bank AG Sec. Litig., 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).<br />
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under<br />
Section 12(a) of the Securities Exchange Act of 1933. The court rejected defendants’ contention<br />
that some of the defendants could not be considered “statutory sellers” as defined by Section<br />
12(a)(2). The court held that plaintiffs’ pleadings alleging one defendant conducted offerings of<br />
the securities at issue and raised billions in capital from the sale of the securities were sufficient<br />
to make that defendant a “seller” for purposes of Section 12. The court then dismissed claims<br />
against the underwriter defendants because plaintiffs merely pled purchases occurred “pursuant<br />
or traceable to” defendants’ offering documents. Such language failed to allege facts sufficient<br />
to demonstrate that the securities were purchased in the public offerings at issue. The court then<br />
granted plaintiffs leave to amend claims related to certain offerings.<br />
Pub. Emps. Ret. Sys. of Miss. v. Merrill Lynch & Co., 2011 WL 3652477 (S.D.N.Y. Aug. 22,<br />
2011).<br />
The court granted plaintiffs’ motion to certify a class for plaintiffs’ claims arising under<br />
Section 12(a) of the Securities Act of 1933. The plaintiffs alleged that the defendants violated<br />
Section 12 by selling mortgage pass-through certificates using documents containing untrue<br />
statements and material omissions. Plaintiffs moved for certification of a class comprising all<br />
those who purchased or otherwise acquired the certificates from the defendants in thirteen<br />
offerings during a specified period. The court rejected the defendants’ arguments against<br />
certification, holding that the sophistication of plaintiffs did not preclude them from satisfying<br />
the numerosity requirement, that there were common questions of law and fact susceptible to<br />
common answers, the lead plaintiffs were adequate representatives and that their claims were<br />
typical of the class, even though putative class members purchased certificates in different<br />
offerings, because the alleged misrepresentations were the same in each offering and part of the<br />
same course of events. Defendants further argued that individualized inquiries predominated<br />
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over common questions, given the number of separate offerings and the need to determine<br />
whether the actionable misstatements were material and the extent to which each putative class<br />
member relied on those statements. The court concluded that common questions predominated<br />
because of the similarity between the offerings and alleged misrepresentations present in each.<br />
Finally, the court rejected the defendants’ arguments that there were individual questions arising<br />
from the statute of limitations, which had allegedly tolled for many plaintiffs based on their<br />
possible suspicion of misrepresentations at an earlier time. The court held mere suspicion of<br />
legal violations did not constitute actual knowledge for tolling purposes and defendants had not<br />
alleged that any putative class members participated in the illegal acts at issue.<br />
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.<br />
Sept. 15, 2011).<br />
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under<br />
Section 12(a) of the Securities Exchange Act of 1933. The court held that plaintiffs’ complaint<br />
alleging that “[defendants] promoted and sold the Certificates to plaintiffs and other class<br />
members” was sufficient to satisfy statutory standing requirements under Section 12(a)(2).<br />
Further, the court also found that diminution of a security is a cognizable loss under Section<br />
12(a)(2). The court determined that plaintiffs’ 12(a)(2) claims that mortgage loans were made<br />
without any regard to borrower qualifications, that borrowers were coached by defendants, and<br />
that defendants employed atypical real estate valuation practices could not be dismissed because<br />
of disclosures made in defendants’ offering documents that “borrower information was not<br />
always obtained or verified, and that appraisals might not be independent.” The court then<br />
dismissed plaintiffs’ claims that defendants, by stating that underlying securities held a certain<br />
investment claim, made an actionable misrepresentation without disclosing underlying flaws in<br />
the ratings process. The court held these “ratings-related” claims failed to state a factual<br />
misstatement but granted plaintiffs leave to amend.<br />
City of Roseville Employees’ Retirement Sys. v. Energysolutions, Inc., No. 09 Civ. 8633 (JGK),<br />
2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011).<br />
The court granted defendants’ motion to dismiss in part and denied it in part. Plaintiffs<br />
were a proposed class of investors in common stock of engineering, spent fuel management, and<br />
decontamination and decommissioning company that serviced nuclear reactors. About a year<br />
after its IPO, defendants announced that that they would not be able to move forward with an<br />
announced major project due to significant decline in the trust fund for that decommissioning<br />
project. Further, new regulatory policies the company had expected to pass had been denied.<br />
For these reasons, defendants’ revenue and earnings estimates would need to be significantly<br />
reduced, causing the company’s stock to drop more than 60% over the next month. Plaintiffs<br />
alleged that Registration Statements filed by defendants prior to this announcement contained<br />
false and misleading statements under Section 12(a)(2) of the Securities Act of 1933. These<br />
alleged misstatements and omissions included 1) representations regarding impact of certain<br />
contracts defendant entered prior to its IPO on waste disposal opportunities, 2) available<br />
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opportunities present in the market, 3) the viability of targeted disposal project, 4) the likelihood<br />
of regulatory action allowing use of decommissioning funds for disposal of components of<br />
operational reactors, and 5) the potential adverse effects of macro-economic conditions. The<br />
court denied defendants’ motion as to points 1, 2, and 4 noted above. Plaintiffs’ complaint<br />
established that defendant had overstated the amounts of certain types of waste of which they<br />
were contracted to dispose. Further, plaintiffs alleged that defendants overstated opportunities<br />
available in the market by including projects in forecasts when defendants had good reason to<br />
believe it would not obtain these projects or the projects would not be available for some time.<br />
Additionally, plaintiffs pled with specificity that defendants had information that the regulatory<br />
changes they referred to as imminent were in fact highly unlikely to be passed. The court<br />
dismissed those claims involving the viability of a targeted disposal project because the<br />
document upon which plaintiffs’ allegations were based in fact contradicted that assertion.<br />
Finally, the court noted that plaintiffs failed to allege any material misstatements or omissions<br />
regarding macroeconomic conditions because the allegations focused on the period after the IPO<br />
was complete.<br />
Cobalt Multifamily Investors I, LLC v. Arden, 2011 WL 4542734 (S.D.N.Y Sept. 30, 2011).<br />
The court adopted the magistrate judge’s report and recommendation that the receiver’s<br />
motion for summary judgment for violations of Section 12(a)(1) of the Securities Act of 1933 be<br />
granted against individual defendants but be denied against corporate defendant. Individual<br />
defendants were sales employees who solicited investments by means of alleged<br />
misrepresentations. The individual defendants all had judgments entered against them for<br />
criminal securities violations. The plaintiff receiver alleged that all defendants violated Section<br />
12(a)(1) based on their breaches of Section 5 of the Securities Act which prohibits the use of the<br />
mails or means of interstate commerce to offer or sell a security without an exemption. The<br />
magistrate judge found that the receiver made a prima facie claim for violation of Section 5 by<br />
establishing that the individual defendants had solicited purchases of unregistered securities over<br />
the phone. As to the sole corporate defendant, however, the receiver did not establish that its<br />
representative had made calls or used other means of interstate commerce to solicit investors.<br />
For this reason the magistrate judge recommended that the Receiver’s motion be denied as to<br />
that claim.<br />
Int’l Fund Mgmt. S.A., v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,<br />
2011).<br />
The court granted defendants’ motion to dismiss as to two of plaintiffs’ allegations<br />
regarding Section 12(a)(2) of the Securities Act of 1933. Plaintiffs were foreign investors and<br />
members of putative classes against defendant, several of its officers and directors, and its<br />
subsidiary in connection with its underwriting of various debt offerings. Plaintiffs alleged that<br />
they suffered losses relating to misrepresentations and omissions concerning the defendants’<br />
exposure to collateralized debt obligations, structured investment vehicles, alternative A class<br />
residential mortgage backed securities, and auction rate securities; the company’s mortgage<br />
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lending practices; and its solvencies. Because the allegations did not sound in fraud, plaintiffs’<br />
complaint was analyzed under the pleading standards of Fed. R. Civ. P. 8. Under this standard,<br />
defendants sought only dismissal of the structured investment vehicles (“SIVs”) and the auction<br />
rate securities (“ARSs”). As to the structured investment vehicles, plaintiffs alleged that<br />
defendants had implicitly guaranteed to assume the SIVs’ debts to prevent the SIVs from<br />
defaulting. Further, the plaintiffs allege that the rating agencies relied on defendants’ reputation<br />
when rating the securities, and that defendant played multiple managerial roles for the SIVs.<br />
However, the court ruled that none of these facts plausibly supported the inference that defendant<br />
had guaranteed anything. As to the ARSs, plaintiffs alleged the defendants had violated the<br />
Securities Act by failing to disclose its ARS holdings and liquidity problems in two separate<br />
SEC filings. The court ruled that defendants had no duty under Item 303 because no known<br />
trend in the collapse of defendants’ ARS business was apparent before the filing dates of the<br />
disputed disclosures. Finally, the court ruled that plaintiffs’ claims were not barred by either the<br />
statute of limitations or statute of repose because the time for filing was tolled as plaintiffs were<br />
members of a class which had asserted the same claims within the applicable period.<br />
Brecher v. Citigroup Inc., 2011 WL 5525353 (S.D.N.Y. Nov. 14, 2011).<br />
The court denied plaintiffs’ rule 59(e) motion to amend the court’s dismissal of plaintiffs’<br />
claims alleging a violation of Section 12(a)(2) of the Securities Act of 1933 and also denied<br />
plaintiffs’ motion for leave to amend their complaint under rule 15(a) as futile. Plaintiffs argued<br />
that their Section 12 claim against the corporate entity defendants should not have been<br />
dismissed as untimely because new alleged facts would show that plaintiffs could not have<br />
discovered the claims prior to one-year limitations period. The court found that the proposed<br />
amended complaint and referenced documents did not support this assertion and upheld its<br />
original dismissal of the claim. As to individual defendants and the board of director’s personnel<br />
and compensation committee defendants, plaintiffs argued that the proposed amended complaint<br />
alleged that they were control persons and that should suffice to meet the pleading requirement<br />
that defendants be statutory sellers. The court held that liability as a control person under<br />
Section 15 is distinguishable as a separate cause of action than the Section 12 statutory seller<br />
requirement and that allowing leave to amend as to individual defendants and the board of<br />
director’s personnel and compensation committee would be futile because plaintiffs failed to<br />
allege that they were statutory sellers.<br />
In re Merck & Co., Inc. Sec., Derivative, & ERISA Litig., 2011WL 3444199 (D.N.J. Aug. 8,<br />
2011).<br />
The court denied defendant’s motion to dismiss plaintiff’s claims arising under Section<br />
12(a) of the Securities Act of 1933 because plaintiffs had validly plead a prima facie claim.<br />
Plaintiffs brought a claim pursuant to Section 12(a) maintaining that defendant overstated the<br />
commercial viability of its drug by deliberately downplaying the possible link between the drug<br />
and an increased risk of heart attack or other cardiovascular events. Plaintiffs also contended<br />
that defendant’s misstatements of fact and belief regarding the drug artificially inflated the stock<br />
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price, which fell sharply when the truth began to emerge. The court held plaintiffs stated a prima<br />
facie claim under Section 12 because plaintiffs alleged that they purchased the security pursuant<br />
to a prospectus and plaintiffs alleged facts showing material misstatements or omissions.<br />
Pension Trust Fund for Operating Eng’rs. v. Morgtgage Asset Securitization Trans., Inc., 2011<br />
WL 4550191 (D.N.J. Sept. 29, 2011).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section<br />
12(a)(2) of the Securities Exchange Act of 1933 because plaintiff failed to allege facts setting<br />
forth the time and circumstances of the discovery of the defendants’ allegedly actionable<br />
statements as required by Section 13 of the 1933 Act. The court granted plaintiff leave to amend<br />
since plaintiff’s claims were “sufficiently particularized to convince [the] [c]ourt that granting<br />
leave to amend would not be ‘futile.’”<br />
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).<br />
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’<br />
claims arising under Section 12(a)(2) of the Securities Exchange Act of 1933. The court held<br />
that defendants did not make material misrepresentations by including statements in offering<br />
documents that the occurrence of a specific event was avoidable and unexpected even though<br />
defendants lacked sufficient contingency plans once the specific event actually occurred.<br />
Additionally, the court dismissed three of plaintiffs’ claims because plaintiffs failed to allege<br />
defendants’ subjective beliefs as to the truth of opinion statements or that defendants had no<br />
reasonable basis for the opinions. Several of the issuer’s statements regarding its intent to<br />
develop strong business relationships and sound strategy constituted “mere puffery” and could<br />
not be the basis for securities liability. Plaintiffs’ claim concerning statements that the issuer<br />
regularly validated and updated its proprietary credit-risk analysis was dismissed because<br />
plaintiffs failed to plead facts to show a misstatement. The court then denied defendants’ motion<br />
to dismiss two Section 12 claims, holding that not all statements regarding loan loss reserves are<br />
opinion statements, allegations that defendants failed to follow stated loan loss policy<br />
methodology were sufficient to state a claim, and the “bespeaks doctrine” could not be applied to<br />
these factual statements. Further, the court held that statements regarding whether the issuer<br />
complied with capital adequacy requirements were also factually based and not “forwardlooking.”<br />
The court granted plaintiffs leave to amend the dismissed claims.<br />
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(1)<br />
of the Securities Exchange Act of 1933, and granted in part and denied in part defendantmovants’<br />
motion to dismiss the plaintiffs’ claims under Section 12(a)(2). The plaintiffs brought<br />
the Section 12 claims, among others, alleging that defendants operated a Ponzi-like scheme in<br />
selling partnership interests to plaintiffs. Three defendants who served as managers to the<br />
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partnership and worked to obtain investors moved to dismiss the suit. In arguing for dismissal of<br />
the Section 12(a)(1) claim, the movants claimed plaintiffs had not plead with particularity that<br />
movants were “sellers” of the securities because movants had sold their interest in the<br />
partnership. The court found plaintiffs had alleged sufficient facts to find that movants’ actions<br />
may have served their own financial interests. The court granted the motion to dismiss as to two<br />
of the movants on the Section 12(a)(2) claims. The court noted because the claim sounds in<br />
fraud, plaintiffs’ allegations must meet Rule 9 pleading requirements. The court held that<br />
plaintiffs had failed to plead particularized facts showing that two of the movants made<br />
fraudulent misrepresentations to investors, or that movants had the requisite scienter. In<br />
rejecting defendants’ motion to dismiss the Section 12(a)(2) claim as to the third movant, the<br />
court held that plaintiffs had met the misrepresentation and scienter requirements of Rule 9 by<br />
pleading that the movant had misled plaintiffs by implying that the partnership was registered<br />
when it was not.<br />
Billitteri v. Sec. Am, Inc., 2011 WL 3586217 (N.D. Tex. Aug 4, 2011).<br />
The court approved a settlement agreement for claims including violations of Section<br />
12(a) of the Securities Act of 1933 because the settlement provided a fair and reasonable<br />
recovery for class members and met all Rule 23 requirements. After investing in two Ponzi<br />
schemes, the plaintiffs in two class actions brought suit against several defendants alleging<br />
several violations of federal and state securities laws, including violation of Section 12(a). After<br />
arbitration and mediation, the parties proposed a settlement agreement that disposed of the<br />
Section 12 claims against all the defendants, which the court found fair and reasonable for all<br />
class members.<br />
Nexbank, SSB v. BAC Home Loan Servicing, LP, 2011 WL 5182118 (N.D. Tex. Oct. 28, 2011).<br />
The court granted plaintiff’s second motion to remand the suit to state court. Plaintiff<br />
asserted various common law and statutory state law claims, as well as federal securities claims<br />
under Section 12(a)(2) of the Securities Act of 1933 based on alleged misconduct by the<br />
defendants related to three mortgage-backed securities. Defendants removed the suit to federal<br />
court. The court remanded the case, rejecting defendants’ argument that the Section 12 claim<br />
was baseless and holding that the claims were not removable. In the state court, defendants filed<br />
a motion for summary judgment in which they raised for the first time the argument that<br />
plaintiff’s Section 12 claim failed because the securities at issue were acquired after the ninetyday<br />
maximum window closed for delivery of a prospectus, and the certificates purchased by<br />
plaintiff did not require delivery of a prospectus. This state court granted the motion, and the<br />
defendants again removed the case to federal court. Because defendants could have but did not<br />
raise the “new” improper or fraudulent pleading ground when they removed the first time, the<br />
court held that it could not serve as a basis for the defendants’ second removal. Further, the state<br />
court’s dismissal of the Section 12 claim did not constitute a finding that the claim was<br />
improperly or fraudulently pleaded, as there was no such conclusion in the order.<br />
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In re Enron Corp. Sec., Derivative & ERISA Litig., 761 F. Supp. 2d 504 (S.D. Tex. 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12(a)(2)<br />
of the Securities Exchange Act of 1933. Plaintiffs filed suit claiming defendants violated Section<br />
12 by making misleading claims in face-to-face sales meetings and information pamphlets for<br />
potential investors. The court granted defendants’ motion to dismiss holding that Section<br />
12(a)(2) liability expressly reaches the sale of a security “by means of a prospectus” that contains<br />
a misstatement or omission of material fact. Here, plaintiffs’ claim failed because there was no<br />
prospectus applicable to plaintiffs’ certificate purchases. Further, because plaintiffs’ purchase<br />
occurred by purely private sale, the court held there could be no Section 12 liability.<br />
In re Enron Corp. Sec. Derivative & ERISA Litig., Nos. H–01–3624, H–03–0815, 2011 WL<br />
3489524 (S.D. Tex. Aug. 9, 2011).<br />
The court granted plaintiffs’ motion for leave to amend their complaint to include a claim<br />
arising under Section 12(a) of the Securities Act of 1933. The defendants opposed the motion<br />
arguing that allowing the plaintiffs to amend would unfairly prejudice the defense and<br />
dramatically expand the factual allegations against the defendants. The court allowed the<br />
amendment reasoning that the plaintiffs asserted the basic factual underpinnings of the Section<br />
12 claim in their previous pleadings and, therefore, defendants had fair warning of the nature of<br />
the Section 12 claims and none of the defendants filed an answer or motion to dismiss in<br />
response to the prior pleadings.<br />
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D.Mich. Feb. 28, 2011)<br />
The court granted a defendant’s motion to dismiss plaintiffs’ claim under Section 12 of<br />
the Securities Act of 1933. Plaintiffs alleged that they invested in unregistered securities at the<br />
behest of an employee of the defendant. Plaintiffs sought to hold defendant liable for these acts<br />
under Section 15’s vicarious Section 12 liability for “controlling persons.” Because plaintiffs’<br />
allegations under Section 12 were rooted entirely in fraud, the court found that the heightened<br />
pleading standards of Federal Rule of Civil Procedure 9(b) applied. Although the employee’s<br />
misrepresentations were clearly identified, plaintiffs failed to plausibly allege any misstatement<br />
during a time and place that he was under defendant’s control. Therefore the court dismissed<br />
plaintiff’s Section 12 cause of action against the defendant.<br />
Smith v. Mpire Holdings, LLC, 2011 WL 3841676 (M.D. Tenn. Aug. 30, 2011).<br />
The court entered judgment for plaintiffs on their claims under Section 12(a) of the<br />
Securities Exchange Act of 1933. Defendants ultimately failed to appear or defend against<br />
plaintiffs’ claims. The court entered a default judgment against the defendants and found<br />
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Section 12(a)(2) required the court to award damages based on the statutory interest rate and not<br />
the higher interest rate originally promised to plaintiffs by defendants in the underlying offering.<br />
City of New Orleans Employee’s Retirement Sys. v. PrivateBancCorp, Inc., No. 10c 6826, 2011<br />
WL 5374095 (N.D. Ill. Nov. 3, 2011).<br />
The court granted bank defendants’ motion to dismiss for failure to state a claim under<br />
Fed. R. Civ. P. 12(b)(6) and the Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), 15<br />
U.S.C. § 78u-4(b)(3)(A). The dispute arose over defendants’ writing off of certain risky loans<br />
after putative class action plaintiffs had bought stock in defendants and asserted that the banks<br />
defrauded them by delaying to make the write-off until after they invested. Plaintiffs alleged that<br />
Defendants had made false or misleading statements in registration statements and prospectus<br />
supplements by failing to disclose the deteriorating credit quality problems in certain loan<br />
portfolios in violation of Section 12(a)(2) of the Securities Exchange Act of 1933. Additionally,<br />
Plaintiffs alleged that the documents defendants filed with the SEC were misleading because<br />
they failed to maintain an allowance for loan losses that were sufficient to absorb the credit<br />
losses inherent in the loan portfolio. However, the court ruled the defendants did make<br />
disclosures in quarterly reports showing increases in non-performing loans and growth in<br />
outstanding loans. Further, the plaintiffs failed to allege that the defendants did not actually<br />
believe that loan loss allowances were adequate. Plaintiffs’ conclusory allegations that<br />
incorporated documents were “false” by failing to disclose the high-risk loans originating under<br />
defendant’s growth plan were insufficient.<br />
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D.Cal. 2011).<br />
The court denied defendants’ motion for summary judgment of plaintiffs’ claim under<br />
Section 12 of the Securities Act of 1933. Defendants failed to introduce facts precluding the<br />
conclusion that plaintiffs expected profits on the investment solely from the efforts of third<br />
parties. Thus, the court held summary judgment was improper on the issue of whether the<br />
interest in real estate was a statutory “security.” Next, defendants alleged that they were not<br />
statutory “sellers.” The court rejected this argument as to each defendant. As to the investmentadviser-defendant,<br />
the court noted that he was paid for his role in the transaction, and plaintiffs<br />
presented facts that indicated he was intricately involved in the investment. The court thus<br />
rejected his argument that he merely referred a client to the true sellers. As to the real estate<br />
company-defendants, there was a fact issue as to whether the investment adviser acted with its<br />
apparent authority. Finally, the court rejected defendants’ arguments that the investment was<br />
exempt from the Securities Act’s registration requirements because defendants failed to produce<br />
any evidence of the number of offerees.<br />
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Drescher v. Baby It’s You, LLC, 2011 WL 63615 (C.D. Cal. 2011).<br />
The court granted defendants’ motion to dismiss plaintiff’s claim under Section 12(a)(2)<br />
of the Securities Exchange Act of 1933. Plaintiff filed suit claiming defendants violated Section<br />
12 by making misleading statements in acquiring plaintiff’s investment in the defendants’ theater<br />
company. Defendants moved to dismiss, arguing that plaintiff did not allege an agreement to<br />
purchase securities, and thus plaintiff was not a purchaser within the meaning of the statute. The<br />
court dismissed the claim but granted plaintiff leave to amend, agreeing with defendants that<br />
plaintiff did not allege that he purchased any securities from defendants.<br />
Me. State Retirement Sys. v. Countrywide Fin. Corp., No. 2:10–CV–0302 MRP (MANx), 2011<br />
WL 4389689 (C.D. Cal. May 5, 2011).<br />
The court granted in part and denied in part defendants’ motion to dismiss the claims<br />
under Section 12(a) of the Securities Exchange Act of 1933 in a putative class action, finding<br />
that the class lacked standing to bring certain of its claims, had failed to sufficiently plead other<br />
claims, and had properly pled the remaining claims. With respect to standing, the court found<br />
that the class lacked standing to pursue any Section 12 claim involving certificates that at least<br />
one named plaintiff did not purchase, reasoning that different certificates purchased under the<br />
same prospectus are nevertheless separate securities under Section 12. As to four issuerdefendants,<br />
the court found that the class had failed to state a plausible claim because the<br />
securities were sold through a “firm commitment underwriting,” where title passed to the<br />
underwriter-defendants from the issuer-defendants prior to the ultimate purchasers. Thus, the<br />
issuer-defendants were not “immediate sellers” as required by Section 12. With respect to the<br />
underwriter-defendants, the court found that the complaint’s assertion that plaintiffs had<br />
purchased the securities either “directly from the Section 12 underwriter defendants in the<br />
Offerings” or “pursuant to the Offering Documents” sufficiently alleged that the securities were<br />
purchased as part of the initial public offering and not in the secondary market. While the court<br />
admonished that any securities purchased after the expiration of the forty-day prospectus<br />
delivery period could not form the basis of a valid claim, the court was unable to determine on<br />
the pleadings alone which securities were purchased within the initial public offering and which<br />
were not.<br />
In re STEC Inc. Sec. Litig., Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx),<br />
SACV 09–1320–JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011<br />
WL 4442822 (C.D. Cal. June 17, 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section<br />
12(a)(2) of the Securities Act of 1933 because plaintiffs failed to plead facts sufficient to show<br />
an actionable misstatement or omission. Plaintiffs brought a putative class action alleging that<br />
defendants violated various securities laws, including Section 12(a)(2), through materially untrue<br />
statements and omissions as to the issuing defendant’s financial performance and condition that<br />
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initially inflated the company’s stock price and ultimately caused the stock to drastically decline<br />
in value. Defendants moved to dismiss the complaint. The court dismissed the Section 12<br />
claims because plaintiffs based their claims on statements concerning the relationship between<br />
the issuer and another products manufacturer as well as statements concerning sales strategy and<br />
relationships that could not constitute untrue statements of material fact. The court granted<br />
plaintiffs leave to amend.<br />
In re STEC Inc. Sec. Litig., Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx),<br />
SACV 09–1320–JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011<br />
WL 2669217 (C.D. Cal. June 17, 2011).<br />
The court granted in part defendants’ motion to dismiss plaintiffs’ claims arising under<br />
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs brought a putative class action alleging<br />
that defendants violated federal securities laws, including Section 12(a)(2) of the Securities Act,<br />
when they issued or caused to be issued materially untrue statements and made omissions that<br />
created an inflated impression of issuing defendant’s revenue growth and dramatically inflated<br />
the company’s stock price. The issuer defendants moved to dismiss pursuant to Federal Rules of<br />
Civil Procedure 12(b)(1), (b)(6), 8(a), and 9(b) and the Private Securities <strong>Litigation</strong> Reform Act<br />
of 1995 arguing that plaintiffs did not adequately allege material misrepresentation. The court<br />
denied defendant’s motion and cited several instances where plaintiffs alleged factual<br />
misrepresentations. The court noted that plaintiffs did not oppose dismissal of the Section<br />
12(a)(2) claims against the underwriter defendants and thereby granted dismissal without<br />
discussion.<br />
Healthy Habits, Inc. v. Fusion Excel Corp., No. CV11–675–CAS (PLAx), 2011 WL 2448256<br />
(C.D. Cal. June 17, 2011).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claims arising under Section<br />
12(a)(2) of the Securities Act of 1933 because plaintiffs validly asserted a prima facie Section 12<br />
claim. Investors brought suit alleging violation of Section 12(a)(2) based on the sale of<br />
unregistered securities and fraudulent misrepresentations associated with those sales.<br />
Defendants moved to dismiss the Section 12 claims pursuant to Federal Rules of Civil Procedure<br />
12(b)(1) and (b)(6) arguing that the court lacked subject matter jurisdiction because plaintiffs<br />
failed to show the sale of a “security.” The court denied the motions because plaintiffs had plead<br />
a sufficient factual basis to establish a Section 12 claim. The court held that defendants’<br />
submissions regarding the true nature of the disputed security inappropriately required the court<br />
to make findings of fact. The court deemed such factual determinations more suitable for a<br />
summary judgment motion.<br />
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Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp.2d 1125 (C.D. Cal. 2011).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section<br />
12(a) of the Securities Act of 1933 because plaintiff’s claims were barred by the three-year<br />
statute of repose. The investor in residential mortgage-backed securities brought suit in<br />
California state court alleging various federal and state law claims. Defendants removed the case<br />
to federal district court and then moved to dismiss. The court dismissed the Section 12 claims<br />
ruling that the claims were barred by the applicable three-year statute of repose since all of the<br />
securities in the complaint were purchased more than three years prior to the filing of the<br />
complaint. The court held plaintiff failed to plead tolling by merely asserting that the securities<br />
in question were tolled by a prior class-action suit without showing that plaintiffs in the prior<br />
class action suit actually purchased the same securities that formed the basis of the current<br />
litigation. The court granted plaintiff leave to amend the complaint but required plaintiff to show<br />
tolling with particularity.<br />
Katz v. China Century Dragon Media, Inc., 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).<br />
The district court granted defendants’ 12(b)(6) motion to dismiss plaintiff’s securities<br />
claims brought under Section 12(a)(2) of the Securities Act of 1933 for failure to plead fraud<br />
with adequate specificity and granted plaintiff leave to amend its complaint. Plaintiff filed a<br />
lawsuit against defendant alleging a violation of Section 12 for falsely stating earnings in its<br />
registration statement and prospectus because the numbers filed with the SEC were different<br />
from the numbers filed with the Chinese regulatory agency. Defendants moved to dismiss. The<br />
court held that plaintiff alleged fraud and that the complaint lacked the specificity required for<br />
fraud pleadings and that the rules require more than merely alleging that the numbers were not<br />
the same in the two filings.<br />
Bowler v. Green Tree Servicing, LLC, 2011 WL 320398 (E.D. Cal. Jan. 28, 2011).<br />
The magistrate judge recommended that the district court grant defendants’ motion to<br />
dismiss plaintiffs’ claim under Section 12(a) of the Securities Exchange Act of 1933. The pro se<br />
plaintiffs alleged that defendants, mortgage brokers, were securities brokers who had breached a<br />
duty of care when they “manipulated the plaintiffs’ account,” among other claims. The<br />
magistrate judge recommended granting defendants’ motion to dismiss for failure to state a claim<br />
because plaintiffs’ amended complaint did not identify any public offerings, and therefore, there<br />
could be no Section 12 liability.\<br />
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Self v. Chase Bank, N.A., 2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section<br />
12(a) of the Securities Exchange Act of 1933. The plaintiffs alleged that defendants sold them<br />
unregistered securities in violation of Section 12(a). The court took judicial notice of SEC<br />
filings regarding the securities at issue and found that the securities were, in fact, registered at the<br />
time of sale. The complaints were dismissed with prejudice.<br />
Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).<br />
The court granted in part and denied in part the defendants’ motions to dismiss the<br />
plaintiffs’ claims under Section 12(a) of the Securities Exchange Act of 1933. Plaintiffs, a<br />
putative class who had invested in a certain mutual fund, sued two sets of defendants, both of<br />
whom filed motions to dismiss. As to the first group (the entities responsible for issuing,<br />
managing, and distributing shares of the fund) the court denied defendants’ motion, finding that<br />
plaintiffs had adequately stated a claim under Section 12 in alleging that the defendants were<br />
misleading in their disclosures regarding (1) an appropriate investor for the fund and (2) the<br />
inherent risk of the mathematical compounding system used for tracking the fund. These<br />
defendants failed to satisfy the “stringent showing” necessary to establish that the disclosures<br />
and cautionary language were insufficient as a matter of law. As to the second group of<br />
defendants (the independent trustees) the court found that the plaintiffs had adequately pled the<br />
overwhelming majority of their claims. The court found that plaintiffs’ claims were not timebarred,<br />
as defendants failed to overcome the “especially high hurdle” of establishing inquiry<br />
notice—the contents of the prospectuses themselves did not, as defendants contended, clearly<br />
give plaintiffs notice of the misrepresentations contained therein. The court also rejected<br />
defendants’ argument that the plaintiffs had not suffered “compensable damages” (and thus<br />
could not overcome defendants’ affirmative defense of loss causation), because plaintiffs had<br />
alleged that their loss in the case was caused, or at least exacerbated by, the “materialization” of<br />
undisclosed risks. Finally, the court found that plaintiffs did not have standing to sue for<br />
representations made in a registration statement issued after their shares had already been<br />
purchased. On the other hand, plaintiffs did have standing to sue for representations made as to<br />
classes of shares they did not purchase, in which the representations were contained in the same<br />
registration statements.<br />
Charles Schwab Corp. v. J.P. Morgan Sec. Inc., 2011 WL 1642459 (N.D. Cal. May 2, 2011).<br />
The court granted the plaintiff’s motion to remand its state and federal claims (including<br />
its claim under Section 12 of the Securities Exchange Act of 1933) to state court. In determining<br />
that equitable remand to state court was proper, the court stated that “claims under the Securities<br />
Act first filed in state court are normally not removable.”\<br />
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B.2<br />
Rafton v. Rydex Series Funds, No. C 10–04523 JSW, 2011 WL 1642588 (N.D. Cal. May 2,<br />
2011).<br />
The court denied defendants’ request for leave to file a motion for reconsideration of the<br />
court’s prior order refusing to dismiss plaintiff’s claims under Section 12 of the Securities<br />
Exchange Act of 1933. Defendants sought reconsideration based on In re State Street Bank &<br />
Trust Co. Fixed Income Funds Invs. Litig., 2011 U.S. Dist. LEXIS 35857 (S.D.N.Y. Mar. 31,<br />
2011), where the court dismissed the defendants’ Section 12 claims due to the plaintiffs’ failure<br />
to establish loss causation. In denying the motion for leave, the court stated that loss causation is<br />
an affirmative defense in the Ninth Circuit, not an affirmative element of a Section 12 claim.<br />
Thus, the New York decision was not a change in law necessitating reconsideration of the court’s<br />
prior decision.<br />
Salameh v. Tarsadia Hotels, 2011 WL 1044129 (S.D. Cal. Mar. 22, 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the<br />
Securities Act of 1933. Plaintiffs purchased condominiums at the Hard Rock Hotel San Diego<br />
and entered into a “Rental Management Agreement” with defendants to rent out their units. The<br />
court noted that the alleged “security” consisted of two contracts, the original purchase contract<br />
and Rental Management Agreements entered into months after the original purchase contracts.<br />
Not all purchasers elected to enter into the Rental Management Agreement. The court concluded<br />
that since plaintiffs could not sufficiently allege that the purchase contracts and the Rental<br />
Management Agreements formed a single economic reality, they could not plausibly show a<br />
“security” consisting of an investment of money with an expectation of profits produced by the<br />
efforts of others. Therefore, the transaction was not subject to the protection of Section 12, and<br />
the court granted defendants’ motion to dismiss.<br />
Taddeo v. Am. Invsco Corp., 2011 WL 4346380 (D. Nev. Sept. 15, 2011).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims arising under Section<br />
12(a)(1) of the Securities Exchange Act of 1933. The court held that plaintiff’s claims were time<br />
barred under Section 13.<br />
KeyBank, N.A. v. Bingo, Coast Guard Official No. 1121913, No. C09-849RSM, 2011 WL<br />
1559829 (W.D. Wash. Apr. 22, 2011).<br />
The court granted plaintiff’s motion to dismiss defendants’ counterclaims brought under<br />
Section 12(a) of the Securities Exchange Act of 1933, finding that defendants failed to<br />
adequately allege that plaintiff was the one who solicited, offered, or sold the unregistered<br />
securities at issue in the suit. Defendants failed to allege that the plaintiff was “affiliated with,”<br />
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“associated with,” or “acted as the agent for” the entity that offered and sold the shares. Instead,<br />
the counterclaims merely alleged that plaintiff “aided and abetted” and “promoted and assisted”<br />
in the activities. The court found that this alone was not sufficient to convert plaintiff into a<br />
“seller” under Section 12.<br />
In re Oppenheimer Rochester Funds Group Sec. Litig., 2011 WL 5042066 (D. Colo. Oct. 24,<br />
2011).<br />
The court denied defendants’ motions to dismiss various alleged securities violations.<br />
Plaintiffs were shareholders in various municipal bond funds alleging that defendant funds,<br />
managers, and trustees had violated Sections 12 of the 1933 Act based on alleged<br />
misrepresentations and omissions made in marketing the funds. According to plaintiffs, the<br />
funds’ prospectuses were materially misleading because their stated investment objectives and<br />
disclosures misrepresented the nature of a high-risk, high-return investment strategy employed<br />
by the fund. Plaintiffs claimed that the fund represented that it was for the purpose of<br />
“preservation of capital,” with various statements supporting this goal, when in fact it had a very<br />
aggressive “high-risk, high-return” objective that employed highly leveraged financial<br />
instruments causing significant potentials for loss in certain market environments. The court<br />
ruled that, taken together and in context, the alleged misstatements did not constitute mere<br />
puffery. Further, the court ruled that plaintiffs had alleged facts tending to demonstrate that<br />
defendants’ stated investment strategies were materially different from the strategies they<br />
actually pursued, and that the stated risks of the investment strategies were materially<br />
misleading. The court acknowledged that the plaintiffs faced significant issues in showing loss<br />
causation, but noted that the factual issues this presented need not be addressed on a motion to<br />
dismiss. The court noted that plaintiffs need not assert in detail factual allegations beyond basic<br />
statements noting that defendants “actively solicited the funds’ shares through the Prospectus . . .<br />
to serve its own financial interests” in order to establish the certain defendants were sellers for<br />
purposes of Section12(a)(2).<br />
In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).<br />
The court denied plaintiffs’ motion to reconsider the court’s previous dismissal of claims<br />
arising under Section 12(a)(2) of the Securities Act of 1933. Investors brought putative class<br />
action against a mortgage corporation, underwriters, and officers alleging various violations of<br />
federal security laws. Plaintiffs moved for reconsideration of orders granting in part and denying<br />
in part defendants’ previous motions to dismiss as to alleged Section 12(a)(2) violations. The<br />
plaintiffs argued that defendants made a misstatement of material fact when they failed to<br />
disclose that an accounting firm had, prior to writing an opinion agreeing with certain financial<br />
statements made by the issuer, found problems with the financial statements. The court<br />
reconsidered the motions but upheld dismissal of the Section 12 claims and found the Form 10-K<br />
was not actionable merely because the accounting firm had, prior to the time it accepted the<br />
financial statements as true, stated certain reservations that were never disclosed in offerings<br />
documents.<br />
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Genesee County Employees’ Retirement Sys. v. Thornburg Mortg. Sec. Trust 2006-3, 2011 WL<br />
5840482 (D.N.M. Nov. 12, 2011).<br />
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’<br />
securities class action complaint alleging violations of, among other things, Section 12(a)(2) of<br />
the Securities Act of 1933. Plaintiffs alleged that defendants made misrepresentations as to the<br />
true risk of several investment offerings of mortgage-backed securities in violation of Section 12.<br />
Defendants moved to dismiss plaintiffs’ securities class action complaint on multiple grounds.<br />
Defendants argued that plaintiffs did not adequately plead economic loss where the offering<br />
documents stated there would be no secondary market; plaintiffs countered that they alleged a<br />
decline in value in the mortgage-backed certificates, and the court agreed that plaintiffs<br />
sufficiently alleged economic loss. Defendants argued that early disclosures advising plaintiffs<br />
of occasional deviation from underwriting policies undercut plaintiffs’ argument that<br />
misrepresentations were material; the court rejected defendants’ argument because while the<br />
disclosures provided notice of some deviations, they did not warn investors of the systematic<br />
abandonment of underwriting policies. The court addressed and rejected similar arguments as to<br />
early disclosures concerning appraisals and credit ratings. The court found that plaintiffs<br />
sufficiently alleged material misrepresentations or omissions regarding defendants’ abandonment<br />
of underwriting guidelines. The court also found sufficient plaintiffs’ allegations concerning<br />
defendants’ use of improper appraisal practices, inflated LTV values, and inaccurate credit<br />
ratings in the offering documents for some, but not all, of the offerings but granted leave to<br />
amend the deficient allegations. The court also held the following: that plaintiffs have no<br />
obligation to plead that a material number of non-complying loans exist to establish materiality;<br />
that plaintiffs have no obligation to plead that defendants failed to cure non-complying loans;<br />
and that in the context of a securities class action, the issue of statutory standing is better<br />
addressed at the class-certification or summary-judgment stage rather than on a motion to<br />
dismiss.<br />
Campbell v. Castle Stone Homes, Inc., No. 2:09–CV–250 TS, 2011 WL 902637 (D. Utah Mar.<br />
15, 2011).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12 of the<br />
Securities Act of 1933. Plaintiffs alleged defendants sold them unregistered securities in<br />
violation of Section 12. The investment involved using plaintiffs’ good credit to fund<br />
defendants’ construction of new homes and splitting the profit when the homes were sold.<br />
Defendants argued that this was not a “security” under Section 12. The court disagreed, noting<br />
that the definition of security was “flexible.” The key is “whether or not the investment was for<br />
profit.” Since the contracts spoke of “Guaranteed Client Profit,” the court found that plaintiffs<br />
had plausibly alleged the existence of a “security.” The court then rejected defendants’ argument<br />
for summary judgment on loss causation and statute of limitations grounds without substantial<br />
discussion and denied the motion.<br />
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Gibbons v. Nat’l Real Estate Investors, LC, No. 2:07–cv–0990–CW, 2011 WL 1086364 (D. Utah<br />
Mar. 23, 2011).<br />
The court granted plaintiffs’ motion for summary judgment on its claim under Section 12<br />
of the Securities Exchange Act of 1933 for selling an unregistered security. Plaintiffs alleged<br />
that defendant sold them an unregistered security in violation Section 5, which is made part of<br />
Section 12 in subsection (a)(1). Defendant had sold plaintiffs membership interests in a limited<br />
liability company. Defendant argued that these interests did not qualify as “securities” under the<br />
Securities Act based on the definition of that term given by a Utah statute. Rejecting this<br />
argument, the court found Utah’s code wholly inapposite to Section 12. No registration of the<br />
security was ever filed and the use of interstate commerce was not seriously contested.<br />
Therefore, there was no genuine issue as to any material fact, and the court granted plaintiffs’<br />
motion for summary judgment.<br />
Morgan Keegan & Co. v. Shadburn, 2011 WL 5244696 (M.D. Ala. Nov. 3, 2011).<br />
The court granted plaintiff’s motion for preliminary injunction seeking to enjoin FINRA<br />
arbitration initiated by defendant. Plaintiff was an underwriter of an investment fund, and<br />
defendant was an investor who purchased shares of the fund through a third party broker (where<br />
he maintained an account). In the arbitration proceeding, defendant alleged violations of Section<br />
12(a)(2) of the Securities Exchange Act of 1933. The claims under Section 12(a)(2) were for<br />
material misstatements or misleading omissions in marketing materials that the underwriter had<br />
put in a description of the fund on its website. Defendant reviewed these materials in deciding<br />
whether to invest in the fund via the third party broker. In order to properly seek arbitration on<br />
these claims under the FINRA rules, the court noted that defendant must be a customer of<br />
plaintiff. In granting plaintiff’s motion for preliminary injunction, the court ruled that plaintiff<br />
showed a substantial likelihood of success on the merits because defendant had no relationship<br />
with plaintiff, but rather with the third party brokerage firm. His contact with plaintiff was thus<br />
insufficient to create a “customer” relationship under the FINRA arbitration rules. Finding that<br />
plaintiff met the other requirements for preliminary injunction, the court granted the motion.<br />
Costa v. Carambola Partners, LLC, 2011 WL 397949 (M.D. Fla. Feb. 4, 2011).<br />
The court denied plaintiffs’ motion to enter a proposed default judgment filed after the<br />
court granted default judgment against defendants. The court stated that an interest rate of .28%<br />
on plaintiffs’ damages from the date of service of the summons and complaint through the<br />
anticipated date of entry of judgment was not unreasonable. The court stated that Section 12(a)<br />
of the Securities Exchange Act of 1933 allows a successful plaintiff to recover the consideration<br />
paid for the security at issue “with interest thereon,” but does not prescribe a specific rate.<br />
However, the court denied the proposed default judgment because plaintiff failed to show<br />
entitlement to the amount of costs claimed.<br />
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3. Section 17<br />
B.3<br />
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).<br />
After the district court granted in part the defendants’ motion to dismiss and granted the<br />
SEC’s motion to voluntarily dismiss the remaining claims, both parties appealed. On appeal, the<br />
Second Circuit held that the SEC’s allegation that the mutual fund’s chief operating officer made<br />
statements of “half-truth” was sufficient to state a claim for securities fraud. The basis for the<br />
SEC’s securities fraud claims against the former COO was a statement regarding the elimination<br />
of market timing that specifically provided that “for more than two years, scalpers have been<br />
identified and restricted or banned from making further trades.” The district court dismissed the<br />
SEC’s claims because this statement was, in fact, true. However, the Second Circuit noted that<br />
the law is well-settled that so-called “half-truths,” that is, literally true statements that create a<br />
materially misleading impression, can support claims of securities fraud. In this case, because a<br />
reasonable investor could plausibly conclude after reading the statement at issue that the adviser<br />
had attempted to eliminate all market timing, when in fact, the adviser had entered into an<br />
agreement with a specific investor allowing that investor to engage in a very large amount of<br />
market timing in return for an investment in another hedge fund run by the defendant, the Second<br />
Circuit concluded that the district court erred in dismissing the Section 17(a) claims.<br />
SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011).<br />
The district court granted the defendant’s motion for judgment as a matter of law upon<br />
conclusion of the SEC’s presentation of its case-in-chief in this action alleging that an outside<br />
director committed securities fraud by participating in the grant of backdated stock options. The<br />
district court concluded that the SEC had failed to prove the requisite elements of scienter and<br />
negligence. The SEC appealed and the Eighth Circuit Court of Appeals affirmed the district<br />
court’s decision.<br />
In the district court, the defendant testified that as an outside director, he relied upon the<br />
company’s finance and accounting departments, outside and general counsel, and the company’s<br />
independent auditors to ensure that the stock option plans were properly administered and<br />
reported. It was undisputed in the district court that none of these professionals ever raised a<br />
concern regarding the option dating and pricing or the company’s disclosures regarding the<br />
option grants. The Eighth Circuit noted that, depending on others to ensure the accuracy of<br />
disclosures, even if inexcusably negligent, is not the severely reckless conduct that is the<br />
functional equivalent of intentional securities fraud. On appeal, the SEC argued that the danger<br />
of misleading investors “must have been obvious” to the outside director because the disclosures<br />
stated that the company was issuing at-the-money options. The Eighth Circuit rejected this<br />
argument, concluding that the SEC failed to meet the heavy burden of proving the severe<br />
recklessness that is the functional equivalent of intentional fraud because the disclosure was<br />
ambiguous and it was primarily the responsibility of the accounting and finance professionals to<br />
B.3<br />
50
avoid ambiguous, potentially misleading disclosures on this complex subject, not the role of an<br />
outside director.<br />
The Eighth Circuit also affirmed the district court’s conclusion that the SEC failed to<br />
present sufficient evidence of negligence with respect to its claims brought pursuant to Section<br />
17(a)(2) and (3) because the SEC failed to offer any evidence regarding the duties of members of<br />
a board of directors or any testimony, lay or expert, regarding the degree of care that an ordinary<br />
person would exercise under the circumstances and failed to prove that the disclosures about<br />
options dating were unambiguous. In short, because it was undisputed that the defendant was an<br />
outside director, had no personal expertise in these complex matters, that the company complied<br />
with accounting principles at the time, no one alerted the outside director to any potential<br />
concern and there was no evidence that the defendant violated the appropriate standard of care,<br />
the SEC failed to state a claim for violations of Sections 17(a)(2) and (3).<br />
SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
The SEC and defendant Milling, a former officer of Tecumseh, filed cross motions for<br />
summary judgment in this action alleging violations of the antifraud provisions of the Securities<br />
Exchange Act and Section 17(a) of the Securities Act. The SEC alleged that Tecumseh’s<br />
offering documents as well a letter to shareholders were false and misleading because of their<br />
description of the quarterly distributions. The SEC argued that the offering documents and<br />
shareholder letter did not disclose to investors that the companies had been losing money and<br />
that any profit-derived dividends were highly unlikely and instead implied that the companies<br />
were a profitable enterprise.<br />
In response, Milling relied upon certain cautionary language included in the offering<br />
documents, specifically language providing that there was no assurance that Tecumseh would<br />
pay dividends. The court stated that these cautionary statements were insufficient to advise<br />
investors that the “dividend” payments were not actually dividends but rather, returns of investor<br />
capital. The court concluded that even the cautionary language implied that at least part of the<br />
distributions would be profit-derived, and that informing investors that their quarterly<br />
“distributions”—which were also intermittently referred to as dividends or “ROIs”—might be<br />
paid from a “general fund,” (rather than from profits), fell far short of disclosing a piece of<br />
information that is obviously important to a reasonable investor—that the distributions could not<br />
have been paid from earnings, because the earnings were non-existent.<br />
SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011).<br />
In approving the SEC and Vitesse’s proposed consent judgment, Judge Rakoff again<br />
criticized the SEC over the boiler-plate language included in nearly every securities regulatory<br />
settlement—that the defendant neither “admits nor denies” any wrongdoing. Judge Rakoff<br />
approved a $3 million agreement between the SEC and Vitesse Semiconductor and three former<br />
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51
executives over the improper accounting of revenue and the backdating of stock options, and<br />
spent the majority of the opinion criticizing the Commission’s long-standing settlement practice<br />
and again stated that the SEC was treating the court as a “rubber stamp” when seeking approval<br />
of consent judgments. In this enforcement action, Judge Rakoff found the terms of the<br />
settlement to be fair, reasonable and in the public interest, even while noting that “the proposal<br />
raises difficult questions of whether the SEC’s practice of accepting settlements in which the<br />
defendants neither admit nor deny the SEC’s allegations meets the standards necessary for<br />
approval by a district court.”<br />
SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147 (S.D.N.Y. 2011).<br />
On a motion to dismiss brought by former Goldman Vice President, Fabrice Tourree, the<br />
court applied the Supreme Court’s Morrison decision to fraud claims brought by the SEC under<br />
both the Securities Exchange Act of 1934 and the Securities Act of 1933. Goldman had<br />
previously settled the claims against it for $550 million. The court’s decision is the first to apply<br />
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), which held that section 10(b)<br />
of the Exchange Act does not apply extraterritorially, to Section 17(a) of the Securities Act.<br />
The court analyzed the sufficiency of the SEC’s claim under section 17(a) of the<br />
Securities Act, and whether Morrison applied to that statutory section. The court observed that<br />
Morrison did not involve or consider section 17(a), none of the parties had cited any cases<br />
applying Morrison to section 17(a), and the court was not aware of any such case. Noting that In<br />
re Royal Bank of Scotland Grp. PLC. Litig. applied Morrison to sections 11, 12 and 15 of the<br />
Securities Act, but did not address section 17(a), the court nevertheless agreed with Tourre that<br />
Morrison applies to section 17(a), stating that “Morrison itself expressly states that the Exchange<br />
Act and the Securities Act share ‘[t]he same focus on domestic transactions.’” Because<br />
Morrison focused on whether sales of securities were domestic or foreign, the court concluded<br />
that, to the extent section 17(a) applied to sales, it does not apply to sales that occur outside the<br />
United States. The court therefore dismissed the section 17(a) claim, but only to the extent that it<br />
was based on sales to foreign entities. The court continued its analysis, however, observing that<br />
section 17(a), unlike section 10(b), applies not only to sales of securities, but also to offers to sell<br />
securities. The court examined the definition of the term “offer” in the Securities Act, which<br />
states that an offer includes “every attempt to offer or dispose of, or solicitation of an offer to<br />
buy, a security or interest in a security, for value.” The court stated that this definition left no<br />
doubt that the focus of “offer,” under the Securities Act, was on the person or entity attempting,<br />
or offering, to dispose of, or soliciting an offer to buy, securities. Applying this definition to the<br />
allegations of the complaint, the court noted that the SEC alleged Tourre, acting from New York<br />
City, offered the notes at issue to IKB, a foreign entity, and solicited ABN’s (another foreign<br />
entity) participation in the credit default swaps at issue. The court observed that Tourre allegedly<br />
engaged in numerous communications from New York City that constituted domestic offers of<br />
securities or swaps, and thus, the court permitted the section 17(a) claim to survive to the extent<br />
that it was based on such “offers.”<br />
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52
B.3<br />
SEC v. Kelly, 2011 WL 44331161 (S.D.N.Y. Sept. 22, 2011).<br />
The SEC brought securities fraud charges against defendants alleging that they<br />
engineered transactions that allowed the corporation to improperly report over $1 billion in<br />
revenue from online advertising. After the Supreme Court issued its decision in Janus Capital<br />
Group, Inc. v. First Derivative Traders, --- U.S. ---, 131 S. Ct. 2296 (2011), certain defendants<br />
moved for judgment on the pleadings on the SEC’s claims brought pursuant to Section 10(b) of<br />
the Exchange Act and Section 17(a) of the Securities Act. The SEC conceded that Janus<br />
foreclosed a misstatement claim against certain defendants under subsection (b) of Rule 10b-5<br />
because neither defendant “made” a misleading statement. The same defendants also moved for<br />
judgment on the pleadings on the SEC’s claim brought pursuant to Section 17(a) of the<br />
Securities Act. The defendants argued that because a claim for misstatement liability under<br />
Section 17(a) is treated identically to a claim under Section 10(b), the SEC’s Section 17(a) claim<br />
must also be dismissed on the basis of Janus. The court concluded that although the language of<br />
subsection (2) of Section 17(a), which applies to misstatement liability, is not identical to that of<br />
subsection (b) of Rule 10b-5, because both provisions have “the same functional meaning” with<br />
respect to creating primary liability, Janus applies to Section 17(a)(2) claims as well as Section<br />
10(b) claims. The court stated that it would be inconsistent for Janus to require that a defendant<br />
have actually “made” the misleading statement to be liable under subsection (b) of Rule 10b-5<br />
but not under subsection (2) of Section 17(a).<br />
SEC v. Citigroup Global Markets Inc., 2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011).<br />
The SEC filed a complaint against Citigroup alleging violations of Sections 17(a)(2) and<br />
(3) of the Securities Act over a collapsed $1 billion mortgage-bond fund. According to the<br />
complaint, during early 2007, Citigroup created a billion-dollar fund that sought to “dump” some<br />
toxic mortgage-backed securities on “misinformed investors.” Citigroup allegedly pitched the<br />
Fund’s assets to prospective investors as attractive investments rigorously selected by an<br />
independent investment adviser; however, in reality, Citigroup purposely selected a substantial<br />
amount of negatively performing assets for inclusion in the Fund and then took a short position<br />
in those assets, betting that their value would decline over time. Investors in the Fund lost more<br />
than $700 million, while Citigroup reaped net profits of approximately $160 million.<br />
The same day the complaint was filed, the SEC and Citigroup filed a proposed consent<br />
judgment. Both the SEC and Citigroup asserted that the proposed settlement was “fair,<br />
reasonable, and in the public interest,” and asked the court to approve the proposed settlement.<br />
In response, Judge Rakoff asked both parties to answer several questions concerning the<br />
proposed consent judgment. After receiving responses to the court’s questions and hearing<br />
argument, Judge Rakoff rejected the proposed $285 million settlement between the SEC and<br />
Citigroup and concluded that because the SEC’s standard, boilerplate “neither admit nor deny”<br />
settlement language failed to satisfy the required standard in evaluating such settlements, the<br />
proposed settlement would not be approved. Judge Rakoff concluded that the district court could<br />
B.3<br />
53
not approve the proposed settlement “because the court has not been provided with any proven<br />
or admitted facts upon which to exercise even a modest degree of independent judgment.”<br />
SEC v. Daifotis, 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011).<br />
In this enforcement action alleging violations of the securities laws based upon<br />
defendants management of the Schwab YieldPlus Fund, defendants moved for reconsideration of<br />
their motions to dismiss and strike the complaint against them in light of the Supreme Court’s<br />
decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011). In<br />
Janus, the Supreme Court held that for purposes of Rule 10b-5’s prohibition making it “unlawful<br />
for any person, directly or indirectly, . . . [t]o make any untrue statement of a material fact” in<br />
connection with the purchase or sale of securities, the “maker” of a statement “is the person or<br />
entity with ultimate authority over the statement, including its content and whether and how to<br />
communicate it.” 2011 WL 3295139 at *1 (quoting Janus, 131 S. Ct. at 2302).<br />
Defendant Daifotis argued that Janus should also apply to claims brought under Section<br />
17(a). The court rejected this argument, noting that because the specific language of Rule 10b-5<br />
the Supreme Court was interpreting—specifically, the word “make”—is absent from the<br />
language of Section 17(a), Janus’ holding does not apply to the SEC’s Section 17(a) claim. The<br />
court also noted that because Janus’ interpretation of the word “make” followed the Supreme<br />
court’s prior decisions limiting the scope of the implied private right of action and Section 17(a)<br />
does not contain an implied private right of action, Janus’ rationale should not apply to a Section<br />
17(a) claim.<br />
SEC v. Mercury Interactive, LLC, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011).<br />
The court had previously denied defendant Susan Skaer’s motion to dismiss the SEC’s<br />
claims that she violated Sections 10(b) and 14(a) of the Securities Exchange Act and Section<br />
17(a) of the Securities Act. Skaer moved for reconsideration of that decision based upon the<br />
Supreme Court’s decision in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct.<br />
2296, 180 L.Ed.2d 166 (2011). Skaer argued that Janus should be extended to claims brought<br />
pursuant to Section 17(a) of the Securities Act even though the Janus decision did not address a<br />
claim under Section 17(a) of the Securities Act. Rather, Janus addressed what it means to<br />
“make” a statement for purposes of Rule 10b-5(b), which provides that it is unlawful to “make<br />
any untrue statement of a material fact . . . in connection with the purchase or sale of any<br />
security.” The court stated that Section 17(a) does not require that the defendant “make” a<br />
statement to be liable, and thus, the court agreed with those decisions that have concluded that<br />
Janus does not extend to claims brought pursuant to Section 17(a) because Section 17(a) does<br />
not contain the very language that Janus construed.<br />
B.3<br />
B.3<br />
54
B.3<br />
SEC v. Woodruff, 778 F. Supp. 2d 1073 (D. Colo. March 31, 2011).<br />
In this action against former employees of Qwest Communications International, the SEC<br />
alleged that the defendants engaged in various schemes to conceal the “true nature and source”<br />
of Qwest’s revenue between 1999 and 2002. The court granted in part and denied in part the<br />
defendants’ summary judgment motions. The issues on which the court granted the defendants’<br />
summary judgment motions centered on whether certain defendants, members of Qwest’s<br />
financial reporting department, “caused” the company to make misleading statements. The court<br />
concluded that where the defendant did not himself sign or otherwise issue any of Qwest’s public<br />
statements and the defendant was simply “familiar with the contents” of the public statements,<br />
this evidence was insufficient to demonstrate that the defendant either “caused” Qwest to issue<br />
misleading statements or that he aided and abetted another person in issuing such statements.<br />
Additionally, the court concluded that because the SEC did not provide any specific<br />
evidence regarding the defendants’ involvement in the “review” of the earnings releases or<br />
preparation of materials for investor conference calls, the defendants did not “cause” or provide<br />
“substantial assistance” to another’s issuance of misleading statements. The court stated that the<br />
mere fact that certain defendants commented, in unknown ways, about conference call scripts<br />
and press releases reveals nothing about whether the defendants’ comments concerned Qwest’s<br />
alleged failure to disclose material facts about its revenues. The court also concluded that where<br />
defendants were involved in drafting a 10-K statement that did not contain an allegedly<br />
misleading statement or omission, but were subsequently directed by a superior to make edits to<br />
the statement that allegedly rendered the statement materially misleading (and it is undisputed<br />
that the defendants lacked the authority to disregard those directives), the defendant did not<br />
“cause” the allegedly misleading statement to be made. Rather, the court concluded that the<br />
defendants discharged their duties by supplying the CFO with a draft 10-K that was not<br />
materially misleading and made appropriate disclosures and that their subsequent, ministerial<br />
involvement in the CFO’s decision to remove certain disclosure language was not a meaningful<br />
“cause” of Qwest ultimately making an allegedly misleading statement.<br />
SEC v. Monterosso, 768 F. Supp. 2d 1244 (S.D. Fla. 2011).<br />
In this action alleging that former executives of wholesale telecommunications<br />
companies violated Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act,<br />
among other violations, both parties moved for summary judgment. The court concluded that the<br />
overstatements of revenue were so obviously important to an investor that there were no genuine<br />
issues of fact concerning the issue of materiality, especially in light of the staggering magnitude<br />
of the overstatement and the subsequent restatements. The court also noted that the movement<br />
(or lack thereof) of a company’s stock price is not dispositive of whether a given statement is<br />
material, but rather, is simply a factor that might be relevant to materiality. The court further<br />
concluded that the defendants were primarily liable for violations of Section 10(b) of the<br />
B.3<br />
55
Exchange Act and Section 17(a) of the Securities Act because there was an abundance of<br />
evidence that the defendants intentionally made deceptive contributions to the fraudulent<br />
scheme, despite the fact that the defendants did not actually prepare the financial statements or<br />
help to prepare the SEC filings. Alternatively, the court concluded that the defendants would be<br />
liable under an aiding and abetting theory of liability because their role in providing fake<br />
invoices in support of overstated revenue was integral to the fraudulent scheme.<br />
SEC v. Betta, Jr., 2011 WL 4369012 (S.D. Fla. Sept. 19, 2011).<br />
The SEC moved for summary judgment against defendant Gagliardi on its claims that he<br />
violated Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act. Gagliardi<br />
was a registered representative with Brookstreet Securities Corp. (“Brookstreet”), a broker-dealer<br />
and investment adviser that collapsed in June of 2007. The SEC alleged that Gagliardi<br />
recommended and sold collateralized mortgage obligations (“CMOs”) to customers even though<br />
he knew, or should have known, that the highly risky CMOs were unsuitable for these customers<br />
and he failed to disclose these risks. The court concluded that viewing the undisputed facts in a<br />
light most favorable to Gagliardi, there were genuine issues of material fact regarding whether<br />
Gagliardi acted with scienter and therefore, summary judgment was not appropriate.<br />
The SEC argued that Gagliardi’s failure to understand and adequately investigate the<br />
Program CMOs was an extreme departure from the standards of ordinary care to which brokers<br />
are held and that Gagliardi’s deviation from these standards of care presented such a clear danger<br />
of misleading his customers that he must have been aware of it. Gagliardi told his customers that<br />
CMOs were appropriate for retirees and that they were well-suited for the conservative segment<br />
of their investment portfolio because they were so safe. According to Gagliardi, he believed all<br />
of these representations because it was his understanding that the SEC and FINRA had “vetted<br />
and reviewed” Brookstreet’s CMO Program in the past and took no action. The court concluded<br />
that there were plausible opposing inferences that could be made from the evidence that did not<br />
lead to the conclusion, as a matter of law, that Gagliardi either knew or it was so obvious that he<br />
must have known that the Program CMOs were too risky and complex for certain investors. In<br />
light of the evidence presented regarding Brookstreet’s forms, training and approach to selling<br />
Program CMOs, the court concluded that as a matter of law, that it was not an extreme departure<br />
from the standard of ordinary care for Gagliardi to recommend CMOs as he had been trained.<br />
Additionally, Gagliardi submitted evidence that suggests that the risks associated with CMOs at<br />
the time was not so clearly established. Thus, the court denied the SEC’s motion for summary<br />
judgment on their Section 10(b) and Section 17(a)(1) claims.<br />
B.3<br />
56
C. Liabilities under the Securities Exchange Act of 1934<br />
1. Section 10(b) and Rule 10b-5<br />
a. Churning<br />
C.1.a<br />
Goldenson v. Steffens, 802 F. Supp. 2d 240 (D. Me. Aug. 4, 2011).<br />
The court denied defendants’ motion to dismiss except for count ten. Plaintiffs’ alleged<br />
that defendants never revealed that plaintiffs’ investments in two hedge funds had been funneled<br />
through a “feeder fund” for Madoff Securities instead being told that the funds employed a<br />
unique proprietary investment strategy. Plaintiffs further alleged that defendants did not reveal<br />
that the loses that occurred in the hedge funds went beyond the funds direct investments and<br />
included loses sustained by other funds. The court held that the plaintiffs properly pleaded the<br />
elements of a Section 10(b) and Rule 10b-5 claim to withstand a motion to dismiss. The court<br />
found that plaintiffs’ common and derivative law claims also were properly pleaded to survive a<br />
motion to dismiss.<br />
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).<br />
C.1.a<br />
The court granted defendants’ motion to dismiss. Plaintiff alleged that his investment<br />
advisor, Alfred Allos (“Mr. Allos”), made hundreds of unauthorized trades in his account that<br />
resulted in Mr. Allos receiving thousands of dollars in commissions and losses to the plaintiff.<br />
Plaintiff further alleged that Mr. Allos changed his stated investment objectives to “trading<br />
profits” and “speculation” despite informing defendants that his investment objectives were<br />
“conservative capital preservation” and not “high risk or speculation.” The court held that the<br />
plaintiff’s claim was barred under Section 10(b) of the Securities Exchange Act of 1934 by the<br />
relevant two year statute of limitations argument. The court found that plaintiff failed to<br />
properly state a Section 20(a) control liability claim and declined to exercise supplemental<br />
jurisdiction over the Plaintiff’s state law claims.<br />
Pipino v. Onuska, 2011 WL 1630134 (N.D. Ohio Apr. 29, 2011).<br />
C.1.a<br />
The court granted plaintiffs’ motion to remand their complaint to state court. First, the<br />
defendants removed the action to federal court theorizing that the defendants had indirectly<br />
invoked the protections of the federal securities laws to support their churning claim (as well as<br />
their unsuitability claim). The plaintiffs alleged that despite their conservative risk tolerance,<br />
defendants recommended unsuitable, risky investments and charged them excessive and<br />
unreasonable fees. The court held that the plaintiffs’ complaint should be remanded to state<br />
court because it did not contain a federal claim or give any other basis for federal jurisdiction.<br />
57
The court also found that if Ohio state law recognized churning and unsuitability as common-law<br />
claims, then the state court has jurisdiction to either dismiss or hear the action.<br />
Self v. Chase Bank, N.A., 2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).<br />
C.1.a<br />
The court granted defendant’s motion to dismiss. Plaintiffs alleged that defendants<br />
committed fraud by excessively trading their accounts by entering sell and buy orders in a<br />
“manner disproportionate to the size, character, and objectives of the instructions of Plaintiff[s],<br />
bought and sold securities from one to another without any investment justification other than to<br />
generate brokerage commissions…” Plaintiffs’ claimed that the purchases made in their<br />
accounts were not suitable for their investment objectives, financial situation and needs.<br />
Plaintiffs’ complaint, however, did not specify what their objectives and needs were. The court<br />
held that plaintiffs could not sustain a private right of action under 10(b) because the lines of<br />
credit that plaintiffs obtained from defendants did not constitute a security. The court noted<br />
plaintiffs’ complaints were factually and legally frivolous and warranted sanctions, however,<br />
defendant failed to submit declarations calculating reasonable attorney’s fees and costs.<br />
b. Suitability<br />
In re Bear Stearns Companies, Inc. Sec., Derivative, and ERISA Lit., 763 F. Supp. 2d. 423<br />
(S.D.N.Y. 2011).<br />
C.1.b<br />
The court denied defendants’ motion to dismiss plaintiffs’ securities complaint, but<br />
granted defendants’ motion to dismiss the derivative and ERISA complaints. Plaintiffs’ ERISA<br />
complaint alleged that Bear Stearns and the ESOP Committee failed to take substantial<br />
precautions to protect the plan participants from sustaining losses in their retirement savings plan<br />
by failing to divest the plan of Bear Stearns stock when they knew or should have known that it<br />
was not a suitable and appropriate investment plan. The court held that Bear Stearns was not a<br />
fiduciary of the plan, solely based on their ability to make contributions to the plan. The court<br />
reasoned that the plan agreement did not give any authority to Bear Stearns or the ESOP<br />
Committee members to diversify or divest plan assets.<br />
Owens v. Gaffken & Barringer Fund, LLC, 2011 WL 1795310 (S.D.N.Y. May 5, 2011).<br />
C.1.b<br />
The court granted defendants’ motion for summary judgment as to plaintiff’s claims<br />
against Bridgeville Mangement, G & B and Barringer Capital and denied the motion pertaining<br />
to the remainder of the defendants. Plaintiff alleged that he relied entirely on defendants’ oral<br />
representations pertaining to an investment fund. Plaintiff alleged that defendants’<br />
misrepresented the risks involved with his investment and never provided him with offering<br />
materials that contained the appropriate risk disclosures of that fund. The court held that a<br />
58
easonable juror could conclude that plaintiff reasonably relied on defendants’ oral<br />
representations that the fund was a “conservative investment vehicle that functioned like a<br />
money market fund.”<br />
Pipino v. Onuska, 2011 WL 1630134 (N.D. Ohio Apr. 29, 2011).<br />
C.1.b<br />
The court granted plaintiffs’ motion to remand their complaint to state court. First, the<br />
defendants removed the action to federal court on the grounds that the defendants had indirectly<br />
invoked the protections of the federal securities laws to support their churning claim (as well as<br />
their unsuitability claim). The plaintiffs alleged that despite their conservative risk tolerance,<br />
defendants recommended unsuitable, risky investments and charged them excessive and<br />
unreasonable fees. The court held that the plaintiffs’ complaint should be remanded to state<br />
court because it did not contain a federal claim or give any other basis for federal jurisdiction.<br />
The court also found that if Ohio state law recognized churning and unsuitability as common-law<br />
claims, then the state court has jurisdiction to either dismiss or hear the action.<br />
La. Pac. Corp. v. Money Mkt. 1 Inst. Inv. <strong>Dealer</strong>, 2011 WL 1152568 (N.D. Cal. Mar. 28, 2011).<br />
C.1.b<br />
The court denied defendant, Money Market 1 Institutional’s (“MM1”) motion to dismiss,<br />
stating that plaintiffs properly set forth a suitability claim under 10(b). The plaintiffs alleged the<br />
Auction Rate Securities (“ARS”) that they purchased pursuant to MM1’s recommendation were<br />
unsuitable. The plaintiff’s further accused MM1 of failing to disclose that the complicated<br />
structured investments fell outside the scope of investment guidelines. The court found that<br />
MM1 failed to sustain its burden to demonstrate that the complaint failed to state a claim upon<br />
which relief could be granted under Federal Rule of Civil Procedure 12(b)(6). The court also<br />
held that to the extent which the plaintiff was a sophisticated institutional investor and<br />
responsible for understanding the risks associated with the ARS investment, were questions of<br />
fact and not appropriate for resolution at the procedural stage.<br />
C.1.b<br />
Keybank N.A. v. Bingo, Coast Guard Official No. 1121913, No. C09-849RSM, 2011 WL<br />
1559829 (W.D. Wash. Apr. 22, 2010).<br />
The court granted plaintiffs’ motion to dismiss defendants’ counterclaims with leave to<br />
amend regarding the suitability, breach of fiduciary duty, breach of contract and securities law<br />
violation claims. Defendants’ counterclaim alleged that KeyBank failed to comply with the<br />
suitability rule set forth in RCW 21.20.702, by failing to recommend conservative investments.<br />
The court held that defendants could not sustain a suitability claim under Washington law as<br />
defendants’ failed to prove that KeyBank acted as a broker within the meaning of Ives v.<br />
Ramsden, 142 Wash.App. 391 (Wash.App.2008). The court found that the suitability portion of<br />
Defendants’ counterclaim failed as a common law duty of care claim.<br />
59
C.1.b<br />
SEC v. Betta, 2011 WL 4369012 (S.D. Fla. Sep. 19, 2011).<br />
The court denied plaintiff’s motion for summary judgment. Plaintiff alleged that<br />
Gagliardi and nine other defendant representatives materially misrepresented the risks and<br />
characteristics involved with collateralized mortgage debt obligations (“CMOs”). Plaintiff filed<br />
a motion for summary judgment and claimed there was no genuine issue of material fact as to<br />
whether Gagliardi either knew, or should have known, that CMOs were inappropriately risky and<br />
complex for investors who had preservation of capital as their main objective. The court held<br />
that, as a matter of law, the SEC offered insufficient evidence to meet the summary judgment<br />
standard. The court found that Gagliardi presented evidence (from the NASD) that suggested the<br />
risks associated with CMOs were not clearly established.<br />
Guenther v. B.C. Ziegler and Company, FINRA Case No. 10-00558, Jan. 13, 2011.<br />
C.1.b<br />
Claimants asserted lack of suitability and violation of Rule 10b-5. Claimants requested<br />
compensatory damages in the amount of $250,000 and $20,000 in other costs. The panel denied<br />
and dismissed with prejudice all of claimants’ claims. The panel ruled that claimants’ financial<br />
advisor did not make unsuitable recommendations of securities transactions to claimant. The<br />
panel also found that claimant failed to prove any monetary damages that occurred as a result of<br />
claimant’s financial advisor’s conduct.<br />
Wynns v. Citigroup Global Markets, Inc., FINRA Case No. 10-00278 Sep. 14, 2011.<br />
C.1.b<br />
Claimants brought an action against respondents alleging, amongst other allegations,<br />
violations of Rule 10b-5 and unsuitability. Claimants requested relief in the form of $241,000<br />
worth of compensatory damages and $125,000 worth of punitive damages. The panel found<br />
respondents jointly and severally liable to claimants for the sum of $92,400 in compensatory<br />
damages, $45,045 in interest and $35,000 in attorneys’ fees. Despite this ruling, the panel<br />
reasoned that any allegations or proofs regarding the failure of respondents to monitor the<br />
investment options in the Universal Variable Life Insurance Policy were clearly erroneous. The<br />
panel further ruled that the claimants’ FA was not involved in the alleged investment-related<br />
sales practice violation, forgery, theft, misappropriation, or conversion of funds.<br />
C.1.b<br />
Prud’homme v. Merrill Lynch, Pierce, Fenner, & Smith Inc., FINRA Case No. 09-05271 Sep.<br />
19, 2011.<br />
Claimants asserted the following causes of action, amongst others; violation of 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 and violation of FINRA Rule 2310.<br />
60
Claimants requested compensatory damages in the amount of $58,000 at the close of the hearing<br />
and that the present value of the hedge fund be returned to them. The panel found respondent<br />
not liable and denied claimants’ claim in its entirety. The panel also held that claimants’<br />
allegation that their financial advisor intentionally withheld information about the fund was<br />
clearly erroneous. The panel reasoned that there was no evidence presented to support<br />
claimants’ allegation that their financial advisor withheld information about the fund. Lastly, the<br />
panel found that there was no evidence presented to show that claimants’ financial advisor had<br />
access to information that was different than what was communicated to claimants.<br />
c. Insider Trading<br />
C.1.c<br />
Matrixx Initiative, Inc. v. Siracusano, 131 S.Ct. 1309 (2011).<br />
Respondent shareholders brought a securities fraud class action against Petitioner<br />
pharmaceutical company and three of its executives alleging that Petitioners failed to disclose<br />
reports of a possible link between its cold remedy product and loss of smell, rendering<br />
petitioners’ public statements to the contrary misleading in an effort to maintain high prices for<br />
its securities. The district court granted the motion to dismiss for failure to properly allege<br />
materiality or scienter. The Court of Appeals reversed, holding that the omitted information<br />
would have been significant to a reasonable investor and that omission of reports of loss of smell<br />
gave rise to a strong inference of scienter. The Supreme Court affirmed, holding that<br />
(1) respondents adequately pleaded materiality because reports of loss of smell, although not in<br />
statistically significant numbers, would have been viewed as material by a reasonable investor in<br />
light of petitioner’s statements that its revenues were going to increase and that third party<br />
reports of loss of smell were “completely unfounded and misleading;” and (2) respondents<br />
adequately pleaded scienter because petitioner’s denial of third party reports of loss of smell and<br />
false claims that it had conducted its own studies gave rise to an inference that petitioner did not<br />
disclose the reports of loss of smell because of their likely effect on the market.<br />
d. Misrepresentations/Omissions<br />
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (U.S. 2011).<br />
C.1.d<br />
The sole issue before the Court was whether investors need to show loss causation for<br />
class certification. The Court held they did not. Courts below had required a showing of loss<br />
causation in order to satisfy the requirement that class members “establish that reliance was<br />
capable of resolution on a common, class-wide basis.” The Supreme Court rejected this<br />
requirement as misplaced. Loss causation requires a showing that “a misrepresentation that<br />
affected the integrity of the market also caused a subsequent economic loss.” In sum, “loss<br />
causation has no logical connection to the facts necessary to establish the efficient market<br />
predicate to the fraud-on-market theory.”<br />
61
C.1.d<br />
Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309 (U.S. 2011).<br />
Class action against pharmaceutical company and executives, alleging violation of<br />
federal securities laws by failing to disclose material information including adverse event report<br />
and research studies regarding one of the company’s cold remedy products. The Supreme Court<br />
held that lack of statistical significance of adverse event reports did not necessarily preclude<br />
those reports from being material to reasonable investors, investors sufficiently alleged<br />
materiality and scienter under § 10(b) and Rule 10b-5(b). Scienter was adequately pled under<br />
the Private Securities <strong>Litigation</strong> Reform Act of 1995 (PSLRA). Securities Exchange Act of 1934<br />
§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5(b).<br />
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011).<br />
C.1.d<br />
Shareholders of asset management firm that launched mutual funds filed putative class<br />
action alleging that firm and its wholly-owned investment advisor subsidiary separately<br />
negotiated market timing arrangements with certain traders to permit timing in specific funds.<br />
The U.S. District Court dismissed the action and plaintiffs appealed. The U.S. Court of Appeals<br />
reversed and remanded and certiorari was granted to determine whether liable in a private action<br />
under Rule 10b-5 for false statements included plaintiffs’ prospectuses. In reversing the U.S.<br />
Court of Appeals’ decision, the U.S. Supreme Court held that because false statements included<br />
in mutual fund prospectuses were ‘made’ by investment fund, investment advisor and parent<br />
capital group could not be liable in private action under Securities and Exchange Commission<br />
rule prohibiting employment of manipulative and deceptive devices in connection with purchase<br />
or sale of securities.<br />
Hill and NECA-IBEW Pension Fund, v. Gozani, 638 F.3d 40 (1st Cir. 2011).<br />
C.1.d<br />
Shareholder brought securities fraud action against medical device manufacturer and<br />
officers. The Court of Appeals, held that omission from manufacturer’s press release of opinion<br />
regarding manufacturer’s promotion of use of incorrect and possibly fraudulent insurance billing<br />
code for its device did not make statements in press release misleading. Statements in quarterly<br />
report were not made misleading by omission of facts pertaining to use of inappropriate billing<br />
codes for device. Allegations did not establish “pervasive” insurance reimbursement problems<br />
that manufacturer was required to disclose. Statements in quarterly report were not made<br />
misleading due to omissions. Annual report containing extensive risk disclosures was not<br />
materially misleading. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17<br />
C.F.R. § 240.10b-5.<br />
62
C.1.d<br />
Ashland Inc. v. Morgan Stanley & Co., Inc., 652 F.3d 333 (2d Cir. 2011).<br />
Investors in auction rate securities (ARS) sued broker, asserting claims alleging securities<br />
fraud. The Court of Appeals held that investors in auction rate securities backed by guaranteed<br />
student loan obligations could not have reasonably relied upon broker’s alleged<br />
misrepresentations regarding safety and liquidity of investment, including broker’s practice of<br />
stepping in to place sufficient proprietary bids to prevent auction failure, as required to establish<br />
§ 10(b) claim, despite their longstanding relationship with financial advisor employed by broker,<br />
their repeated inquiries regarding investment’s liquidity, and fact that auction information was<br />
not publicly available, where broker’s publicly-filed statement mandated by Securities and<br />
Exchange Commission (SEC) explicitly disclosed very liquidity risks about which investors,<br />
who admittedly were sophisticated investors, claimed to have been misled. Securities Exchange<br />
Act of 1934 § 10(b), 15 U.S.C.A § 78j(b).<br />
Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011).<br />
C.1.d<br />
Shareholders brought putative class action against bank holding company and its<br />
subsidiaries alleging claims of violations of the Securities Act in connection with hybrid<br />
securities offering as a result of allegedly negligently false and misleading statements concerning<br />
goodwill and loan loss reserves. The court found that plaintiff failed to sufficiently plead an<br />
actionable securities fraud claim with respect to statements about goodwill and loan reserves.<br />
The court determined that such statements are inherently subjective and will vary depending on a<br />
variety of predictable and unpredictable circumstances. For plaintiff to have proven actionable<br />
fraud, he must allege that defendant’s opinions were both false and not honestly believed when<br />
made. Since the complaint did not plausibly allege subjective falsity, the complaint fails to state<br />
a valid claim.<br />
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).<br />
C.1.d<br />
Investors brought putative class action against an asset management company and<br />
officers alleging violations of the Securities Act relating to a registration statement and<br />
prospectus in connection with an initial public offering. The United States District Court for the<br />
Southern District of New York dismissed the case. The Court of Appeals vacated the dismissal<br />
and remanded the case. Plaintiffs were seeking remedies under §11, 12(a)(2) and 15 of the<br />
Securities Act of 1933 for alleged material omissions from and misstatements in Blackstone’s<br />
Registration and Prospectus. They found the district court erred in dismissing the case because<br />
plaintiffs plausibly alleged that Blackstone omitted from its Registration Statement and<br />
prospectus material information related to its investments in FGIC and Freescale that Blackstone<br />
was required to disclose under item 303 of Regulation S-K. Moreover, plaintiffs plausibly<br />
alleged that Blackstone both omitted material information that it was required to disclose under<br />
63
Item 303 and made material misstatements in its offering documents related to its real estate<br />
investments.<br />
In re DVI, Inc. Securities <strong>Litigation</strong>, 639 F.3d 623 (3d Cir. 2011).<br />
C.1.d<br />
Investors’ class action certification was appealed. Court of appeals affirmed investors’<br />
reliance on fraud on the market theory, except as to defendant law firm whose conduct was not<br />
publicly disclosed and it owed no duty of disclosure to the investors. The court rejected<br />
argument of defendant accounting firm that investor must show loss causation at class<br />
certification stage.<br />
Katyle v. Penn National Gaming, Inc., 637 F.3d 462 (4th Cir. 2011).<br />
C.1.d<br />
Shareholders brought a securities fraud class action. The Court of Appeals held that<br />
purportedly corrective disclosures of delays in states’ regulatory approval process for proposed<br />
buy-out/merger agreement and purportedly corrective disclosures in analysts’ reports were<br />
insufficient to show loss causation. The corporation’s failure to issue press release announcing<br />
state regulatory approval of proposed buy-out/merger did not constitute corrective disclosures<br />
sufficient to show loss causation. Allegations of purportedly corrective disclosures of delays in<br />
states’ regulatory approval process for proposed buyout/merger agreement were insufficient to<br />
show loss causation with sufficient specificity required by Private Securities <strong>Litigation</strong> Reform<br />
Act (PSLRA). Securities Exchange Act of 1934, § 10(b), 21D(b)(1,2), 15 U.S.C.A. § 78j(b),<br />
78u-4(b)(1,2); 17 C.F.R. § 240.10B-5; Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.<br />
Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461 (6th Cir. 2011).<br />
C.1.d<br />
Action alleging securities fraud claims against broker of auction rate securities (ARS).<br />
The Court of Appeals held that Investor’s allegations failed to give rise to strong inference that<br />
broker acted with scienter when recommending that investor buy ARS, as required to state<br />
§ 10(b) securities fraud claim in connection with meltdown of ARS market. Investor failed to<br />
allege common-law fraud claim with sufficient particularity. <strong>Broker</strong>’s alleged misstatement to<br />
investor that auction rate securities (ARS) were safe and secure was too vague to qualify as<br />
material misrepresentation. <strong>Broker</strong>’s description of ARS as safe and secure was a soft<br />
description that escaped objective verification. Securities Exchange Act of 1934 § 10(b), 15<br />
U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.<br />
64
C.1.d<br />
AnchorBank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).<br />
Plaintiffs sued Hofer, an employee of AnchorBank, for engaging in a collusive trading<br />
scheme in violation of sections 9(b) and 10(b) of the Securities Exchange Act of 1934. Hofer<br />
moved to dismiss under Fed. R. Civ. P. 8(a), 9(b), and 12(b)(6), and the Private Securities<br />
<strong>Litigation</strong> Reform Act (“PSLRA”). The district court granted Hofer’s motion and plaintiffs<br />
appealed. The Seventh Circuit reversed the district court and held that plaintiffs stated a claim<br />
under sections 9(a) and 10(b) of the Exchange Act. To show a violation of section 9(a) of the<br />
Exchange Act, plaintiffs had to plead and prove (1) a series of transactions in a security created<br />
actual or apparent trading in that security or raised or depressed the market price of that security;<br />
(2) the transactions were carried out with scienter; (3) the purpose of the transactions was to<br />
induce the security’s sale or purchase by others; (4) the plaintiffs relied on the transactions; and<br />
(5) the transactions affected the plaintiff’s purchase or selling price. Plaintiffs’ second amended<br />
complaint alleged that Hofer and two other employees coordinated purchases and sales of units<br />
of the AnchorBank Unitized Fund (“the Fund”) in order to artificially inflate or deflate the unit<br />
price. As an AnchorBank employee, Hofer was permitted to invest in the Fund. He also knew<br />
that the Fund was required to maintain a specific ratio of cash to equities and was required to buy<br />
and sell AnchorBank stock on the open market at specific times and in specific amounts to<br />
maintain the required ratio. Hofer’s coordinated trading activity allowed him to impact the price<br />
of fund units to his benefit and the Fund’s detriment. The court found that the inference of<br />
scienter was strong in comparison to Hofer’s contention that he was simply buying low and<br />
selling high. The court also rejected Hofer’s argument that plaintiffs did not plead loss<br />
causation, finding that Hofer’s activities caused the Fund’s unit price to decline, even though<br />
some of the decline might eventually be attributed to the general economic downturn.<br />
McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011).<br />
C.1.d<br />
Spouse of stock owner filed action against corporation alleging misrepresentations in<br />
connection with her receipt and sale of stock. The district court dismissed the action on the<br />
ground that it was time-barred. Plaintiff appealed alleging that the period in which a private suit<br />
for a federal securities violation begins is on the date of injury, rather than the date the fraud first<br />
occurs. The Supreme Court has thus far declined to answer the question. The Court of Appeals,<br />
in affirming the dismissal, held that: 1) wife’s surrender of demand for other concessions in<br />
divorce decree, such as longer period of alimony, which enabled her to “hold” stock until<br />
husband, as owner of that stock, decided to sell, constituted purchase of stock; and 2) five year<br />
deadline for action involving securities claim of “fraud, deceit, manipulation, or contrivance”<br />
was statute of repose, than statute of limitation, that ran from date of fraud rather than date of the<br />
injury.<br />
65
Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011).<br />
C.1.d<br />
Investors brought putative class action against a biotechnology company and its<br />
individual officers and directors alleging securities fraud. The district court certified the class<br />
and defendants appealed. The district court based certification on the “fraud on the market<br />
presumption” which requires a showing that the market was efficient and whether the purported<br />
falsehoods were public. Defendants’ claim that alleged misrepresentations were immaterial, did<br />
not sway court as it determined that materiality is a trial issue, not one for certification.<br />
Furthermore, defendants would have to assert a defense to the fraud on the market presumption<br />
at trial. The court, in upholding certification, held that proof of materiality is not necessary to<br />
ensure that the question of reliance is common among all prospective class members’ securities<br />
fraud claims. Plaintiffs need only allege materiality with sufficient plausibility to withstand a<br />
12(b)(6) motion.<br />
Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681 (9th Cir. 2011).<br />
C.1.d<br />
Shareholder brought punitive class action for securities fraud against oil company and<br />
related defendants. The Court of Appeals held that royalty trust’s periodic filing with Securities<br />
and Exchange Commission (SEC) of its contract with oil company, in compliance with its legal<br />
obligations, would not be viewed by reasonable investor as certifying company’s ongoing<br />
compliance with agreement’s “prudent operator standard” provision, and therefore company’s<br />
alleged subsequent breach of prudent operator standard did not provide actionable<br />
misrepresentation supporting private securities fraud claim. Securities Exchange Act of 1934 §<br />
10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.<br />
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).<br />
C.1.d<br />
Plaintiff invested in defendant alternative fuels start-up company. Plaintiff sued, seeking,<br />
inter alia, rescission of the transaction. The Court of Appeals held that true rescission was not<br />
available but that the district court had discretion to consider a rescissionary measure of<br />
damages, i.e., “any rescissionary damage award should be offset by the value of the stock as well<br />
as any other benefits incurred after the transaction.” Nevertheless, the rescissionary approach<br />
still requires plaintiff to show loss causation, that the alleged conduct caused the loss.<br />
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011).<br />
C.1.d<br />
Defendant executives solicited plaintiff to invest in company at a time while the company<br />
founders engaged in undisclosed sale of personally owned shares in the company which was<br />
66
experiencing large operating losses. Plaintiff had an agreement with defendants that the<br />
company would disclose such founder sales to it. Defendants argued that this right to disclosure<br />
could be waived by a vote of 60% of company shareholders and notice of this vote could in turn<br />
be waived. Thus, plaintiff had no notice of the “fact that the right to notice itself was cancelled.”<br />
Plaintiff argued that the parties’ agreement required that any waiver required a vote of investors<br />
“voting together.” The court of appeals held this to be the “far more natural interpretation,” but<br />
that in any event it was a fact question not subject to a motion to dismiss. As to the securities<br />
claims, defendants argued that theirs was a plausible reading of the agreement and thus they did<br />
not have the requisite scienter under the federal securities laws. The court of appeals rejected<br />
defendants’ argument because the more plausible reading was that waiver could occur only after<br />
all investors have had an opportunity to vote.<br />
Findwhat Investor Group v. Findwhat.com, 658 F.3d 1282 (11th Cir. 2011).<br />
C.1.d<br />
Investors appealed district court dismissal of securities class action. Investors alleged<br />
that defendant engaged in “click fraud”, i.e., the “practice of clicking on an Internet<br />
advertisement for the sole purpose of forcing the advertiser to pay for the click.” This would<br />
increase the defendant’s short term revenue but the practice was coming under increased<br />
regulatory scrutiny. The company announced that, inter alia, it was taking measures to minimize<br />
the effects of fraudulent clicks. Subsequent company announcements disclosed that click fraud<br />
had been responsible for some of the company’s revenues and the company’s stock price<br />
dropped 21% in a day. The cautionary language in the company’s prior disclosures was<br />
actionable because it contained only general warnings about risks and nothing specific about<br />
click fraud that had occurred.<br />
Ledford v. Peeples, 657 F.3d 1222 (11th Cir. 2011).<br />
C.1.d<br />
Member of a limited liability company and its owners brought action against party which<br />
financed the buyout of member’s interest in LLC alleging violations of federal securities laws.<br />
The district court granted defendant’s motion for summary judgment. The Court of Appeals, en<br />
banc, affirmed holding that the misrepresentation by an individual that had financed active<br />
member buyout of another member’s one-half interest in a limited liability company, when he<br />
falsely stated that he had no role in other member’s decision to buyout, played no causative role<br />
in the other member’s decision to accept the buyout of its interest, and thus did not rise to level<br />
of a fraud actionable under Rule 10b-5. Plaintiffs did not rely on the misrepresentations in<br />
making their decision to accept buyout so they were unable to prove but for causation.<br />
67
C.1.d<br />
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial Corp., 793 F. Supp.<br />
2d 1138 (C.D. Cal. 2011).<br />
Defendants moved to dismiss securities fraud complaint. The district court held that<br />
arguments regarding economic loss, loss causation and reliance were not appropriate at the<br />
dismissal stage. The court nevertheless made the following observations regarding the viability<br />
of investors’ claims. As to economic loss, it is appropriate to net gains and losses and find that<br />
certain investors were not injured. As to loss causation, there will need to be a showing that<br />
defendants’ corrective disclosures caused the drop in value, not macroeconomic events<br />
generally. And as to reliance, it will be necessary for investors to show that they relied on the<br />
alleged misstatements, and not, e.g., on an individual trading strategy.<br />
Hodges v. Akeena Solar, Inc., 274 F.R.D. 259 (N.D. Cal. 2011).<br />
C.1.d<br />
Court certified class action brought under federal securities laws. Numerosity was met<br />
by proof of volume of trading of 14 million shares per week on NASDAQ. The following issues<br />
showed commonality: (1) whether defendants violated federal securities laws (2) whether<br />
defendants omitted or misrepresented material facts during class period (3) whether defendants<br />
acted with requisite state of mind (4) whether market price was inflated and (5) whether market<br />
price fell when misconduct became known to market. Typicality was met by similar losses by<br />
named plaintiffs from similar conduct by defendants. Class representatives were adequate<br />
because of the level of their understanding of the facts and claims and their acceptance of their<br />
responsibilities in prosecuting the class claims. Counsel were found to have sufficient<br />
experience to adequately and vigorously prosecute the case. Plaintiffs also made a prima facie<br />
case of fraud on the market.<br />
Plichta v. Sunpower Corporation, 790 F. Supp. 2d 1012 (N.D. Cal. 2011).<br />
C.1.d<br />
Shareholders filed putative class action against company and its executives alleging that<br />
unsubstantiated accounting entries rendered company’s filings with Security and Exchange<br />
Commission (“SEC”) false and misleading. Defendants moved to dismiss on the grounds that<br />
plaintiff’s claims are inadequate and fail to plead facts giving rise to the requisite strong<br />
inference of scienter. In granting defendants’ motion, the court held that: 1) shareholders failed<br />
to plead scienter; 2) shareholders failed to plead reliance; and 3) shareholders lacked standing to<br />
bring claims under Securities Act.<br />
68
C.1.d<br />
Resnik v. Woertz, 744 F. Supp. 2d 614 (D. Del. 2011).<br />
Shareholder alleged that misrepresentations in a company’s proxy statement deprived<br />
him of his right to a fully informed stockholder vote. The court rejected his claim for injunctive<br />
relief under Section 14(a) of the Securities Exchange Act. The court held that corrective<br />
disclosure and holding another stockholder vote was an injury “insufficient to meet the loss<br />
causation requirement.” Shareholder was successful, however, in avoiding dismissal of his<br />
claims for unjust enrichment and corporate waste based on the high executive salaries received<br />
from the company as a result of the proxy vote.<br />
Vandevelde v. China Natural Gas, Inc., 277 F.R.D. 126 (D. Del. 2011).<br />
C.1.d<br />
Investor filed class action lawsuit alleging securities fraud by Chinese natural gas<br />
corporation and corporate officers in violation of §§10(b) and 20(a) of Securities Exchange Act<br />
and Rule 10b-5. More specifically, plaintiffs alleged that defendant failed to disclose material<br />
facts regarding its financial well-being which, in turn led plaintiffs to purchase its common stock<br />
to their detriment. A notice of the class action was published and two investors filed competing<br />
motions seeking appointment as lead plaintiff and seeking approval of each of their selections for<br />
lead counsel. The court in denying one motion and granting another, held: 1) investor who<br />
suffered largest financial loss was presumptive lead plaintiff; 2) investor satisfied typicality<br />
requirement; 3) investor satisfied adequacy requirement; 4) investor’s communications with<br />
corporation did not create unique defense to his lead plaintiff status; and 5) investor’s electronic<br />
message board postings did not render him inadequate to represent the class.<br />
SEC v. Monterosso, 768 F. Supp.2d 1244 (S.D. Fla. 2011).<br />
C.1.d<br />
Security and Exchange Commission (“SEC”) instituted fraud proceedings against<br />
executives of wholesale telecommunications companies for generating fictitious revenue. Both<br />
parties moved for summary judgment. Plaintiff alleged that: 1) Defendants were liable for<br />
violations of the anti-fraud provisions based on their conduct of making false statements and<br />
participation in a fraudulent scheme; 2) defendants acted with knowledge or at least recklessly in<br />
manufacturing and submitting invoices for business that never occurred; 3) overstatements of<br />
revenue were material; 4) defendants aided GlobeTel’s reporting and book violations; and 5)<br />
defendants falsified records and misled GlobeTel’s auditors in violation of Rules 13b2-1 and<br />
13b2-2. Defendants moved for summary judgment on the SEC’s claims on the basis that any<br />
misstatements of revenue were immaterial. The court, in denying defendants’ motion and<br />
granting plaintiff’s motion, held that: 1) company’s misstatements were made in connection<br />
with purchase or sale of securities within meaning of antifraud provisions of federal securities<br />
laws; 2) overstatements of $108 million of revenue in annual reports, registration statements, and<br />
press releases were material; 3) overstatements of revenue were made with scienter; 4) court was<br />
69
permitted to draw adverse inference against owner of company, for purposes of establishing<br />
scienter, based on his invocation of Fifth Amendment privilege at deposition; 5) Chief Operating<br />
Officer (“COO”) was liable as a primary violator since he had caused the misstatements to be<br />
made and knew the statements were calculated to reach investors; and 6) COO was liable for<br />
aiding and abetting company with filing of false reports to SEC.<br />
Patel v. Patel, 761 F. Supp. 2d 1375 (N.D. Ga. 2011).<br />
C.1.d<br />
Investors brought action alleging that bank’s officers and directors concealed bank’s true<br />
financial condition and business operations, in violation of the Securities Exchange Act.<br />
Defendants moved to dismiss for failure to sufficiently allege scienter, loss causation, and<br />
materiality. The court granted defendants’ motion to dismiss, holding that the defendants alleged<br />
motive to maintain a dividend stream is insufficient to show scienter as it is analogous to the<br />
desire to sustain a company’s stock price, and that alleged “excessively risky” lending practices<br />
were also insufficient to show scienter. The court also held the investors failed to allege loss<br />
causation because the allegation that the FDIC was taking over the defendant bank, resulting in<br />
loss in value of stock, did not necessarily establish the alleged misrepresentations and omissions<br />
caused the investors’ loss.<br />
SEC v. Morgan Keegan & Co., Inc., 806 F. Supp. 2d 1253 (N.D. Ga. 2011).<br />
C.1.d<br />
The Securities and Exchange Commission brought an enforcement action alleging that<br />
the defendant investment firm misled investors concerning risks associated with auction rate<br />
securities (ARS) in violation of § 10(b) of Rule 10b-5. Investment firm moved for summary<br />
judgment, asserting that it prepared several written disclosures for its customers warning of the<br />
risks associated with auction rates securities. The SEC contended the written disclosures were<br />
rendered ineffective and inadequate because brokers did not adequately direct its customers to<br />
them and that its brokers made oral misrepresentations. The court granted the investment firm’s<br />
motion for summary judgment, holding that four alleged statements made to investors by the<br />
investment’ firms brokers were insufficient, by themselves, to alter the total mix of information<br />
made available to the public and customers regarding the liquidity risks of auction rate securities<br />
products.<br />
SEC v Mannion, 789 F. Supp. 2d 1321 (N.D. Ga. 2011).<br />
C.1.d<br />
SEC brought civil enforcement action against principals of master and feeder hedge funds<br />
and advisors alleging misrepresentations of net asset values, misuse of fund assets and fraud on<br />
private equity. Under the SEA, to plead securities fraud, a party must allege 1) material<br />
representations or material misleading omissions, 2) in connection with the purchase or sale of a<br />
security, and 3) made with scienter. Materiality is sufficiently plead when shown that the<br />
70
substantial likelihood that disclosure of omitted fact would have been viewed by a reasonable<br />
investor as having significantly altered total mix of information available. Here, the crux of the<br />
complaint arose from defendant’s representations about the value of the Fund’s World Health<br />
investments in the aftermath of the revelations of misconduct and fraud by top executives of<br />
World Health. The Fund loaned millions of dollars to World Health and the principals inflated<br />
the value of World Health to investors and potential new investors. The court found that the<br />
SEC satisfied the “in connection with” requirement for securities fraud and that the<br />
misrepresentations to the new investor constituted sufficient allegations. The SEC sufficiently<br />
pled fraud and scienter with respect to the allegations against the investors but not against the<br />
Fund itself.<br />
SEC v. Morgan Keegan & Company, Inc., 806 F. Supp. 2d 1253 (N.D. Ga. 2011).<br />
C.1.d<br />
Securities and Exchange Commission (SEC) brought enforcement action against<br />
investment firm, alleging that firm misled investors concerning risks associated with auction rate<br />
securities (ARS). The court held that firm adequately distributed its written disclosures<br />
concerning risks associated with ARS, and alleged misrepresentations made by four of firm’s<br />
brokers were insufficient to establish that firm, as a whole, misrepresented risks of ARS.<br />
Investment firm adequately distributed to its customers its written disclosures concerning risks<br />
associated with ARS. Firm prepared ARS manual that tracked best practices for securities<br />
industry as a whole and distributed manual to each of its ARS customers and posted it on its<br />
website, and after each ARS purchase, firm sent trade confirmations to purchasers directing them<br />
to its website for information regarding ARS procedures. Securities Exchange Act of 1934 §<br />
10(b), 15 U.S.C.A § 78j(b).<br />
C.1.d<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys<br />
Healthcare, 778 F. Supp. 2d 858 (N.D. Ill. 2011).<br />
Investors brought a putative class action case against the corporation, its chief financial<br />
officer and its chief executive officer alleging violations of the Securities Exchange Act<br />
involving statements made by the individuals regarding the implementation and success of a new<br />
computer software version for healthcare organizations. In determining whether the statements<br />
made were actionable, the court reviewed the statements to determine their context and whether<br />
or not they were materially relied upon. The court found that the CEO’s statements about the<br />
corporation’s ability to deliver solid results were not material and thus not actionable. Likewise,<br />
the court determined that the corporation revenue projections were protected under the Private<br />
Securities <strong>Litigation</strong> Reform Act’s safe harbor provision as forward looking statements. The<br />
court further held that the corporation made sufficient, meaningful cautionary statements to point<br />
to the principal contingencies that could cause actual results to depart from projections. The<br />
cautionary language must be substantive and tailored to the specific predictions made in the<br />
allegedly misleading statement. Lastly, the court found the CEO’s statements concerning the<br />
corporations work on implementation to be misleading and actionable.<br />
71
C.1.d<br />
Akamai Tech., Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).<br />
Plaintiff sued defendant as a control person under section 20(a) of the Securities<br />
Exchange Act of 1934, based on the alleged fraudulent conduct of defendant’s wholly owned<br />
subsidiary, Deutsch Bank Securities (“DBS”), which was Plaintiff’s securities broker and<br />
investment advisor. Plaintiff alleged that it had a discretionary account with DBS and instructed<br />
DBS to purchase only safe, liquid securities. DBS, however, purchased auction rate securities<br />
(“ARS”), which it represented to plaintiff were highly liquid and safe investments. DBS<br />
allegedly failed to inform plaintiff that demand for ARS had been declining, that auctions were<br />
being supported by financial institutions, and that DBS was reducing its own exposure to ARS at<br />
the same time it continued to increase plaintiff’s ARS holdings. Plaintiff filed suit after the ARS<br />
market collapsed in February 2008 and defendant moved to dismiss under Fed. R. Civ. P.<br />
12(b)(6) and section 9(a) of the Private Securities <strong>Litigation</strong> Reform Act (“PSLRA’). The<br />
district court held that plaintiff’s stated a claim for control-person liability. To state a claim for<br />
control-person liability under section 20(a), plaintiff had to plead (1) an underlying violation of<br />
the securities laws, and (2) that the defendant controlled the primary violator with culpable<br />
participation. The district court found that plaintiff adequately pleaded material omissions by<br />
DBS in failing to disclose facts about the ARS market despite owing plaintiff a fiduciary duty<br />
based on plaintiff’s discretionary account and DBS’s status as an investment advisor. The court<br />
also found that plaintiff merely needed to meet the pleading standard of Fed. R. Civ. P. 9(b), and<br />
did not have to satisfy the PSLRA’s standard for pleading scienter, because PSLRA’s standard<br />
only applied where the plaintiff’s recovery depended on the defendant acting with a particular<br />
state of mind. Plaintiff further pleaded reliance in that it relied on DBS to purchase securities<br />
consistent with its instruction to purchase only safe and liquid securities. Finally, plaintiff<br />
pleaded loss causation because it would not have owned ARS but for DBS’s misconduct. The<br />
court concluded that defendant’s control over DBS presented a question of fact that could not be<br />
decided at the pleading stage, and denied defendant’s motion to dismiss.<br />
C.1.d<br />
Special Situations Fund III, L.P. v. American Dental Partners, Inc., 775 F. Supp. 2d 227 (D.<br />
Mass. 2011).<br />
Defendant was a company which provided administrative services to dental practices.<br />
Plaintiff claimed the defendant misrepresented its economic performance by failing to disclose<br />
that it was based on wrongful conduct that violated defendant’s agreements with dental practices.<br />
Defendant had stated, inter alia, that there had been no change in how it had conducted its<br />
business with respect to its largest dental client. The court did not find this plausible in light<br />
especially of the pending lawsuit against defendant brought by its largest client. Defendant’s<br />
statement was also held to be at least reckless as to the likelihood of misleading investors.<br />
72
C.1.d<br />
In re Evergreen Ultra Short Opportunities Fund Securities <strong>Litigation</strong>, 275 F.R.D. 382 (D. Mass.<br />
2011).<br />
In a federal securities class action, the court certified a class action holding that (1)<br />
plaintiffs have standing to sue notwithstanding different purchase dates (2) numerosity is<br />
satisfied because the millions of shares traded allowed the court to infer sufficient numbers of<br />
plaintiffs (3) common issues included allegation of the misleading character of the offering<br />
materials and the damages allegedly suffered by plaintiffs (4) the claims are typical of the<br />
alleged same course of conduct and applicable legal theory (5) adequacy of the class<br />
representatives despite different purchase dates and (6) substantial experience of counsel with<br />
similar cases.<br />
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Me. 2011).<br />
C.1.d<br />
Investors brought action against investment firms and investment managers for breach of<br />
fiduciary duty, fraudulent misrepresentation, aiding and abetting tortious conduct, intentional<br />
infliction of emotional distress, civil conspiracy, securities fraud, joint and several liability for<br />
securities fraud, punitive damages, and unjust enrichment. Defendants moved to dismiss on the<br />
grounds that plaintiffs’ claims are legally insufficient. The court held that: 1) investors stated<br />
claim for securities fraud; 2) investors stated claim for joint and several liability under Securities<br />
Exchange Act; 3) investors stated claim for breach of fiduciary duty; 4) investors stated claim for<br />
intentional infliction of emotional distress; 5) investors stated claim for aiding and abetting<br />
tortious conduct; and 6) investors stated claim for constructive trust to be imposed upon<br />
defendants.<br />
Szymborski v. Ormat Technologies, Inc., 776 F. Supp. 2d 1191 (D.C. Nev. 2011).<br />
C.1.d<br />
Shareholders brought securities fraud class action against corporation engaged in the<br />
geothermal and recovered energy power business and against corporation’s officers and directors<br />
alleging that defendants made misleading disclosures about corporation’s accounting methods<br />
and about completion and capacity of their geothermal power plant. The court determined that<br />
the complaint sufficiently included the requisite facts and circumstances to show a prima facie<br />
case of securities fraud including a sufficient showing of scienter. However, the court found that<br />
defendants’ misstatements regarding the completion date and capacity of the power plant were<br />
shielded from securities litigation under the Private Securities <strong>Litigation</strong> Reform Act safe harbor<br />
for forward looking statements and that there was no scienter alleged. The court granted<br />
defendants’ motion in part and denied it in part.<br />
73
C.1.d<br />
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).<br />
Hedge fund filed suit against international corporations, their executives, and their<br />
subsidiaries, alleging market manipulation scheme to artificially inflate price of stock in<br />
violation of federal and Washington state security laws, and state law claims of common law<br />
fraud, breach of contract, veil piercing, and conspiracy. Defendants moved to dismiss on the<br />
grounds of jurisdictional and substantive objections. In granting defendants’ motions, the court<br />
held: (1) it did not have general jurisdiction over Swiss broker; but 2) Swiss broker had sufficient<br />
minimum contacts with United States for exercise of personal jurisdiction; 3) court did not have<br />
personal jurisdiction over German broker; 4) court did not have personal jurisdiction over<br />
nonresident corporation’s principal shareholder; 5) court had personal jurisdiction over<br />
nonresident corporation’s managing director; 6) hedge fund failed to state claim for market<br />
manipulation since its damages were not caused by reliance on an assumption of an efficient<br />
market; 7) complaint failed to allege facts sufficient to give rise to strong inference of scienter on<br />
part of Swiss corporation or its United States agent; 8) allegations that corporation and its<br />
managing director knew that trading would have impact upon market price were insufficient to<br />
allege scienter; 9) allegations of undercapitalization were insufficient to meet scienter<br />
requirement; 10) complaint sufficiently alleged corporation’s managing director’s manipulative<br />
acts with particularity; 11) sua sponte dismissal of claims against non-appearing defendant was<br />
appropriate; and 12) amendment of complaint would be futile, so dismissal without leave to<br />
amend was appropriate.<br />
C.1.d<br />
In re Bear Stearns Companies, Inc., Securities, Derivative and ERISA <strong>Litigation</strong>, 763 F. Supp.<br />
2d 423 (S.D.N.Y. 2011).<br />
Investors in bank stocks and former employees who held stock in an ESOP brought class<br />
action against bank, its officers and directors and accounting firm that performed audits to<br />
recover for violations of federal securities laws and ERISA violations. Defendants moved to<br />
dismiss for failure to state a claim. Under the Private Securities <strong>Litigation</strong> Reform Act, a<br />
securities fraud plaintiff asserting a claim for money damages must 1) specify the statements that<br />
he believes are fraudulent, 2) identify the speaker, 3) state where and when statements were<br />
made, and 4) explain why statements were fraudulent. Securities Exchange Act §10(b) The<br />
district court held that plaintiffs had sufficiently pled allegations of securities fraud with respect<br />
to the bank’s continued use of outdated models to value mortgage backed securities. Plaintiffs<br />
also sufficiently alleged insider trading and control liability against officers and directors of the<br />
bank as well as violations of securities laws against the accounting firm for using improper<br />
auditing standards. The court found that the allegations of securities fraud were material and<br />
were made with the requisite scienter to establish the violations. Plaintiff’s derivative claims and<br />
the ERISA claims were dismissed.<br />
74
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>, 765 F. Supp. 2d 375 (S.D.N.Y. 2011).<br />
C.1.d<br />
Purchasers of auction rate securities (ARS) brought securities fraud class action against<br />
auction dealer. The court held that purchasers failed to state misrepresentation or market<br />
manipulation claim, failed to reasonably rely on dealer’s internal research reports and conclusory<br />
allegations of “fraudulent” or “intentional” misrepresentations and omissions failed to give rise<br />
to “strong” inference of scienter. Auction rate securities (ARS) dealer disclosed its bidding<br />
practices, including its ability to submit support bids or affect the clearing rate for securities to<br />
ensure auction is successful, and that its choice to support auctions was made entirely in its<br />
discretion. Auction rate securities (ARS) dealer disclosed liquidity risks in market to purchasers<br />
of ARS. Securities Exchange Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § 240.10b-5.<br />
In re Sanofi-Aventis Securities <strong>Litigation</strong>, 774 F. Supp. 2d 549 (S.D.N.Y. 2011).<br />
C.1.d<br />
Investors brought putative class action against foreign pharmaceutical company over<br />
alleged failure to disclose, inter alia, safety and other data about one of the company’s drugs.<br />
The court held that even if the company arguably had no independent duty to disclose, once the<br />
company chose to speak, it had a duty to do so truthfully and accurately. However, the statement<br />
by a company executive that “You know everything concerning [the drug]” was mere puffery.<br />
Furthermore, the investors cannot base a fraud claim on a disagreement over how to interpret<br />
drug testing results.<br />
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 52 (S.D.N.Y. 2011).<br />
C.1.d<br />
Domestic and foreign shareholders filed class action asserting derivative claims against<br />
foreign global media corporation and officers for securities fraud in violation of § 10(b) and Rule<br />
10b-5 as well as control person liability, under Securities Exchange Act, for selling ordinary<br />
shares, or American depository receipts (ADRs) representing those shares, by allegedly material<br />
misrepresentations and omissions that artificially inflated stock price. The court held that foreign<br />
media corporation’s ordinary shares purchased by foreign shareholders and underlying<br />
corporation’s American depository receipt (ADR) offering with foreign bank, registered with the<br />
Securities and Exchange Commission (SEC), and also listed on the New York Stock Exchange<br />
(NYSE), but not for trading, were not “listed on domestic exchange,” within meaning of<br />
transaction rule providing § 10(b) securities fraud claims reached only transactions in securities<br />
listed on domestic exchanges, and domestic transactions in other securities. Securities Exchange<br />
Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); 17 C.F.R. § § 240.10b-5, 240.12d1-1(a).<br />
75
C.1.d<br />
Russo v. Bruce, 777 F. Supp. 2d 505 (S.D.N.Y. 2011).<br />
Shareholder filed putative securities fraud action against gold mining company and its<br />
officers alleging that the company made fraudulent misrepresentations regarding status of, and<br />
the likelihood that it would obtain environmental permit necessary to mine gold in Venezuela.<br />
The defendants moved to dismiss and the court granted the motion. Plaintiffs alleged violations<br />
of §10(b) of the Securities Exchange Act in that defendants, with knowledge of or reckless<br />
disregard for the truth, disseminated or approved during the class period false and misleading<br />
statements. Plaintiffs also contend that defendants violated Section 20 of the Securities<br />
Exchange Act by trading securities while in possession of material, non public information.<br />
Lastly, plaintiffs alleged that the defendants were liable as control persons over the wrongful<br />
conduct of Crystallex. Defendants argued that plaintiffs failed to adequately and specifically<br />
allege falsity and scienter in the complaint. Further, they contended that all of the supposed<br />
misstatements were forward looking and immune from liability under the safe harbor of the<br />
PSLRA, 15 USC 78u-5(c). Additionally, defendants argued there was no causation between the<br />
statements and any damages sustained by plaintiffs. The court held that plaintiffs’ complaint<br />
was devoid of particularized facts and circumstances to adequately and sufficiently plead a fraud<br />
case actionable under the Securities Act. Further, the court found that plaintiffs failed to plead<br />
the requisite scienter and that the reasonable inferences for scienter were not as compelling as<br />
those opposing inferences of executive’s non-fraudulent intent. The court allowed plaintiffs to<br />
file an amended complaint but only if they have a good faith basis to do so.<br />
Sawabeh Information Services, Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).<br />
C.1.d<br />
Sawabeh Information Services Company and its wholly owned subsidiary Edcomm, Inc.<br />
brought an action against former Edcomm officers and shareholders, arising from the sale of all<br />
outstanding shares of Edcomm from defendants to plaintiffs. Plaintiffs allege defendants<br />
committed federal securities fraud as well as common law fraud. Defendants moved to dismiss<br />
on the following grounds: 1) the fraud counts - because defendants made no false<br />
representations; plaintiffs have failed to plead facts giving rise to a strong inference that<br />
defendants acted with scienter; plaintiffs could not have reasonably relied on the alleged<br />
misrepresentations; the alleged misrepresentations caused no losses; and the alleged<br />
misrepresentations occurred after the execution of the Term Sheet; 2) the state securities law<br />
claims – because they are preempted by the Martin Act; 3) the contract claims - because the<br />
Term Sheet was not a binding contract; 4) the fraud counts - to the extent that they arise out of<br />
the same facts as plaintiffs’ breach of contract claims; 5) the breach of fiduciary duty - because<br />
plaintiffs fail to allege any damages caused by the alleged breach of fiduciary duty; and 6) the<br />
remaining counts - because the court should decline to exercise supplemental jurisdiction over<br />
these state law claims after dismissing the federal securities claims. In denying in part and<br />
granting in part defendants’ motion, the court held plaintiff’s: 1) alleged material<br />
misrepresentations; 2) properly alleged scienter under Tellabs; 3) properly pled reasonable<br />
reliance; 4) do not need to allege damages with specificity; 5) adequately alleged causation; 6)<br />
76
fiduciary duty and negligent misrepresentation counts are not preempted by the Martin Act; 7)<br />
the Term Sheet was a binding preliminary agreement; 8) properly pled defendants’ breach of the<br />
Term Sheet; 9) allegations concerning the covenant of good faith are duplicative of the breach of<br />
contract claims; 10) fraud counts are not identical to their breach of contract claims; 11) alleged<br />
sufficient damages; and 12) state law claims are not subject to dismissal.<br />
SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147 (S.D.N.Y. 2011).<br />
C.1.d<br />
Defendant failed to disclose to investors that it had permitted a short investor to help<br />
select the reference portfolio of a collateralized debt obligation (“CDO”). Instead of making this<br />
disclosure, defendant engaged a “portfolio selection agent,” which was not informed of the short<br />
investor’s short position, and whose role in the transaction was alleged to reassure other<br />
investors in the CDO. Defendant settled with the SEC. Defendant’s employee, Fabrice Tourre,<br />
filed motions to dismiss the counts against him. Tourre argued, inter alia, that there was no<br />
extraterritorial application of the federal securities laws but the court held that he had<br />
participated in phone calls and sent emails from New York City and that section 17(a) of the<br />
Securities Act applies to both sales and offers to sell, making a complete transaction unnecessary<br />
to impose liability.<br />
C.1.d<br />
City of Roseville Employees’ Ret. Sys. v. EnergySolutions, Inc., No. 09-8633, 2011 WL 4527328<br />
(S.D.N.Y. Sept. 30, 2011).<br />
Plaintiffs sued EnergySolutions (“ES”), its officers and directors, and its former owner,<br />
ENV Holdings, Inc. (“ENV”), under sections 10(b) and 20(a) of the Securities Exchange Act of<br />
1934, based on alleged misstatements and omissions in a registration statement as part of an IPO<br />
and subsequent sale of stock. The court held that ENV was responsible for statements made in<br />
ES’s registration statements, distinguishing the Supreme Court’s holding in Janus Capital<br />
Group, Inc. v. First Derivative Traders. At the time of the IPO, ENV was the sole shareholder<br />
of ES, and was a majority shareholder at the time of the later sale. Despite the fact that the<br />
prospectuses and registration statements were issued by ES, the court concluded that ENV<br />
“made” the allegedly misleading statements because it had ultimate authority over the<br />
statements, including their content and whether and how to communicate it. The court<br />
distinguished this case from Janus because, unlike Janus, the registration statements made it<br />
plain that (1) ENV was a majority shareholder and seller in both transactions; (2) ENV’s owners<br />
controlled ES through ENV; and (3) ES agreed to indemnify ENV for any material<br />
misstatements or omissions in the registration statements. Based on these facts, the court found<br />
that ENV’s position enabled it to control all of ES’s corporate actions. Furthermore, the court<br />
rejected ENV’s argument that the registration statements were attributed to ES, reasoning that<br />
attribution to ES did not preclude attribution to ENV also, particularly in light of the indicia of<br />
control in the registration statements. Therefore, plaintiffs were able to state a claim against<br />
ENV.<br />
77
C.1.d<br />
International Fund Management S.A. v. Citigroup, Inc., 2011 WL 4529640 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Foreign investors brought actions against corporation and others alleging violations of<br />
federal securities laws relating to collateralized debt obligations. The court held that although<br />
investors failed to raise strong inference of scienter required to state § 10(b) securities fraud<br />
claim in connection with write-downs of corporation’s collateralized debt obligations (CDOs).<br />
Investors allegations were sufficient to raise strong inference of recklessness . . . with respect to<br />
corporate officer’s CDO-related statements, investors insufficiently alleged actual reliance, . . .<br />
based on corporation’s alleged misstatements in its filings with Securities and Exchange<br />
Commission (SEC). Investors’ allegations failed to raise strong inference that corporation<br />
recklessly ignored relevant data or otherwise acted with scienter, as required in connection with<br />
its write-downs of collateralized debt obligations (CDO’s), which were allegedly insufficient in<br />
that corporation wrote-down its CDO portfolio by just under half, when relevant indices had lost<br />
nearly all their value. Investors’ allegations, that officer who headed corporation’s investor<br />
relations department received specific information indicating that corporation had billions of<br />
dollars in undisclosed subprime collateralized debt obligation (CDO) exposure, were sufficient to<br />
raise strong inference of recklessness. Securities Exchange Act of 1934 § 10(b), 15 U.S.C.A §<br />
78j(b); 17 C.F.R. § 240.10b-5; Private Securities <strong>Litigation</strong> Reform Act of 1955, § 101 (b), 15<br />
U.S.C.A. § 78u-4(b)(1).<br />
C.1.d<br />
Louisiana Municipal Police Employees Retirement System, v. KPMG <strong>LLP</strong>,, 2011 WL 4629299<br />
(N.D. Ohio Sept. 30, 2011).<br />
Private securities fraud class action alleging that company, officers and outside auditor<br />
participated in fraudulent scheme that caused company to falsify its financial records by<br />
improperly recognizing revenue and manipulating its recording of expenses. The court held that<br />
the Complaint adequately pled scienter against corporate officers. Investor adequately pled<br />
scienter against outside auditor. Investor adequately pled loss causation under Private Securities<br />
<strong>Litigation</strong> Reform Act (PSLRA). Private Securities <strong>Litigation</strong> Reform Act of 1995, § 101(b), 15<br />
U.S.C.A. § 78u-4(b)(1,2). 17 C.F.R. § 240.10b-5(b).<br />
C.1.d<br />
City of Ann Arbor Employees’ Retirement System v. Sunoco Products Co., 2011 WL 5041367<br />
(D.S.C. Oct. 19, 2011).<br />
Investors brought action against corporation and two of its officers, alleging violations of<br />
Securities Exchange Act. The court held that investors’ proposed expert testimony on loss<br />
causation was sufficiently reliable to be admissible; fact issue concerning safe harbor provision<br />
precluded summary judgment; and fact issue regarding scienter precluded summary judgment.<br />
Genuine issue of material fact existed as to whether cautionary language accompanying<br />
78
corporation’s earnings forecasts was meaningful, precluding summary judgment for corporation<br />
on issue of whether its forecasts were protected by safe harbor provision for forward-looking<br />
statements in investors’ action alleging violations of § 10(b) and Rule 10b-5. Securities<br />
Exchange Act of 1934 § 10(b), 15 U.S.C.A § 78j(b); Private Securities <strong>Litigation</strong> Reform Act of<br />
1995, § 102(b), 15 U.S.C.A. § 78u-5(i)(1)(A); 17 C.F.R. § 240.10b-5.<br />
In Re Franklin Bank Corp. Securities <strong>Litigation</strong>, 782 F. Supp. 2d 364 (S.D. Tex.<br />
2011).<br />
C.1.d<br />
Purchasers of common and preferred stock in the failed Franklin Bank Corp. filed<br />
securities fraud class action against bank’s officers and directors, its outside auditor, and<br />
underwriter for preferred stock offer. Defendants moved to dismiss for failure to satisfy the<br />
Private Securities <strong>Litigation</strong> Reform Act (PSLRA) heightened pleading requirements for<br />
securities fraud cases under Rule 9(B). The court granted defendants’ motion, holding that the<br />
Bank’s acts, and its officers,’ directors,’ and auditors’ acts did not give rise to cognizable claims<br />
because for failure to allege an omission to be sufficiently “material” and failure to allege<br />
scienter sufficient to support a securities fraud claim.<br />
Puskala v. Koss Corp., 799 F. Supp.2d 941 (E.D. Wis. 2011).<br />
C.1.d<br />
Investors brought putative class action against corporation and certain of its officers for<br />
securities fraud and control-person liability involving a $50 million embezzlement scheme by the<br />
vice president of finance. The investors also sued the company’s outside auditors. Plaintiffs<br />
alleged that the defendants had recklessly certified the accuracy of the company’s financial<br />
statements and recklessly represented that the financial statements fairly represented the<br />
company’s financial position. The court rejected the company’s motion to dismiss in part<br />
holding that the company could be liable under the doctrine of apparent authority for the V-P<br />
finance’s “statements to the market while acting with apparent authority, and therefore the<br />
company is liable for her fraud even though she was not trying to further the company’s goals.”<br />
The claim against the auditor was dismissed because its conduct was merely negligent and not<br />
reckless.<br />
e. Standing<br />
C.1.e<br />
Amorosa v. AOL Time Warner Inc., 2011 WL 310316 (2nd Cir. 2011).<br />
Plaintiff brought suit against defendants alleging a violation of Section 10(b) of the<br />
Securities Exchange Act of 1934 based on misleading statements contained in an audit of AOL’s<br />
financial statements. The district court granted defendants’ motion to dismiss. On affirming the<br />
district court, the Second Circuit addressed, inter alia, defendant’s “holder” Rule 10b-5 claim.<br />
Essentially, plaintiff attempted to argue that it had standing to sue based on the Exchange Act as<br />
79
a holder of securities, even though it did not purchase or sell the securities. The court rejected<br />
this argument because the Supreme Court has specifically announced that there is no holder<br />
claim under the federal securities laws.<br />
In re Smith Barney Transfer Agent <strong>Litigation</strong>, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).<br />
C.1.e<br />
Investors in mutual funds brought class action against funds’ investment advisors and<br />
their affiliates, alleging securities fraud in violation of the Securities Exchange Act of 1934.<br />
Defendants moved to dismiss plaintiffs’ claims under Section 10(b) of the Exchange Act for lack<br />
of standing on three separate grounds: (1) the claims must be pled as derivative rather than direct<br />
claims; (2) plaintiffs purchased shares in only three of the 105 funds at issue; and (3) claims by<br />
mere holders of the fund are barred because they neither purchased nor sold shares during the<br />
class period. As to the first issue, the court noted the lack of case law on pleading a Section<br />
10(b) claim derivatively. Nonetheless, the court found that the plaintiffs suffered individual<br />
injuries distinct from the injury to the corporation. Accordingly, direct claim was sufficient and<br />
not required to be plead derivatively. Next, the court held that plaintiffs lacked standing to the<br />
extent that they did not purchase the funds at issue. The court reasoned that although a lead<br />
plaintiff need not satisfy all the elements of standing, at least one named plaintiff must.<br />
Accordingly, plaintiffs’ claims as to each fund not held by a named plaintiff were dismissed.<br />
Finally, the court dismissed any “holder” claims, claims in which plaintiffs merely held the stock<br />
rather than purchase or sell it, brought by plaintiffs because the courts do not recognize holder<br />
claims under the Exchange Act.<br />
Scottrade, Inc. v. Broco Investments, 774 F. Supp. 2d 573 (S.D.N.Y. 2011).<br />
C.1.e<br />
Online securities broker brought action against investment broker and alleged hackers,<br />
seeking to recover funds it paid to its customers to reimburse them for money customers lost in<br />
securities fraud scheme. Defendant moved to dismiss. The court found that this action presented<br />
a question of first impression. Ultimately, the court concluded that plaintiff lacked standing to<br />
pursue claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934<br />
because it did not purchase or sell any securities. Instead, plaintiff merely provided the interface<br />
and systems by which defendant’s purchases and sales occurred. The court further reasoned that<br />
although plaintiff “effected” customer trades, as the broker, it did not itself initiate, order or have<br />
any input on any trades or decisions to place orders. Accordingly, the court granted defendants’<br />
motion to dismiss.<br />
80
C.1.e<br />
In re Bank of America Corp. Securities, Derivative, and ERISA <strong>Litigation</strong>, 2011 WL 3211472<br />
(S.D.N.Y. 2011).<br />
Plaintiffs brought a class action suit asserting that defendants were liable for a series of<br />
misstatements and omissions related to Bank of America’s acquisition of Merrill Lynch in<br />
violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Defendants<br />
filed a motion to dismiss based on, inter alia, lack of standing to assert claims on behalf of<br />
certain securities holders. In particular, the court found that the complaint expanded the plaintiff<br />
class to encompass additional categories of securities owners that purchased preferred shares,<br />
options and debt securities. However, defendants successfully argued that these claims should<br />
be dismissed because the class plaintiffs, who only purchased common stock, did not themselves<br />
purchase or sell the other types of securities. In relying on Lujan v. Defenders of Wildlife, 504<br />
U.S. 555 (1992), the court found that a plaintiff must have suffered an injury in fact, one that is<br />
concrete and particularized, to have standing. Plaintiffs could not satisfy this requirement<br />
without actually having purchased or sold the securities subject to the complaint. Accordingly,<br />
plaintiffs’ claims were dismissed to the extent they encompassed non-common stock claims.<br />
McCann v. Hy-Vee, 2011 WL 250262 (N.D. Ill. 2011).<br />
C.1.e<br />
Plaintiff sued her ex-husband alleging violations of Rule 10b-5 of the Securities<br />
Exchange Act of 1934 based on his and defendant’s false statement that defendant’s stock was<br />
non-transferrable. On defendant’s motion to dismiss, defendant claimed that plaintiff was never<br />
a purchaser or seller of the stock at issue. Plaintiff argued that two possible transactions made<br />
her a purchaser or seller. First, a consent decree was entered, which awarded plaintiff the stock<br />
at issue. Second, the court, after entrance of the consent decree, later ordered plaintiff to turn<br />
over the same shares. The defendant argued that both these transactions merely amounted to a<br />
temporary holding of the stock, not actual ownership, purchase or sale. The court disagreed, and<br />
held that for purposes of the motion to dismiss, the consent decree award could have constituted<br />
a sale to plaintiff. Nonetheless, plaintiff’s claims were still dismissed because they were barred<br />
by the five year statute of repose.<br />
Drescher v. Baby It’s You, LLC, 2011 WL 63615 (C.D. Cal 2011).<br />
C.1.e<br />
Defendant approached plaintiff about investing in a Broadway production that defendant<br />
was writing. Defendant allegedly made misrepresentations to plaintiff, which plaintiff claimed<br />
caused him to invest in defendant’s project in violation of Rule 10b-5 of the Securities Exchange<br />
Act of 1934. Defendant filed a motion to dismiss. As an initial matter, the court addressed<br />
whether plaintiff had standing to bring suit. The court found that plaintiff failed to sufficiently<br />
plead a violation of the Exchange Act because plaintiff did not include any allegation in the<br />
complaint that he purchased securities from defendants. Although plaintiff provided defendant<br />
81
with an sum of money in the form of an investment, it does not follow that such investment,<br />
absent further allegations, is a purchase of securities.<br />
Bello v. Chase Home Finance, 2011 WL 133351 (S.D. Cal. 2011).<br />
C.1.e<br />
Plaintiff brought suit against defendant alleging that it committed securities fraud under<br />
the Securities Exchange Act of 1934 by securitizing plaintiff’s mortgage. On defendant’s motion<br />
to dismiss, the court found that plaintiff lacked standing to sue for securities fraud because he<br />
was not a purchaser of any securities resulting from the securitization of his and other loans.<br />
Accordingly, the court granted defendant’s motion to dismiss.<br />
Gehron v. Best Reward Credit Union, 2011 WL 976624 (S.D. Cal. 2011).<br />
C.1.e<br />
Plaintiffs asserted several claims against defendants relating to the securitization and sale<br />
of plaintiff’s mortgage loans. Defendants brought a motion to dismiss plaintiff’s claims,<br />
including defendants’ alleged violation of Section 10(b) of the Securities Exchange Act of 1934.<br />
The court, in granting defendants’ motion, found that plaintiff’s mere allegation that defendants<br />
securitized and sold plaintiff’s mortgage did not make plaintiffs purchasers of securities, a<br />
required element to have standing to sue for securities fraud. Accordingly, the court dismissed<br />
plaintiff’s claims with prejudice.<br />
Slaughter v. Laboratory Medicine Consultants, Ltd., 2011 WL 1486228 (D. Nev. 2011).<br />
C.1.e<br />
Plaintiff, a prior employee of defendant, brought suit alleging violations of Rule 10b-5 of<br />
the Securities Exchange Act of 1934 based on defendant’s conversion of stock it was allegedly<br />
supposed to place in escrow. As an initial matter, the court addressed Plaintiff’s standing to<br />
bring a claim under the Exchange Act. The court found that plaintiff did not state any facts in his<br />
complaint that amounted to him either selling or purchasing defendant’s stock. Plaintiff<br />
attempted to argue that he did not need to have purchased or sold the security because it was<br />
“fraudulently redeemed.” However, the court ruled that plaintiff was not forced to sell his stock<br />
or even that it was sold. Rather, defendant’s alleged actions were solely based on failing to place<br />
the stock in escrow and then converting it. Accordingly, the court held that the claim did not fall<br />
under the Exchange Act because it did not involve a transaction in securities within the meaning<br />
of Rule 10b-5 or Section 10(b) of the Exchange Act.<br />
82
f. Affirmative Defenses<br />
Wilson v. Merrill Lynch & Co., Inc., 2011 WL 5515958 (2nd Cir. 2011).<br />
C.1.f<br />
Investors brought a class action against Merrill Lynch alleging securities fraud in<br />
violation of the Securities Exchange Act of 1934 related to auction rate securities (“ARS”)<br />
purchases. Plaintiffs alleged that defendant engaged in a scheme to manipulate the ARS market<br />
by using its own capital to place bids in order to prevent auction failures. The district court<br />
entered an order granting defendant’s motion to dismiss and investor appealed. On appeal,<br />
defendant argued that it had made various public disclosures of its ARS auction practices,<br />
several of which were the result of an SEC investigation. In evaluating plaintiffs’ market<br />
manipulation claims, the court found that Second Circuit case law clearly required a showing<br />
that an alleged manipulator engaged in market activity aimed at deceiving investors as to how<br />
other market participants had valued a security. The case law was less clear as to when<br />
disclosures were sufficient to negate a claim that a certain market practice is manipulative. In<br />
addressing the disclosures, the court recognized the “bespeaks caution” doctrine, which provided<br />
protection to someone who adequately warned investors of certain risks. However, the court<br />
noted that cautionary words about future risk cannot insulate one from liability for the failure to<br />
disclose that the risk has already transpired. Nonetheless, the court, in affirming the district<br />
court, held that Merrill’s disclosures were adequate to defeat the allegation that its practices<br />
amounted to a market manipulation.<br />
U.S. v. Behrens, 2011 U.S. App. LEXIS 14294 (8th Cir. July 13, 2011).<br />
C.1.f<br />
Defendants pled guilty pursuant to a plea agreement to, inter alia, the violation of Rule<br />
10b-5 of the Securities Exchange Act of 1934 brought in an enforcement action. Defendants<br />
were sentenced to serve jail time. At the sentencing hearing, Defendants asserted the “noknowledge”<br />
provision as an affirmative defense. Under the no-knowledge provision, a defendant<br />
is not subject to imprisonment if he or she proves that he had no knowledge of such rule or<br />
regulation. The district court held that, as a matter of law, pleading guilty to a statutory offense<br />
prevents a defendant from asserting the no-knowledge defense. On appeal, the Eight Circuit<br />
reversed and remanded, holding that the government must prove that a person “willfully”<br />
violated Rule 10b-5 prior to that person being imprisoned. Pleading guilty does not, as a matter<br />
of law, prevent a defendant from asserting the no-knowledge defense. Accordingly, the district<br />
court erred by holding defendants could not have asserted the no-knowledge defense.<br />
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Maine 2011).<br />
C.1.f<br />
Investors brought action against investment firms and managers for, inter alia, Section<br />
10(b) and Rule 10b-5 violations arising out of recommendation made in connection with a hedge<br />
fund. Defendants allegedly made these recommendations verbally and through confidential<br />
offering memoranda. Plaintiffs alleged that the hedge fund was merely a feeder fund for the<br />
Madoff fund. Defendants made a motion to dismiss on two grounds. First, defendants argued<br />
83
that the claims were barred by the five year statute of repose. According to defendants, the five<br />
year statute of repose for Section 10(b) and Rule 10b-5 violations began to run from the date the<br />
buyer purchased the securities. Second, defendants argued that plaintiffs’ complaint failed to<br />
contain an allegation that defendants wrote or published the confidential offering memoranda.<br />
The court recognized an exception to the statute of repose because, as the confidential offering<br />
memoranda was sent to plaintiffs every year, the fraudulent statements were ongoing and<br />
continuing. Accordingly, the alleged misrepresentations came from a common group of<br />
defendants in pursuit of a common scheme and were not barred by the statute of repose. The<br />
court also dismissed defendants’ argument that they did not make or publish the confidential<br />
offering document. The court reasoned that plaintiffs sufficiently alleged the defendants made<br />
these statements to survive a motion to dismiss.<br />
Hill v. State Street Corporation, 2011 WL 3420439 (D. Mass. Aug. 3, 2011).<br />
C.1.f<br />
Plaintiffs brought suit alleging, inter alia, violations of the Securities Exchange Act of<br />
1934 related to false and misleading statements about defendants’ practice and its portfolio<br />
valuation. Defendants raised the defense that its statements should be considered honestly held<br />
beliefs that were reasonably based on opinions that are not actionable as a matter of law. The<br />
court differentiated two cases in which defendants relied on. First, in Virginia Bankshares, Inc.<br />
v. Sandberg, 501 U.S. 1083 (1991), the Supreme Court held that a statement couched in<br />
conclusory or qualitative terms purporting to explain an executive’s reasons for recommending<br />
certain action is actionable if it includes knowingly false statements. Defendants wrongly<br />
attempted to read this holding in the inverse: that a conclusory statement cannot be actionable if<br />
it was not knowingly false. The court disagreed. Further, defendants wrongly relied on<br />
Plumbers Union Local No. 12 v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011),<br />
which held that defendants will not be liable for their opinions that were honestly held when<br />
formed, but simply turned out later to be inaccurate; nor are they liable because they could have<br />
formed better opinions. The court reasoned that the statements at issue in Nomura were related<br />
to ratings established by Standard & Poor’s and Moody’s, which were more reliable than<br />
defendants’ own, self serving assessments. Accordingly, the court dismissed defendants’ claim<br />
that the statements were not actionable as a matter of law.<br />
Johnson v. Siemens AG, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011).<br />
C.1.f<br />
Plaintiff brought a class action against defendants pursuant to the Securities Exchange<br />
Act of 1934 alleging that defendants disseminated false statements about the financial well-being<br />
of the company, which artificially inflated the prices of defendants’ securities. Defendants<br />
moved to dismiss the complaint based on (1) the failure to plead scienter with particularity, (2)<br />
the statements fell within the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform<br />
Act of 1995 (“PSLRA”) and the “bespeaks caution” doctrine, (3) the claims are barred by the<br />
statute of limitations, and (4) the plaintiff lacks standing. The court ultimately granted the<br />
motion to dismiss solely based on the failure to adequately allege scienter. The court reasoned<br />
84
that the complaint failed to allege facts that gave rise to an inference of fraudulent intent<br />
regarding the statements made by defendants because, at most, plaintiff’s allegations merely<br />
amounted to allegations that the company was mismanaged.<br />
C.1.f<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Technologies, 793 F.Supp. 2d 651 (S.D.<br />
N.Y. 2011).<br />
Hedge fund operators brought class action against issuer and related individuals seeking<br />
damages in connection with funds’ purchases of shares in issuer. Specifically, plaintiffs claimed<br />
that the defendants intentionally made misrepresentations related to press releases concerning<br />
false future prospects that inflated defendant’s share price in violation of Section 10(b) of the<br />
Securities Exchange Act of 1934. Defendants brought a motion to dismiss, alleging, inter alia,<br />
the affirmative defense that the statements were sufficiently forward-looking that they fell within<br />
the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”).<br />
The court held that under the PSLRA, a defendant is not liable if the forward-looking statement<br />
is identified and accompanied by meaningful, cautionary language, is immaterial or the plaintiff<br />
fails to prove that it was made with actual knowledge that it was false or misleading. The court<br />
found that the plaintiffs failed to allege facts sufficient to make the requisite showing, other than<br />
blanket assertions of knowledge, that defendants actually knew the statements were false when<br />
made. Accordingly, the court granted defendants’ motion.<br />
In re Smith Barney Transfer Agent <strong>Litigation</strong>, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).<br />
C.1.f<br />
Investor in mutual funds brought class action against funds’ investment advisors and their<br />
affiliates, alleging securities fraud in violation of the Securities Exchange Act of 1934.<br />
Defendants moved to dismiss plaintiff’s claims, inter alia, as barred by the statute of limitations.<br />
Defendants contended that a reasonably diligent plaintiff would have discovered the alleged<br />
scheme more than two years prior to filing the complaint. However, the court disagreed. The<br />
court reasoned that investigators in a related investigation had yet to determine whether there<br />
were violations of the disclosure rules. Accordingly, the court found that if the investigators<br />
could not discover the scheme while the instant case was ongoing, even a reasonably diligent<br />
plaintiff could not have discovered the alleged scheme more than two years ago.<br />
C.1.f<br />
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>, 2011 WL 1330847 (S.D.N.Y. Mar. 30,<br />
2011).<br />
Plaintiffs brought suit alleging Section 10(b) and Rule 10b-5 Securities Exchange Act of<br />
1934 violations related to misrepresentations concerning auction rate securities (“ARS”).<br />
Plaintiffs alleged that defendants made misstatements related to the reasoning behind the rates of<br />
ARS increasing during 2007 and the bid supporting procedures used by defendants. On motion<br />
85
to dismiss, defendants claimed, inter alia, the “bespeaks caution” doctrine protected any<br />
statements made in connection with the ARS market. The court found that the bespeaks caution<br />
doctrine protected forward-looking statements so long as adequate cautionary language disclosed<br />
the risks associated with ARS. The cautionary language must so clearly disclaim the risks that<br />
the alleged misstatements could not be said to be material. The court, in dismissing defendants’<br />
motion and taking the allegations in the complaint as a whole, held that there was a question as<br />
to whether the alleged disclosures accurately informed the investors of the risks of ARS.<br />
Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
C.1.f<br />
Plaintiffs brought a complaint against defendants alleging violations of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 related to the purchase of equity linked<br />
securities (“ELKs”). In particular, plaintiffs alleged that defendants made misrepresentations or<br />
omissions related to the risks associated with ELKs. On defendants’ motion to dismiss,<br />
defendants claimed that any statements they made in association with ELKs were tempered by<br />
the plethora of warnings and disclaimers provided to plaintiffs prior to their purchase of the<br />
ELKs. The court found this argument to essentially be the “bespeaks caution” doctrine defense,<br />
which holds that certain forward-looking statements that directly contradict cautionary language<br />
in the offering documents will generally be considered immaterial as a matter of law. However,<br />
the court held that such disclaimers did not defeat plaintiffs’ allegations of misrepresentations.<br />
Rather, the disclaimers did not directly relate to the risk that was allegedly misrepresented, a<br />
requirement of the bespeaks caution doctrine. Accordingly, the court denied defendants’ motion<br />
to dismiss on the Section 10(b) claim.<br />
In re Anadigics, Inc., Securities <strong>Litigation</strong>, 2011 WL 4594845 (D. N.J. Sept. 30, 2011).<br />
C.1.f<br />
Plaintiffs brought a class action suit against defendant alleging violations of Section 10(b)<br />
and Rule 10b-5 of the Securities Exchange Act of 1934 related to multiple statements made in<br />
various press releases and earnings calls. Allegedly, defendant was losing its market share to<br />
various competitors and failed to disclose this fact to plaintiffs. Moreover, defendant allegedly<br />
made affirmative statements indicating it currently had a substantial market share of the relevant<br />
market. On its motion to dismiss, defendant made two main arguments. First, defendant argued<br />
that, absent an affirmative duty to disclose, it was not required to disclose the fact that it was<br />
losing marking share. The court agreed, reasoning that defendant had no duty to disclose the<br />
information in question. The court reasoned that the applicable information did not require<br />
disclosure, unlike a situation in which there is insider trading, a statute requiring disclosure, or an<br />
inaccurate, incomplete or misleading prior disclosure. Second, defendant argued that it was<br />
protected from any statements it allegedly made by the safe harbor provision of the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”). Again, the court agreed, holding that a<br />
party is not liable under Section 10(b) or Rule 10b-5 for forward looking statements provided<br />
they are (1) identified as such, and accompanied by meaningful cautionary statements; (2)<br />
86
immaterial; or (3) made without actual knowledge that the statement was false and misleading.<br />
The court found that defendant’s use of certain terms, including “expecting,” “anticipating” and<br />
“believing,” were sufficient to indicate they were forward looking statements.<br />
In re Lincoln Educ. Srvs. Corp. Sec. Lit., 2011 WL 3912832 (D. N.J. Sept. 6, 2011).<br />
C.1.f<br />
Plaintiffs filed a securities fraud claim against defendant educational institution, alleging<br />
defendant misled investors concerning the implementation of reforms to defendant’s admissions<br />
standards, which allegedly would have affected the student enrollment growth rate. Defendant,<br />
on motion to dismiss, alleged that the statements allegedly made in connection with the change<br />
in admission standards were forward-looking in nature and not subject to claims of<br />
misrepresentations or omissions under the Securities Exchange Act of 1934. The court found<br />
that the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”)<br />
states that forward-looking statements are protected if they are identified as forward looking and<br />
are accompanied by meaningful cautionary statements identifying important factors that could<br />
cause actual results to differ from those in the forward-looking statement. Plaintiffs argued that,<br />
although the statements were forward looking, the warnings were not adequate to provide<br />
meaningful cautionary language. However, the court found that the cautionary language was<br />
sufficient, and the statements fell within the safe harbor provision.<br />
Love v. Alfacell Corp., 2011 WL 4915874 (D. N.J. Oct. 17, 2011).<br />
C.1.f<br />
Plaintiff, who executed stock options in defendant company, brought suit against<br />
defendants for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934. Plaintiff alleged that defendants disseminated false and misleading statements related to<br />
pharmaceutical drug trials when they claimed a phase would be completed by a certain date.<br />
After the date passed, and the phase had not been completed, plaintiff’s stock dropped<br />
significantly in value. Defendants asserted, in a motion to dismiss, that any statements made<br />
were either not material, or subject to the safe harbor provision of the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 (“PSLRA”). The court found that a reasonable investor, in<br />
viewing all of the information made available by defendant, would not have considered the<br />
projections as significantly altering the total mix of information available. Moreover, the various<br />
disclaimers given by defendants prior to each statement turned the statements into mere<br />
predictions of the completion date of the phase at issue. Accordingly, the court dismissed<br />
plaintiff’s Section 10(b) and Rule 10b-5 claims.<br />
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).<br />
C.1.f<br />
Plaintiffs brought securities fraud class action against defendants, alleging defendants had<br />
material information about the true state of defendant corporation’s financial condition, including<br />
87
credit quality and delinquency of collections and wrongfully withheld such information. As a<br />
result, plaintiffs alleged that defendants engaged in a deceptive practice to artificially inflate the<br />
financial results and stock prices of the corporation. Defendants first argued that the statute of<br />
limitations bars Plaintiffs’ claims. The court noted that the statute of limitations period began to<br />
run at the point plaintiffs knew or reasonably should have discovered facts constituting the<br />
violation, including the requisite scienter. The court could not find, as a matter of law, that<br />
Plaintiffs’ allegations were time-barred. Next, defendants claimed that the statements about<br />
credit quality were forward looking and protected by the bespeaks caution and safe harbor<br />
doctrines. However, the court found that the actual statements made reported various current or<br />
historical pieces of information, including the company’s credit quality, which were knowable at<br />
the time the statements were made. Accordingly, those statements made were not forward<br />
looking. Taking the allegations as a whole, the court found that the plaintiffs had made sufficient<br />
allegations to at least survive a motion to dismiss.<br />
C.1.f<br />
In re Conventry Healthcare, Inc. Securities <strong>Litigation</strong>, 2011 WL 1230998 (D. Md. Mar. 30,<br />
2011).<br />
Arising out of defendants’ motion to dismiss, the court addressed plaintiffs’ allegations<br />
that defendants committed securities fraud in violation of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934 by publicly praising its “Private Fee-for Service” (“PFFS”)<br />
program, while they knew that the program was actually failing. The court found that the<br />
plaintiffs adequately alleged the various statements made relating to the PFFS were misleading.<br />
However, prior to making this determination, the court found that the statements may not be<br />
actionable if they fell within the parameters articulated by the judge-made “bespeaks caution”<br />
doctrine. Under this doctrine, cautionary language in an offering document, as part of the total<br />
mix of information, may negate the materiality of an alleged misstatement or omission. The<br />
court denied defendants’ motion. While the court found the decision a close question, the court<br />
reasoned that the plaintiffs had at leased alleged enough information to survive the motion to<br />
dismiss.<br />
C.1.f<br />
City of Ann Arbor Employees’ Retirement System v. Sonoco Products Co., 2011 WL 5041367<br />
(D. S.C. Oct. 19, 2011).<br />
Plaintiffs asserted a cause of action under Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 claiming defendants made false economic forecasts. Specifically,<br />
plaintiffs alleged that defendants cushioned their 2007 forecasts by failing to disclose several<br />
adverse incidents in the forecast, which created an unrealistic prediction of productivity<br />
improvements and earnings forecasts. Purportedly, defendants knew these adverse incidents<br />
would materially affect their financial results, and the failure to disclose the incidents artificially<br />
inflated the company’s stock price. Defendants made a motion for summary judgment based on<br />
plaintiffs’ inability to establish the elements of a Section 10(b) or Rule 10b-5 claim. In<br />
particular, defendants argued that the statements were protected under the safe harbor provision<br />
88
of the Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), and that the statements were<br />
either true or not material. The court held that the statements, including the non-forward looking<br />
statements of the assumptions underlying or relating to the forward-looking statements, were<br />
considered forward-looking. However, in agreeing with plaintiffs’ arguments, the court found<br />
that a question of fact existed as to whether the safe harbor provision applied to defendants’<br />
statements based on their failure to provide adequate and meaningful cautionary language in<br />
conjunction with the statements, a requisite of the safe harbor provision. Further, the court held<br />
that a question of fact existed as to whether defendants’ representations were knowingly false in<br />
light of the omitted information relating to the adverse incidents. Accordingly, the court denied<br />
summary judgment.<br />
Hopson v. MetroPCS Communications, Inc., 2011 WL 1119727 (N.D. Tex. Mar. 25, 2011).<br />
C.1.f<br />
Plaintiffs brought a class action suit under Rule 10b-5 and Section 10(b) of the Securities<br />
Exchange Act of 1934 based on losses sustained after purchasing shares of defendants’ common<br />
stock at allegedly artificial prices as a result of defendants’ materially false, misleading and<br />
reckless statements. In particular, plaintiffs alleged that defendants made false statements in<br />
their earnings guidance, their predictions about the economy and future competition from current<br />
competitors. Defendants brought a motion to dismiss the complaint for failure to state a claim<br />
based on, inter alia, the affirmative defense that any statements made were protected by the safeharbor<br />
provision of the Private Securities <strong>Litigation</strong> Reform Act of 1995(“PSLRA”). The court,<br />
in granting defendants’ motion to dismiss, held that the statements were protected under the<br />
PSLRA, as they explicitly fell into the category of forward-looking statements, because they<br />
simply contained projections of revenues and future economic performance. Moreover, the court<br />
found that each statement carried meaningful cautionary language, including a warning that<br />
certain factors may affect the forward-looking statements and used the terms “expects” in<br />
various statements. Plaintiffs attempted to circumvent the safe harbor provision by arguing that<br />
defendants had actual knowledge that their statements were false when made. However, the<br />
court held that plaintiffs’ allegations did not sufficiently plead the specific information that<br />
defendants’ had actual knowledge of, who reviewed the information or how the information<br />
contradicted the defendants’ forward-looking statements. In addition, the court, in addressing<br />
plaintiffs’ claims that there was a strong inference of scienter based on alleged insider trading,<br />
held that any insider trading was made pursuant to Rule 10b5-1 trading plans. Such plans, which<br />
are pre-determined agreements to purchase or sell stock made before any inside information is<br />
learned, acts as an affirmative defense to insider trading. The court also held that the existence<br />
of such plans rebutted plaintiffs’ claims that the insider trading supported the scienter claim.<br />
SEC v. Geswein, 2011 WL 4541308 (N.D. Ohio Aug. 2, 2011).<br />
C.1.f<br />
The SEC brought a complaint against defendants based on, inter alia, violations of<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 generally relating to<br />
fraudulent accounting practices during the period of 2002 to 2007. Defendants moved to dismiss<br />
89
the complaint, asserting the statute of limitations as a defense. The SEC argued that the statute<br />
of limitations, including the five year statute of repose, was tolled based on the fraudulent<br />
concealment by the defendants of the facts necessary to discover the fraudulent accounting<br />
practices. In particular, the SEC alleged that defendants falsely responded to a checklist<br />
provided by the SEC to defendants relating to their accounting practices. Defendants argued that<br />
they simply were silent as to certain requests, thus they did not actively conceal any facts. The<br />
court, in denying defendants’ motion to dismiss, held that the complaint adequately alleged that<br />
the defendants engaged in active concealment. The court found that defendants engaged in<br />
active concealment by both giving affirmatively false statements and remaining silent as to the<br />
checklist provided by the SEC. The court reasoned that while silence is generally not enough to<br />
allege active concealment, plaintiffs were under a duty to disclose facts requested by the<br />
checklist.<br />
C.1.f<br />
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc., 788 F. Supp.2d 609 (S.D. Ohio<br />
2011).<br />
Plaintiff brought suit against defendants alleging a series of false or misleading<br />
statements concerning two initiatives at defendants’ company in violation of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934. On motion to dismiss, defendants asserted<br />
the affirmative defense that any allegedly false or misleading statements were puffery or<br />
otherwise protected by the safe-harbor provision of the Private Securities <strong>Litigation</strong> Reform Act<br />
of 1995 (“PSLRA”). The court agreed, finding that the safe-harbor protection is only overcome<br />
if the statements are material, the defendants had actual knowledge of the false or misleading<br />
nature of the statement and if the statement was not identified as forward-looking or lacking<br />
meaningful cautionary statements. All of the statements made by defendants were either puffery,<br />
as they were simply loosely optimistic statements that were so vague and lacking in specificity<br />
that they clearly constituted the opinions of the speaker, or protected as forward-looking<br />
statements.<br />
Antelis v. Freeman, 799 F.Supp.2d 854 (N.D. Ill. 2011).<br />
C.1.f<br />
Investor filed suit against his former business partner alleging violations of Rule 10b-5 of<br />
the Securities Exchange Act of 1934 based on investments in promissory notes sold by a<br />
company allegedly recommended by defendant. Plaintiff contended that defendant used the<br />
company as a shell corporation designed to allow defendant to defraud investors. On a motion to<br />
dismiss, defendant argued that the two year statute of limitations period had run because plaintiff<br />
should have discovered the facts that constituted the violation more than two years before filing<br />
his claim. As a preliminary matter, the court noted that the statute of limitations, as an<br />
affirmative defense, is not typically a part of a Rule 12(b)(6) motion because complaints are not<br />
required to anticipate such affirmative defenses to survive a motion to dismiss. Accordingly, the<br />
court limited the statute of limitation analysis strictly to whether the facts plaintiff pleaded in his<br />
complaint showed the Rule 10b-5 violation was filed after the statute of limitations. The court<br />
90
held that the statute of limitations begins to run at the point which plaintiff was on “inquiry<br />
notice” of the fraud. However, the court recognized the new inquiry notice standard, as<br />
recognized in the U.S. Supreme Court case Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010),<br />
which focused on when a reasonable investor would have actually uncovered the facts<br />
constituting the fraud. The court found plaintiff’s complaint was not time barred because, based<br />
on the allegations in the complaint, nothing indicated the plaintiff should have discovered the<br />
fraud.<br />
In re STEC Inc. Securities <strong>Litigation</strong>, 2011 WL 2669217 (C.D. Cal. June 17, 2011).<br />
C.1.f<br />
Plaintiffs brought a class action suit against defendants alleging defendants made false<br />
statements and omissions that inflated the company’s stock price and ultimately caused the price<br />
to collapse when the truth was disclosed. In particular, plaintiffs alleged that defendants falsely<br />
represented its business prospects, including falsely stating that a particular purchase contract by<br />
defendants’ largest customer would be continually renewed, when in fact it would not.<br />
Defendants moved to dismiss the claim for failure to state a claim and that Plaintiffs had not<br />
sufficiently alleged the existence of a false statement in the registration statement or prospectus.<br />
Defendants also asserted the affirmative defense of the safe harbor provision of the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), and the bespeaks caution doctrine. The<br />
court found that the bespeaks caution doctrine provides a mechanism by which a court can rule<br />
as a matter of law that defendants’ forward-looking representations contained enough cautionary<br />
language or risk disclosure to protect a defendant against claims of securities fraud. However,<br />
the court held that the statements made by defendants were not meaningfully cautionary because<br />
they did not relate directly to the forward-looking statements at issue. Specifically, the<br />
cautionary statements were not of sufficient similar significance to the recurring nature of the<br />
purchase contract to indicate it was a “one-off” contract. Accordingly, the court denied<br />
defendants’ motion to dismiss.<br />
In re Verifone Holdings Inc. Securities <strong>Litigation</strong>, 2011 WL 1045120 (N.D. Cal. Mar. 22, 2011).<br />
C.1.f<br />
This case represents the consolidation of nine securities fraud class actions filed against<br />
defendants, including officers of defendant corporation, relating to the corporation’s public<br />
announcement that it had to restate its quarterly financial statements for at least the previous<br />
three quarters to correct errors that overstated previously reported profits. In particular, plaintiffs<br />
alleged that several of the corporate officers committed insider trading in violation of the<br />
Securities Exchange Act of 1934 by trading company stock on this information prior to the<br />
public announcement. On defendants’ motion to dismiss, several of the defendants claimed that<br />
Rule 10b5-1 acted as an affirmative defense to the insider trading claim. Rule 10b5-1 permits an<br />
insider with inside information to trade in stock so long as the trades were pursuant to a contract,<br />
instructions given to another or a written plan that did not permit the person to exercise any<br />
influence over the purchase or sale of stock after learning the inside information. Accordingly,<br />
the court found that so long as defendants executed the purchase or sale of defendants’ stock<br />
91
pursuant to Rule 10b5-1, they would not be held liable for insider trading. The court held that<br />
the defendants traded stock solely based on their 10b5-1 plans, which were in effect prior to any<br />
known errors on the company’s financial statements. Accordingly, the court granted defendants’<br />
motion to dismiss.<br />
Applestein v. Medivation, Inc., 2011 WL 3651149 (N.D. Cal. Aug. 18, 2011).<br />
C.1.f<br />
Plaintiffs filed a securities class action against defendants based on violations of Section<br />
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 by making misleading<br />
representations related to the results of a clinical trial for a drug. In support of their claim,<br />
plaintiffs argued that insider trading allegedly perpetrated by corporate officers was indicative of<br />
scienter for the claims under the Securities Exchange Act of 1934. Defendants, in their motion<br />
to dismiss, argued the affirmative defense that any trading done on their behalf was pursuant to<br />
Rule 10b5-1 plans. Such plans are a predetermined plan or contract to trade in stock created prior<br />
to becoming aware of material non-public information. However, the court concluded that<br />
defendants could not claim the defense under Rule 10b5-1 because plaintiffs alleged that the<br />
plans were adopted by the individual defendants after they knew of the inside information.<br />
Nonetheless, the court determined that plaintiffs failed to adequately plead facts giving rise to an<br />
inference of scienter, and dismissed the complaint without prejudice.<br />
Curry v. Hansen Medical, Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).<br />
C.1.f.<br />
Plaintiffs, who purchased or acquired common stock in defendant corporation, brought a<br />
class action against defendants alleging violations of Rule 10b-5 and Section 10(b) of the<br />
Securities Exchange Act of 1934. Plaintiffs alleged that defendants induced plaintiffs to<br />
purchase common stock at artificially inflated prices by making intentional misstatements<br />
regarding defendant corporation’s revenue recognition and sales performance. In particular,<br />
plaintiffs asserted that defendants specifically indicated that the company had seen four<br />
successive quarters of increasing sales. Defendants moved to dismiss the complaint on the basis<br />
that the complaint failed to allege securities fraud with sufficient particularity. The court, in<br />
evaluating whether the statements were forward-looking statements protected by the safe harbor<br />
provision of the Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), found that<br />
statements of present or historical fact are not protected. Accordingly, references to concrete<br />
rates of sales and user activity were not protected by the safe harbor provision as statements of<br />
present or historical fact. However, the court held that the plaintiffs failed to adequately allege<br />
that the defendants made the statements with knowledge of the alleged falsity. Accordingly, and<br />
for other reasons, the Court granted defendants’ motion to dismiss and found that plaintiffs failed<br />
to adequately plead the misstatements were made with the requisite knowledge.<br />
92
C.1.f<br />
In re Novatel Wireless Securities <strong>Litigation</strong>, 2011 WL 5873113 (S.D. Cal. Nov. 23, 2011).<br />
Plaintiffs brought a class action suit against defendant corporation and various of its<br />
corporate officers. Plaintiffs alleged that defendants engaged in insider trading by creating a<br />
fraudulent scheme to inflate Novatel’s stock so that defendants could sell their stock for profit in<br />
violation of the Securities Exchange Act of 1934. Defendants moved for summary judgment,<br />
alleging, inter alia, the affirmative defense that any sale of stock was made pursuant to a Rule<br />
10b5-1 plan. Such plan is a defense to an insider trading claim so long as the individual did not<br />
know the inside information at the time he or she entered into the plan, and the individual<br />
exercised no discretion over his sales after adoption of the plan. However, the court dismissed<br />
this affirmative defense because it found that each defendant entered a new or amended 10b5-1<br />
plan during the time frame that plaintiffs alleged defendants had inside information.<br />
Accordingly, the court denied defendants’ motion for summary judgment and determined that a<br />
genuine issue of material fact existed as to whether the defendants executed trades based on<br />
inside information.<br />
C.1.f<br />
In re Cell Therapeutics, Inc. Class Action <strong>Litigation</strong>, 2011 WL 444676 (W.D. Wash. Feb. 4,<br />
2011).<br />
Plaintiffs filed a complaint against defendants alleging violations of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 relating to statements made by defendants<br />
that a drug it produced would be approved by the FDA under a fast track approval process. The<br />
drug failed to be approved and the company’s stock dropped by 50% in a single day. Defendants<br />
filed a motion to dismiss based on, inter alia, the safe harbor provision of the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), which protects certain forward-looking statements<br />
from liability under the Exchange Act. The court, in refusing to grant defendants’ motion, found<br />
that the majority of the statements defendants made were not forward-looking. While statements<br />
that the company had hopes for approval were forward-looking, statements that the drug had<br />
been “fast-tracked” and other similar present-fact statements were not forward-looking to fall<br />
within the safe harbor provision. Accordingly, the court denied defendants’ motion.<br />
C.1.f<br />
In re Bankatlantic Bancorp, Inc. Securities <strong>Litigation</strong>, 2011 WL 1585605 (S.D. Fla. Apr. 25,<br />
2011).<br />
Plaintiffs, purchasers of defendants’ common stock, brought a class action suit against<br />
defendants contending that defendants misrepresented and concealed the true quality and value<br />
of certain assets in defendants’ loan portfolio in violation of the Securities Exchange Act of<br />
1934. After trial, defendants brought a motion for judgment as a matter of law and a motion for<br />
new trial. Defendants argued, inter alia, that the court committed reversible error by instructing<br />
the jury that four statements made by defendants were false, when the statements were protected<br />
93
from Rule 10b-5 liability as forward-looking statements. According to defendants, Eleventh<br />
Circuit precedent essentially held that non-forward looking statements were automatically<br />
protected by the safe harbor provision if such statements were coupled with forward-looking<br />
components. The court disagreed. Rather, the court found that the Eleventh Circuit, in Harris v.<br />
Ivax, 182 F.3d 799 (11th Cir. 1999), assessed the applicability of the safe harbor provision to<br />
statements that allegedly failed to include the risk of a certain situation occurring, namely the<br />
possibility of a goodwill write-down. The court found that Harris stood for the proposition that a<br />
mixed statement is still forward-looking if it simply contains an omission of material risk factors<br />
for the forward-looking statement. On the other hand, statements are not protected by the safe<br />
harbor provision when any of the non-forward looking statements are misleading omissions or<br />
misrepresentations. In the instant case, the court held that defendants’ statements were not<br />
simply omissions of material risk factors, but statements of what defendants allegedly knew.<br />
Accordingly, the court denied defendants’ motion on the basis that the statements were not<br />
protected under the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995.<br />
In re Immucor, Inc. Securities <strong>Litigation</strong>, 2011 WL 3844221 (N.D. Ga. Aug. 29, 2011).<br />
C.1.f<br />
Plaintiffs alleged defendant made false and misleading statements in violation of Section<br />
10(b) of the Securities Exchange Act of 1934 in relation to its compliance with FDA regulations,<br />
as well as its participation in an illegal price-fixing scheme. Specifically, plaintiffs alleged that<br />
defendants made false and misleading statements based on its commitment to quality and its<br />
belief that the company was in compliance with FDA regulations. Defendant, in a motion to<br />
dismiss, argued that any statements made in connection with plaintiffs’ allegations were merely<br />
statements of corporate optimism, and were protected under the safe harbor provision of the<br />
Private Securities <strong>Litigation</strong> Reform Act of 1995 as mere statements of belief. The court, in<br />
denying defendants’ motion, found that the statements were not forward-looking, as defendants<br />
used the term “ongoing” and used the present tense in various statements. Accordingly, these<br />
statements were referencing the current state of the company. Moreover, defendant’s use of the<br />
term “believes” did not bring the statements within the safe harbor provision. Therefore, the<br />
court denied defendant’s motion to dismiss.<br />
g. Other<br />
C.1.g<br />
Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011).<br />
Plaintiffs asserted a cause of action against a parent company, who created a mutual fund,<br />
and the mutual fund itself. Although the two entities maintained their legal independence, the<br />
plaintiffs argued that both the parent company and the mutual fund were liable under Rule 10b-5<br />
of the Securities Exchange Act of 1934 because they made material representations within the<br />
rule. The Supreme Court held that for purposes of Rule 10b-5, the maker of a statement is the<br />
person or entity with ultimate authority over the statement, including its content and whether and<br />
how to communicate it. Accordingly, the Supreme Court found that it was not proper to hold a<br />
94
parent company liable for statements made under Rule 10b-5, because the mutual fund company,<br />
not the parent company, had control over the content of the allegedly misleading SEC filings.<br />
Preparation or publishing of a statement on behalf of another may not constitute making a<br />
statement under rule 10b-5.<br />
U.S. v. Tzolov & Butler, 642 F.3d 314 (2nd Cir. 2011).<br />
C.1.g<br />
Defendants were convicted in the Eastern District of New York of inducing their<br />
customers to purchase ARS by misrepresenting the non-guaranteed nature of the particular ARS<br />
at issue. Defendants appealed the appropriateness of invoking venue in the Eastern District of<br />
New York solely based on defendants’ use of JFK Airport for flights to their clients. The Second<br />
Circuit reversed the Defendants’ conviction on the Section 10(b) Securities Exchange Act of<br />
1934 count. The court held that Section 10(b) requires that a defendant be tried in the district<br />
where his crime was “committed,” which is anywhere any act “constituting the violation<br />
occurred.” The court found that the flights from JFK were only preparatory acts that did not<br />
constitute the violation.<br />
VanCook v. SEC, 653 F.3d 130 (2nd Cir. 2011).<br />
C.1.g<br />
Defendant stockbroker developed a scheme whereby he exploited a loophole in his<br />
clearing firm’s mutual fund order routing system which allowed him to place mutual fund orders<br />
up to an hour and a half after the NYSE closing bell and after the funds’ NAVs were calculated.<br />
Based on this exploitation, defendant was able to execute trades for certain clients after NAVs<br />
were calculated. Defendant falsified the books and records of his firm by printing screenshots of<br />
his computer monitor by showing all orders being entered prior to 4 p.m. The court concluded<br />
that the undisclosed late-trading of mutual funds, in conjunction with the falsification of records,<br />
constituted a device, scheme or artifice to defraud in violation of Section 10(b) and Rule 10b-5<br />
of the Securities Exchange Act of 1934.<br />
Amorosa v. AOL Time Warner Inc., 409 Fed. App’x 412 (2nd Cir. 2011).<br />
C.1.g<br />
Plaintiff brought suit against defendants alleging violation of Section 10(b) of the<br />
Securities Exchange Act of 1934 based on misleading statements contained in an audit of AOL’s<br />
financial statements. The district court granted defendants’ motion to dismiss based on<br />
Plaintiff’s failure to plead loss causation. In affirming the district court, the Second Circuit<br />
reasoned that the plaintiff was unable to show any corrective disclosure regarding AOL’s audit<br />
that implicated the audit opinion. Absent such a showing, plaintiff could not have established<br />
that any misstatement or omission in the audit was revealed to the market. Without such<br />
showing, the risk never materialized, and the plaintiff failed to establish loss causation on a<br />
“materialization of the risk” theory.<br />
95
C.1.g<br />
Barnard v. Verizon Communications, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).<br />
Plaintiffs, former shareholders of a spin-off of Verizon, appealed from the district court’s<br />
dismissal of their claims that the spin-off was designed to defraud shareholders of their<br />
shareholdings of Verizon in favor of the secured and unsecured creditors of the spin-off.<br />
Plaintiffs failed to specifically allege that they individually relied on any misrepresentations<br />
made by Verizon and essentially argued that Verizon had created a “fraud on the market” by<br />
artificially inflating the market. Recognizing that the Third Circuit has rejected the fraud on the<br />
market theory, the court affirmed the district court’s ruling.<br />
Dronsejko v. Grant Thornton, 632 F.3d 658 (10th Cir. 2011).<br />
C.1.g<br />
Plaintiffs brought suit alleging violations of Section 10(b) of the Securities Exchange Act<br />
of 1934 on behalf of a class of members who purchased certain common stock based on what<br />
turned out to be an overstatement of revenues. In considering the scienter element, the Tenth<br />
Circuit reasoned, in dicta, that other circuits have adopted a recklessness standard for Section<br />
10(b) claims against outside auditors. Based on that standard, outside auditors act recklessly<br />
only when accounting practices were so deficient that the audit amounted to no audit at all, to an<br />
egregious refusal to see the obvious, or that accounting judgments that were made were such that<br />
no reasonable accountant would have made the same decision. However, the court dismissed the<br />
complaint and did not adopt the reckless standard because the complaint was deficient.<br />
Basis Yield Alpha Fund v. Goldman Sachs Group, Inc., 798 F.Supp.2d 533 (S.D.N.Y. 2011).<br />
C.1.g<br />
Plaintiff fund brought suit against Goldman Sachs alleging securities fraud under Section<br />
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiff alleged that Goldman<br />
Sachs offered assurance that the CDO market was price stable and that certain collateralized debt<br />
obligations (“CDOs”) were stable. Shortly after plaintiff purchased $50 million of CDOs that<br />
were not listed on any exchange, it received a series of margin calls and the securities dropped by<br />
$30 million. The district court granted Goldman Sachs’s motion to dismiss, with leave to amend,<br />
because the complaint failed to allege sufficient facts indicating that the purchase or sale of the<br />
CDOs was made in the United States. The district court reasoned that the Securities Exchange<br />
Act of 1934 only applies to domestic securities transactions, and that the CDOs at issue were not<br />
listed on any exchange. Absent a listing on the exchange, plaintiffs were required to plead in the<br />
complaint that the securities were bought or sold in the United States.<br />
96
C.1.g<br />
SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
The SEC filed suit alleging violations of Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 based on misrepresentations contained in offering materials that falsely<br />
stated defendant’s anticipated profits, dividends and acquisition of a separate corporation. The<br />
SEC moved for summary judgment as to one of the corporate executives of defendant<br />
corporation. Defendant executive argued, inter alia, that even if the offering materials contained<br />
false statements, he was not responsible for compliance and oversight of sales personnel. The<br />
court, in granting the SEC’s summary judgment motion, held that the requisite standard of mind<br />
under the Exchange Act is an intent to deceive, manipulate or defraud. However, the court found<br />
that the Second Circuit has held that the scienter element can be satisfied by a strong showing of<br />
reckless disregard for the truth. The court held that defendant executive, as the principal of<br />
defendant corporation, knew or should have known of the materially false and misleading<br />
information provided to the investors and granted summary judgment in favor of the SEC.<br />
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y. 2011).<br />
C.1.g<br />
Plaintiffs brought derivative claims against foreign global media corporation and its<br />
former executives for securities fraud in violation of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934 relating to allegations of artificially inflated prices as a result of<br />
various misrepresentations made by defendants. After a jury trial on the merits, the jury<br />
concluded that certain defendants violated the Exchange Act. Defendants filed a motion for<br />
judgment as a matter of law, and while the motion was pending, the U.S. Supreme Court issued<br />
its opinion in Morrison v. National Australia Bank, 130 S.Ct. 2869, (2010), holding that Section<br />
10(b) does not apply extraterritorially. Accordingly, the court asked defendants to submit<br />
supplemental briefs on the matter. The court found that the transactions in securities at issue in<br />
the case were either purchased by foreign shareholders with a foreign bank or were purchased on<br />
a foreign exchange by Americans. Such shares were not listed on a domestic exchange or<br />
purchased in the United States, a requisite of bringing securities fraud claims under Morrison.<br />
Accordingly, claims by such purchasers were dismissed.<br />
In re MRU Holdings Securities <strong>Litigation</strong>, 769 F. Supp. 2d 500 (S.D.N.Y. 2011)<br />
C.1.g<br />
Investors in corporation that was purchaser, holder and seller of federal and private<br />
student loans brought class action against defendant alleging violations of Rule 10b-5 and<br />
Section 10(b) of the Securities Exchange Act of 1934. In particular, plaintiffs alleged that<br />
defendants issued false and incomplete financial statements and press releases relating to<br />
defendants’ issuance of auction rate securities (“ARS”), which resulted in the inflation of MRU’s<br />
stock price. Merrill Lynch (“Merrill”) managed the auction process for defendants. In addition<br />
to allegations against defendants, plaintiffs claimed that Merrill was equally liable for violations<br />
97
of the Exchange Act based on Merrill’s participation in the ARS market because Merrill failed in<br />
its duty to disclose the description of its auction practices. Plaintiffs further argued that Merrill<br />
could be liable as a secondary actor. The court found that plaintiffs’ allegations were essentially<br />
a fraud based on nondisclosure, which only would have arose with a fiduciary or similar<br />
relationship. The court held that no such relationship existed because there was no relationship<br />
of trust and confidence between plaintiffs and Merrill. Moreover, the court reasoned that<br />
plaintiffs’ claim against a secondary actor under the Exchange Act is only cognizable based on<br />
an actor’s own articulated statement, or on statements made by another that have been explicitly<br />
adopted by the secondary actor. The court found Merrill neither made nor adopted such<br />
statements and granted defendants’ motion to dismiss.<br />
Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
C.1.g<br />
Plaintiffs brought a complaint against defendants alleging violations of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 related to the purchase of equity linked<br />
securities (“ELKs”). In particular, plaintiffs alleged that defendants made misrepresentations or<br />
omissions related to the risks associated with ELKs. On defendants’ motion to dismiss,<br />
defendants claimed that the court lacked jurisdiction to hear the Exchange Act claims because<br />
the transaction did not involve a security listed on a domestic exchange. Specifically, defendants<br />
argued that the ELKs were not purchased in the United States. The court disagreed, and found<br />
that the notes, even though not purchased in the United States, were linked to securities listed on<br />
a domestic exchange, namely the NYSE. The court reasoned that the purchase of a foreign<br />
derivative instrument whose value was linked to the value of stock traded on a domestic<br />
exchange constituted the “functional equivalent” of a purchase of a domestically traded stock.<br />
Accordingly, the court had jurisdiction over the plaintiffs’ claims.<br />
In re Optimal U.S. Litig., 2011 U.S. Dist. LEXIS 119141 (S.D.N.Y. Oct. 14, 2011).<br />
C.1.g<br />
Defendants, a Madoff feeder fund, filed a motion to dismiss claims under Section 10(b)<br />
and Rule 10b-5 of the Securities Exchange Act of 1934 brought by plaintiffs relating to<br />
fraudulent statements made in the feeder fund’s Explanatory Memorandum. Defendants claimed<br />
that they did not “make” the fraudulent statements because they were not the issuer of the<br />
Explanatory Memorandum. In dismissing the Section 10(b) and Rule 10b-5 claims, the court<br />
followed the U.S. Supreme Court’s holding in Janus Capital Group v. First Derivative Traders,<br />
131 S.Ct. 2296 (2011), which held that an investment advisor was not liable for fraud in<br />
prospectus of sponsored mutual fund because investment advisor was not the “maker” of those<br />
statements. The court reasoned that a statement is only made by the entity that delivers it.<br />
However, the court found control person liability under Section 20(a) of the 1934 Act.<br />
98
C.1.g<br />
Fishman v. Morgan Keegan & Co., Inc., 2011 WL 3705187 (E.D. La. Aug. 24, 2011).<br />
Plaintiff brought suit against Morgan Keegan based on, inter alia, violations of Section<br />
10(b) of the Securities Exchange Act of 1934 relating to the purchase of Auction Rate Securities<br />
(“ARS”) in 2005. Morgan Keegan claimed that plaintiff’s claim was time barred. Morgan<br />
Keegan asserted that it had made disclosures in 2006 as a result of an SEC investigation, and<br />
plaintiff should have discovered the alleged fraud as a result of the disclosures. On Morgan<br />
Keegan’s motion to dismiss, the court held that plaintiff, as a non-institutional investor, was not<br />
required to have known the information contained in Morgan Keegan’s disclosures because<br />
plaintiff had bought the ARS prior to the additional disclosures required as a result of the SEC<br />
investigation. Accordingly, the court denied Morgan Keegan’s motion to dismiss.<br />
In re Burton W. Wiand, as Receiver, 2011 U.S. Dist. LEXIS 113212 (M.D. Fla. Sept. 29, 2011).<br />
C.1.g<br />
An investigation by the SEC led to a guilty plea by a hedge fund manager that perpetrated<br />
a Ponzi scheme. As a result of the investigation, a receiver was appointed that initiated over 150<br />
“clawback” cases in an attempt to recover false profits received by certain investors. Several of<br />
these investors moved the court to compel arbitration of the clawback cases alleging, inter alia,<br />
the violation of Rule 10b-5 of the Securities Exchange Act of 1934. The court agreed with the<br />
investors, finding that the arbitration agreements in their contracts mandated arbitration.<br />
Accordingly, the court granted the investors’ motion to compel arbitration.<br />
2. Section 14<br />
C.2<br />
Besinger v. Denbury Resources Inc., 2011 U.S. Dist. LEXIS 91905 (E.D.N.Y., Aug. 11, 2011)<br />
The U.S. District Court of the Eastern District of New York denied defendant’s motion to<br />
dismiss claims asserted by plaintiff Besinger for violations of Section 11 of the Securities<br />
Exchange Act of 1933 and Section 14 of the Securities Exchange Act of 1934. The defendant,<br />
Denbury Resources Inc. (“Denbury”) contends that the plaintiff has not stated a claim upon<br />
which relief can be granted.<br />
Besinger claimed that the defendant’s violations stem from the use of materially<br />
misleading information in Denbury’s registration and proxy statement regarding the formula<br />
used to calculate the amount of compensation due to Encore Acquisition Company (“Encore”)<br />
shareholders upon completion of Encore’s merger with Denbury. As a result of the<br />
misinformation, Encore shareholders received significantly less compensation once the merger<br />
was completed.<br />
In determining whether the defendant’s motion should be denied, the court examined<br />
plaintiff’s claims against the two actionable elements required for a Section 11 and Section 14<br />
99
claim; that there is an actual misstatement or omission at the time the statement is made and that<br />
the misstatement or omission is materially misleading. The court found that, due to the several<br />
misstatements regarding how compensation to the Encore shareholders would be calculated,<br />
defendant’s actions met the first requirement under both sections 11 and 14. Further, the court<br />
found that the misstatements made are not immaterial as a matter of law. Under Section 14, the<br />
materiality standard turns on whether a reasonable shareholder would consider the fact important<br />
in deciding how to vote. Accordingly, since the misstatements at issue related directly to the<br />
compensation received by Encore shareholders, the misstatements are material as a matter of<br />
law, causing defendant’s motion to dismiss to fail.<br />
Tiberius Capital, LLC v. Petrosearch Energy Corporation, 2011 WL 1334839 (S.D.N.Y. Mar.<br />
31, 2011)<br />
In March 2009, Petrosearch Energy Corp. announced that it had entered into a merger<br />
agreement with Double Eagle Petroleum Co. (DBLE). Plaintiff, a shareholder in Petrosearch,<br />
made a tender offer, which the Petrosearch Board rejected. A proxy statement discussing the<br />
DBLE merger and plaintiff’s tender offer was issued in July 2009, and the merger was approved<br />
in a shareholder meeting in August of 2009. Plaintiff filed suit alleging violations of sections<br />
10(b), 14(a), and 20(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder, as well as<br />
state law claims. Plaintiff alleged in connection with both the Section 10(b) and 14(a) claims,<br />
that Petrosearch had made a material misrepresentation that plaintiff was not entitled to<br />
dissenters’ rights. Although Petrosearch had subsequently acknowledged that their<br />
representation was in error, the court found that the conclusion that dissenters’ rights were<br />
available was not obvious, and could only be reached after legal analysis, and that plaintiff did<br />
not reasonably rely on the misrepresentation, as plaintiff had communicated its independent<br />
conclusion that it was entitled to dissenters’ rights in a letter on the day of the shareholder<br />
meeting. With specific reference to the Section 14(a) claim, the court found that as a minority<br />
shareholder, plaintiff could not plead transaction causation, and that plaintiff’s votes were not<br />
necessary for the approval of the merger. Following analysis of the aiding and abetting and state<br />
law claims, the court granted defendant’s motion to dismiss.<br />
Strugala v. Riggio, 2011 U.S. Dist. LEXIS 115834 (S.D.N.Y. Oct. 4, 2011).<br />
Although the underlying claim is a Section 14(a) of the Exchange Act, this particular<br />
decision is about whether the plaintiff sufficiently alleged under Delaware law that it would have<br />
been futile to make a demand on the board before bringing a suit against the corporation. In this<br />
case, the plaintiff failed to show that it would have been futile. The court decided that the<br />
following, on their own, are insufficient to establish a reasonable doubt that the shareholders<br />
were disinterested or independent: 1) the possibility that a shareholder would face a substantial<br />
likelihood of liability; 2) the existence of an insured versus insured insurance policy; 3) the<br />
previous payment of director’s fees; and 4) personal or close social relationships.<br />
C.2<br />
C.2<br />
100
C.2<br />
Litwin v. Oceanfreight, Inc., 2011 WL 5223022 (S.D.N.Y., Nov. 2, 2011)<br />
Plaintiff, on behalf of a putative class of shareholders of OceanFreight, Inc. common<br />
stock, moved to enjoin a special shareholder meeting scheduled to vote on a proposed transaction<br />
in which OceanFreight would be acquired by a subsidiary of DryShips, Inc. Both companies<br />
were incorporated under the law of the Marshall Islands. Plaintiff alleged that the 17-day<br />
solicitation period used was inadequate, and that the disclosures in the proxy failed to comply<br />
with the federal securities laws. The court found that because OceanFreight was a foreign<br />
private issuer of securities, they were exempt from Section 14(a) of the Exchange Act, and<br />
further that NASDAQ, on which the shares were listed, permits foreign private issuers to utilize<br />
their home country practice with respect to proxy timing, and that a 17-day notice period was<br />
permissible under the laws of the Marshall Islands. The court also held with respect to the<br />
alleged misstatements or omissions in the proxy disclosures, that OceanFreight was except from<br />
Section 14(a) and Rule 14a-9 thereunder, as a foreign private issuer, but that even if it had been<br />
subject to those provisions of the securities laws, plaintiff would have been unable to establish<br />
loss causation, because DryShips already owned and controlled 50.5% of OceanFreight’s shares.<br />
The court also rejected plaintiff’s other arguments, and accordingly found that plaintiff had failed<br />
to demonstrate a likelihood of success on the merits and denied the motion.<br />
Resnik v. Woertz, 774 F.Supp.2d 614 (D.Del. 2011).<br />
Plaintiff, a shareholder of Archer-Daniels-Midland Co. (ADM), sued ADM and<br />
individual defendants in connection with alleged violations of Section 14(a) of the Exchange Act<br />
and derivative state law claims. Plaintiff’s Section 14(a) claims against ADM centered around<br />
proxy disclosures regarding a proposed incentive plan, approved by shareholders in the annual<br />
meeting in November 2009. The court found that the risk a bonus might not be tax deductible<br />
and the information necessary to determine whether it is deductable are material to the average<br />
investor at the time of the Proxy Statement. In that connection, the court found that plaintiff had<br />
adequately pled that the number of individuals in a particular class who are eligible to participate<br />
in an incentive plan, whether an incentive plan was designed to comply with Section 162(m) of<br />
the Internal Revenue Code, and the omission of information on whether improved performance<br />
would be required to achieve a bonus, how difficult it would be to achieve target levels, or how<br />
target levels would be calculated would be material to investors. However, the court found that<br />
plaintiff had failed to meet the heightened pleading standards because it did not allege economic<br />
injury. Accordingly the court granted in part ADM’s motion to dismiss.<br />
Seinfeld v. Connor, 774 F.Supp.2d 660 (D. Del. 2011)<br />
The U.S. District Court for the District of Delaware granted defendants’ motion to<br />
dismiss claims asserted by plaintiff Frank David Seinfeld for violations of Section 14(a) of the<br />
C.2<br />
C.2<br />
101
Exchange Act. Plaintiff’s claims arise from a proxy statement distributed by Republic Services,<br />
Inc.’s (“Republic”) board of directors in advance of Republic’s annual stockholder meeting. The<br />
proxy statement sought shareholder approval for several items, including two compensation<br />
plans for Republic’s senior executives. Plaintiff asserted that the proxy statement contained<br />
materially false and misleading statements or omissions regarding the ability of the<br />
compensation plans to comply with Section 162(m) of the Internal Revenue Code.<br />
In granting defendants’ motion to dismiss, the court determined that the proxy statement<br />
issued by Republic did not make any misstatements regarding the proposed compensation plans<br />
compliance with Section 162(m). The court found that the proxy statement made reasonable<br />
conditional statements regarding compliance with Section 162(m) and that the plaintiff’s<br />
complaint is based on his mischaracterization of the proxy statement. Further, the court found<br />
that the defendant complied with the disclosure requirements of Section 162(m). Accordingly,<br />
the court found that plaintiff’s claims for violations of Section 14(a) were unfounded.<br />
In re Heckmann Corp. Sec. Litig., 2011 U.S. Dist. LEXIS 63830 (D.Del., June 16, 2011).<br />
Plaintiff in a shareholder action alleged fraud, recklessness, and materially false<br />
statements in connection with a merger between Heckmann Corp. and China Water and Drinks,<br />
Inc. (“China Water”). Defendants were Heckmann Corp., China Water, and officers and<br />
directors of Heckmann Corp. who had indicated in the proxy solicitation that they approved the<br />
merger. Misstatements alleged in connection with the proxy solicitation for the merger included<br />
(1) a failure to disclose that the audit firm had informed defendants that the president and CEO<br />
of China Water had defended inconsistent VAT payments on the ground that such was common<br />
practice in China and (2) that Heckmann Corp. had promised to reimburse the president and<br />
CEO of China Water for 7.6 million shares of China Water stock used to induce China Water<br />
shareholders to approve a merger amendment that reduced the amount of cash Heckmann Corp.<br />
would have to pay.<br />
Defendants moved to dismiss on a number of grounds. First, defendants argued that<br />
plaintiff’s claims under Section 14(a) relied impermissibly on group pleading, but the court<br />
found that because the complaint alleged that each defendant had specifically indicated their<br />
approval of the merger in the proxy solicitation. The court also rejected defendants’ claims that<br />
plaintiff had failed to meet the heightened state of mind pleading requirements of the PLSRA,<br />
first on the grounds that the District of Delaware has not applied heightened pleading<br />
requirements to claims under Section 14(a), and second because even if such claims were met,<br />
the events underlying the alleged misstatements had occurred prior to the merger, but were not<br />
disclosed in the proxy solicitation. The court further found that plaintiff met the loss causation<br />
requirements for claims under Section 14(a) by alleging that that because if Heckmann Corp. had<br />
failed to complete a qualifying transaction (e.g. the merger with China Water) within twenty-four<br />
months of its IPO, shareholders would have received the IPO proceeds back, shareholders had<br />
suffered a loss due to the merger and the proxy solicitation.<br />
C.2<br />
102
Hysong v. Encore Energy Partners LP, 2011 U.S. Dist. LEXIS 130688 (D. Del. Nov. 10, 2011).<br />
The plaintiff, a holder of limited partnership shares in Encore Energy Partners (“the<br />
partnership”), filed a class action complaint against the partnership, several general partners, and<br />
partnership executives. The plaintiff alleged violations of Section 14(a) of the Exchange Act of<br />
1934, claiming that the Form S-4 Registration Statement issued by the defendants was<br />
misleading due to several omissions. Plaintiff identified two categories of omitted facts that he<br />
claims altered the totality of information: (1) information about the sales process and the<br />
partnership’s efforts to auction the partnership rather than enter into a merger; and (2) the<br />
underlying methodologies to calculate the value of the partnership.<br />
The court found that the plaintiff’s complaint “does not adduce ‘enough facts to raise a<br />
reasonable expectation that discovery will reveal evidence’ that any statement in the Registration<br />
Statement is either (1) affirmatively misleading, or (2) rendered misleading by the omission of a<br />
material fact.” The court found the plaintiff’s complaint to be nothing more than a “threadbare<br />
recital” of the elements of a Section 14(a) claim, and held that that plaintiff failed to identify any<br />
specific misleading statement and thus failed to state a cause of action against the defendants<br />
under Section 14(a).<br />
Resnik v. Boskin, 2011 U.S. Dist. LEXIS 16634 (D.N.J. Feb. 17, 2011).<br />
The plaintiff, a stockholder of Exxon, filed suit against numerous defendants, including<br />
Exxon, the corporation, for various claims in connection with 2008 and 2009 proxy statements<br />
soliciting shareholder votes. In 1997 and 2003, Exxon solicited and obtained shareholder<br />
approval for an executive compensation program and an employee performance compensation<br />
program (collectively, the “Programs”). The plaintiff alleged that Exxon’s 2008 and 2009 proxy<br />
statements, which solicited shareholder vote for the election of Exxon directors, ratification of<br />
the selection of Exxon’s independent auditor, and various other proposals, never asked Exxon<br />
shareholders to vote for the Programs or the tax treatment of the Programs. Moreover, the<br />
plaintiff claimed that Exxon violated Section 14(a) of the Securities Exchange Act of 1934 when<br />
it improperly solicited shareholder vote by erroneously stating that the Programs were taxdeductible.<br />
The court granted defendants’ motion to dismiss plaintiff’s Section 14(a) claim, finding<br />
that plaintiff had failed to establish that the alleged misrepresentations regarding the tax<br />
implications of the Programs related to anything on which Exxon shareholders were called to<br />
vote in the 2008 and 2009 proxy statements. Indeed, the 2008 and 2009 proxy statements dealt<br />
only with the election of Exxon directors, the ratification of an independent auditor, and other<br />
proposals not related to the Programs. Therefore, because neither the Programs nor their taxdeductibility<br />
were covered by the 2008 and 2009 proxy statements, the court found that<br />
defendants did not make a materially false or misleading proxy solicitation in connection with<br />
the 2008 and 2009 shareholder votes.<br />
C.2<br />
C.2<br />
103
C.2<br />
Jasin v. Kozlowski, 2011 U.S. Dist. LEXIS 91802 (M.D. Pa., Nov. 3, 2010).<br />
This matter came to the court on defendants’ motion for reconsideration and on<br />
defendants’ independent motion for summary judgment. Regarding the former, the defendant<br />
moved for reconsideration of the court’s previous order granting in part and denying in part<br />
defendants’ motion for summary judgment on the ground that plaintiff could not identify any<br />
evidence of loss causation, as required under sections 14(a) and 10(b) of the 1934 Securities and<br />
Exchange Act. In granting the defendants’ motion for reconsideration, the court held it had<br />
committed an error of fact in considering an expert report that had been “submitted on behalf of<br />
a plaintiff in a different case.” Id. at *21. Consequently, as the expert report was the “only<br />
competent evidence presented by plaintiff to establish loss causation, plaintiff [was] unable to<br />
establish violations of sections 10(b) and 14(a).” Id.<br />
KBR, Inc. v. Chevedden, 776 F.Supp.2d 415 (S.D.Tex. 2011)<br />
KBR Inc. v. Chevedden, 2011 U.S. Dist. LEXIS 36431 (S.D. Tex. Apr. 4, 2011).<br />
KBR, Inc. v. Chevedden, 2011 U.S.Dist.LEXIS 139257 (S.D.Tex., Dec. 5, 2011)<br />
Chevedden, a shareholder of KBR, submitted a shareholder proposal to be included in<br />
KBR’s proxy statement for its May 2011 annual shareholder meeting. Chevedden submitted a<br />
written statement from RAM Trust Services (RTS) affirming that he had met the ownership<br />
requirements under Rule 14a-8(b)(1). KBR responded that because RTS was not a record holder<br />
of KBR stock, additional documentation would be required. Chevedden did not supply the<br />
additional documentation requested. KBR filed suit seeking a declaratory judgment that KBR<br />
was not required to include Chevedden’s shareholder proposal in its proxy statement.<br />
In ruling on Chevedden’s motion to dismiss, the court found that there is a private cause<br />
of action to enforce Rule 14a-9, and that a public company has standing to seek a declaratory<br />
judgment that a shareholder’s proposal is properly excluded from a proxy statement because the<br />
shareholder’s ability to sue or challenge the exclusion creates uncertainty warranting judicial<br />
resolution. In a previous case, involving the same plaintiff, the court had found the same type of<br />
letter from an introducing broker (such as RTS) insufficient under Rule 14a-8. The court ruled<br />
that KBR could exclude Chevedden’s proposal, but before granting KBR’s summary judgment<br />
motion, requested that the parties address no-action letters issued by the SEC in additional<br />
briefing.<br />
Both parties submitted additional briefings, but Chevedden did not comment on SEC noaction-letter<br />
decisions. Instead, Chevedden made promised that he would not sue the Plaintiff if<br />
it elected to remove his proposal from its proxy materials. In granting KBR’s motion for<br />
summary judgment, the court stated that, although Chevedden had promised not to sue, the<br />
promise did not eliminate any case or controversy. Chevedden’s refusal to withdraw his<br />
proposal after requests from KBR to do so demonstrated his inclination to continue to litigate<br />
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and created an uncertainty that KBR was entitled to have clarified. Subsequently, Chevedden<br />
filed motions for reconsideration all of which were denied.<br />
LNB Bancorp, Inc. v. Osborne, 2011 U.S. Dist. LEXIS 137705 (E.D.Ohio, Nov. 30, 2011)<br />
Defendant, Osborne, was a shareholder of LNB. In 2008, he mounted a proxy contest<br />
seeking to compel LNB to include language in its proxy materials. This contest was resolved<br />
with a settlement agreement pursuant to which Osborne was entitled to designate two members<br />
of LNB’s board. The term of the agreement lasted for 18 months, or until those board members<br />
resigned. In 2009, Osborne filed an amended Schedule 13D indicating his intent to conduct a<br />
proxy campaign to elect his nominees to LNB’s board. LNB filed suit seeking to enforce the<br />
terms of the agreement. Osborne was preliminarily enjoined from engaging in activities<br />
prohibited by the settlement agreement. In February 2010, Osborne filed a motion to dissolve<br />
the preliminary injunction, on the grounds that the agreement was no longer in effect. The<br />
district court found that because Osborne’s designees had not resigned from the board, the<br />
agreement was still in effect, and therefore denied the motion. On appeal, the Sixth Circuit<br />
upheld the reasoning of the district court. LNB moved for partial summary judgment, which<br />
motion was granted in part and denied in part. Osborne moved for summary judgment, arguing<br />
contra LNB that he had not violated Section 14(a) of the Exchange Act by omitting from his<br />
preliminary proxy filings any mention of an intent to merge LNB with another company, PVF, or<br />
by stating his belief that the agreement had been terminated. The court found that material issues<br />
of fact remained with respect to these points, and accordingly denied Osborne’s motion for<br />
summary judgment.<br />
Black v. Cincinnati Fin. Corp., 2011 U.S. Dist. LEXIS 46852 (S.D. Ohio 2011)<br />
The U.S. District Court for the Southern District of Ohio denied plaintiff’s motion for a<br />
temporary restraining order and preliminary injunction to prevent Cincinnati Financial from<br />
holding a shareholder vote. Plaintiff further requested that Cincinnati Financial be ordered to<br />
revise its 2011 Proxy Statement in order to ensure compliance with Section 14(a) of the<br />
Securities Exchange Act of 1934.<br />
The court found that plaintiff was unlikely to succeed on the merits of the claim that the<br />
defendant violated Section 14(a). Plaintiff alleged that the 2011 Proxy Statement contained false<br />
and misleading statements regarding the company’s senior executive compensation plan’s<br />
compliance with Section 162(m) of the Internal Revenue Code. Specifically, plaintiff contended<br />
that the performance goals in the company’s stock plan were too broad to qualify for the tax<br />
exemption offered by Section 162(m). Upon a review of Section 162(m), the court found that<br />
the 2011 Proxy Statement issued by the defendant fully complied with its disclosure obligations<br />
regarding the compensation plan’s compliance with Section 162(m). Accordingly, the court<br />
found that plaintiff is unlikely to succeed on its claim that a violation of Section 14(a) occurred.<br />
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C.2<br />
Dixon v. Ladish Company, Inc., 785 F.Supp.2d 746 (E.D.Wis. 2011)<br />
The U.S. District Court for the Eastern District of Wisconsin granted defendants’ motion<br />
to dismiss claims alleged by plaintiff, Dixon, for violations of Sections 14(a) and 20(a) of the<br />
Securities Exchange Act. The plaintiff also asserts a claim for breach of fiduciary duty, arising<br />
under Wisconsin law. Defendants contend that the plaintiff’s claims arising under Section 14(a)<br />
must fail because the claims are not plead with the particularity required under the Private<br />
Securities <strong>Litigation</strong> Reform Act (“PSLRA”).<br />
The claims arise from a merger agreement between Ladish Company Inc. (“Ladish”) and<br />
Allegheny Technologies, Inc. (“Allegheny”), in which Allegheny agreed to acquire Ladish. The<br />
court found that while the amended compliant alleged that the registration statement misstated<br />
and omitted material information; the complaint did not allege any specific facts to support the<br />
general allegations. The complaint also contained general allegations regarding the lack on<br />
information regarding Ladish’s decision to enter into, and subsequently approve of, the merger<br />
agreement with Allegheny. However, the court found that, without specific facts relating to how<br />
such an omission lead to misstatements, the claim failed under the requirements of the PSLRA.<br />
The court found this to be true regardless of whether the misstatements were material.<br />
SEC v. Mercury Interactive, LLC, 2011 U.S. Dist. LEXIS 134580 (N.D. Cal. Nov. 22, 2011).<br />
On a motion to reconsider the denial of defendant’s motion to dismiss plaintiff’s Section<br />
14(a) claim, the court held that Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct.<br />
2296 (2011), did not apply to Section 14(a) claims. The Supreme Court in Janus decided that<br />
“[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate<br />
authority over the statement, including its content and whether and how to communicate it.” Id.<br />
at 2302. The court noted that Section 14(a), however, “proscribe[s] the solicitation of proxies<br />
‘by means of’ false or misleading statements.” Mercury Interactive, 2011 U.S. Dist. LEXIS<br />
134580, at *8 (quoting Section 14(a)). Because Section 14(a) is not limited to those situations in<br />
which someone “makes a statement,” that is, the language that the Janus Court construed, Janus<br />
does not apply to Section 14(a) claims.<br />
SEC v. Zhenyu Ni, Case No. CV-11-0708 DMR, SEC Litig. Rel. No. 21859 (N.D.Cal. Feb. 16,<br />
2011).<br />
The Commission brought suit alleging, inter alia, that defendant had violated Section<br />
14(e) of the Exchange Act and Rule 14e-3 thereunder by trading in shares of Bare Escentuals,<br />
Inc., after overhearing confidential communications suggesting upcoming merger while sitting in<br />
the office of his sister, who was then Director of Tax at Bare. The Commission also alleged<br />
violations of Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder. Defendant<br />
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consented to the entry of a final judgment enjoining him from violations of the aforementioned<br />
provisions of the securities laws, requiring him to pay $157,615 in disgorgement and<br />
prejudgment interest, and a $157,066 civil penalty.<br />
SEC v. Kovzan, 2011 U.S. Dist. LEXIS 85794 (D. Kan. Aug. 4, 2011).<br />
The Commission alleged violations of the securities laws by defendant, CFO and CAO of<br />
NIC Inc., in connection with failures to disclose information about compensation and perquisites<br />
provided to the CEO, such as compensation for his commute by private airplane from Wyoming<br />
to Kansas, as well as reimbursement of other personal expenses. Count 9 alleged that defendant<br />
aided and abetted violations of Section 14(a) of the Exchange Act, and Rules 14a-3 and 14a-9<br />
thereunder.<br />
On a motion to dismiss, the court denied the Section 14(a) to the extent it was based on<br />
allegations that NIC’s proxy statements were misleading because they referred to NIC’s code of<br />
ethics without also disclosing violations of that code. The court found that the disclosures did<br />
not suggest that there had been no violations or waivers of the provisions of that code of ethics.<br />
The court found, with respect to other allegations underlying the Section 14(a) claim, that the<br />
Commission had sufficiently pleaded that defendant had notice of problems with the CEO’s<br />
expenses and that without identifying all facts entering into the total mix of information<br />
concerning NIC, it could be said as a matter of law, that the alleged perquisites to the CEO<br />
would not have altered the total mix of information. The court also found that the complaint<br />
alleged facts supporting a plausible inference that defendant knew the CEO was commuting from<br />
Wyoming to Kansas, and was receiving reimbursements for personal expenses, and that this was<br />
sufficient to show either recklessness or actual knowledge as required for aiding and abetting<br />
liability. Accordingly, the court denied the motion to dismiss with respect to aiding and abetting<br />
violations of Section 14(a).<br />
SEC v. Weintraub, 2011 U.S. Dist. LEXIS 14999 (S.D. Fla. Dec. 30, 2011)<br />
The Commission filed suit against the defendant, Allen E. Weintraub (“Weintraub”) and<br />
AWMS Acquisition, Inc. d/b/a/ Sterling Global Holdings (“Sterling Global”) for violations of<br />
sections 10(b) and 14(e) of the Securities and Exchange Act and Rules 10b-5 and 14e-8<br />
thereunder. The court granted the Commission’s motion for summary judgment.<br />
On March 19 and March 29, 2011, Weintraub issued offer letters to both Eastman Kodak<br />
Company (“Kodak”) and AMR Corporation (“AMR”) offering to purchase the company’s<br />
outstanding stock. Weintraub also provided the offer letters to investors of both companies and<br />
press outlets. However, Weintraub had not secured any credit with which to finance either<br />
purchase transaction, nor did he disclose to the companies or their investors that he had pled<br />
guilty to organized fraud and money laundering and was on probation at the time the offer letters<br />
were issued. The SEC alleged that Weintraub violated the above sections of the Securities and<br />
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Exchange Act by making materially false and misleading statements regarding his ability to<br />
secure financing and close the proposed deals with Kodak and AMR. Further, the SEC alleged<br />
that Weintraub made materially false and misleading statements regarding his own background.<br />
The SEC requested that the court permanently restrain and enjoin the defendants from violating<br />
sections 10(b) and 14(e) and the rules thereunder.<br />
In granting summary judgment on the Section 14(e) claim, the court determined that,<br />
while the offer letters were not formal tender offers, the letters were pre-commencement<br />
communications that fall under the purview of Rule 14e-8. Accordingly, Weintraub’s tender<br />
offer letters and material misstatements regarding his ability to complete the proposed<br />
transactions and his background violate the antifraud provisions of both Section 14(e) of the<br />
Securities and Exchange Act and Rule 14e-8.<br />
In re Sam P. Douglass and Anthony R. Moore, Securities and Exchange Commission,<br />
Administrative Proceeding File No. 3-13934 (Feb. 24, 2011).<br />
The Commission filed an administrative proceeding against Douglass, formerly<br />
Chairman and CEO of Equus, a business development company, alleging misleading disclosures<br />
regarding officer compensation in proxy statements in 2005 and 2006, and in quarterly and other<br />
filings with the Commission. In 2005, Equus made a proxy solicitation for approval of a change<br />
in investment adviser and fund administrator. The Commission alleged that in connection with<br />
the 2005 proxy solicitation, Douglass had stated in a press release that the purchase price for<br />
shares issued upon exercise of options held by officers and directors would not exceed the<br />
current market price for shares, when an agreement had already been negotiated which would<br />
compensate a senior vice president for his shares at a premium above market price. The<br />
Commission alleged that in 2006, Equus’s annual proxy statement omitted to disclose more than<br />
$460,000 which had been paid to the senior vice president as a consulting fee to the new<br />
administrator in connection with the change in investment adviser and manager, and as a<br />
retention bonus. Because of this and other conduct alleged, the Commission found that Douglass<br />
had violated Section 14(a) of the Exchange Act, and Rules 13b2-1, 13b2-2, and 14a-9<br />
thereunder, as well as causing violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the<br />
Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Section 206(2) of<br />
the Investment Advisers Act.<br />
Without admitting or denying the findings, Douglass consented to the entry of an order<br />
(1) requiring him to cease and desist the above mentioned provisions of the securities laws, (2)<br />
censuring him, and (3) requiring him to pay a $25,000 penalty.<br />
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3. Section 15(c)<br />
C.3<br />
SEC v. Ficeto, Homm, Heatherington, Hunter World Markets, Inc., and Hunter Advisors, LLC,,<br />
2011 SEC LEXIS 716, SEC <strong>Litigation</strong> Release No. 21865 (February 25, 2011)<br />
The SEC charged Todd M. Ficeto, Florian Homm, their investment firms, and their hedge<br />
fund trader, Colin Heatherington (“Defendants”) with violations of sections of the Securities<br />
Exchange Act of 1934 (“Exchange Act”) and the Investment Advisers Act of 1940 (“Advisers<br />
Act”). By engaging in portfolio pumping, match ordering, orders marking the close, wash<br />
trades, and backdate orders, the Defendants reportedly generated more than $63 million in illicit<br />
proceeds. The $63 million came from commissions, manipulated stock sales, and sales credits.<br />
The SEC alleges that for two years from September 2005 to September 2007, Ficeto and Homm<br />
orchestrated an elaborate scheme using the broker-dealer firm they co-owned, Hunter World<br />
Markets, Inc. (“HWM”), and the London-based hedge fund manager, Absolute Capital<br />
Management Holdings Limited (“ACMH”), owned by Homm. Using traders, mostly<br />
Heatherington and HWM’s trader Tony Ahn, Ficeto and Homm purchased microcap companies<br />
publicly and then used various manipulation techniques to increase the stock prices of these<br />
companies before selling their shares to ACMH. Additionally, Ficeto obtained more money<br />
from this scheme through sole ownership of an investment advisor agency, Hunter Advisors,<br />
LLC (“Hunter Advisors”), that maintained the Hunter Fund, Ltd (the “Fund”). The Fund’s sole<br />
investors were three of the ACMH hedge funds being used for the fraudulent scheme. The<br />
principals from ACMH and HWM used a secret, alternative message system to send instant<br />
messages to one another to arrange the deals.<br />
The defendants face a number of direct charges under the Exchange Act and Advisers<br />
Act and several aiding and abetting charges. All defendants, except Hunter Advisors, are<br />
charged with fraud under 10(b) of the Exchange Act and Exchange Act Rule 10b-5. HMW alone<br />
is charged with fraud under 15(c)(1), while Ficeto, Homm, and Heatherington are charged with<br />
aiding and abetting that fraud. Additionally, HMW is charged with violations of 17(a) and Rules<br />
17a-4(b)(4) and 17a-8. Homm, Ficeto, and Hunter Advisors are all charged with investment<br />
adviser fraud under 206 (1) and 206(2) of the Advisers Act. Ficeto’s additional charges include<br />
fraud under 17(a), aiding and abiding HWM’s failure to keep proper records under 17(a) and<br />
Rules 17a-4(b)(4), and aiding and abetting Homm’s investment adviser fraud under the Adviser<br />
Act (along with Heatherington and HMW). The SEC seeks permanent injunctive relief,<br />
disgorgement of ill-gotten profits along with prejudgment interest, and civil penalties. The SEC<br />
also seeks to permanently bar Ficeto from acting as an officer or director of a public company<br />
and to impose a penny stock bar against him.<br />
Charges were also brought against Ahn and former chief compliance officer, Elizabeth<br />
Pagliarini, but both settled their cases without admitting or denying the allegations. Ahn’s<br />
penalties include a $40,000 fine and prohibition from association with a broker and dealer for<br />
five years. Pagliarini agreed to a $20,000 penalty and a one-year suspension as a supervisor with<br />
a broker or dealer.<br />
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SEC v. UBS Financial Services Inc., 2011 SEC LEXIS 1555, SEC <strong>Litigation</strong> Release No. 21956<br />
(May 4, 2011)<br />
On May 4, 2011, the SEC filed a complaint against UBS Financial Services Inc. (“UBS”)<br />
in the U.S. District Court for the District of New Jersey alleging that UBS engaged in various<br />
fraudulent bidding practices in connection with at least 100 municipal bond transactions.<br />
According to the Commission, UBS made fraudulent misrepresentations and omissions to<br />
various municipalities and their agents. Specifically, UBS illegally won bids as a provider of<br />
reinvestment products, rigged bids for the benefit of other providers while acting as a bidding<br />
agent for the municipalities, and facilitated the payment of improper, undisclosed amounts to<br />
other bidding agents. As a result of this conduct, UBS generated millions of dollars in ill-gotten<br />
gains and threatened the tax status of over $16.5 billion of underlying municipal securities.<br />
Without admitting or denying these allegations, UBS has consented to entry of a final<br />
judgment enjoining it from violations of Section 15(c) of the Securities Exchange Act of 1934<br />
and has agreed to pay a penalty of $32.5 million and disgorgement of $9,606,543 with<br />
prejudgment interest of $5,100,637. The settlement was approved by the court on May 6, 2011.<br />
SEC v. J.P. Morgan Securities LLC, 2011 SEC LEXIS 2329, SEC <strong>Litigation</strong> Release No. 22031<br />
(July 7, 2011)<br />
On July 7, 2011, the SEC filed a complaint against J.P. Morgan Securities LLC (“J.P.<br />
Morgan”) in the U.S. District Court for the District of New Jersey alleging that J.P. Morgan<br />
engaged in various fraudulent bidding practices in connection with at least 93 municipal bond<br />
reinvestment transactions. According to the Commission, through misrepresentations and<br />
omissions, J.P. Morgan, acting as an agent for its affiliated commercial bank, affected the prices<br />
municipalities paid for reinvestment products and deprived municipalities the presumption that<br />
the reinvestment products were purchased at fair value. Specifically, J.P. Morgan engaged in<br />
“last looks,” a process by which it won bids because it obtained information from bidding agents<br />
about other bids, “set-ups,” a process by which it won bids because the bidding agent<br />
deliberately obtained non-winning bids from other providers, and rigging bids for other providers<br />
by deliberately submitting non-winning bids. As a result of this conduct, J.P. Morgan generated<br />
millions of dollars in ill-gotten gains and threatened the tax status of billions of dollars of<br />
underlying municipal securities.<br />
Without admitting or denying these allegations, J.P. Morgan has consented to entry of a<br />
final judgment enjoining it from violations of Section 15(c)(1)(A) of the Securities Exchange Act<br />
of 1934 and has agreed to pay a penalty of $32.5 million and disgorgement of $11,065,969 with<br />
prejudgment interest of $7,620,380. The settlement was approved by the court on July 8, 2011.<br />
J.P. Morgan and its affiliates have also agreed to pay $177 million to settle parallel charges<br />
brought by other federal and state authorities.<br />
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SEC v. Stifel, Nicolaus & Co., Inc. and David Noack, 2011 SEC LEXIS 2767, SEC <strong>Litigation</strong><br />
Release No. 22064 (August 10, 2011)<br />
On August 10, 2011, the SEC filed a complaint in the U.S. District Court for the Eastern<br />
District of Wisconsin against Stifel, Nicolaus & Co, Inc. (“Stifel”), a registered broker-dealer<br />
and investment advisor, and former Senior Vice President David Noack alleging the fraudulent<br />
sale of unsuitable financial instruments to five Wisconsin school districts. According to the<br />
Commission, Stifel and Noack encouraged the risk-averse school districts to invest in notes<br />
linked to the performance of synthetic collateralized debt obligations (“CDOs”) as a means to<br />
fund retiree benefits owed to current and former employees. However, Stifel and Noack<br />
misrepresented the risks associates with the investment and failed to disclose material facts.<br />
Specifically, Stifel and Noack made “sweeping assurances” to the school districts,<br />
misrepresented that 30 of the 105 companies in the portfolio would have to default and that 100<br />
of the top 800 companies in the world would have to fail before the school districts would suffer<br />
a loss of their principle, and failed to disclose poor portfolio performance, credit downgrades, the<br />
concerns by CDO providers about the investments, such as selling this type of product to this<br />
investor, and the providers’ ultimate refusal to participate. According to the Commission, the<br />
school districts did not have prior experience investing in CDOs and lacked the sophistication to<br />
independently evaluate the investment. Over a few years, the school districts’ $200 million<br />
investment became worthless.<br />
The SEC has charged Stifel and Noack with violating Section 17(a) of the Securities Act<br />
of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and<br />
Stifel with violating and Noack with aiding and abetting violations of Section 15(c)(1)(A) of the<br />
Securities Exchange Act of 1934. The investigation is ongoing.<br />
SEC v. Finger and Black Diamond Securities LLC, 2011 SEC LEXIS 3132, SEC <strong>Litigation</strong><br />
Release No. 22087 (September 8, 2011)<br />
The SEC is alleging that Richard A. Finger Jr. and his brokerage firm Black Diamond<br />
Securities LLC (“Black Diamond”) violated Sections 10(b) and 15(c)(1)(A) of the Securities<br />
Exchange Act of 1934 (“Exchange Act”) by cheating customers out of millions of dollars<br />
through unauthorized, high-risk options trading and excessive commissions. Finger, who was<br />
the sole owner and majority shareholder of Black Diamond, obtained most of his clientele from<br />
family and friends who he served in his previous positions at other financial institutions.<br />
The complaint, filed on September 8, 2011, alleges that Finger falsified documents and<br />
customer receipts indicating higher account balances and lower commission percentages than<br />
were actually in the account. In one instance, characteristic of all Black Diamond accounts,<br />
Finger reported nearly $800,000 on his customer statement when the account actually only had<br />
$62.00. Additionally, Finger reportedly told his clients that he was taking little or no<br />
commission on certain transactions, while in reality he was purportedly taking hundreds of<br />
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thousands of dollars to finance his lavish lifestyle which included a $2 million dollar home and<br />
luxury vehicles.<br />
Under Section 10(b) of the Exchange Act and Rule 10b-5, Finger and Black Diamond are<br />
charged for their fraudulent behavior in connection with the purchase or sale of securities. Black<br />
Diamond is charged under 15(c)(1)(A) as broker and Finger is charged under Section<br />
15(c)(1)(A) for aiding and abetting the fraudulent activity of the brokerage firm. The SEC seeks<br />
permanent injunctions, disgorgement of ill-gotten gains, civil penalties, prejudgment interest, an<br />
asset freeze, an accounting, and orders allowing for expedited discovery and prevention of any<br />
destruction of accounting records, ledgers, and other business instrumentalities.<br />
In re Richard Goble, 2011 SEC LEXIS 3492, SEC Initial Decision Release No. 435 (October 5,<br />
2011)<br />
On October 5, 2011, administrative law judge Cameron Elliot granted the SEC’s Motion<br />
for Summary Disposition affirming the April 27, 2011 district court decision holding Richard L.<br />
Goble liable for committing fraud and aiding and abetting his clearing firm’s violations of<br />
sections 10(b), 15(c)(3), and 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and<br />
Exchange Act Rules 10b-5, 15c3-3, and 17a-3. Goble was the founder, sole owner, former board<br />
member, and a director of North American Clearing, Inc (“North American”). North American<br />
was a clearing firm for approximately 40 correspondent firms and more than 10,000 customer<br />
accounts. In response to financial trouble arising in late 2007, Goble and his financial team<br />
falsified final records in an effort to obtain operating funds through consumer funds maintained<br />
in a special reserve account (“Account”). Based on this false documentation, Goble illegally<br />
transferred $3.4 million from the Account. Goble was permanently enjoined from violating SEC<br />
laws and from attempting to obtain a security license and/or engage in the securities business.<br />
Goble also had to pay a $7,500 civil penalty.<br />
On May 14, 2008, to comply with Exchange Act 15(c)(3) and Rule 15c3-3 weekly<br />
reserve requirements, Goble instructed Timothy Ward, former financial and operations principal,<br />
to record a sham purchase of approximately $5 million in money market funds and to fabricate<br />
North American’s money market statement to show a customer credit balance of $5 million less<br />
than its actual balance. Since these falsified documents showed customer debits exceeded<br />
customer credits, Wade was seemingly able to lawfully withdraw $3.4 million from the Account<br />
to meet legitimate operational expenses. On May 15, 2008, FINRA examiners discovered the<br />
sham exchange and immediately directed North American to return the $3.4 million to the<br />
Account. Using the proper financial data, FINRA also determined that North American actually<br />
owed the Account $1.8 million. Unable to meet the deposit requirement, North American was<br />
forced into bankruptcy and charges were brought against North American officials.<br />
The SEC investigation began on May 27, 2008 when Goble, Bruce Blatman, former<br />
North American president, and Ward were charged with violations of 10(b), 15(c)(3), and 17(a)<br />
of the Exchange Act and Exchange Act Rules 10b-5, 15c3-3, and 17a-3. Blatman and Ward<br />
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settled with the SEC prior to the conclusion of Goble’s case. Without affirming or denying<br />
liability, they consented to permanent injunctions and civil penalties.<br />
4. Section 16(b)<br />
C.4<br />
Katz v. SEC, 647 F.3d 1156, 2011 U.S. App. LEXIS 16141 (DC Cir. 2011).<br />
Petitioner, a representative associated with a member of the NYSE, sought review of an<br />
SEC order sustaining a NYSE disciplinary action. An NYSE hearing panel had found that<br />
petitioner caused customer funds to be transferred to other customers’ accounts without<br />
authorization, made misstatements to a customer, effected unsuitable transactions, and engaged<br />
in unauthorized trading. A portion of the case, and NYSE’s findings, concerned a finding that<br />
petitioner violated SEC Rules 17a-3 and 17a-4, by entering or causing to be entered inaccurate<br />
information on a customer’s new account forms. The SEC had sustained the NYSE’s finding<br />
that petitioner caused her firm to fail to learn essential facts about the customer by entering, or<br />
causing to be entered, inaccurate information on the customer’s new account forms, including<br />
her investment objective, income, net worth, and financial experience.<br />
Petitioner challenged the SEC’s finding that she caused her firm’s books and records to<br />
be inaccurate, largely on the grounds that similar charges had been brought with respect to the<br />
account forms of other similar customers and dismissed by the SEC. From this, she argued, it<br />
was arbitrary for the SEC not to also reject the books and records violation as to the remaining<br />
customer. But, the court pointed to various findings of the SEC that supported the conclusion<br />
that the account form of the remaining customer was inaccurate, and that the evidence supporting<br />
those inaccuracies stood in contrast to the lack of evidence of inaccuracies that caused the other<br />
charged violations to be dismissed. Therefore, the court held, it was not arbitrary for the SEC to<br />
dismiss the books-and-records charges regarding those clients’ forms while affirming the finding<br />
of a violation with respect to the remaining client’s form. Thus, the D.C. Circuit affirmed the<br />
SEC’s order, not only with respect to the books-and-records findings, but as to all findings.<br />
VanCook v. SEC, 653 F.3d 130 (2nd Cir. 2011).<br />
Petitioner, a former stockbroker, sought review of an SEC order finding that he willfully<br />
violated the Securities Exchange Act’s antifraud and recordkeeping provisions and imposing<br />
penalties, by virtue of a scheme involving late trading of mutual funds and aiding and abetting<br />
and causing his firm to keep inaccurate books and records, in violation of Section 17(a)(1) and<br />
SEC Rule 17a-3. Specifically, the Section 17 violation pertained to the requirement that the firm<br />
maintain a memorandum of an order, including the time at which the order was received. The<br />
receipt of the order is important to mutual fund trading because only orders received by 4:00<br />
p.m. are entitled to receive that day’s valuation, calculated by the mutual fund after 4:00 p.m.<br />
based on that’s day’s trading activity. The SEC had barred petition from working in the<br />
securities industry and required him to disgorge his unjust enrichment and imposed a civil money<br />
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penalty. The Second Circuit held that there was sufficient evidence in the record to support the<br />
SEC’s finding that petitioner had actual knowledge that his firm’s records were inaccurate,<br />
including that he himself had failed to record the actual times that final trading instructions were<br />
given and that he had also designed the mechanism by which the records were falsified, and in so<br />
doing, aided and abetted the recording keeping requirements. The Second Circuit denied the<br />
petition and affirmed the SEC’s order.<br />
Simmonds v. Credit Suisse Securities (USA), LLC, 638 F.3d 1072 (9th Cir. 2011)<br />
Plaintiff appealed the district court’s dismissal of fifty-four related derivative complaints<br />
brought under Section 16(b), seeking to recover disgorgement of alleged short-swing trading<br />
profits. Specifically, plaintiff alleged that defendants, who were investment banks participating<br />
in Initial Public Offerings (IPOs) of companies coordinated their activities with the issuers’<br />
officers, directors, and principal shareholders to obtain financial benefits from increases in the<br />
stock prices after the IPOs. The transactions in question occurred in 1999 and 2000, while the<br />
complaints were filed in 2007.<br />
As to thirty of the cases, the Ninth Circuit affirmed the district court’s dismissal based on<br />
lack of a proper pre-suit demand letter. The court, however, reversed the district court’s decision<br />
that the remaining twenty-four cases were by the two-year statute of limitations for Section 16(b)<br />
claims. The Ninth Circuit reaffirmed its rule articulated in Whittaker v. Whittaker Corp., 639<br />
F.2d 516 (9th Cir. 1981), tolling the two-year limitations period to recover short-swing profits<br />
from corporate insiders under Section 16(b) until the insider reports the offending trades to the<br />
SEC under Section 16(a). Under the Ninth Circuit rule, the plaintiff’s actual knowledge of his or<br />
her claim and failure to sue in spite of that knowledge is not considered, which prompted the<br />
author of the main opinion, in a special concurring opinion, to note that the rule ignores the text<br />
of Section 16(b) and congressional intent, and that were it not for clear precedent in the Ninth<br />
Circuit, he would have would limited the filing of Section 16(b) suits to within two years after<br />
the short-swing trades actually took place.<br />
The Supreme Court granted certiorari and heard oral argument on November 29, 2011.<br />
Chechelle v. Sheetz, 2011 U.S. Dist. LEXIS 97489 (S.D.N.Y., Aug. 29, 2011).<br />
The district court granted a motion to dismiss a shareholder’s short-swing insider trading<br />
claim under Section 16(b) on the grounds that defendant was not shown to have beneficially<br />
owned more than ten percent of the corporation’s stock. Although the plaintiff alleged the<br />
existence of agreements that defendant was part of a shareholder group, the court found those<br />
allegations too conclusory to justify maintaining the action.<br />
Defendant was president and CEO of a public company, as well as the co-founder, cochairman<br />
and co-CEO of a separate corporation formed “for the purpose of investing in debt and<br />
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equity interests in real estate assets and businesses.” Defendant was allegedly a member of a<br />
shareholder group as defined in Section 13(d) of the Exchange Act, which allegedly included the<br />
investment corporation, and other individuals who were insiders of the public company, and<br />
officers of the investment corporation. Plaintiff alleged that the existence of a shareholder group<br />
could be inferred from a series of at least five agreements for the purpose of acquiring, holding,<br />
voting, or disposing of the company’s common stock a “Credit Agreement” and “Lock-Up<br />
Agreements,” among others. While the court credited the existence of the agreements, it did not<br />
agree that the existence of the agreements amounted to a plausible claim that the defendant had<br />
made an agreement with the others to form a shareholder group. The court denied leave to<br />
amend.<br />
Gibbons v. Malone, 801 F. Supp. 2d 243; (S.D.N.Y. 2011).<br />
Plaintiff filed suit under Section 16(b) against a director of a public company seeking to<br />
recover disgorgement of short-swing profits from a series of purchases and sales occurring in an<br />
eleven day period in 2008. Referring to the plaintiff’s legal theory of liability as “novel,” the<br />
court considered the contention that the directors sales of shares of Series C stock should be<br />
matched with his purchases of Series A stock. The district court held that a director’s alleged<br />
sales of the one series of stock and purchases of a different series did not constitute a short swing<br />
transaction under Section 16(b). The court looked to the language of Section 16(b), which refers<br />
to profits realized from “the purchase and sale, or sale and purchase, of any equity security of the<br />
issuer.” Analyzing the features of the Series A and C shares, the court noted that unlike some<br />
situations, where courts have held that different securities could be “matched” for Section 16(b)<br />
purposes, the Series A and C shares were neither derivatives of, nor convertible into the same<br />
security. Further, the voting rights of the shares were different and they had different dividend<br />
features. As a result, the court dismissed plaintiff’s action.<br />
Grecco v. Local.Com Corp., 806 F. Supp. 2d 653; 2011 U.S. Dist. LEXIS 4319 (S.D.N.Y. 2011).<br />
Plaintiff, a shareholder of a public company, filed a derivative action alleging that<br />
defendant Hearst Communications, Inc. (“Hearst”) purchased securities of the company in<br />
violation of Section 16(b). Hearst moved for leave to amend its answer to assert the affirmative<br />
defenses of res judicata and collateral estoppel, and for summary judgment based on such<br />
defenses.<br />
Plaintiff’s action challenged the same transactions as a prior action filed by a different<br />
derivative plaintiff. That prior plaintiff’s action failed, having been dismissed on summary<br />
judgment, with such dismissal affirmed on appeal. The new plaintiff attempted to justify the<br />
new case, and opposed Hurst’s res judicata argument, by contending that he was not in privity<br />
with the prior plaintiff, and that the prior plaintiff’s prosecution of the case was inadequate to<br />
represent the shareholders. The court found that plaintiff had alleged no conflict of interest<br />
between himself and the prior plaintiff, and that differences in legal strategy do not amount to<br />
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inadequate representation. Moreover, the court noted that the plaintiff had notice of the prior<br />
action and failed to intervene. As such, the court granted Hurst’s motion to amend, and granted<br />
summary judgment in Hurst’s favor.<br />
Klawonn v. YA Global Investments, L.P., 2011 U.S. Dist. LEXIS 88535 (D. N.J., Aug. 10, 2011).<br />
Plaintiff alleged that defendant earned short-swing profits from trading in the stock of a<br />
public company under a variety of theories under which defendant would be treated as a<br />
statutory insider by virtue of beneficial ownership of more than ten percent of the company’s<br />
common stock. The court considered the allegations under an amended complaint, designed to<br />
remedy deficiencies concerning the beneficial ownership allegations in the original complaint.<br />
Defendant argued that conversion caps were in place for all the relevant securities agreements<br />
that plaintiff relied upon to establish ten percent ownership, which limited defendant’s voting<br />
rights 4.99 percent. Plaintiff, in turn, argued that the caps were ineffective for various reasons,<br />
both factual and legal.<br />
The court rejected theories that the conversion caps were ineffective based on theories that: (a)<br />
voting rights conferred to defendant by a convertible series of stock established greater than ten<br />
percent beneficial ownership; (b) defendant was the beneficial owner of the stock held in<br />
“escrow” by a third party; (c) the conversion caps should be deemed illusory, based on the<br />
position taken by the SEC an amicus brief filed in a different case; and (d) SEC Rule 13d-3(b),<br />
which prohibits the use of agreement as part of a plan or scheme to evade reporting<br />
requirements, rendered the caps invalid. The court, however, found that the claim based a<br />
waiver of the conversion caps as to certain convertible debentures, caused by the company’s<br />
registration-related defaults, was sufficient to state a plausibly viable claim, and allowed the case<br />
to proceed solely on that theory. As such, the motion to dismiss was granted in part and denied<br />
in part.<br />
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5. Section 17<br />
C.5<br />
SEC v. Tecumseh Holdings Corp., 765 F.Supp.2d 340 (S.D.N.Y 2011).<br />
This case concerns an alleged fraudulent securities offering by virtue of false and<br />
misleading offering memoranda. The material statements and omissions were charged as<br />
violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC also<br />
alleged that one of the defendants (who served as counsel to one of the broker-dealer defendants)<br />
aided and abetted the brokerage firm’s violation of Section 17(a). In a prior decision, the court<br />
found that the evidence was insufficient to establish substantial aiding and abetting liability, but<br />
directed the SEC to inform the court if it had additional evidence, indicating the court’s intention<br />
to grant summary judgment against the defendant. SEC v. Tecumseh Holdings Corp., 2009 U.S.<br />
Dist. LEXIS 119869 at *5 (S.D.N.Y., Dec. 22, 2009). The SEC provided no new evidence in<br />
support of its renewed motion for summary judgment on the Section 17 claim, and thus, the court<br />
granted summary judgment in favor of the individual counsel defendant. In so doing, the court<br />
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noted that the SEC had “merely rephrase[ed] one of its arguments for why [defendant] provided<br />
the requisite ‘substantial assistance’ to establish aiding and abetting liability” without offering<br />
additional evidence.<br />
6. Section 18<br />
C.6<br />
SRM Global Fund Ltd P’ship v. Countrywide Fin. Corp., 2011 U.S. App. LEXIS 23526 (2d Cir.<br />
Nov. 23, 2011).<br />
Plaintiff asserted violations of Section 18 of the Securities Exchange Act of 1934,<br />
claiming that defendants’ statements of adequate liquidity in 2007 SEC filings were false and<br />
misleading in light of the fact that defendants later acknowledged that the company had lost<br />
liquidity and viability during 2007. The Second Circuit affirmed the district court’s dismissal of<br />
the claims, reasoning that (1) because fraud cannot be pled by hindsight, a claim must be<br />
dismissed where plaintiff fails to allege that defendants knew the allegedly fraudulent statements<br />
were false at the time the statements were made; (2) defendants’ optimistic statements were<br />
forward-looking and non-actionable; and (3) plaintiff improperly failed to allege that the<br />
liquidity position in the SEC filings was, in fact, misstated.<br />
Special Situations Fund III, L.P. v. Am. Dental Partners, Inc., 775 F. Supp. 2d 227 (D. Mass.<br />
2011).<br />
Defendants moved to dismiss claims under Section 18 of the Securities Exchange Act of<br />
1934 where claims were asserted more than one year after plaintiffs discovered facts giving rise<br />
to their claims. Plaintiffs argued that the Section 18 statute of limitations had been tolled by a<br />
class action pending against the defendants under Section 10(b) of the Exchange Act. The court<br />
dismissed the Section 18 claim as time-barred, rejecting the proposed application of the class<br />
action tolling doctrine on the ground that, because of the Section 10(b) scienter requirement, “the<br />
facts required to be pleaded and proved under section 10(b) are significantly different from the<br />
facts that give rise to section 18 claims.”<br />
Maverick Fund, L.D.C. v. Comverse Tech. Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).<br />
Plaintiffs alleged that defendants violated Section 18 of the Securities Exchange Act of<br />
1934 because: (i) Comverse’s SEC filings stated that the company complied with GAAP when in<br />
fact the company was improperly accounting for stock options and (ii) the company announced<br />
that it would be become current in its SEC filings by the end of 2007 but thereafter failed to do<br />
so. The court granted defendants’ motion to dismiss with respect to the latter category of claims<br />
because the allegations were based on forward-looking statements protected by the Private<br />
Securities <strong>Litigation</strong> Reform Act. The court denied the motion to dismiss with respect to the<br />
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emainder of the Section 18 claims, however, noting that the claims were not rendered<br />
implausible by plaintiffs’ voluminous “in-and-out” trading of Comverse stock, or by the fact that<br />
plaintiffs continued to trade in Comverse stock after the release of negative information about the<br />
company. The court held that plaintiffs pleaded fraud with adequate particularity because they<br />
provided enough detail to identify the allegedly fraudulent statements and show why they were<br />
allegedly fraudulent. Further, plaintiffs adequately pleaded loss causation by alleging that they<br />
sold their Comverse shares at a loss after the allegedly fraudulent statements were revealed and<br />
the stock price dropped. Finally, plaintiffs adequately pleaded actual reliance under Section 18<br />
by alleging that they “read and/or listened to and relied upon the defendants’ false and<br />
misleading statements before investing . . . in Comverse shares.”<br />
Int’l Fund Mgmt S.A. v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Plaintiffs alleged that Citigroup’s 2006 and 2007 Form 10-K filings included<br />
misstatements and omissions in violation of Section 18 of the Securities Exchange Act of 1934<br />
and that “in connection with [their] purchases of Securities after February 23, 2007, Plaintiffs<br />
and/or their investment managers read and relied upon Citi’s [2006 and 2007 Form 10-Ks],<br />
including the false financial statements and other statements alleged herein to be false or<br />
misleading.” The court dismissed the claims for failure to plead actual reliance, holding that the<br />
allegations were merely conclusory because they were “incredibly broad” and lacked supporting<br />
factual matter.<br />
Hines v. Cal. Pub. Utils. Comm., 2011 U.S. Dist. LEXIS 134583 (N.D. Cal. Nov. 21, 2011).<br />
The court granted a motion to dismiss a claim brought under Section 18 of the Securities<br />
Exchange Act of 1934. The court held that the plaintiff failed to state a claim where she (i) did<br />
not identify the allegedly misleading statements, (ii) did not allege that any purportedly<br />
misleading statements were made in a document filed pursuant to the Exchange Act, and (iii) did<br />
not allege that she had relied on any misstatements or omissions when purchasing or selling a<br />
security.<br />
7. Section 19(b)<br />
Fiero v. Financial Ind. Regulatory Auth., Inc., 660 F.3d 569 (2d. Cir. 2011).<br />
A registered broker-dealer and its sole registered representative brought an action seeking<br />
a declaration that FINRA lacks the authority to bring court actions to collect disciplinary fines it<br />
has imposed. The Second Circuit held FINRA lacked authority to bring such court actions.<br />
Although FINRA (then-NASD) had filed a rule change back in 1990 with the SEC to allow it to<br />
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ing such court actions (the “1990 Rule Change”), FINRA filed the proposed rule change under<br />
Section 19(b)(3)(A)(i) of the Exchange Act. That section allows self-regulatory organizations to<br />
avoid the requirement to engage in a public notice and comment period prior to approval of rule<br />
changes, but only for so-called “house-keeping” rules and other rules that do not substantially<br />
effect the public interest or the protection of investors. The court held the 1990 Rule Change<br />
was a new substantive rule that affected the rights of disciplined members regarding the payment<br />
of fines from disciplinary proceedings. Thus, the 1990 Rule Change should have been approved<br />
only after the prescribed notice and comment period, not as a “house-keeping” rule. Since the<br />
1990 Rule Change was never properly promulgated, FINRA lacked authority to judicially<br />
enforce collection of disciplinary fines.<br />
Standard Inv. Chartered, Inc. v. National Assoc. of Sec. <strong>Dealer</strong>s, Inc., 637 F.3d 112 (2d. Cir.<br />
2011).<br />
Suit was brought by a member of the NASD which alleged that NASD and its officers<br />
made misstatements in connection with a proxy solicitation through which the NASD sought to<br />
amend its bylaws as part of its consolidation with NYSE Group, Inc. The Court of Appeals held<br />
a self-regulatory organization and its officers have absolute immunity from private damages suits<br />
in connection with amendment of the organization’s bylaws where, as here, the amendments are<br />
“inextricable” from the organization’s role as a regulator. As part of its reasoning, the court<br />
found the SEC’s role in approving or adopting amendments to NASD’s bylaws to be significant.<br />
The court found that this framework highlights the extent to which a self-regulatory<br />
organization’s bylaws are closely linked with the regulatory powers the SEC delegates to such<br />
organizations and confirm that immunity should apply.<br />
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8. Margin Violations<br />
C.8<br />
In re Application of Philip L. Spartis and Amy J. Elias, FINRA Admin. Proc. File No. 3-13979,<br />
2011 SEC LEXIS 1693 (May 13, 2011).<br />
The Securities and Exchange Commission (the “SEC”) affirmed the disciplinary action<br />
taken by NYSE Regulation (now the Financial Industry Regulatory Authority, “FINRA”)<br />
(“NYSE”) against Philip L. Spartis and Amy J. Elias, former registered representatives of<br />
Salomon Smith Barney, Inc. (the “Firm”), a member of the New York Stock Exchange, LLC.<br />
The NYSE found that Spartis and Elias caused the Firm to violate NYSE Rule 472.30 by sending<br />
customers communications that omitted material facts and/or were misleading with regards to the<br />
risks of using margin loans. Specifically, the representatives provided marketing materials to<br />
their customers, between 1998 and 2001, with connection with the customers’ exercise of<br />
employee stock options that had been granted to them by WorldCom, Inc. The material<br />
encouraged customers to utilize an exercise-and-hold strategy whereby employees could<br />
purchase stock at the grant price and hold onto it for a period of time, paying the purchase price<br />
of the stock, taxes, and fees with cash or by use of a margin loan obtained through the Firm. The<br />
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materials did not disclose the downside risks of holding the WorldCom shares on margin, such as<br />
accelerated losses including interest payments and margin calls if the share price declined, as it<br />
ultimately did. The SEC sustained the NYSE’s censure of Spartis and Elias.<br />
FINRA Department of Enforcement v. Kale E. Evans, FINRA Disc. Action Complaint No.<br />
2006005977901, 2011 FINRA Discip. LEXIS 36 (Oct. 3, 2011).<br />
The Financial Industry Regulatory Authority (“FINRA”) National Adjudicatory Council<br />
(“NAC”) affirmed the Hearing Panel’s sanctions against Kale E. Evans for violations of various<br />
NASD and FINRA rules. Evans, while a registered representative of TD Waterhouse Investor<br />
Services, Inc. (the “Firm”), induced a young woman who was living with his family to entrust<br />
him with the proceeds of her father’s life insurance plan. Evans convinced her to establish a<br />
joint brokerage account with him at his Firm, and he opened a margin account for her. He then<br />
proceeded to fund the account with the life insurance money and undertook risky trades, relying<br />
heavily on margin. These trades were all executed without the young woman’s knowledge, and<br />
the account suffered heavy losses. When the young woman learned of these losses she<br />
confronted Evans and he tried to settle the matter with away from his Firm. FINRA charged him<br />
with violating NASD Rules 2110, 2310, 2510(a) and Interpretive Material 2310-2(b)(2). The<br />
Hearing Panel barred Evans from associating with any FINRA member in any capacity, and the<br />
NAC affirmed the Hearing Panel’s decision and also ordered him to pay disgorgement in the<br />
amount of $52,647.<br />
FINRA Department of Enforcement v. William J. Murphy Midlothian, Carl M. Birkelbach, and<br />
Birkelbach Investment Securities, Inc., FINRA Disc. Action Complaint No. 2005003610701,<br />
2011 FINRA Discip. LEXIS 42 (Oct. 20, 2011).<br />
The Financial Industry Regulatory Authority (“FINRA”) National Adjudicatory Council<br />
(“NAC”) affirmed the Hearing Panel’s sanctions against William J. Murphy Midlothian, Carl M.<br />
Birkelbach, and Birkelbach Investment Securities, Inc. (the “Firm) for violations of various<br />
federal securities laws, NASD rules, and FINRA rules. Midlothian, a registered representative,<br />
engaged in unauthorized trading in two customer accounts, and his misconduct included<br />
churning these accounts, engaging in excessive and unsuitable trading that created large margin<br />
debit balances, and sending the customers misleading written communications about their<br />
accounts. He was charged with violating NASD Rule 2510(b), 2860, 2110, 2310, IM-2310-2,<br />
2220, and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.<br />
His supervisor Birkelbach ignored numerous red flags and failed to adequately supervise<br />
Midlothian, and was charged with violating NASD Rules 3010, 2860(b), and 2110. The Firm<br />
was also charged with using an improper confidentiality provision in a settlement agreement<br />
with a customer, in violation of NASD Rule 2110. The NAC barred Murphy and fined him<br />
$586,174.67 for disgorgement, and also barred Birkelbach in all capacities. The NAC also<br />
affirmed the $2,500 fine on the Firm.<br />
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D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995<br />
1. Pleading<br />
D.1<br />
Matrixx Initiatives, Inc., v. James Siracusano, 131 S.Ct. 1309 (U.S. 2011).<br />
The court, denied defendants’ motion to dismiss on the basis that plaintiffs’ complaint<br />
adequately pleaded scienter under the Private Securities <strong>Litigation</strong> Reform Act of 1995.<br />
Plaintiffs’ alleged that defendants violated federal securities laws by failing to disclose adverse<br />
event reports linking defendants’ cold remedy to a loss of sense of smell. Plaintiffs alleged that<br />
Defendants misrepresented the remedy’s concerns through a press release stating that the product<br />
did not cause the loss of smell and had been reviewed by a consultant, a panel of physicians and<br />
scientists.<br />
City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp., 632 F.3d<br />
751 (1st Cir. 2011).<br />
In a securities fraud class action against issuer and its senior executives, the court<br />
dismissed the suit, and investors appealed. The court held that even assuming the issuer<br />
defendant knew, during the relevant period, that Japan had relaxed water testing regulations and<br />
that such change would ultimately lead to less demand for issuer’s products and services in<br />
Japan, such knowledge alone did not provide a sufficient basis for a cogent and compelling<br />
inference that defendant acted with scienter in failing to disclose earlier the regulatory change.<br />
Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011).<br />
Shareholder brought a securities fraud action against medical device manufacturer and<br />
three of its officers. The court granted defendants’ motion to dismiss complaint and shareholders<br />
appealed. Plaintiffs alleged that defendant’s warnings regarding the risk of non-reimbursement<br />
for use of one of its medical devices were misleading or false because defendants knew the level<br />
of risk, or even of certainty, of non-reimbursement was more serious than disclosed in the<br />
warnings. On appeal, the court affirmed the ruling of the district court that none of the omissions<br />
by the defendants rose to level required to be shown as misleading but instead that internal<br />
disagreements regarding proper reimbursement code choice and strategy represented risk<br />
investors were fully informed about and that plaintiffs failed to identify any actionable<br />
misstatements with the requisite particularity required under the PSLRA.<br />
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D.1<br />
Mississippi Pub. Emps.’ Ret. Sys. v. Boston Scientific Corp., 649 F.3d 5 (1st Cir. 2011).<br />
Plaintiffs, investors brought securities fraud class action against defendants, a coronary<br />
stent manufacturer and its executives. The court granted defendants’ motion to dismiss and<br />
investor appealed. On appeal, the court reversed and remanded. On remand, the court granted<br />
defendants’ motion for summary judgment and plaintiffs again appealed. On second appeal, the<br />
court held that defendants did not act with the scienter required to establish securities fraud.<br />
Specifically, the court found that defendants’ were not shown to be aware of a problem that<br />
threatened the device’s viability. The court also reasoned that the defendants had no obligation<br />
to disclose the fact that they were working on an improvement to the device to reduce<br />
complaints.<br />
Amorosa v. AOL Time Warner Inc., 2011 WL 310316 (2d Cir. Feb. 2, 2011).<br />
Stockholder in company that was merged with another company brought action against<br />
auditor for merging company and company surviving merger for alleged violations of the<br />
Securities Exchange Act of 1934. The court granted the auditor’s motion to dismiss holding that<br />
stockholder failed to adequately allege loss causation linking the purportedly false and<br />
misleading statements made by auditor in a “clean” audit opinion of financial statements and the<br />
ruling was affirmed upon appeal. Specifically, the court found that plaintiff could not establish<br />
any misstatement or opinion in the audit opinion that was revealed to the market directly<br />
resulting in a diminution in the value of plaintiff’s securities.<br />
Inter-Local Pension Fund GCC/IBT v. GE, 2011 U.S. App. LEXIS 19271 (2d Cir. 2011).<br />
The court granted defendants’ motion to dismiss plaintiffs’ securities law claims<br />
reasoning that that plaintiffs failed to adequately plead the element of loss causation under the<br />
heightened pleading requirements of the PSLRA. Plaintiffs alleged that defendants concealed its’<br />
liquidity problems and plans to raise $15,000,000,000 in dilutive equity financing. The court<br />
found that no loss occurred as a result of defendants’ announcement to offer new equity to<br />
remedy its liquidity problems. The court held that Plaintiffs’ complaint did not adequately plead<br />
that defendants concealed the pricing of the offering with requisite particularity.<br />
GE Investor, v. General Electric Company, 2011 WL 5607137 (2d Cir. Nov. 18, 2011).<br />
The court, in ruling on defendants’ motion to dismiss plaintiffs’ securities law claims,<br />
found that plaintiffs failed to satisfy the heightened pleading requirements under PSLRA and did<br />
not adequately plead the element of loss causation. Plaintiffs’ alleged that defendants’ concealed<br />
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its’ liquidity problems and plans to raise $15,000,000,000 in dilutive equity financing. The court<br />
found that no loss occurred as a result of defendants’ announcement to offer new equity to<br />
remedy its liquidity problems. Ultimately the court held that the complaint did not adequately<br />
plead that defendants’ concealed the pricing of the offering with requisite particularity.<br />
New Orleans Emps. Ret. Sys. v. Celestica, Inc, 2011 WL 6823204 (2d Cir. Dec. 29, 2011).<br />
The court, denied defendants’ motion to dismiss on the basis that plaintiffs provided<br />
sufficient facts to satisfy the particularity requirement of the Private Securities <strong>Litigation</strong> Reform<br />
Act of 1995. Plaintiffs’ alleged that defendants recklessly misrepresented the rising volume of<br />
unsold inventory in one of defendant’s facilities. Plaintiffs further relied on confidential<br />
witnesses testimony that provided them with information about rising levels of inventory to<br />
defendants. The court found that although the witnesses were not identified by name in the<br />
complaint, plaintiffs’ descriptions of these persons were sufficiently particular to permit the<br />
strong inference of scienter necessary for plaintiffs to sustain their burden on a motion to<br />
dismiss.<br />
Michael S. Rulle Family Dynasty Trust v. AGL Life Assurance Company, 2011 WL 3510285 (3d<br />
Cir. July 14, 2011).<br />
Plaintiff, life insurance policy owner brought action against defendant, insurer after<br />
policy premiums that had been invested in a Ponzi scheme lost their entire value. The court<br />
granted defendant’s motion to dismiss and plaintiff owner appealed. On appeal, the court held<br />
that policy owner failed to state a securities fraud claim. Specifically, plaintiff failed to meet the<br />
PSLRA heightened pleading requirement because plaintiff did not state how or why defendant<br />
should have known or discovered that 23% of the policy owner’s premiums would be invested<br />
with one manager by a separate entity.<br />
City of Roseville Empls.’ Ret. Sys. al. v. Horizon Lines, Inc, 2011 WL 3695897 (3d Cir. Aug. 24,<br />
2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Plaintiffs alleged that defendant’s senior executives and managers made false or misleading<br />
statements about the corporation’s financial status. The court found that plaintiffs failed to the<br />
PSLRA heightened pleading standard by failing to properly allege that defendants acted with<br />
scienter when making material false statements about corporation’s good financial health.<br />
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D.1<br />
Barnard v. Verizon Communication, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).<br />
The court, granted defendant’s motion to dismiss reasoning that investors did not satisfy<br />
the PSLRA particularity pleading requirement for common law fraud. Plaintiffs alleged that<br />
defendant’s annual statement and a spin-off corporation’s prospectus omitted information<br />
concerning tax sharing agreements. The court found that plaintiffs failed to show how any<br />
defendants’ alleged misrepresentations impacted Plaintiffs’ decisions to purchase or sell<br />
securities.<br />
Katyle v. Penn National Gaming Inc., 637 F.3d 462 (4th Cir. 2011).<br />
The court granted defendant’s motion to dismiss for failure to adequately allege loss<br />
causation as required under PSLRA. On appeal, court held that purportedly corrective<br />
disclosures of delays in states’ regulatory approval process for a proposed buy-out/merger<br />
agreement, and defendant’s failure to issue press release announcing the regulatory approval<br />
were insufficient to show loss causation. The court further stated that not every announcement<br />
of bad news should be constitute grounds to issue a corrective disclosure.<br />
Frank v. Dana Corporation, 646 F.3d 954 (6th Cir. 2011).<br />
Shareholders brought a securities fraud class action against a corporation’s former CEO<br />
and CFO who allegedly falsified corporation’s financial reports. The court granted defendants’<br />
motion to dismiss, and plaintiffs appealed. On appeal, the court vacated and remanded. On<br />
remand, the court granted defendants’ motion to dismiss and plaintiffs appealed again. On<br />
appeal, the court held that shareholders adequately pleaded scienter. Specifically, plaintiffs<br />
alleged that defendants reported inflated earnings, filed reports, made public statements and<br />
asserted the veracity of their financials to government authorities all while key product line was<br />
operating at 50 percent of earnings, multiple factories were failing to meet budgets and the price<br />
of inputs had risen nearly 60%.<br />
Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461 (6th Cir. 2011).<br />
Plaintiff, investor brought action alleging securities fraud claims against defendant, a<br />
broker of auction rate securities (“ARS”). The court granted defendant’s motion and plaintiff<br />
appealed. On appeal, the court held that plaintiff’s allegations failed to give rise to strong<br />
inference that defendant acted with scienter. The court found that plaintiff failed to allege why<br />
or how defendant possessed advance, non-public knowledge that underwriters would jointly exit<br />
the ARS market and cause its collapse. The court reasoned that the allegations suggested that a<br />
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few of defendant’s employees were aware of consequences if underwriters did exit market. The<br />
court also held that plaintiff failed to satisfy the PSLRA particularity requirement because its<br />
sole allegation came in the vague form of a misstatement that ARS were “safe and secure.” The<br />
court went on to reason that this statement, standing by itself did not qualify as a material<br />
misrepresentation and did not indicate that defendant was aware of the impending ARS market<br />
meltdown.<br />
Anchorbank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).<br />
Plaintiffs, bank, investment fund, and fund’s trustee brought securities fraud action<br />
against defendant, bank employee who allegedly engaged in collusive trading scheme with coworkers<br />
involving purchase and sale of units in a fund. The court granted defendant’s motion to<br />
dismiss and plaintiffs appealed. On appeal, the court reversed and remanded, holding that<br />
plaintiffs alleged securities fraud with sufficient particularity, adequately alleged reliance,<br />
economic loss, loss causation, and scienter. The court found that defendants’ possible<br />
explanations not to be plausible under the heightened pleading requirements of the PSLRA.<br />
Further, the court found that reliance and economic loss were properly pleaded because the<br />
complaint alleged that the actions taken by the fund in response to the artificially inflated and<br />
deflated prices were caused by the employees’ fraudulent activities.<br />
Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc., 641 F.3d 1023 (8th<br />
Cir. 2011).<br />
Plaintiffs, investors’ class action securities lawsuit against defendants, manufacturer of<br />
silicon wafers used in semiconductor industry and its former president and CEO, the court<br />
dismissed the action and plaintiff appealed. On appeal, the court affirmed the dismissal and held<br />
that the defendants had no duty to disclose the incidents that disrupted production at two<br />
manufacturing facilities to investors. The court found that plaintiffs’ allegations were<br />
insufficient did not satisfy the scienter requirement under the PLSRA. Specifically, plaintiffs’<br />
failed to properly allege that defendants knew of past production problems influencing investor<br />
decisions. The court also emphasized defendants’ lack of motive and personal benefit from these<br />
disruptions.<br />
New Mexico State Investment Council v. Ernst & Young, <strong>LLP</strong>, 641 F.3d 1089 (9th Cir. 2011).<br />
Shareholders brought action against a corporation’s outside auditor, alleging that auditor<br />
knew of or recklessly disregarded the corporation’s fraudulent backdating actions despite issuing<br />
audit opinions attesting to the validity of corporation’s financial statements. The court granted<br />
defendants’ motion to dismiss. On appeal, the court reversed and remanded the ruling holding<br />
that the shareholders’ allegations were sufficient to support an inference of scienter. The court<br />
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acknowledged that difficulty of pleading sufficient facts because outside auditors have more<br />
limited information and exercise complex and subjective professional judgments that can be<br />
difficult to second guess. However, court held that auditor’s participation in corrective reforms<br />
undertaken to ensure future option grants were treated properly was sufficient to support an<br />
inference of scienter.<br />
Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681 (9th Cir. 2011).<br />
Shareholder brought a putative class action for securities fraud against an oil company<br />
and related defendants. The court held that the defendant’s alleged breach of the operator<br />
standard in its agreement, did not provide actionable misrepresentation supporting private<br />
securities fraud claim. On appeal, the court held that the breach of a contractual promise, even<br />
though filed in conjunction with U.S. Securities and Exchange Commission reporting<br />
requirements, was not a sufficient foundation for a securities fraud action.<br />
WPP Luxembourg Gamma Three Sari v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011).<br />
Plaintiff shareholder, brought action against defendants, corporation asserting securities<br />
fraud claims. The court granted defendants’ motion to dismiss without prejudice to which both<br />
parties appealed. On appeal, the court held that shareholder had sufficiently pleaded scienter<br />
with regard to the founders, and loss causation against founders, but failed to allege that the<br />
remaining parties acted with scienter. The court found that plaintiffs sufficiently alleged that the<br />
founders knew of and ignored notice requirements in the shareholder’s agreement that mandated<br />
the company’s management provide information about the eventual sale of their shares. The<br />
court subsequently found that the plaintiffs adequately pled loss causation by alleging that<br />
founders’ secret sales of shares caused the shareholders’ shares of the corporation to immediately<br />
become worthless. The court reasoned that an email conversation where the general counsel<br />
referenced the wrong offering in response to the shareholders’ questions about secondary<br />
offerings refuted the scienter requirement.<br />
New York State Teachers’ Ret. Sys. v. Fremont General Corporation, 2011 WL 5930459 (9th<br />
Cir., Nov. 29, 2011).<br />
The court granted defendants’ motion to dismiss reasoning that plaintiff’s allegations<br />
failed to raise strong inference of scienter with the specificity required under PSLRA. Plaintiffs’<br />
failed to show that each individual defendant possessed contemporaneous knowledge of<br />
undisclosed information that would render their public statements consciously misleading.<br />
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Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011).<br />
Shareholders brought securities fraud class action against corporation’s independent<br />
auditor, alleging that auditor’s expression of unqualified opinions on corporation’s financial<br />
statements artificially inflated the market price of the corporation’s stock. The court granted the<br />
defendant’s motion to dismiss for failure to properly plead scienter under the heightened<br />
pleading requirements of the PSLRA. Specifically, the court found that plaintiffs’ allegations<br />
failed to raise strong inference that defendant acted recklessly in certifying corporation’s<br />
financial statements.<br />
Findwhat Investor Group v. Findwhat.com, 658 F.3d 1282 (11th Cir. 2011).<br />
The court granted defendant’s motion for summary judgment reasoning that plaintiffs<br />
failed to plead scienter adequately with respect to statements in a Form 10-K annual report filed<br />
by an internet commerce company providing “pay-per-click” advertising services. A review of<br />
the allegations relating to scienter lacked sufficient particularity to create a strong inference of<br />
scienter relating to whether it was “commonly known” within the company that two of the<br />
company’s top revenue-generating distribution partners relied on “click fraud.”<br />
Durgin v. Mon, 2011 WL 573483 (11th Cir. Feb. 18, 2011).<br />
Plaintiff, a union pension fund purchased shares in a residential building corporation and<br />
brought suit against defendant for securities fraud. The court granted defendants’ motion to<br />
dismiss. On appeal, the court held that the amended complaint did not satisfy the heightened<br />
pleading requirements for scienter under the PSLRA. Specifically, the statements made by<br />
defendants in SEC filings, press releases and analysts’ conference calls stating that certain joint<br />
venture loans were not “non-recourse” was not significant because plaintiff failed to allege that<br />
defendants knew that certain loans made to joint ventures were made without recourse.<br />
Kadel v. Flood, 2011 WL 2015379 (11th Cir. May 24, 2011).<br />
Investors brought putative class action against a mortgage and lending company, alleging<br />
violations of federal securities laws. The court granted defendants’ motion to dismiss and the<br />
investors appealed. On appeal, the court held that the investors’ allegations were insufficient to<br />
demonstrate the necessary scienter to commit securities violations under the PSLRA. The court<br />
found that while plaintiffs alleged that defendants expressed mistaken confidence in the<br />
corporation’s well-being and engaged in business practices that contributed to the corporation’s<br />
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demise, the facts alleged did not give rise to a strong inference that defendants knew that their<br />
statements were fraudulent or were reckless.<br />
Akamai Technologies, Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).<br />
Plaintiff, an institutional investor sued a defendant, broker-dealer alleging violations of<br />
federal securities laws. Plaintiff claimed that its broker made various misrepresentations and<br />
omissions of material facts in relating to the risks involved with the purchase of auction-rate<br />
securities (“ARS”) in its account. The court denied defendant’s motion to dismiss holding that<br />
plaintiff’s claims were pleaded with sufficient particularity. Specifically, the complaint included<br />
allegations that plaintiff’s broker failed to disclose or misrepresented the risk of each ARS<br />
transaction, and that the broker knew that the statements in connection with purchase of ARS<br />
were false and misleading. The plaintiff also alleged that that its broker doubled its ARS<br />
holdings just prior to the collapse of the ARS market in February 2008.<br />
Special Situations Fund III, L.P. v. American Dental Partners, Inc., 775 F.Supp.2d 227 (D.Mass.<br />
2011).<br />
Investment partnership that purchased common stock in a corporation brought suit<br />
against corporation and three of its officers for alleged violations of federal securities laws.<br />
Defendants moved to dismiss as required under the heightened pleading standard of the PSLRA.<br />
Plaintiffs alleged that defendant’s statements regarding its future would not change manner of<br />
operations with regard to affiliated businesses. The court denied defendants’ motion to dismiss<br />
holding that complaint satisfied the information and belief requirement for alleging<br />
misstatements, material omissions, scienter and loss causation.<br />
Urman v. Novelos Therapeutics, Inc., 796 F. Supp. 2d 277 (D. Mass. 2011).<br />
Investors brought a class action suit against defendant, biopharmaceutical company for<br />
violations of federal securities laws. Defendant subsequently moved to dismiss for failure to state<br />
a claim in accordance with the heightened pleading standards of the PSLRA. Plaintiffs alleged<br />
that defendants made materially false and misleading statements concerning the success of an<br />
experimental drug. The court granted defendant’s motion finding that corporation’s statement<br />
that patients in its experimental drug trial were living longer than expected was not materially<br />
misleading.<br />
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In re Smith & Wesson Holding Corp. Sec. Litig., 2011 WL 6089727 (D. Mass. Mar. 25, 2011).<br />
Investors brought a class action suit against gun manufacturing company and its officers<br />
alleging violations of federal securities laws. Defendants subsequently filed a motion to dismiss<br />
for failure to state a claim as required under the heightened pleading standards of the PSLRA.<br />
Plaintiffs claimed that defendants issued a series of public statements in which they<br />
misrepresented level of demand for products. The court granted defendants’ motion finding no<br />
evidence of scienter and that statements made by corporation regarding demand and general<br />
sales were not false or misleading.<br />
Hill v. State Street Corporation, 2011 WL 3420439 (D. Mass. Aug. 3, 2011).<br />
Plaintiffs brought a class action suit against defendants alleging violations of federal<br />
securities laws. Plaintiffs alleged defendants misled the market regarding the defendant<br />
company’s exposure when it assured investors in the fall of 2008 that debt securities contained in<br />
its investment portfolio collateralized in part by risky mortgage-backed securities—were of high<br />
quality. Plaintiffs further alleged that as a result of those improper statements plaintiffs suffered<br />
substantial damages. The court denied defendants’ motion to dismiss holding that plaintiffs<br />
satisfied heightened pleadings standard required under the PSLRA for their claims under the<br />
Securities Exchange Act of 1934.<br />
In re Boston Scientific Corporation Securities <strong>Litigation</strong>, 2011 WL 4381889 (D. Mass. Sept. 19,<br />
2011).<br />
Plaintiffs brought suit against defendant alleging violations of federal securities laws.<br />
Defendants then filed a motion to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants made several<br />
misrepresentations or omitted to disclose information regarding unlawful sales practices leading<br />
to an artificial inflation of the company’s stock. The court granted defendants’ motion to dismiss<br />
finding that plaintiffs failed to sufficiently allege a material misrepresentation, omission and a<br />
strong inference of scienter.<br />
Casula v. AthenaHealth, Inc, 2011 WL 45661155 (D. Mass. Sept. 30, 2011).<br />
Lead plaintiff brought suit against defendants alleging violations of federal securities<br />
laws. Defendants filed a motion to dismiss for failure to state a claim and failure to meet the<br />
heightened pleading requirements under the PSLRA. Plaintiff alleged that defendant, company<br />
and officers improperly amortized certain revenues over shorter terms instead of the expected<br />
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performance life of a customer relationship -- effectively front-loading these revenues. The court<br />
granted the defendant’s motion finding that there was nothing about the change in accounting<br />
procedures that suggested a prior intent to defraud. The court also found a lack of requisite<br />
scienter given the small portion of the company’s revenues to which the allegations related.<br />
Ambert v. Caribe Equity Group, Inc., 2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim upon which relief can be granted.<br />
Plaintiffs alleged that defendants knowingly and willfully omitted material facts and made false<br />
representations in their dealings with plaintiffs relating to an investment in a company<br />
purportedly for the purpose of creating a new HMO plan when the company, in fact, purchased a<br />
previously existing, troubled HMO plan. The court denied defendants’ motion finding that<br />
plaintiffs’ allegations properly particularized sufficient detail relating to defendants access to<br />
information on the company’s finances. Plaintiff also adequately alleged a reasonable and strong<br />
inference of scienter, reliance and loss causation given the likelihood that plaintiffs may have<br />
changed their investment decision had they known of the alternative plans of the fund.<br />
City of Roseville Empls.’ Ret. Sys. v. Textron, Inc., 2011 WL 3740768 (D.R.I. Aug. 24, 2011).<br />
Investors filed securities fraud class action alleging that company and several of its senior<br />
officers made series of statements about its financial condition that were misleading because they<br />
omitted important qualifying information. Defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. The court granted the<br />
motion finding that defendant’s failure to disclose it had recently relaxed its underwriting<br />
standards and its decision to finance deposits of aircraft sold by its subsidiary, did not render<br />
these public statements materially misleading. The court found that plaintiff failed to establish<br />
that the company concealed a weakness in the backlog of orders and that executive’s statement<br />
that company was “not involved in sub-prime or other misunderstood or high-risk” products was<br />
not false when made.<br />
In re Sturm, Ruger & Company, Inc. Securities <strong>Litigation</strong>, 2011 WL 494753 (D. Conn. Feb. 7,<br />
2011).<br />
Lead plaintiff brought class action suit against defendants alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. Plaintiff alleged that defendants failed to<br />
disclose problems with their transition to a “lean manufacturing” model and thereby misled<br />
plaintiffs into purchasing the company’s stock at an artificially inflated value. The court denied<br />
defendants’ motion finding that some of the statements alleged by plaintiff were properly<br />
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particularized as materially misleading. The court also found that defendants’ motives in<br />
delaying bad news to personally benefit themselves by selling their own shares gave rise to a<br />
strong inference of scienter.<br />
Maverick Fund, L.D.C. v. Comverse Technology, Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).<br />
Hedge funds that purchased shares of a corporation’s stock brought action against<br />
corporation, its officers, and members of the corporation’s compensation and audit committees,<br />
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. The court granted the<br />
defendants’ motion in part and denied it in part holding that hedge funds were not required to<br />
plead the specific details of each purchase and sale of stock to satisfy heightened pleading<br />
requirements but adequately alleged loss causation.<br />
Johnson v. Siemens AG, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011).<br />
Lead plaintiff brought class action suit against defendants alleging violations of federal<br />
securities laws. Defendants moved to dismiss in accordance with the heightened pleading<br />
standards of the PSLRA. Plaintiff alleged that defendants knowingly or recklessly disseminated<br />
or approved false statements about the financial well-being of its company, resulting in an<br />
inflated price of defendant company’s securities. The court granted defendants’ motion to<br />
dismiss finding that plaintiff’s claim failed to allege facts giving rise to a strong inference of<br />
scienter.<br />
In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011).<br />
Shareholders brought suit against bank holding company and others alleging violations of<br />
federal securities laws. Defendants filed a motion to dismiss for failure to state a claim as<br />
required under the heightened pleading standards of the PSLRA. Plaintiffs’ claims related to the<br />
company’s financial disintegration. The court granted defendants’ motion to dismiss finding that<br />
the alleged misstatements of company officials, consisting of repeated public declarations of<br />
their conservative underwriting standards and credit risk management, were not actionable as<br />
securities fraud. The court also held that the complaints, considered collectively, failed to plead<br />
facts giving rise to strong inference of scienter that company and its officials acted with intent to<br />
deceive, manipulate, or defraud the shareholders.<br />
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In re Bear Stearns Companies, Inc. Securities, Derivative, and Erisa <strong>Litigation</strong>, 763 F. Supp. 2d<br />
423 (S.D.N.Y. 2011).<br />
Investors in brought a class action suit against a bank, its officers and directors, and<br />
accounting firm that performed audits alleging violations of federal securities laws. Defendants<br />
moved to dismiss for failure to state a claim. Plaintiffs claimed that defendants made materially<br />
misleading statements regarding the banks financial condition and use of flawed models in its<br />
valuations despite being aware of the its liquidity issues and potential of market failures in their<br />
models to inflate prices. The court denied defendants’ motions to dismiss, finding that the<br />
allegations in the complaint regarding the defendants’ continued use of out-dated valuation<br />
models of mortgage-backed assets and allegations of glaring oversights by the auditor were<br />
pleaded sufficiently under the PSLRA.<br />
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>, 765 F. Supp. 2d 375 (S.D.N.Y. 2011).<br />
Plaintiffs, purchasers of auction rate securities (“ARS”) brought class a action suit against<br />
a defendant, broker-dealer alleging violations of federal securities laws. Defendants moved to<br />
dismiss for failure to state a claim as required under the heightened pleading requirements of the<br />
PSLRA. Plaintiffs alleged that defendant in failed to disclose its own bidding activity and role in<br />
propping up the ARS market, while the auction rate market was deteriorating. The court granted<br />
defendant’s motion to dismiss and found that the purchasers’ conclusory allegations of<br />
“fraudulent” or “ intentional” misrepresentations and omissions by defendant failed to meet the<br />
PSLRA scienter requirement.<br />
In re Smith Barney Transfer Agent <strong>Litigation</strong>, 765 F. Supp. 2d 391 (S.D.N.Y. 2011).<br />
Plaintiff, investors in mutual funds brought class action suit against a defendant, funds’<br />
investment advisors and their affiliates alleging violations of federal securities laws. Defendants<br />
then moved to dismiss for failure to state a claim in accordance with the heightened pleading<br />
requirements of the PSLRA. Plaintiffs alleged defendants’ fraudulently induced them into<br />
purchasing shares in its fund based on material misrepresentations regarding transfer agent fees<br />
in prospectuses. The court held that plaintiff sufficiently alleged that defendants’ subsidiary’s<br />
senior vice president had helped evaluate an agreement to use the transfer agent, drafted a<br />
comprehensive memorandum concerning its details, and presented the allegedly fraudulent<br />
proposal to the board. The court also found that the plaintiff adequately alleged that over a fouryear<br />
defendant signed numerous prospectuses that failed to disclose the transfer agent scheme.<br />
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Stephenson v. Pricewaterhousecoopers, <strong>LLP</strong>, 768 F. Supp. 2d 562 (S.D.N.Y. 2011).<br />
Plaintiff, investor in a feeder fund to a firm engaged in a massive Ponzi scheme brought a<br />
class action suit against a defendant, auditor of the firm alleging violations of federal securities<br />
laws. Defendants filed a motion to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. The court granted the defendant’s motion to<br />
dismiss finding that the allegations that the auditor ignored certain red flags relating to verifiable<br />
controls, aggregate asset value reporting discrepancies, and exceptional returns insufficient to<br />
establish scienter.<br />
In re Jeanneret Associates, Inc., 769 F.Supp.2d 340 (S.D.N.Y. 2011).<br />
Plaintiffs, investors brought suit against defendants, investment advisors, asset<br />
management consultant, accounting firm, and individuals associated with investment firm<br />
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading requirements of the PSLRA. Plaintiffs claimed<br />
defendants failed to disclose a lack of diligence concerning a multi-billion dollar investment firm<br />
when soliciting investors. Plaintiffs further claimed that they would not have entrusted firm with<br />
their money if they had understood it would be placed with the un-investigated firm. The court<br />
denied defendants’ motion to dismiss reasoning that the plaintiffs sufficiently alleged facts<br />
giving rise to inference of recklessness. However, the court granted the independent auditor’s<br />
motion to dismiss finding that the allegation of defendants’ failure to identify the problems with<br />
firm that was engaged in Ponzi Scheme was insufficient to plead the required scienter.<br />
Alki Partners, L.P. v. Vatas Holding Gmbh, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).<br />
Plaintiff, hedge fund filed suit against defendants, international corporations, their<br />
executives, and their subsidiaries alleging violations of federal securities laws. Defendants filed<br />
a motion to dismiss for failure to state a claim as required under the heightened pleading<br />
standards of the PSLRA. The court granted defendants’ motion in part and denied it in part<br />
finding that plaintiff failed to allege facts sufficient to give rise to scienter on the part of<br />
defendants’ corporation or its U.S. agent. The court also held that allegations of<br />
undercapitalization and that the corporation and its managing director knew that trading would<br />
have an impact on the market price were insufficient to allege scienter. However, plaintiff did<br />
sufficiently allege the managing director’s deceptive acts with requisite particularity.<br />
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In re MRU Holdings Securities <strong>Litigation</strong>, 769 F. Supp. 2d 500 (S.D.N.Y. 2011)<br />
Plaintiffs, investors in corporation that was purchaser, holder, and seller of federal and<br />
private student loans brought class action suit against defendants alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. Specifically, plaintiffs claimed that defendant<br />
issued press releases and investor presentations that omitted fact that the securities issued were<br />
auction rate securities (“ARS”), and provided false assurances to the market concerning its<br />
reliance on the ARS. The court granted defendants’ motions to dismiss finding that plaintiffs<br />
allegations failed to allege with particularity any false or misleading statements by senior<br />
executive officers and directors. The court also held that plaintiffs failed to provide any evidence<br />
of scienter against defendants banker and auditor.<br />
Glaser v. The9, Ltd., 772 F. Supp. 2d 573 (S.D.N.Y. 2011).<br />
Investors brought class action suit against a company alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants fraudulently<br />
misrepresented facts relating to the likelihood of their renewal of an exclusive license granted to<br />
them by a third party. The court granted defendants’ motion to dismiss with leave for plaintiffs<br />
to amend finding that plaintiffs failed to adequately plead scienter in showing that defendants<br />
knew about statements it made regarding the progress of the licensing renewal.<br />
In re Sanofi-Aventis Securities <strong>Litigation</strong>, 774 F. Supp. 2d 549 (S.D.N.Y. 2011).<br />
Investors filed class action suit against French pharmaceutical company and executives<br />
alleging violations of federal securities laws. Defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that<br />
defendants misrepresented information regarding the association between an obesity drug,<br />
rimonabant, and suicidality. Plaintiffs alleged that this misrepresentation resulted in losses to<br />
investors upon company’s withdrawal the drug’s application for approval. The court denied and<br />
granted defendants’ motion in part finding that plaintiffs’ omissions claim was not sufficiently<br />
alleged, however, plaintiffs claim based on material defendants’ omissions regarding an FDA<br />
approval letter was sufficiently alleged. The court also held that plaintiffs sufficiently alleged<br />
material omissions and scienter through defendants’ public statement denying a submission of<br />
additional data to the FDA.<br />
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Russo v. Bruce, 777 F. Supp. 2d 505 (S.D.N.Y. 2011).<br />
Shareholder brought class action suit against gold mining company and its officers<br />
alleging violations of federal securities laws. Defendants filed a motion to dismiss for failure to<br />
state a claim as required under the heightened pleading standards of the PSLRA. Plaintiff<br />
claimed that defendants made fraudulent misrepresentations regarding the status of, and<br />
likelihood that it would obtain an environmental permit necessary to mine for gold in Venezuela.<br />
The court granted defendants’ motion to dismiss finding that none of the allegations made were<br />
sufficiently particularized or gave sufficient facts to adequately allege scienter.<br />
Stratte-McClure v. Stanley, 784 F. Supp. 2d 373 (S.D.N.Y. 2011).<br />
Investors brought class action suit against corporation and its officers and former officers<br />
for alleged violations of federal securities laws. Defendants moved to dismiss for failure to state<br />
a claim as required under the heightened pleading standard of the PSLRA. The court granted<br />
defendants’ motion to dismiss finding that statements made regarding the corporation’s risk<br />
controls were puffery rather than factually verifiable, objective statements. The court also held<br />
that although the investors sufficiently alleged material misrepresentations regarding<br />
corporation’s mark down of losses, plaintiffs failed to sufficiently allege loss causation through a<br />
specific disclosure by defendants’ that negatively affected the value of plaintiffs’ securities.<br />
Prime Mover Capital Partners L.P v. Elixir Gaming Techs., Inc., 793 F. Supp. 2d 651 (S.D.N.Y.<br />
2011).<br />
Hedge fund operators brought suit against issuer, a defendant, corporation and<br />
corporation’s chairman, alleging violations of federal securities laws. Defendants moved to<br />
dismiss for failure to state a claim as required under the heightened pleading standards of the<br />
PSLRA. The court granted defendants’ motion to dismiss finding that one plaintiff failed to<br />
adequately allege transaction loss causation. The court also found some operators had<br />
sufficiently pleaded transaction loss causation, through the representations regarding misreported<br />
expected average net win rates for electronic gaming machines placed in certain venues. Other<br />
plaintiffs, however, failed to plead loss causation adequately with respect to most of the alleged<br />
misrepresentations. Specifically, the court pointed out that other alleged misrepresentations did<br />
not become public until after time when share price had already dropped to lowest level alleged<br />
in complaint.<br />
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Brecher v. Citigroup, Inc., 797 F. Supp. 2d 354 (S.D.N.Y. 2011).<br />
Employees who participated in an employer’s stock purchase program brought action<br />
against employer, members of its board of directors, and board’s committee which administered<br />
the program, for alleged violations of federal securities laws. Defendants moved to dismiss for<br />
failure to state a claim as required under the heightened pleading standard of the PSLRA.<br />
Plaintiffs claimed that defendants failed to disclose the stock purchase program’s subprime<br />
mortgage exposure. The court granted defendants’ motion to dismiss finding that the employees<br />
failed to allege scienter through declarations concerning corporation’s overall business outlook.<br />
The court found these to be announcements of corporate optimism and not actionable as<br />
fraudulent misstatements.<br />
In re Lehman Brothers Securities and Erisa <strong>Litigation</strong>, 799 F. Supp. 2d 258 (S.D.N.Y. July 27,<br />
2011).<br />
Investors brought class action suit against a financial services corporation and its former<br />
officers, directors, auditors, and underwriters, for violations of federal securities laws.<br />
Defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that defendants made materially false and<br />
misleading statements and omissions regarding corporation’s liquidity risk and value of real<br />
estate holdings. The court granted defendants’ motion to dismiss in part and denied in part<br />
holding that plaintiffs sufficiently alleged material misrepresentations, scienter and loss<br />
causation by its former officers. The court found, however, that plaintiffs failed to allege<br />
material misrepresentations by auditor.<br />
In re Manulife Financial Corporation Securities <strong>Litigation</strong>, 276 F.R.D. 87 (S.D.N.Y. 2011).<br />
Investors brought a class action suit against a financial services corporation and its<br />
former officers, for alleged violations of federal securities laws. Defendants moved to dismiss<br />
for failure to state a claim as required under the heightened pleading standard of the PSLRA.<br />
Specifically, plaintiffs alleged that defendants made material misrepresentations and omissions<br />
concerning the corporation’s risk management activities. The court granted defendants’ motion<br />
to dismiss finding that investors failed to allege a material misrepresentation, scienter and loss<br />
causation.<br />
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Jacquemyns v. Spartan Mullen Et Cie, S.A., 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading requirements of the PSLRA. Plaintiffs alleged money damages based on defendants’<br />
offer and sale of a fraudulent investment scheme that resulted in the misappropriation of<br />
plaintiffs’ investment. The court granted the defendants’ motion to dismiss finding that plaintiffs<br />
failed to plead securities fraud with the requisite particularity.<br />
In re Citigroup, Inc., 2011 WL 744745 (S.D.N.Y. Mar. 1, 2011).<br />
Plaintiff brought a class action suit against defendants alleging violations of federal<br />
securities laws. Defendants then filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants<br />
mislead participants concerning defendants’ intervention in the auction-rate-securities (“ARS”)<br />
market giving a misleading picture of the market’s stability. The court granted defendants’<br />
motion to dismiss finding that plaintiffs failed to allege sufficient facts in order to demonstrate<br />
that defendants’ conduct was deceptive. Plaintiffs also failed to prove that they reasonably relied<br />
on any of the alleged misleading impressions, given that defendants’ policies regarding<br />
participation in the markets were publicly posted and available to plaintiffs.<br />
Fried v. Lehman Brothers Real Estate Associates III, L.P., 2011 WL 1345097 (S.D.N.Y. Mar.<br />
29, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants subsequently filed a motion to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants omitted<br />
material information in its investment prospectus, and related documents regarding the risks and<br />
use of the investment entities as a vehicle to dispose of over-valued assets to losses. The court<br />
granted defendants’ motion to dismiss finding that plaintiffs failed to plead facts supporting an<br />
inference of scienter with the required specificity and failed to allege that defendants knew or<br />
should have known that certain properties being transferred had sustained losses with the<br />
requisite specificity.<br />
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Kuriakose v. Federal Home Loan Mortgage Corp., 2011 WL 1158028 (S.D.N.Y. Mar. 30,<br />
2011).<br />
Plaintiffs, brought class action suit against defendants alleging violations of federal<br />
securities laws. Defendants then filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendant<br />
corporation and its officers materially misrepresented the corporation’s exposure to risky<br />
mortgage products, the sufficiency of its capital, and the accuracy of its financial reporting<br />
resulting in inflated share prices. The court granted defendants’ motion to dismiss but gave<br />
plaintiffs leave to amend finding that plaintiffs failed to adequately plead the existence of<br />
actionable misstatements or omissions relating to exposure to non-prime mortgage loans, or<br />
capital adequacy. The court also found that plaintiffs failed to plead loss causation with respect<br />
to alleged claims relating to internal controls and financial statements.<br />
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>, 2011 WL 1330847 (S.D.N.Y. Mar. 30,<br />
2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Specifically, plaintiffs claimed that<br />
defendants made misstatements and omissions about the safety and liquidity of the Auction Rate<br />
Securities market in which plaintiffs had invested. The court denied defendants’ motion to<br />
dismiss finding that the two allegations made by plaintiff, taken together, supported that the facts<br />
that defendants’ continued to sell an illiquid product to investors with a need for liquidity and<br />
withdrawing support from the products while continuing to tout them as safe adequately alleged<br />
a strong inference of scienter. The court also found that plaintiffs reasonably alleged reliance<br />
because defendants’ represented and plaintiffs relied on the fact that auction rate securities were<br />
liquid instruments.<br />
Plumbers and Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco Inc., 2011 WL<br />
1198712 (S.D.N.Y. Mar. 30, 2011).<br />
Plaintiffs brought a class action suit against defendants alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants, an<br />
insurance company and its officers, failed to properly disclose potential liabilities relating to its<br />
inability to integrate nineteen separate computer systems of recently acquired insurance<br />
companies. The complaint went on to allege that this lack of integration often resulted in<br />
accidental payments over policy maximums and payments for uncovered incidents. The court<br />
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granted the defendants’ motion to dismiss finding that plaintiff failed to adequately allege<br />
scienter and that the disclosures in the complaint, equated to a much more likely showing of nonculpable<br />
attempts to remedy internal business difficulties while keeping the market informed to<br />
the extent practicable.<br />
Oughtred v. E*Trade Financial Corporation, 2011 WL 1210198 (S.D.N.Y. Mar. 31, 2011).<br />
Plaintiffs brought a class action suit against defendants for alleged violations of federal<br />
securities laws. Defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading standard of the PSLRA. Plaintiffs alleged that defendants defrauded<br />
purchasers of auction rate securities by making misrepresentations and omissions of material fact<br />
about the risks, value and liquidity of those securities. The court granted defendants’ motion to<br />
dismiss finding that plaintiffs did not properly plead scienter by failing to show a motive,<br />
opportunity, and circumstantial evidence of conscious misbehavior or recklessness of defendants.<br />
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Tiberius Capital, LLC v. Petrosearch Energy Corporation, 2011 WL 1334839 (S.D.N.Y. Mar.<br />
31, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiff claimed that defendant made material misstatements<br />
stating that plaintiff was not entitled to dissenter’s rights as a shareholder prior to a merger. The<br />
court noted that defendant subsequently admitted it had been mistaken and plaintiff was in fact<br />
entitled to those rights. However, the court granted defendants’ motion to dismiss finding that<br />
although plaintiff did sufficiently particularize the relevant misstatement, scienter was not<br />
sufficiently pleaded in relation as plaintiff failed to show that any contradictory information was<br />
in the possession or knowledge of defendants. The court also noted that plaintiff failed to<br />
adequately plead economic loss or loss causation through a lack of evidence of a mispriced<br />
merger.<br />
Egan v. Tradingscreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011).<br />
Plaintiff brought suit against his employer for alleged violations of federal securities<br />
laws. Defendant moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standard of the PSLRA. Plaintiff alleged that he was induced by defendant to invest in<br />
the offering of certain stock options and grants. Plaintiff claimed that defendant concealed<br />
certain underlying misconduct that affected the price of the options and stock. Plaintiff also<br />
claimed that defendant misrepresented the payout policy and failed to allow him to exercise<br />
rights in relation to them that he was promised. The court granted defendant’s motion to dismiss<br />
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ut granted leave to amend finding that plaintiff failed to plead with sufficient particularity any<br />
specific misrepresentations that could subsequently be shown to have known to be false.<br />
City of Omaha v. CBS Corporation, 2011 WL 2119734 (S.D.N.Y. May 24, 2011).<br />
Investor brought suit against a broadcasting corporation and several of its officers for<br />
alleged violations of federal securities laws. Defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading standard of the PSLRA. Specifically, plaintiffs<br />
alleged that defendants failed to disclose an impairment to the defendants’ corporation’s value<br />
when, in the first quarter of 2008, the corporation experienced advertising revenue declines and a<br />
dip in market capitalization. The court granted defendants’ motion to dismiss for failure of the<br />
plaintiff to plead specific misrepresentations. The court also found that the alleged omission of<br />
certain loan reports was not misleading given no duty to disclose on the part of the defendants.<br />
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In re Bank of America Corp. Securities, Derivative, and Employee Retirement Income Security<br />
Act (ERISA) <strong>Litigation</strong>, 2011 WL 3211472 (S.D.N.Y. July 29, 2011).<br />
Plaintiffs brought suit against defendant alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that defendant, bank and several of its<br />
officers did not adequately disclose the bank’s deteriorating financial condition in the fourth<br />
quarter of 2008 and government’s subsequent financial support of the bank. The court denied<br />
defendants’ motion to dismiss with respect to the fourth quarter losses claims finding that the<br />
complaint raised a strong inference of recklessness. The court, however, granted defendants’<br />
motion to dismiss with respect to plaintiff’s claim regarding federal financial support.<br />
Board of Trustees of the City of Ft. Lauderdale General Employees’ Retirement System v.<br />
Mechel OAO, 2011 WL 3502016 (S.D.N.Y. Aug. 9, 2011).<br />
A retirement system and pension fund plans brought a class action suit against a mining<br />
and metals company along with three of its officers alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. The court granted defendant’s motion to dismiss holding that<br />
allegations that defendants’ had motivation to inflate stock prices, along with the company’s<br />
subsequent failure to investigate those prices and knowledge that the company’s subsidiaries<br />
were engaged in anti competitive behavior, were all insufficient to establish scienter.<br />
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Egan v. Tradingscreen, Inc., 2011 WL 4344067 (S.D.N.Y. Sept. 12, 2011).<br />
Plaintiff brought suit against defendant for violation of federal securities laws. Defendant<br />
filed a motion to dismiss for failure to state a claim under the heightened pleading standards<br />
required by the PSLRA. Plaintiff alleged that defendants made various misrepresentations to<br />
him concerning his purchases of stock options and the terms and conditions of his employment.<br />
The court granted defendants’ motion to dismiss finding that the plaintiff’s amended complaint<br />
failed to adequately allege a strong inference of scienter in relation to the alleged<br />
misrepresentations.<br />
380544 Canada, Inc. v. Aspen Technology, Inc., 2011 WL 4089876 (S.D.N.Y. Sept. 14, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. The court granted defendants’ motion to dismiss, even upon<br />
finding that plaintiffs failed to satisfy the particularity requirement because their allegations<br />
never specified any of the individuals making the alleged misrepresentations at meetings the<br />
plaintiffs attended. The court also held that plaintiffs failed to link each individual defendant to a<br />
specific fraudulent statement in any meaningful way.<br />
City of Monroe Employees’ Retirement System v. Hartford Financial Services Group, Inc., 2011<br />
WL 4357368 (S.D.N.Y. Sept. 19, 2011).<br />
Plaintiff investors brought suit against defendants alleging violations of federal securities<br />
laws and defendants filed motion to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. The court granted defendants’ motion finding that<br />
plaintiffs complaint did not include a single allegation of a self-interested motive or opportunity<br />
by any individual whose statements were challenged. The court reasoned that plaintiffs, instead<br />
based their entire complaint on a unilateral, and ultimately unsupported, interpretation of the<br />
defendants’ insurance filing.<br />
In re Sec. Capital Assur. Ltd. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Plaintiff claimed defendants issued misstatements relating to certain credit scores used to<br />
delineate subprime loans as well as assertions of utilizing a distinct internal model for assessing<br />
the risks of subprime exposure. The court granted defendants’ motion to dismiss for failure to<br />
state a claim finding that plaintiff’s amended complaint continued to fail to adequately plead loss<br />
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causation as required under the PSLRA. Specifically the court did not find a link between later<br />
partial corrective disclosures that the plaintiff claimed negatively affected its stock price. The<br />
court also did not find how those partial disclosures related to the improper credit score and<br />
internal model misstatements alleged in plaintiff’s complaint.<br />
Wyatt v. Inner City Broadcasting Corporation, 2011 WL 4484071 (S.D.N.Y. Sept. 28, 2011).<br />
Plaintiff brought suit against defendants alleging violations of federal securities laws.<br />
Defendants moved to dismiss for failure to state a claim in accordance with the heightened<br />
pleading requirements of the PSLRA. Plaintiff a shareholder in defendant company, alleged that<br />
defendant failed to provide him with information relating to a debt purchase agreement, and<br />
information concerning whether the company planned to seek approval of disinterested<br />
shareholders and directors regarding the debt purchase agreement. The court granted the<br />
defendants’ motion to dismiss finding that plaintiff failed to allege fraud with the requisite<br />
particularity, reliance and loss causation.<br />
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Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Company, Inc., 2011 WL 4526517<br />
(S.D.N.Y. Sept. 29, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that defendants fraudulently misrepresented<br />
material facts concerning inventories of certain materials in relation to an acquisition. The court<br />
denied defendants’ motion to dismiss finding that plaintiffs’ complaint adequately pleaded the<br />
specified false and deceptive statements made by defendants with the particularity required and<br />
alleged facts giving rise to a strong inference of scienter.<br />
Tyler v. Liz Claiborne, Inc., 2011 WL 4498983 (S.D.N.Y. Sept. 29, 2011).<br />
Investors brought a putative class action against corporation, its president and CEO,<br />
alleging defendants fraudulently misrepresented facts relating to corporation’s relationship with a<br />
department store in violation of the Securities Exchange Act of 1934. Defendants moved to<br />
dismiss for failure to state a claim as required under the heightened pleading standards of the<br />
PSLRA. The court denied defendants motion to dismiss holding that plaintiffs’ allegation that<br />
the corporation failed to repurchase its own stuck was insufficient to allege scienter.<br />
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City of Roseville Employees’ Retirement System v. Energysolutions, Inc., WL 4527328<br />
(S.D.N.Y. Sept. 30, 2011).<br />
A pension fund brought suit against company, officers and directors, company’s sole<br />
stockholder prior to public offerings, and three underwriters alleging violations of federal<br />
securities laws. The court granted defendants’ motion with respect to violations of the Securities<br />
Exchange Act of 1934 and plaintiffs’ failure to meet the heightened pleading requirements of the<br />
PSLRA. The court held that plaintiffs’ allegations contained sufficient particularity and were<br />
sufficient to scienter with regard to certain defendants. The court held, however, that the<br />
complaint failed to sufficiently allege that the defendants’ statements were false or that<br />
defendants omitted facts necessary to make disclosures materially misleading.<br />
International Fund Management S.A. v. Citigroup, Inc., 2011 WL 4529640 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Foreign investors brought suit against corporation and its affiliates alleging violations of<br />
federal securities laws. The court granted and denied defendants’ motion to dismiss in part.<br />
The court held that certain claims under the Securities Exchange Act of 1934 were not subject to<br />
the heightened pleading requirements under the PSLRA but other claims were. In reference to<br />
those claims that the PSLRA covered, the court held that the investors failed to state claims<br />
based on misstatements or omissions regarding structured investment vehicles. Plaintiffs also<br />
failed to properly allege that the corporation’s failure to disclose its auction rate securities<br />
holdings, raised a strong inference of scienter in connection with write-downs of corporation’s<br />
collateralized debt obligations. Plaintiffs failed to sufficiently allege actual reliance based on<br />
corporation’s alleged misstatements in filings with the Securities and Exchange Commission.<br />
The court did hold that certain of the investors’ allegations were sufficient to raise strong<br />
inference of recklessness with respect to corporate officer’s collateralized debt obligation related<br />
statements.<br />
Wilamowsky v. Take-Two Interactive Software, Inc., 2011 WL 4542754 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Short-seller of corporation’s stock opted out of class action and brought private action<br />
against corporation, its former CEO and former directors, alleging violations of federal<br />
securities laws. Plaintiff’s complaint pertained to defendants’ misrepresentations and omissions<br />
regarding a corporation’s stock option plans. The court granted defendants’ motion holding that<br />
plaintiff had failed to sufficiently allege loss causation. The court found that seller’s transactions<br />
in corporation’s stock began after the price was already allegedly inflated and ended 14 months<br />
prior to the relevant curative disclosures.<br />
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Engstrom v. Elan Corporation PLC, 2011 WL 4946434 (S.D.N.Y. Oct. 18, 2011).<br />
Plaintiffs brought a putative securities fraud class action individually and on behalf of all<br />
purchasers of American Depository Shares of defendant corporation claiming violations of<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for alleged false and<br />
misleading statements made by CEO and CFO. The court held that plaintiffs failed to plead facts<br />
raising a strong inference of scienter as required under the heightened pleading requirements of<br />
the PSLRA. In granting defendants’ motion to dismiss, the court found that defendants’<br />
participation in and failure to disclose certain actions that subsequently were ruled by the court<br />
as a breach of an important contract did not amount to showing that defendants recklessly or<br />
intentionally engaged in fraud. The court noted that this was especially true when the alleged<br />
false and misleading material information was for the failure to disclose such a breach or risk of<br />
such a breach rather than failing to disclose the contract itself.<br />
Shenk v. Karmazin, 2011 WL 5148667 (S.D.N.Y Oct. 28, 2011).<br />
Shareholders brought derivative action on behalf of corporation against corporate officers<br />
alleging violations of federal securities laws. Shareholders alleged that officers made<br />
misrepresentations concerning a pending merger. Specifically, the shareholders alleged that the<br />
merger would result in lower prices and more selections for consumers. The shareholders further<br />
alleged that the officers knew of the large amount of debt to be assumed by corporation in the<br />
merger, ultimately requiring defendants to raise a substantial revenues to necessitate increased<br />
prices. Defendant’s moved to dismiss claiming that plaintiff’s failed to adequately allege<br />
scienter. The court denied defendant’s motion to dismiss holding that on could infer that the<br />
officers and directors recklessly disregard the truth. The court reasoned that the scienter<br />
requirement was met through the allegation that defendants made, and failed to correct,<br />
statements that contradicted reasonably available data.<br />
Pope Investments II LLC v. Deheng Law Firm, 2011 WL 5837818 (S.D.N.Y. Nov. 21, 2011).<br />
Plaintiffs brought suit against defendants for violations of Section 10(b) and Rule 10b-5<br />
of the Securities and Exchange Act of 1934. The defendants were professionals and law firms<br />
who advised plaintiffs in transactions that allegedly ended in the embezzlement of over $10<br />
million. Defendants filed a motion to dismiss on the basis that plaintiffs had not pleaded with the<br />
requisite particularity that defendants acted with scienter as required under the heightened<br />
standards of the PLSRA. In granting the defendants’ motion to dismiss, the court found that<br />
plaintiffs did not allege that defendants possessed any motive other than normal receipt of<br />
professional fees and did not state any specific sources from which defendants would have<br />
learned of the fraud.<br />
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Solow v. Citigroup, Inc., 2011 WL 5869599 (S.D.N.Y. Nov. 22, 2011).<br />
Investor brought action against financial corporation and its chief executive officer<br />
alleging misrepresentations and omissions in violation of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934. Defendants filed a motion to dismiss under the heightened<br />
pleading standards of the PSLRA. The court found that defendants knew that the corporation’s<br />
capital and liquidity were deteriorating, while continuing to represent that its capital and liquidity<br />
were strong. The court reasoned that this gave rise to a strong inference of scienter. The court<br />
found, however, that investors had failed to establish loss causation because the complaint did<br />
not draw any link between these events and artificial inflation of stock price or loss of value of<br />
the investments at issue.<br />
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Sawabeh Information Services Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).<br />
Plaintiffs brought suit against defendants alleging various violations of federal securities<br />
law. Defendants filed a motion to dismiss. The court found that plaintiff’s allegations of fraud<br />
were sufficiently specific and plausible to survive a motion to dismiss under the heightened<br />
pleading standards imposed by the PSLRA. Specifically, defendants failed to reveal the<br />
presence of certain documents establishing substantial liabilities owed to the defendants by the<br />
company prior to selling the company to the plaintiffs. The court found that defendant’s failure<br />
to disclose such material documents prior to the sale was a material omission and that failure to<br />
disclose constituted a sufficient allegation of scienter. The court also held that the complaint<br />
sufficiently pleaded reliance and causation of damages in the plaintiff’s decision to purchase the<br />
company while being unaware of these outstanding liabilities.<br />
U.S. Education Loan Trust III, LLC v. RBC Capital Markets Corp., 2011 WL 6778480<br />
(S.D.N.Y. Dec. 21, 2011).<br />
Plaintiffs were issuers of auction rate securities (“ARS”) that brought suit against their<br />
underwriter and broker-dealer alleging violations of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934. The court granted defendant’s motion to dismiss finding that<br />
plaintiff did not provide a factual basis for the omissions it alleged and did not suggest a<br />
plausible inference with respect to the facts that were actually known. Specifically, the court<br />
found that while the defendant had discussed whether it was advisable to stop supporting ARS<br />
auctions and developed contingency plans should the ARS market collapse, this alone was not<br />
sufficient to show the defendant came to a firm conclusion the market was doomed prior to<br />
selling ARS to plaintiffs. The court found the allegation of defendant’s improper behavior in<br />
extracting fees to be insufficient to adequately plead scienter under the heightened requirements<br />
of the PSLRA.<br />
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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
Plaintiffs brought suit against defendant alleging violations of Section 10(b) and Rule<br />
10b-5 of the Securities Exchange Act of 1934. The court denied defendants’ motion to dismiss.<br />
The court concluded plaintiff had adequately demonstrated the materiality of at least some of the<br />
misstatements and omissions identified in the complaint. The court found that the failure of<br />
defendants to provide relevant information relating to the extremely risky nature of many of the<br />
instruments underlying their investments departed from ordinary practice enough to justify a<br />
finding of scienter. The court also held that the shaky economic background during which many<br />
of the investments were made complicated the analysis of loss causation but that such<br />
complications were to be resolved at trial.<br />
Saunders v. Morton, 2011 WL 1135132 (D. Vt. Feb. 17, 2011).<br />
Plaintiff brought suit against defendant alleging violations of federal securities laws.<br />
Defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Specifically, plaintiff claimed defendant made<br />
misrepresentations as to the use plaintiff’s invested funds, ultimately utilizing them for personal<br />
use and making payments to perpetuate a Ponzi scheme. The court denied defendant’s motion to<br />
dismiss finding that plaintiff’s complaint, as amended, contained sufficient factual matter to state<br />
a claim.<br />
Resnik v. Woertz, 774 F. Supp. 2d 614 (D.Del. 2011).<br />
Shareholders brought separate suits against corporation and individual officers and<br />
members of the board of directors alleging violations of federal securities laws. Defendants filed<br />
a motion to dismiss for failure to state a claim as required under the heightened pleading<br />
standards of the PSLRA. Plaintiffs alleged defendant’s proxy statement failed to make required<br />
disclosures. The court granted defendants’ motion in part and denied in part. The court denied<br />
the motion to dismiss, finding that defendants’ failed to disclose eligibility and other aspects of a<br />
compensation plan. The court, however, granted the motion to dismiss with respect to the<br />
shareholder’s direct claim against officers and board members for failure to adequately allege<br />
loss causation requirement of economic harm.<br />
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Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675<br />
(D.Del. June 14, 2011).<br />
Lead plaintiff brought consolidated suit against various officers for alleged violations of<br />
federal securities laws. Defendants moved to dismiss for failure to state a claim as required under<br />
the heightened pleading standard of the PSLRA. Plaintiffs alleged that defendants deliberately<br />
misrepresented the financial performance of a yellow pages publishing company, resulting in an<br />
artificial inflation stock price. The court denied defendants’ motion to dismiss finding that<br />
plaintiffs’ complaint pleaded sufficient facts regarding defendants alleged material<br />
misrepresentations, omissions and scienter.<br />
In re Heckmann Corp. Sec. Lit., 2011 WL 2413999 (D. Del. June 16, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federals securities laws.<br />
Defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Specifically, plaintiffs alleged that defendants misrepresented<br />
the strength of a potential acquisition target’s past financial and operating results, its past and<br />
future growth prospects, managers’ experience, valuation of the business and the amount of due<br />
diligence that had been done in relation to such business. The court denied the defendants’<br />
motion to dismiss finding that the failure of defendants to inform voting shareholders on the<br />
acquisition, raised the strong inference of scienter. The court also found an inference that<br />
disclosures were withheld from shareholders in order to mislead or deceive them.<br />
In re Heckmann Corporation Securities <strong>Litigation</strong>, 2011 WL 2446388 (D.Del. June 16, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federals securities laws<br />
and defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Specifically, plaintiffs alleged that defendants misrepresented<br />
the strength of a potential acquisition target’s past financial and operating results, growth<br />
prospects, managers’ experience, valuation of the business and the amount of due diligence that<br />
had been done in relation to such business. The court denied the defendants’ motion to dismiss<br />
finding that the individual defendants’ signatures on the proxy solicitations properly<br />
particularized those specific statements to the defendants. The court found plaintiffs adequately<br />
pleaded scienter, that defendants omitted material facts in approving the merger and economic<br />
loss causation.<br />
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White v. Kolinsky, 2011 WL 1899307 (D.N.J. May 18, 2011).<br />
Investors brought suit against defendants for alleged violations of federal securities laws<br />
and defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standard of the PSLRA. Plaintiffs alleged that defendants knew of prior costs already<br />
incurred prior to soliciting investment from plaintiffs and failed to disclose those costs as well as<br />
other potential financing hurdles the investment project was experiencing. The court granted<br />
defendants’ motion to dismiss finding that plaintiffs’ allegations rested on inadequately<br />
particularized “group pleading” claims which were not permitted under the PSLRA. The court,<br />
however, denied the other defendants motion to dismiss finding that whether many of the<br />
statements contained in a private offering memorandum were actionable was a question of fact.<br />
In re Merck & Co., Inc. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8,<br />
2011).<br />
Plaintiffs brought a class action suit against defendant pharmaceutical company for<br />
violations of federal securities laws and defendants filed motion to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that<br />
defendant overstated the commercial viability of one of their drugs or at least recklessly<br />
downplayed the possible link between the drug and cardiovascular complications. Plaintiffs<br />
claimed that the company had strong evidence of heart-attack link with the drug even before the<br />
product launched. Plaintiffs alleged that this evidence continued to increase while company<br />
continued to tout its safety on the market. The court granted defendants’ motion to dismiss with<br />
respect to the alleged misrepresentations of all defendants except for one.<br />
In re Anadigics, Inc., Securities <strong>Litigation</strong>, 2011 WL 4594845 (D.N.J. Sept. 30, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws and<br />
defendants moved to dismiss for failure to state a claim under the heightened pleading<br />
requirements of the PSLRA. Plaintiffs alleged defendants misled investors about its capability to<br />
meet demand for its products. The court granted defendants’ motion to dismiss holding that the<br />
allegedly false or misleading statements were not actionable because they had not been pleaded<br />
with the requisite particularity as to either falsity or scienter. Specifically, the court found that<br />
statements regarding supply shortages no longer being a concern and demand no longer<br />
outstripped capacity to be pleaded with the requisite particularity. The court held, however, that<br />
plaintiff failed to allege any facts with regard to those statements from which the court could<br />
infer scienter.<br />
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Love v. Alfacell Corp., 2011 WL 4915874 (D.N.J. Oct. 17, 2011).<br />
Plaintiff brought suit against defendants for violations of Section 10(b) and Rule 10b-5<br />
under the Securities Exchange Act of 1934 and defendants moved to dismiss for failure to meet<br />
the heightened pleading standards under the PSLRA. The court granted defendants’ motion<br />
holding that plaintiff failed to specify whether many of the statements alleged in the complaint<br />
were misleading or note the reasons why such statements were misleading. The court found the<br />
other claims not to be material the would not alter the total mix of information available to a<br />
reasonable investor.<br />
Monk v. Johnson and Johnson, 2011 WL 6339824 (D.N.J. Dec. 19, 2011).<br />
Plaintiff brought suit against certain former and current officers and directors of a<br />
company and its wholly owned subsidiary, alleging that defendants misrepresented and omitted<br />
material information about system quality control failures at the subsidiary’s over-the-counter<br />
drug manufacturing plants. Defendants filed a motion to dismiss for failure to allege that each<br />
defendant possessed the requisite scienter to commit securities fraud under the heightened<br />
pleading standards of the PSLRA. The court held that plaintiff had sufficiently pled scienter with<br />
respect to certain defendants but that the scienter allegations against other defendants were<br />
insufficient and dismissed those defendants from the suit without prejudice. More specifically,<br />
the court differentiated treatment of defendants based on a lack of specificity with which certain<br />
actions and inactions of the company.<br />
Barnard v. Verizon Communications, Inc., 2011 WL 294027 (E.D. Pa. Jan. 31, 2011).<br />
Plaintiff shareholders brought suit against defendants alleging violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading requirements of the PSLRA. Plaintiff claimed their stock in a company was<br />
rendered useless when the company went into bankruptcy. The plaintiff further alleged that the<br />
bankruptcy was deliberately engineered several years ago when the company was divested and<br />
spun off from another larger company as an intricate way to “unsaddle” debt from the larger<br />
company’s balance sheet. The court granted defendants’ motions to dismiss finding that<br />
plaintiffs failed to allege any specific misleading statements or omissions.<br />
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).<br />
Plaintiffs brought suit against various officers of a company alleging violations of federal<br />
securities laws. Plaintiffs alleged that defendants had information about the true state of the<br />
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company but engaged in deceptive practices to artificially inflate the company’s financial results<br />
and stock prices. Defendants moved to dismiss all counts for failure to state a claim under the<br />
heightened pleading requirements of the PSLRA. The court denied certain defendants’ motions<br />
to dismiss, finding that the plaintiffs had adequately pleaded that those defendants elected to<br />
issue misstatements and omitted statements with knowledge that the information was misleading<br />
and would likely impact the market. The court granted other defendants’ motions to dismiss for<br />
failure to allege any facts upon which it could be shown that those defendants acted with the<br />
requisite scienter.<br />
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Fulton Bank, N.A. v. UBS Securities, LLC, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011).<br />
Plaintiff brought suit against defendants alleging violations of Pennsylvania state<br />
securities laws in connection with its purchase and retention of various auction rate securities<br />
(“ARS”) in auctions that the defendants managed. The court granted the defendant’s motion to<br />
dismiss and found that, given the lack of determining state case law, that an analysis identical to<br />
federal securities law violations of Section 12(b) and Rule 12b-5 of the Securities Exchange Act<br />
of 1934 was appropriate. Under this analysis, the court held that plaintiff failed to sufficiently<br />
allege many required elements under the heightened pleading standards of the PSLRA. The<br />
court found that loss causation was difficult to prove given the surrounding market wide<br />
phenomenon causing comparable losses to other investors. The court also found that plaintiff<br />
failed to allege with reliance with requisite particularity.<br />
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In re Conventry Healthcare, Inc. Securities <strong>Litigation</strong>, 2011 WL 1230998 (D.Md. Mar. 30,<br />
2011).<br />
Plaintiffs brought class action suit against defendant health insurance corporation and<br />
many of its officers allege alleging violations of federal securities laws and defendants filed a<br />
motion to dismiss for failure to state a claim as required under the heightened pleading standards<br />
of the PSLRA. The court granted defendants’ motion to dismiss in part and denied it in part<br />
finding that plaintiffs failed to adequately plead that certain statements alleged were intentionally<br />
misleading and failed to plead sufficient facts that other statements made prior were made with<br />
knowledge of their falsity or reckless disregard to their falsity but that two statements pleaded<br />
were actionable under the Securities Exchange Act of 1934.<br />
In re Coventry Healthcare, Inc. Securities <strong>Litigation</strong>, 2011 WL 3880431 (D. Md. Aug. 30,<br />
2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Defendants requested reconsideration of the court’s prior decision to deny certain motions for<br />
dismissal in relation to certain alleged statements and certain defendants. Plaintiffs alleged that<br />
defendants failed to disclose problems they were incurring with the roll-out of a new Private-<br />
Fee-For-Services healthcare plan product and that such difficulties were known or recklessly<br />
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disregarded and resulted in omissions and misrepresentations of certain figures to investors. The<br />
court declined to reconsider, stating that the confidential witness testimony offered by plaintiff<br />
supported the inference that the problems were pervasive problems and discussed by the<br />
company prior to several of the statements alleged as misrepresentations and that even though<br />
circumstantial, plaintiffs evidence alleged in complaint was sufficient to give rise to a strong<br />
inference of scienter.<br />
Brown v. Schwartzberg, 2011 WL 5599214 (M.D. La. Nov. 16, 2011).<br />
Defendants brought a counter-complaint of fraud against plaintiff under the Securities<br />
Exchange Act of 1934. The court found that the allegations in defendant’s counter-complaint<br />
were vague and lacking factual specificity as to particular misleading statements, information, or<br />
misrepresentations and the source of said statements, information or misrepresentations and<br />
therefore, failed generally and under the PSLRA to connect the allegations of fraud to any<br />
specific statement, document or alleged fact. The court required defendants to amend their<br />
counter-complaint to allege with specificity any claim pursuant to the Securities Exchange Act of<br />
1934.<br />
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading requirements of the PSLRA. Plaintiffs claim that defendants operated a<br />
Ponzi-like scheme targeting members of the Chinese-American community to obtain direct and<br />
indirect investments in the Oversea China Fund and made material misrepresentations to deceive<br />
plaintiffs and influence their decisions to invest. The court granted defendants’ motion to dismiss<br />
finding that plaintiffs failed to sufficient particularize facts showing defendants made fraudulent<br />
misrepresentations to investors. Further, the court found that plaintiffs failed to show specific<br />
acts raising the requisite scienter and, similarly to the alleged misleading statements, relied on<br />
over generalizations rather than specific statements or actions or other facts.<br />
Hopson v. MetroPCS Communications, Inc., 2011 WL 1119727 (N.D.Tex. Mar. 25, 2011).<br />
Plaintiff brought suit against defendants alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs claimed losses sustained after purchasing shares of<br />
defendant company’s stock at artificially inflated prices resulting from the defendants’ materially<br />
false, misleading, and reckless statements and omissions regarding company’s business<br />
prospects. The court granted defendants’ motion to dismiss finding that plaintiff had not pleaded<br />
sufficient facts to support a strong inference of scienter and that even if plaintiff had adequately<br />
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alleged scienter, plaintiff had also failed to plead with particularity claims relating to defendants’<br />
knowledge of “churn” data and that other statements were protected as either forward-looking or<br />
mere puffery.<br />
In re Franklin Corp. Securities <strong>Litigation</strong>, 782 F.Supp.2d 364 (S.D.Tex. 2011).<br />
Purchasers of common and preferred stock brought class action suit against bank and<br />
bank’s officers and directors, its outside auditor, and underwriter alleging violations of federal<br />
securities laws and defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed damage to preferred<br />
shares purchased from bank were caused by bank’s concealing adverse information concerning<br />
bank’s operations, financial condition, and performance alleged to be caused by concealed highrisk<br />
strategy and lack of risk management protocols. The court granted defendants’ motions to<br />
dismiss finding that purchasers failed to plead with sufficient particularity claim that chairman of<br />
bank’s board of directors made material misrepresentations regarding its capitalization and<br />
reserves; purchasers failed to allege scienter; bank’s CEO had no duty to disclose to investors of<br />
mortgage lender’s default on warehouse line of credit; and registration statement did not contain<br />
any false statements or material omissions.<br />
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Hawaii Ironworkers Annuity Trust Fund v. Cole, 2011 WL 1257756 (N.D.Ohio Mar. 31, 2011).<br />
Institutional investor brought class action suit as lead plaintiff against defendants for<br />
alleged violations of federal securities laws and defendants moved to dismiss for failure to state a<br />
claim as required under the heightened pleading standard of the PSLRA. Plaintiff claims that<br />
defendants contributed to the restatement of earnings of a company plaintiff invested in, which<br />
was the result of a fraudulent scheme and wrongful course of business whereby defendants, highlevel<br />
employees, caused the company to issue false financial statements. The court denied<br />
defendants’ motion finding that plaintiff sufficiently alleged that defendants substantially<br />
participated in making misrepresentations, that if not for the defendants’ misleading statements<br />
the plaintiff and others similarly situated might not have made the investment. The court found<br />
that plaintiff sufficiently pleaded scienter and loss causation.<br />
Hawaii Ironworkers Annuity Trust Fund v. Cole, 2011 WL 1257756 (N.D. Ohio Mar. 31, 2011).<br />
Plaintiff brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants<br />
overstated the results of operations at one unit of their business, representing that it was thriving<br />
while the automotive parts manufacturing industry was encountering severely adverse conditions<br />
and once the company was forced to redo its financial statements for those quarters the effects of<br />
the statements on the value of the stock was catastrophic. The court denied defendants’ motion to<br />
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dismiss finding that plaintiff’s allegations sufficiently alleged that defendants substantially<br />
participated in the alleged misstatements, that plaintiffs sufficiently alleged reliance, that<br />
allegations gave rise to strong inference of scienter, and plaintiff’s allegations were sufficient to<br />
plead loss causation.<br />
Louisiana Municipal Police Employees Retirement System v. KPMG <strong>LLP</strong>, 2011 WL 4629299<br />
(N.D. Ohio Sept. 30, 2011).<br />
Investor filed putative private securities fraud class action alleging that company, its<br />
officers, and its outside auditor participated in fraudulent scheme and wrongful course of<br />
business that caused company to falsify its financial records by improperly recognizing revenue<br />
and manipulating its recording of expenses. Defendants moved to dismiss for failure to<br />
adequately plead scienter against corporate officers and outside auditor and failure to adequately<br />
plead loss causation against all defendants. The court denied the motion, holding that investors<br />
adequately pleaded scienter against corporate officers and outside auditor and that they had also<br />
adequately pleaded loss causation.<br />
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc., 788 F. Supp. 2d 609 (S.D.Ohio<br />
2011).<br />
Investors brought class action suit against corporation and its executives alleging<br />
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. Plaintiffs alleged that<br />
corporation’s executives made false or misleading statements to conceal reckless behavior. The<br />
court granted defendants’ motion to dismiss finding that investors’ claims that corporation<br />
participated in nefarious scheme by high-level executives to conceal problems within company,<br />
failed to sufficiently allege scienter; that investors’ claims that corporation’s executives would<br />
receive larger bonuses if stock price was inflated was insufficient motive to satisfy scienter<br />
requirement; that allegations of executives knowing but failing to disclose that its interactive<br />
software system was “doomed to fail” failed to adequately allege scienter given company’s $18<br />
million investment in system start-up, that many of the other corporate statements were either not<br />
false, not material, merely puffery or could not be directly attributed to any executive.<br />
Garden City Employees’ Retirement System v. Psychiatric Solutions, Inc., 2011 WL 1335803<br />
(M.D.Tenn. Mar. 31, 2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants<br />
engaged in and/or materially assisted in a scheme and course of business to artificially inflate the<br />
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value of defendant company’s stock by concealing increasing financial difficulties with<br />
appropriately staffing facilities necessary for patient safety and minimizing the significance of<br />
repeatedly published reports of patient safety incidents at the company’s facilities. The court<br />
denied defendants’ motion to dismiss finding that given the extent of state enforcement agencies’<br />
findings and sanctions for inadequate services and patient care, defendants’ statements were<br />
actionable and the allegations gave rise to a strong inference of scienter.<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys<br />
Healthcare Solutions, Inc., 778 F. Supp. 2d 858 (N.D. Ill. 2011).<br />
Investors brought class action suit against corporation, its CEO and CFO alleging<br />
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. The court granted<br />
defendants’ motion to dismiss in part, finding that CEO’s statements about corporation’s ability<br />
to deliver solid results were not material, and denied defendants’ motion to dismiss in part,<br />
finding that investors sufficiently alleged that CEO’s statement concerning corporation’s work<br />
on implementation was misleading when made and that investors had sufficiently alleged<br />
scienter.<br />
Antelis v. Freeman, 799 F.Supp.2d 854 (N.D.Ill. 2011).<br />
Plaintiff investor brought suit against former business partner for violations of federal<br />
securities laws. Plaintiff alleged that (i) defendant failed to disclose that he would receive<br />
approximately $100,000 in purported kickbacks for convincing investor to loan approximately<br />
$333,000 to a third party for a real estate venture, (ii) the defendant falsely claimed he was an<br />
equal investor in the venture, and (iii) the defendant made other misstatements about his wealth<br />
and the likely success of the venture. Defendant moved to dismiss for failure to state a claim as<br />
required under the heightened pleading standards of the PSLRA. The court dismissed<br />
defendant’s motion, finding that Plaintiff’s allegations failed to allege a sufficient inference of<br />
scienter. The court particularly relied on the fact that Defendant had also purchased a note from<br />
the same third party in the same amount as plaintiff. Further, the court reasoned that a nonculpable<br />
explanation most likely existed for defendants’ actions, especially given the fact that<br />
plaintiff and defendant were friends for long duration prior to the investment at issue.<br />
St. Lucie County Fire District Fire-Fighters’ Pension Trust Fund v. Motorola, Inc., 2011 WL<br />
814932 (N.D. Ill. Feb. 28, 2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of the federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed they suffered damage<br />
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from a decline of defendant’s stock price as a result of defendants’ failure to disclose material<br />
facts regarding projected revenue, demand for its products, progress in turning around a mobile<br />
device division and a legal dispute. The court granted defendants’ motion to dismiss because (i)<br />
given the various disclosures made to plaintiff, plaintiff failed to allege any material<br />
misrepresentations or omission and (ii) that plaintiff failed to adequately plead scienter with<br />
respect to any misstatements alleged.<br />
City of Livonia Employees’ Retirement System v. The Boeing Company, 2011 WL 824604 (N.D.<br />
Ill. Mar. 7, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Plaintiffs claimed that defendants intentionally deceived them regarding the testing and delivery<br />
schedule for an anticipated commercial aircraft. Defendants filed a motion to dismiss for failure<br />
adequately allege scienter as required under the heightened pleading standards of the PSLRA.<br />
The court denied the motion based, in part, on the testimony of a confidential witness who<br />
allegedly testified regarding the scienter element. Later, the court granted reconsideration of the<br />
motion given that the confidential witness had since been identified and recanted all previous<br />
testimony. Upon reconsideration, the court granted defendants’ motion to dismiss finding that<br />
absent the confidential witness’s testimony, plaintiff did not meet the heightened pleading<br />
standard of the PSLRA.<br />
Garden City Employees’ Retirement System v. Anixter International, Inc., 2011 WL 1303387<br />
(N.D.Ill. Mar. 31, 2011).<br />
Plaintiffs brought a class action suit against defendants alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs alleged that during the class<br />
period, defendants engaged in a scheme to deceive and defraud investors of the true value of<br />
defendant company’s stock. Specifically, Plaintiffs alleged that certain “organic growth<br />
projections” were given to the market without a reasonable basis in fact and contained material<br />
misrepresentations and omission by failing to indicate that the company was negatively affected<br />
by the slowing economy. The court granted the defendants’ motion to dismiss without prejudice,<br />
finding that plaintiffs’ claims failed to adequately plead falsity with the requisite particularity<br />
and failed to sufficiently plead scienter.<br />
Wehrs v. Benson York Group, Inc., 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).<br />
Plaintiff brought suit against defendant for violations of federal securities laws. Plaintiff<br />
filed a motion for summary judgment, which was granted by the court. Later, the court granted<br />
defendants’ motion to vacate on the issue of damages. The court held that the previous ruling<br />
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failed to adequately address whether the plaintiff properly plead each allegation with sufficient<br />
particularly. On review, the court found that all of plaintiff’s claims, with the exception of one<br />
misstatement, lacked sufficient particularity to meet the pleading standard. Further, for the<br />
single misstatement that was adequate pled, plaintiff failed to plead reliance.<br />
City of New Orleans Employees’ Retirement System v. Private Bancorp, Inc., 2011 WL 5374095<br />
(N.D. Ill. Nov. 3, 2011).<br />
Plaintiffs brought suit against defendants for violations of federal securities laws and<br />
defendant moved to dismiss for failure to state a claim. Plaintiffs alleged that defendant, a<br />
regional bank, concealed the deterioration of certain loans in its portfolio and falsely represented<br />
its financial condition by knowingly and purposefully failing to write off $109 million in<br />
defaulting loans. The court granted defendants’ motion to dismiss and found that plaintiffs failed<br />
to allege particularized facts sufficient to give rise to a strong inference that any of the<br />
defendants acted with scienter or had knowledge of any purported credit losses that would merit<br />
a write-down.<br />
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Antelis v. Freeman, 2011 WL 6009609 (N.D. Ill. Nov. 30, 2011).<br />
Plaintiff brought suit against defendant alleging various violations of federal securities<br />
laws. Plaintiff alleged that defendant made numerous material misrepresentations and concealed<br />
material facts to induce plaintiff to make loans to an individual who subsequently went bankrupt.<br />
As a result, plaintiff allegedly lost nearly all of his lifesavings. In particular, plaintiff alleged that<br />
the company which guaranteed the notes was a shell corporation designed to defraud investors<br />
with defendant’s assistance and that defendant received thousands of dollars in kickbacks and<br />
other payments. The court granted the defendant’s motion to dismiss, finding that the plaintiff<br />
had failed to plead scienter with the requisite particularity required under the heightened<br />
standards of the PSLRA. The court found that, based on the allegations, it was just as likely that<br />
defendant had also been defrauded because he had also lost $333,000. Further, the court fund<br />
that the defendant was never actually paid the alleged kickbacks because payment was<br />
contingent on repayment of the notes, which were never repaid.<br />
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 2011 WL<br />
338865 (S.D. Ind. Jan. 28, 2011).<br />
Plaintiffs brought a class action suit against defendants alleging violations of federal<br />
securities laws based on the defendants’ alleged failure to disclose known complaints about a<br />
company’s medical device. Defendants moved to dismiss for failure to state a claim as required<br />
under the heightened pleading requirements of the PSLRA. Allegedly, defendant corporation and<br />
its officers were privy to doctors’ complaints about the medical device product and were required<br />
to disclose such information. The court granted defendants’ motions to dismiss finding that<br />
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plaintiffs failed to (i) create strong inference of scienter and (ii) adequately allege the CEO and<br />
CFO had knowledge of the complaints. Further, the court found that Plaintiffs allegations failed<br />
to adequately plead the CEO’s and CFO’s involvement in the concealment. Finally, the court<br />
found that the CEO and CFO had actually disclosed certain facts about the product, which<br />
weighed against an inference that their statements were knowingly false.<br />
Dixon v. Ladish Company, Inc., 785 F. Supp. 2d 746 (E.D.Wis. 2011).<br />
Shareholder brought suit against corporation and its directors alleging violations of<br />
federal securities laws based on misleading statements contained in corporation’s registration<br />
statement. Defendant filed a motion to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. The court granted the motion finding that<br />
shareholder failed to plead a securities fraud claim with requisite particularity where her<br />
complaint (i) contained conclusory allegations and (ii) did not include any specific facts as to<br />
what the corporation omitted from its registration statement to make the statement false or<br />
misleading.<br />
Puskala v. Koss Corporation, 799 F. Supp.2d 941 (E.D. Wisc. July 28, 2011).<br />
Investors brought putative class action against corporation, its former accountant, its<br />
principal accounting officer, and its CEO, alleging violations of federal securities laws.<br />
Defendant moved to dismiss for failure to meet the heightened pleading standards required under<br />
the PSLRA. The court granted defendant’s motion to dismiss on the basis that the investors<br />
failed to adequately plead with the requisite particularity required under the PSLRA. The court<br />
noted that, based on the allegations, plaintiffs only way to have stated a claim would have been<br />
to show that the corporation’s internal controls were completely unreliable. The investors failed<br />
to make such an allegations, which meant that they failed to adequately plead their claim.<br />
Pet Quarters, Inc. v. Ladenburg Thalmann and Company, Inc., 2011 WL 1135902 (E.D.Ark.<br />
Mar. 28, 2011).<br />
Plaintiff brought suit against defendants alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiff alleged that defendants continued to underwrite and<br />
earn large commissions on auction rate securities with knowledge that credit markets were<br />
deteriorating. Further, plaintiff alleged that defendants knew of the deteriorating markets<br />
because defendants submitted “support” bids on behalf of itself to artificially prop up the market.<br />
Without these support bids, the defendants knew the market would no longer exist. The court<br />
granted one defendant’s motion to dismiss with leave for plaintiff to amend finding that plaintiff<br />
had not alleged sufficient facts to demonstrate either scienter or justifiable reliance. The court<br />
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denied another defendant’s motion to dismiss finding that the plaintiff adequately plead that the<br />
complicated structured investments fell outside the scope of the plaintiff’s investment guidelines.<br />
In re Meta Financial Group, Inc., Securities <strong>Litigation</strong>, 2011 WL 2893625 (N.D. Iowa July 18,<br />
2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants filed motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs alleged that defendants either<br />
knowingly or recklessly published a series of materially false and misleading statements and<br />
omissions about defendant company’s operations and finances. The court denied defendants’<br />
motion finding that plaintiffs adequately pleaded their claims with the requisite particularity.<br />
Yary v. Voight, 2011 WL 6781003 (D. Minn Dec. 27, 2011).<br />
Plaintiffs brought suit against defendant asserting claims under the Securities Exchange<br />
Act of 1934 and defendant moved to dismiss. Plaintiffs claimed various statements made by<br />
defendant in advising them to invest in a real estate financing company and other subsequent,<br />
related investments and transfers of their original investments were fraudulent. The court found<br />
that the complaint contained many of the specific statements made by defendant to plaintiffs<br />
relating to the investments, as well as a subsequent release. The court found that these<br />
statements contained the requisite particularity required for stating misrepresentations or<br />
omissions under the heightened pleading standards of the PSLRA. Further, the court found<br />
sufficient evidence for plaintiffs to assert a conversion claim. Finally, the court noted that the<br />
behavior of defendant in making statements about the safety of the investments and encouraging<br />
elderly, unsophisticated investors of limited means to concentrate on extremely risky investments<br />
gave rise to a strong inference of scienter.<br />
McDonald v. Compellent Technologies, Inc., 805 F. Supp. 2d 725 (D. Minn. Aug. 1, 2011).<br />
Investor brought class action suit against defendant corporation and five of its officers<br />
and directors for violations of federal securities laws. Plaintiffs alleged that defendants<br />
participated in fraudulent scheme to artificially inflate corporation’s stock prices. Defendants<br />
moved to dismiss for failure to state a claim as required under the heightened pleadings standards<br />
of the PSLRA. The court granted defendants’ motion, holding that (i) the investor failed to plead<br />
a securities fraud claim with the requisite particularity required, (ii) that defendants’ general<br />
statements about the business, drop in gross margin, and future revenues were not actionable,<br />
and (iii) that statements forecasting corporation’s revenues were not false or misleading when<br />
made and did not rise to the level of required scienter.<br />
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In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).<br />
Plaintiff brought suit against defendants alleging violations of Section 10(g) and Rule<br />
10b-5 of the Securities Exchange Act of 1934. Defendant filed a motion to dismiss claiming that<br />
allegations of complaint fail to satisfy the heightened pleading requirements of the PSLRA with<br />
respect to the identification of false or misleading statements and the requisite state of mind, as<br />
well as other legal requirements for pleading securities fraud claims, particularly with respect to<br />
loss causation. The court granted the motion in part and denied it in part, finding that the<br />
allegations of the complaint relating to undisclosed sales and channel stuffing practices directly<br />
related to representations of the company’s healthy economic status were sufficiently<br />
particularized and that such practices could by the officers do support a strong inference of<br />
scienter as well as loss causation.<br />
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 2011 WL 1253250<br />
(D.Ariz. Mar. 31, 2011).<br />
Plaintiffs brought suit against defendants for alleged violations of federal securities laws<br />
and defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standard of the PSLRA. Plaintiffs claimed various fraudulent activities relating to<br />
improper backdating of options and misleading statements made in conjunction with such<br />
practices. The court granted defendants’ motion to dismiss finding a lack of circumstances<br />
contributing to a strong inference of scienter relating to certain claimed misstatements. The<br />
court also found that plaintiff failed to plead falsity with requisite particularity.<br />
In re Apollo Group, Inc. Securities <strong>Litigation</strong>, 2011 WL 5101787 (D.Ariz. Oct. 27, 2011).<br />
Plaintiffs brought suit against a company that owns and operates proprietary<br />
postsecondary education institutions and several of its officers alleging violations of Section<br />
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs claimed that defendants<br />
made false and misleading statements and omissions of material fact regarding the company’s<br />
financial condition, business focus, ethics, compensation and recruitment practices, and<br />
compliance with applicable laws. These statements and omissions resulted in an artificial<br />
inflation of the company’s stock and led plaintiffs to purchase stock at inflated prices.<br />
Defendants filed a motion to dismiss for failure to meet the heightened pleading requirements<br />
under the PSLRA. The court granted the defendants’ motion with leave for the plaintiffs to<br />
amend, finding that plaintiffs did not adequately plead a strong inference of scienter and loss<br />
causation. The court held that Plaintiffs allegations, which were based on the defendants’ trading<br />
activities, the testimony of mostly low-level confidential witnesses and the failure of defendants<br />
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to correct erroneous accounting procedures, did not adequately support a strong inference of<br />
scienter. Further, the court reasoned that the allegations regarding subsequent corrective<br />
disclosures did not adequately allege loss causation.<br />
Plichta v. Sunpower Corporation, 790 F.Supp.2d 1012 (N.D. Cal. 2011).<br />
Shareholders brought class action suit against company and its executives alleging<br />
violations of federal securities laws and defendants filed a motion to dismiss for failure to state a<br />
claim as required under the heightened pleading standards of the PSLRA. Shareholders alleged<br />
that defendants unsubstantiated accounting entries rendered the company’s filings with the<br />
Securities and Exchange Commission false and misleading. The court granted defendants motion<br />
to dismiss finding that the shareholders failed to plead scienter sufficiently. Further, the court<br />
found that plaintiffs allegations did not support a strong inference that management could have<br />
known that the underlying data entered into the accounting entries were false. Plaintiffs<br />
allegations that executives had made acknowledgements and admissions regarding a lapse in<br />
internal control mechanisms was not sufficient to survive the motion to dismiss.<br />
Lapiner v. Camtek, Ltd., 2011 WL 445849 (N.D. Cal. Feb. 2, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws and<br />
defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading requirements of the PSLRA. Plaintiffs were stockholders claiming defendants engaged<br />
in a scheme to inflate the price of stock by making material misrepresentations regarding its cash<br />
flow and revenue. Allegedly, defendants cashed in letters of credit on orders for products before<br />
the orders were accepted. The court granted defendants’ motion to dismiss, finding that plaintiffs<br />
did not identify the basis of their belief that the letters of credit were used in this manner. The<br />
court also found plaintiffs’ grounds for scienter based on stack sales and positions held in the<br />
company to be deficient and an additional ground for dismissal.<br />
In re Bank of America Corp. Auction Rate Securities (ARS) Marketing <strong>Litigation</strong>, 2011 WL<br />
740902 (N.D. Cal. Feb. 24, 2011).<br />
Investors brought suit against bank alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs claimed that bank earned lucrative fees in<br />
connection with its role in a securities market and that it took advantage of the opportunity to<br />
manipulate the market. The court granted defendants’ motion to dismiss, finding that plaintiffs<br />
failed to sufficiently allege the manipulative acts on which the alleged scheme was based.<br />
Further, the court found that the mere allegation that defendants desired to earn a commission<br />
was too common a motive and not adequately particularized.<br />
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Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that defendants solicited individuals with<br />
good credit scores to participate in a real estate investment scheme that was misrepresented as<br />
having little or no risk. Further, plaintiffs alleged that defendants fraudulently marketed and sold<br />
securities relating to the scheme, which violated federal securities laws. The court denied<br />
defendants’ motion to dismiss. The court found that plaintiffs had adequately alleged scienter<br />
based on defendants’ repeated representations that the investment was a low-risk investment<br />
opportunity. Further, plaintiffs adequately alleged loss causation based on defendants potentially<br />
fraudulent inducement to enter into the contracts.<br />
In re Infineon Technologies AG Securities <strong>Litigation</strong>, 2011 WL 7121006 (N.D.Cal. Mar. 17,<br />
2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed defendants engaged in<br />
securities fraud by participating in an illegal price-fixing conspiracy involving a product and then<br />
manipulated the price of stock by making misrepresentations about the impact of the artificially<br />
inflated product prices on underlying company’s corporate value. The court granted defendants<br />
motion to dismiss and gave plaintiffs leave to amend. The court found that plaintiffs failed to<br />
adequately particularize any specific misrepresentations and instead relied on a generalized<br />
statement that defendants misrepresented inflated product prices during a specific period.<br />
In re Verifone Holdings Inc. Securities <strong>Litigation</strong>, 2011 WL 1045120 (N.D.Cal. Mar. 22, 2011).<br />
Plaintiff brought consolidated class action suit against transaction automation company<br />
and certain of its officers and directors alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged defendants’ failures to make appropriate<br />
accounting corrections resulted in overstated and misreported revenues. This, in turn, caused<br />
plaintiffs to purchase defendants’ stock at artificially inflated rates. The court granted<br />
defendants’ motion to dismiss finding that none of plaintiffs’ allegations gave rise to a strong<br />
inference of scienter but that the stronger inference was mistake or gross negligence by the<br />
officer.<br />
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In re Nuveen Funds/City of Alameda Securities <strong>Litigation</strong>, 2011 WL 1842819 (N.D.Cal. May 16,<br />
2011).<br />
Investors brought suit against defendants for alleged violations of federal securities laws<br />
and defendants filed a motion for summary judgment on the grounds that plaintiffs cannot<br />
establish loss causation, materiality or scienter as required under the PSLRA. Plaintiffs claim<br />
that they purchased notes pursuant to an offering statement prepared by defendants which<br />
contained inflated and wildly optimistic and unrealistic projections. The court granted<br />
defendants’ motion for summary judgment finding that plaintiffs failed to show any evidence of<br />
a causal relationship between the alleged unrealistic projections and the sale of the underlying<br />
project for less than projected.<br />
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Wozniak v. Align Technologies, Inc., 2011 WL 2269418 (N.D.Cal. June 8, 2011).<br />
Plaintiff brought suit against removable teeth aligner manufacturer and several of its<br />
officers for alleged violations of federal securities laws and defendants moved to dismiss for<br />
failure to state a claim as required under the heightened pleading standard of the PSLRA.<br />
Specifically, plaintiffs allege that as a result of a settlement with a competitor, defendant<br />
manufacturer was forced to take on competitor’s customers causing a shift from pursuing a<br />
growth strategy to handling backlog of new non-paying customers. Plaintiffs claim that the<br />
acquisition of these non-paying customers was misrepresented or improperly omitted in various<br />
conference calls and press releases. The court granted defendants’ motion to dismiss finding that<br />
the misstatements alleged were generalized statements of optimism and constituted “nonactionable<br />
puffery” rather than deliberate or reckless misrepresentations. Further, the court<br />
found that the omissions claimed were actually disclosed numerous times prior to and throughout<br />
the class period. The court also found plaintiff failed to sufficiently allege scienter for any of the<br />
statements or inactions as required.<br />
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2011 WL 3501733 (N.D. Cal. Aug. 10,<br />
2011).<br />
Plaintiffs brought suit against defendant alleging violations of federal securities laws and<br />
defendants filed motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that, throughout the class period, individual<br />
defendants were repeatedly asked about the effects of the economic crisis and “steadfastly”<br />
assured analysts and investors that “the economic crisis was not negatively impacting sales and<br />
revenues. Plaintiff also alleged that defendant failed to inform investors that it had effectively<br />
saturated the market with its current product and growth prospects were minimal. The court<br />
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granted defendants’ motion to dismiss with leave to amend finding that, out of nineteen alleged<br />
misstatements, plaintiffs had failed to allege any such dramatically false statement that would<br />
merit the inference of scienter. Further, plaintiff had thus far failed to adequately allege even a<br />
single misrepresentation or omission with respect to any individual corporate officer.<br />
Applestein v. Medivation, Inc., 2011 WL 3651149 (N.D. Cal. Aug. 18, 2011).<br />
Lead plaintiff brought a securities class action against defendant company and several of<br />
its senior officers alleging violations of federal securities laws. Defendants moved to dismiss for<br />
failure to state a claim as required under the heightened pleading standards of the PSLRA. The<br />
court granted defendants’ motion to dismiss with leave for plaintiff to amend, finding that each<br />
of plaintiffs’ allegations were insufficient to give strong inference of scienter and, even<br />
collectively, the allegations were insufficient to meet the threshold for a showing of scienter.<br />
Curry v. Hansen Medical, Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).<br />
Shareholders brought suit against medical company and its officers for violations of<br />
federal securities laws and defendants moved to dismiss for failure to state a claim as required<br />
under the heightened pleading standards required under the PSLRA. Plaintiffs alleged that<br />
defendants induced them to acquire common stock at artificially inflated prices during certain<br />
class periods by making knowing and intentional misstatements regarding the company’s<br />
revenue recognition and sales performance. The court granted defendants’ motion to dismiss<br />
with leave to amend finding that plaintiffs failed to allege fraud with sufficient particularity.<br />
Lapiner v. Camtek, Ltd., 2011 WL 3861840 (N.D. Cal. Aug. 31, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws and<br />
defendants filed motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged defendants engaged in a systematic scheme<br />
to inflate the price of certain stock by publishing false and materially inflated reports of<br />
revenues, earnings, cash flow from operations and days sales outstanding that omitted relevant<br />
developments. Purportedly, defendants failed to disclose their sale of accounts receivables,<br />
cashing in of letters of credit and various other unreported activities. The court granted<br />
defendants’ motion to dismiss, finding that plaintiffs failed to identify materially misleading<br />
statements or omissions by the defendant after giving plaintiffs repeated opportunities to amend.<br />
The court also noted that, though not required to be addressed, plaintiff failed to remedy<br />
previously found deficiencies in loss causation and scienter as well.<br />
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Philco Investments, LTD., v. Martin, 2011 WL 4595247 (N.D. Cal. Oct. 4, 2011).<br />
Plaintiffs brought suit against pharmaceutical company and several of its officers alleging<br />
violations of federal securities laws. Plaintiffs alleged defendants made false and misleading<br />
statements about the efficacy and safety of two of defendants’ drugs. The defendants filed a<br />
motion to dismiss for failure to state a clam and the court granted their motion finding that<br />
plaintiffs failed to adequately allege the violations pursuant to the heightened pleading standards<br />
under the PSLRA for particularity of misrepresentations and omissions as well as scienter.<br />
In re NVIDIA Corporation Securities <strong>Litigation</strong>, 2011 WL 4831192 (N.D. Cal. Oct. 12, 2011).<br />
Plaintiffs brought suit against defendants for violations of federal securities laws.<br />
Plaintiffs alleged defendants were aware of a $150 million to $200 million charge against cost of<br />
revenue to cover expenses arising from defective packaging prior to issuing a press release.<br />
Defendants filed a motion to dismiss the complaint. The court granted the motion to dismiss,<br />
holding plaintiffs failed to plead the element of scienter as required under the heightened<br />
pleadings standards of the PSLRA. The court found that the defendants’ response to the<br />
defective products did not represent an extreme departure from the standards of ordinary care in<br />
the industry and did not support the conclusion that defendants acted with fraudulent intent or<br />
deliberate recklessness.<br />
In re Xenoport, Inc. Securities <strong>Litigation</strong>, 2011 WL 6153134 (N.D. Cal. Dec. 12, 2011).<br />
Defendants moved to dismiss all claims asserted against them in plaintiff’s first amended<br />
complaint for violation of various federal securities laws. Specifically, plaintiff alleged that<br />
defendant misrepresented that a drug it produced had received similar results in toxicology<br />
studies to an approved competitor drug currently on the market. In reality, the product had<br />
actually been shown to potentially cause cancer in both male and female mice where the<br />
competitor product had only shown carcinogenic effects in male mice. The court granted the<br />
defendant’s motion to dismiss finding that, although defendant’s misleading statements were<br />
pled with sufficient particularity and found to be misleading, the plaintiff did not plead scienter<br />
sufficiently under the heightened standards of the PSLRA.<br />
In re Immersion Corp. Sec. Litig., 2011 WL 6303389 (N.D.Cal. Dec. 16, 2011).<br />
Plaintiff brought suit against defendants alleging violations of various federal securities<br />
laws and defendants filed a motion to dismiss. Plaintiff alleged that defendants prematurely and<br />
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improperly recognized revenue on sales of medical devices and falsely reported other expenses<br />
and incomes. Plaintiff further alleged that such improper accounting practices led defendants to<br />
materially misstate revenue and income in financial disclosures as well as misrepresent the<br />
quality of the company’s internal controls and compliance with GAAP. The court granted the<br />
defendants’ motion to dismiss finding that magnitude of financial statement restatements and the<br />
small size of the business alone were not sufficient to establish scienter as required under the<br />
heightened pleading requirements of the PSLRA. Further, none of the confidential witnesses<br />
provided information sufficient to show that defendants, at the time the incorrect financial<br />
reports were made, had actual access to information showing the content therein was incorrect.<br />
Finally, the mere departures of executives shortly after an audit as well as defendants signing<br />
Sarbanes-Oxley certificates that financial statements were true did not adequately support a<br />
finding of scienter.<br />
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial corporation, 793<br />
F.Supp.2d 1138 (C.D.Cal. 2011).<br />
Investors brought suit against defendant issuer of convertible senior debentures and<br />
against defendant’s former senior executives, officers and directors for violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. The court denied defendant’s motion finding that<br />
(i) a factual issue existed as to whether investors suffered economic loses and (ii) investors had<br />
adequately plead alleged loss causation, reasonable reliance on defendants’ misrepresentations<br />
and strong individualized inference of scienter against each defendant.<br />
In re STEC Inc. Securities <strong>Litigation</strong>, 2011 WL 4442822 (C.D. Cal. Jan. 10, 2011).<br />
Investors brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading requirements of the PSLRA. Plaintiffs claimed defendants omitted a<br />
material contract in certain filings, materially misrepresented purchases made to certain<br />
manufacturers, inflated reported revenues and revenue projections and misrepresented the<br />
competition faced by one of its products. The court granted defendants motion to dismiss finding<br />
that plaintiff failed to particularize the part of the omitted contract that was misleading, failed to<br />
show how and when purchasers learned of certain contracts to show how it impacted stock,<br />
failed to allege the amount of inflation that defendants’ misleadingly projected and failed to<br />
show defendants acted with deliberate recklessness in failing to adequately judge the competition<br />
to a product. The court also found that delays in the product’s initial launch were the more likely<br />
reason for increased competition, rather than intentional misrepresentations related to the<br />
company’s predictions.<br />
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Healthy Habits, Inc., v. Fusion Excel Corp., 2011 WL 2448256 (C.D.Cal. June 17, 2011).<br />
Plaintiffs brought suit against defendants for alleged violations of federal securities laws<br />
and defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs’ claims arose out of an alleged “multi-level<br />
marketing” program of certain products of defendant corporation which plaintiffs claim should<br />
have been characterized as the sale of alleged unregistered securities. Further, plaintiffs alleged<br />
that defendants made fraudulent misrepresentations associated with sales under the program. The<br />
court found that plaintiffs had adequately pleaded their claims and denied defendants’ motion to<br />
dismiss.<br />
In re Stec Inc. Securities <strong>Litigation</strong>, 2011 WL 2669217 (C.D.Cal. June 17, 2011).<br />
Plaintiffs brought suit against defendants for violations of federal securities laws and<br />
defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged that defendants made false statements and<br />
omissions that dramatically inflated the company’s stock price and ultimately caused the stock<br />
price to collapse when the truth of the misstatements and omissions was disclosed. Specifically,<br />
plaintiffs’ claimed that defendants misrepresented an extraordinary purchase by a single buyer as<br />
an ordinary course contract, that defendants were expecting other similar large volume purchases<br />
by other customers and that such misrepresentations were incorporated in faulty revenue<br />
projections. The court denied defendants’ motion, finding that plaintiffs had adequately alleged<br />
the requisite elements in their allegations about statements and omissions regarding the large<br />
customer contract and that scienter had been sufficiently pled.<br />
In re Toyota Motor Corp. Securities <strong>Litigation</strong>, 2011 WL 2675395 (C.D.Cal. July 7, 2011).<br />
Plaintiffs brought suit against defendant automobile manufacturers alleging violations of<br />
federal securities laws and defendants moved to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs alleged violations relating to<br />
defendants failure to disclose or properly handle a massive internal defect in one of their major<br />
car lines relating to reported unintended acceleration of the vehicle. The court granted<br />
defendants’ motion in part and denied in part, holding that (i) scienter was not adequately alleged<br />
by the plaintiffs for a variety of misstatements and (ii) some statements were not sufficiently<br />
alleged to be false, but other statements alleged were adequately pled.<br />
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Henning v. Orient Paper, Inc., 2011 WL 2909322 (C.D. Cal. July 20, 2011).<br />
Plaintiffs brought suit against defendant alleging violations of federal securities laws and<br />
defendants filed motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiffs alleged defendant company and several of its<br />
officers issued an annual report containing false and misleading financial statements. The court<br />
denied defendants’ motion to dismiss finding that plaintiffs met their burden under the PSLRA,<br />
pled their claim with sufficient particularity, and created a strong inference of scienter.<br />
Kexuan Yao v. Crisnic Fund, S.A., 2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).<br />
Plaintiff brought suit against defendant for violations of federal securities laws and<br />
defendant moved to dismiss for failure to state a claim pursuant to the heightened pleading<br />
standards required under the PSLRA. Plaintiff alleged that he was deceived into a stock<br />
transaction by defendants’ misrepresentations. The court granted the defendants’ motion to<br />
dismiss finding that plaintiff failed to allege facts that suggested the misrepresentations stated by<br />
plaintiff were made by defendant and relied upon by plaintiff.<br />
In re China Education Alliance, Inc. Sec. Litig., 2011 WL 4978483 (C.D. Cal. Oct. 11, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws.<br />
Plaintiffs alleged that defendants overstated revenues and profits and fraudulently maintained<br />
two sets of books, one an accurate set of financial statements filed with Chinese regulators and<br />
the other a false set of financial statements filed with the SEC. Defendants filed a motion to<br />
dismiss on the grounds that plaintiffs’ complaint failed the heightened pleading standards under<br />
the PSLRA because plaintiffs’ evidence was a supporting report that was anonymous, and that<br />
there was no evidence of scienter presented. The court denied the motion to dismiss on the<br />
grounds that the reliability of the report was a question of fact and that plaintiffs had adequately<br />
alleged scienter.<br />
Nguyen v. Radient Pharmaceuticals Corporation, 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct.<br />
26, 2011).<br />
Plaintiffs brought action against pharmaceuticals company for alleged violations of<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Specifically, plaintiffs<br />
alleged that defendant made intentionally misleading statements about a partnership with the<br />
prestigious Mayo Clinic in testing their star product, which defendant capitalized upon in a<br />
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subsequent equity offering before later press releases revealed no such partnership agreement<br />
existed. Defendant filed a motion to dismiss for failure to state a claim under the heightened<br />
pleading standards of the PSLRA. The court held that plaintiffs’ allegations were sufficient to<br />
allow a strong inference of scienter given the strong financial red flags being experienced by the<br />
company at the time and the company’s motive to raise cash cheaply. Accordingly, the court<br />
denied the defendants’ motion to dismiss.<br />
Dean v. China Agritech, Inc.,2011 WL 5148598 (C.D. Cal. Oct. 27, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of Section 10(b) and Rule<br />
10b-5 of the Securities Exchange Act of 1934. Defendants filed a motion to dismiss for failure to<br />
state a claim. Plaintiffs alleged that defendants materially misstated net revenue and income for<br />
various time periods and concealed certain related-party transactions. Allegedly, these<br />
misstatements and omissions were incorporated in defendants’ subsequent registration statement<br />
and prospectus for public offering. Plaintiff alleged that these statements and omissions caused<br />
plaintiffs to suffer damages in connection with purchases of the company’s stock. The court held<br />
that plaintiffs adequately pled the contested elements of falsity, scienter and loss causation. The<br />
court found that plaintiff (i) adequately pled particularized misrepresentations in the SEC filing<br />
sufficient for falsity, (ii) that defendant’s underlying idle business and factories during the<br />
alleged misrepresentations gave a strong inference of scienter and (iii) that the<br />
misrepresentations were sufficiently pled as a substantial cause of plaintiffs loss. Accordingly,<br />
plaintiff met the heightened pleading requirements under the PSLRA.<br />
Rentea v. Janes, 2011 WL 5822255 (C.D. Cal. Nov. 16, 2011).<br />
Plaintiff filed a complaint against defendant, an officer and director of a medical device<br />
manufacturer, alleging violations of Section 10(b) and Rule 10b-5 of the Securities Exchange<br />
Act of 1934. Plaintiff alleged defendant made false or misleading statements regarding FDA<br />
approval of a product that influenced plaintiff’s decision in purchasing securities of the medical<br />
device manufacturer. The court granted the defendant’s motion to dismiss on the grounds that<br />
plaintiff failed to meet the heightened pleading requirements under PSLRA and therefore did not<br />
plead with the requisite particularity of a Section 10(b) and Rule 10b-5 claim. Specifically, the<br />
court found that plaintiff (i) failed to point to a single specific misleading or false statement, (ii)<br />
offered no detailed facts to support the scienter allegation and (iii) generally failed to meet the<br />
other required elements of a Section 10(b) and Rule 10b-5 claim.<br />
Mannkind Securities Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).<br />
Shareholders of a company that developed an inhalable insulin treatment for diabetes<br />
brought suit against defendants alleging violations of federal securities laws. Specifically,<br />
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plaintiffs alleged that defendants serially misrepresented to investors facts relating to the<br />
existence and likelihood of FDA approval. Defendants moved to dismiss on the grounds that it<br />
failed to meet the heightened pleading requirements under the PSLRA. The court denied the<br />
defendant’s motion and held that the alleged misstatements, taken together, were sufficient to<br />
show a “strong inference” of scienter, that plaintiffs had adequately pled loss causation and that<br />
the statements plaintiffs relied upon were actionable under the PSLRA.<br />
Luciani v. Luciani, 2011 WL 3859707 (S.D. Cal. Sept. 1, 2011).<br />
Plaintiffs brought suit against defendants alleging violations of federal securities laws and<br />
defendant brought a motion to dismiss for failure to state a claim under the heightened pleading<br />
standards required by the PSLRA. Plaintiffs alleged that defendants sought dissolution of a<br />
company that plaintiffs and defendants were investors in with the intention of forcing a<br />
distressed sale of the company. The distressed sale allegedly would benefit defendants in<br />
purchasing the plaintiffs’ membership interests at “low-ball” prices. The court denied<br />
defendants’ motion to dismiss, finding that even though plaintiff failed to specifically identify<br />
which statements contained alleged misrepresentations, the defendants could clearly infer which<br />
statements the plaintiffs alleged contained misrepresentations.<br />
Rich v. Shrader, 2011 WL 4434852 (S.D. Cal. Sept. 22, 2011).<br />
Plaintiff brought suit against defendant alleging violations of federal securities laws and<br />
defendant filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiff alleged that defendant violated federal securities laws<br />
by not disclosing, at the time plaintiff retired, that the company had discarded its longstanding<br />
policy to remain one company. Plaintiff further alleged that defendant was planning to sell its<br />
government division to a private equity firm, which would have entitled plaintiff to a greater<br />
profit from selling his shares under the company’s stock plan. The court granted defendants’<br />
motion to dismiss and found that the entirety of plaintiff’s complaint failed to contain sufficient<br />
facts to create a strong inference of scienter and failed to identify any material facts in the<br />
relevant time period that would support allegation that defendant knew of the plan before.<br />
Lifschitz v. Nextwave Wireless Inc., 2011 WL 5839682 (S.D. Cal. Nov. 21, 2011).<br />
Plaintiff brought suit against defendants alleging violations of Section 10(b) and Rule<br />
10b-5 of the Securities Exchange Act of 1935. Plaintiff alleged that numerous statements made<br />
by Defendants were false and misleading relating to defendants’ knowledge of liquidity<br />
problems and acquisition strategy. The court granted the defendants’ motion to dismiss the<br />
plaintiff’s third amended consolidated complaint with prejudice, finding that plaintiff had failed<br />
to plead a Section 10(b) violation because seventeen out of twenty-four misleading statements<br />
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were forward-looking statements protected by the PSLRA’s “Safe Harbor” Provision. Further,<br />
the remaining seven allegedly misleading statements failed to indicate scienter. Such failure was<br />
based, in part, on plaintiff’s failure to show specific facts relating to its confidential witness’s<br />
position in the company and access to company records to show actual knowledge or deliberate<br />
recklessness in not knowing that the statements were false.<br />
In re Novatel Wireless Securities <strong>Litigation</strong>, 2011 WL 5873113 (S.D.Cal. Nov. 23, 2011).<br />
Shareholders brought securities fraud class action against corporation and its officers,<br />
alleging that defendants engaged in fraudulent scheme to inflate corporation’s stock value.<br />
Defendants moved for judgment on the pleadings and summary judgment. The court found that<br />
genuine issues of material fact precluded summary judgment on the grounds of scienter or<br />
materiality. Further, a question of fact existed related to the securities fraud claim based on the<br />
misrepresentation that the superiority of the corporation’s products would enable it to outperform<br />
the competition. The court also found that genuine questions of material fact precluded judgment<br />
on the pleadings regarding allegations that the corporation misrepresented its true financial<br />
condition because defendants failed to disclose a customer’s plan to stop ordering corporation’s<br />
product.<br />
City of Marysville General Employees Retirement System v. Nighthawk Radiology Holdings,<br />
Inc., 2011 WL 4584778 (D. Idaho Sept. 12, 2011).<br />
Plaintiff brought suit against defendant alleging violations of federal securities laws and<br />
defendant moved to dismiss for failure to state a claim as required under the heightened pleading<br />
standards of the PSLRA. Plaintiff alleged that defendants misled investors with respect to<br />
defendant company’s purchase of certain businesses pursuant to an expansion plan and the<br />
disastrous effects those acquisitions had upon the company’s services. Specifically, plaintiff<br />
asserted that defendants misrepresented the success of their acquisitions, falsely assured<br />
investors that legacy customers were continuing with the company, and issued false earnings<br />
guidance statements for 2007 and 2008. The court granted the motion to dismiss finding that the<br />
complaint failed to state particularized facts that, taken as a whole, raised a strong inference of<br />
scienter rather than simple over-optimism.<br />
RS-ANB Fund, LP, v. KMS SPE LLC, 2011 WL 5352433 (D. Idaho Nov. 7, 2011).<br />
Plaintiff brought suit against an investment company alleging violations of Section 12(b)<br />
and Rule 12b-5 of the Securities Exchange Act of 1934 and defendant filed motion to dismiss for<br />
failure to state a claim. Plaintiff alleged that defendant made fraudulent misrepresentations or<br />
omissions when soliciting investment from plaintiff by failing to disclose that the individual<br />
owner of the company was insolvent at that time. The insolvency allegedly activated provisions<br />
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in various contracts of the company with the FDIC, which placed it in default and severely<br />
limited the income stream to the company. The plaintiff’s main purchase was the income stream<br />
of the company. The court held that plaintiff’s allegation failed to satisfy the heightened pleading<br />
requirements for scienter under the PSLRA and that none of the facts asserted by plaintiff, read<br />
alone or read together, supported an inference that the individual was insolvent at the time in<br />
question. Specifically, that defendant went bankrupt two years later, that his bankruptcy occurred<br />
one day before trial in a civil action to which he was a defendant and that the action was filed<br />
before the Participation Agreement was signed was found insufficient.<br />
Szymborski v. Ormat Technologies, Inc., 776 F.Supp.2d 1191 (D. Nev. 2011).<br />
Shareholders brought class action suit against corporation engaged in the geothermal and<br />
recovered energy power business and its corporate officers, alleging violations of federal<br />
securities laws. Defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that defendants made<br />
misleading disclosures about corporation’s accounting method and about the completion and<br />
capacity of a geothermal power plant. The court denied defendants’ motion with respect to the<br />
accounting method claims, finding that shareholders pled with sufficient particularity their claim<br />
based on allegedly deceptive and improper accounting methods. Further, the court found that the<br />
allegations were sufficient to give rise to strong inference of scienter. Nonetheless, the court<br />
granted defendants’ motion with respect to the geothermal power plant because that<br />
corporation’s allegedly misleading statements about projected completion date were insufficient<br />
to give rise to inference defendants acted with scienter.<br />
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech., 2011 WL<br />
915115 (D. Nev. Mar. 15, 2011).<br />
Plaintiff brought class action suit against defendant gaming company and several of its<br />
officers alleging violations of federal securities laws. Defendants filed a motion to dismiss for<br />
failure to state a claim as required under the heightened pleading standards of the PSLRA.<br />
Plaintiff claimed defendants made false and misleading statements concerning optimistic<br />
disclosures and projections about the company and failed to disclose material facts about low<br />
sales levels during class period. As a result, plaintiff purchased the defendant’s stock at an<br />
inflated price. The court denied defendants’ motion to dismiss, finding that plaintiff sufficiently<br />
alleged inferences that defendants intentionally misled investors. These allegations supported a<br />
strong inference of scienter with regard to statements concerning play levels and certain<br />
agreements, while other claims relating to a technology schedule forecast, operating expense<br />
forecast and stock sales were insufficiently pled to allege fraud.<br />
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Fosbre v. Las Vegas Sands Corp., 2011 WL 3705023 (D. Nev. Aug. 24, 2011).<br />
Investors brought class action suit against defendants for violations of federal securities<br />
laws and defendants filed motion to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. Plaintiffs alleged that during the class period,<br />
defendants knowingly and recklessly made misrepresentations and omissions about the<br />
company, its development plans, and its financial condition. The court granted the motion in part<br />
and denied the motion in part, finding that plaintiffs sufficiently alleged that most false<br />
statements of material fact or omissions of material fact created a strong inference of scienter.<br />
The court further found that the allegations sufficiently plead loss causation.<br />
In re Cell Therapeutics, Inc. Class Action <strong>Litigation</strong>, 2011 WL 444676 (W.D. Wash. Feb. 4,<br />
2011).<br />
Plaintiff brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading requirements of the PSLRA. Plaintiffs alleged certain statements by<br />
defendants that a drug product had been agreed to be fast-tracked by the FDA, when in fact the<br />
FDA had not agreed to defendants’ modifications of the study and was unaware at the time they<br />
were taken. The court denied defendants’ motion to dismiss finding that plaintiffs’ alleged<br />
sufficient evidence that, in the totality, passed the threshold of a strong inference of scienter.<br />
Further, plaintiffs adequately pled loss causation with evidence of decrease in stock prices<br />
directly after release of the corrective disclosures.<br />
In re Coinstar Inc. Securities <strong>Litigation</strong>, 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011).<br />
Plaintiff brought suit against defendants for violations of the federal securities laws.<br />
Plaintiffs alleged that defendants failed to disclose various adverse business developments and<br />
risks that allegedly caused it to have to finally report a revenue shortfall and accounting<br />
correction. Defendants moved to dismiss and the court granted in part and denied in part. The<br />
court found that plaintiffs failed to adequately plead many of defendants’ statements with the<br />
requisite particularity required under the PSLRA, but that several were adequately pled as false.<br />
In addition, the court found that plaintiffs adequately pled scienter by alleging defendants’ knew<br />
of on-going business challenges and still made strong financial forecasts despite such<br />
knowledge.<br />
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In re Crocs, Inc. Securities <strong>Litigation</strong>, 774 F. Supp. 2d 1122 (D. Colo. 2011).<br />
Investors brought class against suit against corporation, its auditor, its officers and<br />
directors alleging violations of federal securities laws and defendants filed a motion to dismiss<br />
for failure to state a claim as required under the heightened pleading standards of the PSLRA.<br />
Plaintiffs claimed that despite difficulties in demand and an inventory buildup, (i) the CEO<br />
signed the company’s financial reports, (ii) various representations were made relating to rapid<br />
growth and distribution, and (iii) the auditor’s participated in verifying such financial statements.<br />
These actions, when taken into consideration with the deteriorating demand, effectively misled<br />
investors into thinking the company was strong. The court granted defendants’ motion to<br />
dismiss finding that investors failed to allege material misrepresentations or omissions and failed<br />
to allege scienter on the part of the CEO and the auditor.<br />
Mishkin v. Zynex Inc., 2011 WL 1158715 (D.Colo. Mar. 30, 2011).<br />
Plaintiffs brought class action suit against defendants alleging violations of federal<br />
securities laws and defendants filed a motion to dismiss for failure to state a claim as required<br />
under the heightened pleading standards of the PSLRA. Plaintiffs claimed that during the class<br />
period, defendants engaged in a systematic scheme to over-bill insurance companies. Plaintiffs<br />
alleged that defendants routinely billed more than they reasonably expected to be paid in order to<br />
inflate revenue numbers. The court denied defendants’ motion to dismiss finding that the<br />
defendants’ statements of optimism could be actionable if defendants were aware of specific<br />
facts that undermined the basis for their statements, and that the totality of plaintiffs allegations<br />
supported a strong inference of scienter.<br />
Simmons Investments, Inc. v. Conversational Computing Corporation, 2011 WL 673759 (D.<br />
Kan. Feb. 17, 2011).<br />
Plaintiff brought suit against defendants alleging violations of federal securities laws and<br />
defendants filed a motion to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. Plaintiff alleged that defendants made a series of material<br />
misrepresentations and omissions of material facts in order to get plaintiff to first invest in<br />
convertible notes and then to extend the maturity date on the notes. The court denied defendants’<br />
motions to dismiss finding that plaintiff’s allegations pled the alleged misstatements with the<br />
requisite particularity.<br />
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In re Thornburg Mortg., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).<br />
Investors brought class action suit against mortgage company officers, alleging violations<br />
of federal securities laws and defendants moved to dismiss for failure to state a claim as required<br />
under the heightened pleading standard of the PSLRA. The court granted officers’ motion,<br />
finding that investors failed to allege that any material misstatements or omissions by officers<br />
were made with scienter. The court found that certain statements made in official filings were<br />
declared as mere puffery, and that the complaint did not attribute any wrongful conduct or<br />
statements to individual officers.<br />
Meyer v. St. Joe Company, 2011 WL 3750324 (N.D. Fla. Aug. 24, 2011).<br />
Plaintiffs brought a class action suit against defendant company and several of its officers<br />
alleging violations of federal securities laws. Plaintiffs alleged defendants intentionally deceived<br />
investors about the value of certain properties located throughout Florida. Defendants filed a<br />
motion to dismiss for failure to state a claim as required under the heightened pleading standards<br />
of the PSLRA. The court granted the defendants’ motion to dismiss finding that plaintiffs’ claims<br />
of misrepresentation were insufficient to meet the standard of pleading fraud with particularity<br />
because they failed to allege that defendants acted with the requisite scienter. Further, plaintiffs<br />
failed to show defendants made statements that they knew were materially false at the time.<br />
Additionally, Plaintiff failed to establish loss causation.<br />
BCJJ, LLC v. Lefevre, 2011 WL 1296682 (M.D.Fla. Mar. 31, 2011).<br />
Plaintiff brought suit against defendant for alleged violations of federal securities laws<br />
and defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standard of the PSLRA. Plaintiff alleged that defendant solicited investment from<br />
plaintiff and made several misleading and material statements regarding appraisal values, the<br />
guarantee of the loan and other matters relating to the investment in property to be developed.<br />
The court granted defendants’ motion, holding that the defendants expressly warned of the<br />
potential for inaccuracies in the appraisal values and did not warrant the purchase agreement.<br />
Further, the court found that the contract contained a merger clause, which made any prior<br />
statements insufficient to show reliance.<br />
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Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enterprises, Inc., 2011 WL 4591541 (S.D. Fla. Sept. 30,<br />
2011).<br />
Plaintiffs brought suit against defendants alleging violations of federals securities laws<br />
and defendants filed a motion to dismiss for failure to meet the heightened pleading standards of<br />
the PSLRA. Specifically, defendants argued that plaintiffs failed to properly plead material<br />
misrepresentations and omissions or allege the requisite scienter. Plaintiffs alleged that<br />
defendants made material misrepresentations and omissions in SEC filings, press releases, and<br />
other public statements about defendants’ “rigorous” processes to ensure the “efficient” and<br />
“accurate” handling of foreclosures, when in fact defendants’ often took short cuts and used<br />
processes that “were, in fact, entirely chaotic in substantial disarray.” The court did not find that<br />
defendants’ statements were false or misleading because many were not specific, verifiable facts<br />
that reasonable investors would rely on, but instead the type of vaguely positive assertions<br />
considered “puffery.” Further, plaintiff failed to adequately plead scienter.<br />
Patel v. Patel, 761 F. Supp. 2d 1375 (N.D. Ga. 2011).<br />
Investors brought action against bank’s officers and directors alleging violations of<br />
federal securities laws and defendants moved to dismiss for failure to state a claim as required<br />
under the heightened pleading requirements of the PSLRA. Plaintiffs claimed defendants<br />
concealed bank’s true financial condition and business operations. The court granted defendants’<br />
motion to dismiss finding that investors’ allegations were insufficient to plead a strong inference<br />
of scienter and that investors failed to allege loss causation.<br />
City of Pontiac General Employees Retirement System v. Schweitzer-Maudit International, Inc.,<br />
806 F. Supp. 2d 1267 (N.D. Ga. 2011).<br />
Investors brought securities-fraud class action against corporation and its officers and<br />
directors alleging defendants engaged in a fraudulent scheme to artificially inflate corporation’s<br />
stock price in violation of federal securities laws and defendants moved to dismiss. The court<br />
granted the defendants’ motion and found that investors failed to plead fraud with particularity.<br />
Further, the court found that plaintiffs failed to sufficiently allege scienter, but did sufficiently<br />
allege loss causation.<br />
In re Immucor, Inc. Securities <strong>Litigation</strong>, 2011 WL 2619092 (N.D.Ga. June 30, 2011)<br />
Plaintiffs brought suit against defendant medical supplier alleging violations of federal<br />
securities laws and defendants moved to dismiss for failure to state a claim as required under the<br />
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heightened pleading standards of the PSLRA. Plaintiffs alleged that defendant’s made<br />
misstatements regarding its commitment to quality. Further, plaintiffs alleged that defendants’<br />
claim that it was in compliance with FDA regulations were false and misleading because the<br />
FDA actually found multiple, continuing violations. The court granted the defendants’ motion to<br />
dismiss and found that the allegations sufficiently alleged misrepresentations or omissions.<br />
Further, the allegations supported a strong inference that defendants were severely reckless when<br />
making the alleged misleading statements. However, plaintiff failed to adequately plead<br />
economic loss causation, especially given that stock prices rebounded several months after the<br />
final disclosures and plaintiffs could have still sold their stock for a profit.<br />
2. Appointment of Lead Plaintiff/Class Counsel<br />
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Plumbers Local No. 200 Pension Fund v. Washington Post Co., 274 F.R.D. 33 (D.D.C 2011).<br />
In a putative securities fraud class action, the district court appointed a pension fund as<br />
lead plaintiff and approved its selection of lead counsel. The court noted that the pension fund’s<br />
claim of having the largest financial interest in the outcome of the case was unchallenged.<br />
Accordingly, after finding that the pension fund met the requirements of Fed. R. Civ. P. 23, the<br />
court appointed it as lead plaintiff and approved its selection of counsel.<br />
Endress v. Gentiva Health Servs., Inc., 276 F.R.D. 62 (E.D.N.Y. 2011).<br />
After consolidating five related securities fraud class actions, the district court considered<br />
the appropriate procedure for appointing a lead plaintiff where the named plaintiff moved to<br />
withdraw and none of the proposed lead plaintiffs were eligible under the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 to be appointed lead plaintiff. Specifically, the PSLRA requires<br />
potential lead plaintiffs to either file the original complaint or move to be appointed lead plaintiff<br />
within 60 days of the PSLRA notice. The court had previously denied the motion of the<br />
Minneapolis Police Relief Association to be appointed lead plaintiff because it did not meet the<br />
PSLRA’s requirements. Thereafter, other class members filed nearly identical complaints on<br />
behalf of the class and filed competing motions for appointment as lead plaintiff after the named<br />
plaintiff moved to withdraw. The court noted that the PSLRA did not provide any specific<br />
guidance for this unique situation and “[d]ue to [an] apparent loophole” the parties were racing<br />
to file complaints in order to qualify to be appointed lead plaintiff. Relying on the intent and<br />
purpose of the PSLRA, the court determined that the most appropriate course was to consider<br />
whether any other class members desired to be appointed as lead plaintiff. The court held that<br />
any class members who filed applications within 60 days of the withdrawal of the named<br />
plaintiff would be considered eligible for appointment. Finally, the court concluded that<br />
publication of an additional PSLRA notice was not necessary because class members had already<br />
been given the opportunity to make an informed decision about whether to apply for the lead<br />
plaintiff position and interested class members would be following the case status and would<br />
know of the new procedure for applying to be named lead plaintiff.<br />
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Waterford Twp. Police & Fire Ret. Sys. v. Smithtown Bancorp, Inc., 2011 WL 3511057<br />
(E.D.N.Y. May 31, 2011).<br />
After consolidating two related putative securities fraud class actions, the district court<br />
considered an unopposed joint motion filed by an individual investor and a retirement system to<br />
be appointed co-lead plaintiffs. Since their motion was unopposed, the court appointed them colead<br />
plaintiffs after finding that they satisfied the requirements of Fed. R. Civ. P. 23. The court<br />
also approved their selection of lead counsel.<br />
Bensley v. FalconStor Software, Inc., 2011 WL 3849541 (E.D.N.Y. Aug. 29, 2011).<br />
In a putative securities fraud class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by an individual investor and Rochester Laborers Pension<br />
Fund (the “Fund”). Although the Fund had suffered the greatest losses on the securities at issue<br />
during the class period, the court found that it was subject to unique defenses because it had sold<br />
all of its shares months before disclosure of the alleged fraud. While the Fund argued that it had<br />
sold its shares after a partial disclosure, the court found that the alleged partial disclosure did not<br />
reveal the fraudulent conduct at issue. Thus, the court found that the Fund was a “total in-andout<br />
trader,” may be unable to demonstrate loss causation, and, thus, was not an adequate lead<br />
plaintiff. Accordingly, after finding that individual investor satisfied the requirements of Fed. R.<br />
Civ. P. 23, the court appointed him as lead plaintiff and approved his choice of counsel.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., 793 F. Supp. 2d 651 (S.D.N.Y.<br />
2011).<br />
In a securities fraud action brought by several hedge funds, the district court granted in<br />
part defendants’ motion to dismiss claims relating to allegedly false and misleading statements<br />
concerning the defendant casino’s business prospects. Defendants argued that certain statements<br />
concerning the expected “average net win rate per machine” were forward-looking statements<br />
entitled to protection under the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor.<br />
The court held such statements were shielded from liability because they were forward-looking<br />
and plaintiffs had failed to adequately allege that defendants had actual knowledge of the falsity<br />
of such statements. Accordingly, the court granted defendants’ motion to dismiss the securities<br />
fraud claims.<br />
Foley v. Transocean Ltd., 272 F.R.D. 126 (S.D.N.Y. 2011).<br />
In a putative securities fraud action, the court considered three competing motions for<br />
appointment as lead plaintiff filed by an institutional investor, a foreign pension fund, and a<br />
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domestic retirement system. The court determined that the foreign institutional investor, Danica,<br />
had the greatest losses, which exceeded the next movant’s losses by enough to offset that<br />
movant’s greater net funds expended and net shares purchased. The court rejected one movant’s<br />
attempt to calculate losses using a different holding date and price chosen by its expert because<br />
the court held that a 90-day “lookback period” for calculating losses should apply absent some<br />
credible argument to the contrary. The court also noted that the competing movant was an<br />
investment advisor and might lack constitutional standing to assert claims based on all his shares<br />
of stock. The court further expressed concerns about this movant’s suitability as lead plaintiff<br />
due to certain procedural maneuvers by its counsel that the court found to be forum-shopping.<br />
Finally, the court rejected several attempts to rebut the presumption that Danica was the most<br />
adequate lead plaintiff. Specially, the court found that: (a) although Danica was a net seller<br />
during the class period, it did not benefit from the fraud because all of its shares were sold after it<br />
had been harmed by partial corrective disclosures; (b) purported conflicts resulting from alleged<br />
relationships between Danica and the defendant were merely speculative; (c) Danica’s status as a<br />
foreign entity did not render it an improper lead plaintiff, since it was suing as a result of<br />
purchases made on a domestic securities exchange; and (d) Danica did not lack constitutional<br />
standing as an investment advisor because as a pension fund it had purchased defendant’s stock<br />
in its own name. Accordingly, after finding that Danica met the requirements of Fed. R. Civ. P.<br />
23, the court appointed it lead plaintiff and approved its choice of counsel.<br />
Richman v. Goldman Sachs Group, Inc., 274 F.R.D. 473 (S.D.N.Y. 2011).<br />
After consolidating six related putative securities fraud class actions, the court considered<br />
three competing motions for appointment as lead plaintiff filed by: (i) a group of pension funds<br />
(the “Pension Funds Group”); (ii) a group of foreign and domestic institutional investors (the<br />
“Institutional Group”); and (iii) an individual investor who bought and sold stock and options<br />
during the class period. The court first rejected the individual investor’s argument that neither<br />
the Pension Funds Group, nor the Institutional Group could adequately represent options<br />
purchasers and, therefore, the individual investor should be appointed as lead plaintiff. The court<br />
noted that the individual investor’s claimed losses were de minimis and that options purchasers’<br />
interests could be adequately protected in other ways. Next, the court rejected the Pension Funds<br />
Group’s arguments regarding the composition of the Institutional Group noting that groups may<br />
be formed by lawyers for the purposes of obtaining lead plaintiff status and that foreign investors<br />
are entitled to the protection of U.S. securities laws. The court also rejected the Institutional<br />
Group’s argument that losses of one of the members of the Pension Funds Group should not be<br />
considered because it was a net seller during the class period. Notwithstanding its sales, the<br />
Pension Funds Group member still suffered losses during the class period and the court found no<br />
reason why such losses should not be recognized. The court then found that the Pension Funds<br />
Group was entitled to presumptive lead plaintiff status because it had the greatest financial losses<br />
using either a LIFO or FIFO methodology. The court rejected the Institutional Group’s<br />
argument that the Pension Fund Group’s larger losses should be discounted in favor of the<br />
Institutional Group’s larger number of net shares purchased and net funds expended. The court<br />
noted that most courts agree that the largest loss is the critical factor in determining which<br />
movant has the largest financial interest. Accordingly, after finding that the Pension Funds<br />
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Group met the requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and<br />
approved its choice of counsel.<br />
Pipefitters Local No. 636 Defined Benefit Plan v. Bank of Am. Corp., 275 F.R.D. 187 (S.D.N.Y.<br />
2011).<br />
After consolidating three related securities fraud class actions involving mortgage-backed<br />
securities, the court considered three competing motions for appointment as lead plaintiff filed<br />
by a group of funds that included a Swedish pension fund manager and two other competing<br />
retirement funds. Utilizing the LIFO methodology, the court determined that the group of funds<br />
had the largest losses and, thus, it was presumptively the most adequate lead plaintiff. The<br />
group, however, was subject to a unique standing defense because it included the Swedish<br />
pension fund manager who did not directly own any shares of the stock at issue. Although a<br />
Swedish law expert opined that the Swedish fund manager was the only entity permitted to sue<br />
on behalf of the Swedish pension fund, the court found that a third-party standing defense could<br />
be raised and potentially prejudice the class. Further, the court was not satisfied by conclusory<br />
assurances in the group’s certifications and was concerned that the group would function<br />
cohesively because its members had no preexisting relationship. Considering the movant with<br />
the next-largest loss, the court rejected an argument that this movant was barred from being<br />
appointed as lead plaintiff because it had initially filed for lead plaintiff status as part of a group<br />
with a Swedish fund manager and had not filed individually. The court found that individual<br />
members of proposed lead plaintiff groups are routinely appointed as lead plaintiffs and the<br />
withdrawal of one of the members of a proposed group is irrelevant. Accordingly, after finding<br />
that the movant with the second largest losses satisfied the requirements of Fed. R. Civ. P. 23,<br />
the court appointed it as lead plaintiff and approved its selection of counsel.<br />
In re Bear Stearns Cos., Inc. Sec., Derivative and ERISA Litig., 2011 WL 321142 (S.D.N.Y. Feb.<br />
1, 2011).<br />
In a consolidated securities fraud class action, the court denied an individual investor’s<br />
motion for reconsideration of the court’s appointment of the State of Michigan Retirement<br />
Systems (“SMRS”) as lead plaintiff. The individual investor argued that SMRS lacked standing<br />
to pursue claims of current and former employees who had obtained their stock as compensation<br />
pursuant to deferred compensation or restricted stock plans. The court noted that the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995 did not require a court to choose a lead plaintiff with<br />
standing to sue on every available cause of action. Rather, courts only require that at least one<br />
named plaintiff have standing to represent each claim. Further, the court reiterated its earlier<br />
finding that claims asserted by current and former employees were identical to those asserted by<br />
other investors. The court distinguished authorities cited by the individual investor, as cases<br />
where lead or named plaintiffs had suffered losses through purchases of different securities or as<br />
a result of different alleged misstatements. Accordingly, the court denied the motion for<br />
reconsideration.<br />
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D.2<br />
In re IMAX Sec. Litig., 2011 WL 1487090 (S.D.N.Y. Apr. 15, 2011).<br />
In a putative securities fraud class action, the district court considered two competing<br />
motions for appointment as substitute lead plaintiff filed by a pension fund and an investment<br />
fund. The court had reopened the lead plaintiff selection process for a second time after the first<br />
two lead plaintiffs had been removed. The court found that the investment fund had the greatest<br />
financial stake in the outcome of the case due to its greater losses during the class period and,<br />
thus, was presumptively the most adequate lead plaintiff. The pension fund attempted to rebut<br />
the presumption by arguing that the investment fund was subject to unique defenses. First, the<br />
court rejected the argument that the investment fund’s assertion of claims violated New York’s<br />
anti-champerty statute. The fund had originally assigned its claims to its investment advisor,<br />
who served as the first lead plaintiff in the case, and the investment advisor had now reassigned<br />
the fund’s claims back to the fund. The court found that this reassignment of the fund’s own<br />
claims hardly violated the anti-champerty statute, which was designed to “curtail the<br />
commercialization of litigation.” Next, the court found that the fund’s sophisticated mergerarbitrage<br />
investment strategy did not subject it to unique defenses because the strategy was not<br />
“reliant upon the proposition that the market is inefficient.” Finally, the court summarily<br />
rejected as irrelevant the pension fund’s argument that it was a more appropriate lead plaintiff<br />
because some of its purchases of the defendant company’s stock pre-dated the fund’s purchases.<br />
After finding that the fund met the requirements of Fed. R. Civ. P. 23, the court appointed it lead<br />
plaintiff and approved its choice of lead counsel, which replaced prior lead counsel.<br />
Kokkinis v. Aegean Marine Petroleum Network, 2011 WL 2078010 (S.D.N.Y. May 19, 2011).<br />
In a putative securities fraud class action, the district court granted an individual<br />
investor’s motion for appointment as lead plaintiff. The court found that the individual met the<br />
requirements of Fed. R. Civ. P. 23 because his claim arose from the same course of events as<br />
other class members and each class member made similar arguments with minor factual<br />
variations to prove defendants’ liability. The court further found that the movant was likely to<br />
fairly and adequately represent the interests of the class based on the unchallenged<br />
representations in his certification. Accordingly, the court appointed the individual investor as<br />
lead plaintiff and approved his choice of counsel.<br />
In re Weatherford Int’l Sec. Litig., 2011 WL 2652443 (S.D.N.Y. Jul. 6, 2011).<br />
In a putative securities fraud class action, the district court denied “unusual” motions for<br />
reconsideration filed by “disgruntled applicants for lead plaintiff.” While the movants alleged<br />
that the appointed lead plaintiff had misled the court about its financial interest in the outcome of<br />
the litigation, the court found that the movants essentially disagreed with the court’s method of<br />
calculating potential recovery. The court found that the movants had not raised any new issues<br />
that were overlooked by the court or that could not have been discussed when the court<br />
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appointed a lead plaintiff. The court also noted that the choice of method used to determine<br />
financial loss is a context-specific determination within the discretion of the court. Next, the<br />
court rejected the argument that the appointed lead plaintiff was inappropriate to represent the<br />
class because it had not yet filed papers with the Multi-District <strong>Litigation</strong> (“MDL”) panel that<br />
was considering whether to consolidate the action with another class action pending in<br />
California. The court found that this was not a proper basis for a motion for reconsideration and<br />
the proceedings before the MDL panel were likely moot, given that the California class action<br />
was to be voluntarily withdrawn. Accordingly, the court denied the motions for reconsideration.<br />
Quan v. Advanced Battery Tech., Inc., 2011 WL 4343802 (S.D.N.Y. Sept. 9, 2011).<br />
In a consolidated securities fraud class action, the district court considered two competing<br />
motions for appointment as lead plaintiff filed by individual investors. The court found that the<br />
movant who held the largest number of retained shares at the end of the class period was the<br />
presumptive most adequate lead plaintiff because he had the largest potential recoverable losses.<br />
The court rejected the argument that sales of securities during the class period and prior to<br />
disclosure of the alleged fraud undermined the presumptive lead plaintiff’s adequacy to represent<br />
the class. Despite sales of stock during the class period, the presumptive lead plaintiff had<br />
retained more than double the number of shares retained by the competing movant and, thus, had<br />
undisputedly suffered the greatest financial losses of any of the competing movants.<br />
Accordingly, after finding that the presumptive lead plaintiff met the requirements of Fed. R.<br />
Civ. P. 23, the court appointed him lead plaintiff and approved his selection of counsel.<br />
Teran v. Subaye, Inc., 2011 WL 4357362 (S.D.N.Y. Sept. 16, 2011).<br />
After consolidating two related putative securities fraud class actions, the district court<br />
considered four competing motions for appointment as lead plaintiff filed by three separate<br />
individual investors and a group of investors. While the court found that the investor group had<br />
the greatest financial interest, the court further held it inappropriate to aggregate the group’s<br />
losses because the group had not demonstrated that it would be able to act cohesively and<br />
effectively manage the litigation apart from its lawyers. Except for two brothers, the group had<br />
no pre-existing relationship. Moreover, the group failed to provide specifics regarding its plans<br />
for communication and decision-making or past activities. The court also noted that a competing<br />
individual movant had a significantly greater financial interest than any of the members of the<br />
group, even if the court were to consider the two brothers together. The court rejected an<br />
argument that the individual movant did not have standing to assert claims based on all the<br />
shares reflected in his certification because he had submitted a declaration reaffirming that all the<br />
shares at issue had been purchased for his own account. Accordingly, after finding that the<br />
individual movant satisfied the requirements of Fed. R. Civ. P. 23, the court appointed him lead<br />
plaintiff and approved his choice of counsel.<br />
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Faris v. Longtop Fin. Techs. Ltd., 2011 WL 4444176 (S.D.N.Y. Sept. 22, 2011).<br />
In a putative securities fraud action, the court considered competing motions for<br />
appointment as lead plaintiff filed by two groups of investors. The court found that one of the<br />
groups which included an investment manager had the largest financial interest in the suit and,<br />
thus, was presumptively the most adequate lead plaintiff. The court found that the investment<br />
manager had standing to assert the claims at issue because there had been a valid assignment by<br />
underlying shareholders. The court found that the assignment did not violate New York’s antichamperty<br />
statute because the statute does not apply to assignments made for the collection of<br />
legitimate claims. The court further found that the competing investor group would not be an<br />
adequate lead plaintiff because three of its members had purchased the bulk of their shares after<br />
certain public disclosures of the alleged fraud. The court also expressed concern that one<br />
member of the competing group was involved in an ongoing lawsuit where it was accused of<br />
having knowingly profited from a Ponzi scheme. Accordingly, after finding that the presumptive<br />
lead plaintiff met the requirements of Fed. R. Civ. P. 23, it appointed that group lead plaintiff and<br />
approved its choice of counsel.<br />
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin. Holdings Ltd.,<br />
2011 WL 4831209 (S.D.N.Y. Oct. 12, 2011).<br />
In a putative securities class action, the district court granted an unopposed motion for<br />
appointment as lead plaintiff filed by a pension fund. The court concluded that the pension<br />
fund’s losses rendered it suitable as a lead plaintiff since the court did not have financial<br />
information about any of the other class members. Accordingly, after finding that the pension<br />
fund met the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court appointed it<br />
lead plaintiff and approved its selection of co-lead counsel.<br />
Canson v. WebMD Health Corp., 2011 WL 5331712 (S.D.N.Y. Nov. 7, 2011).<br />
In a securities fraud class action, the district court considered three competing motions<br />
for appointment as lead plaintiff. The court determined that a proposed lead plaintiff group<br />
comprised of a retirement system and a pension fund had the largest financial interest in the<br />
outcome of the case utilizing the LIFO method of calculating losses and was presumptively the<br />
most adequate lead plaintiff. The court rejected a competing movant’s argument that the group’s<br />
losses should not be aggregated. The court found no evidence that the group members’<br />
combined litigation efforts were in bad faith, the two members had a pre-existing relationship,<br />
and they had affirmed their intention to work together on behalf of the class. Moreover, the<br />
court noted that each member of the group had incurred significantly higher losses than any other<br />
competing movants. Accordingly, after finding that group satisfied the typicality and adequacy<br />
requirements of Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its selection<br />
of lead counsel.<br />
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IBEW Local 90 Pension Fund v. Deutsche Bank AG, 2011 WL 6057812 (S.D.N.Y. Dec. 5,<br />
2011).<br />
In a putative securities fraud class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by a group of pension funds and an individual investor. The<br />
individual investor, however, withdrew his motion because the group of pension funds<br />
undisputedly had a larger financial interest in the relief sought by the class and had made a prima<br />
facie showing of adequacy and typicality as required by Fed. R. Civ. P. 23. Accordingly, the<br />
court appointed the group of pension funds as lead plaintiff and approved its choice of counsel.<br />
Goldstein v. Puda Coal, Inc., 2011 WL 6075861 (S.D.N.Y. Dec. 6, 2011).<br />
After consolidating eleven related securities fraud class actions, the court considered four<br />
competing motions for appointment as lead plaintiff filed by four groups of investors. The court<br />
found that a group of investors led by Mr. Querub (the “Querub Group”) suffered the largest<br />
collective financial loss and, thus, it was presumptively the most adequate lead plaintiff. The<br />
court rejected the argument that Mr. Querub was subject to unique defenses because he had<br />
purportedly purchased shares after disclosure of the alleged fraud. The court noted that the<br />
alleged disclosure was merely an unconfirmed third-party report and not a “curative disclosure”<br />
rendering Mr. Querub’s claims atypical. The court also rejected the argument that one of the<br />
Querub Group member’s claims were atypical because he had purchased stock options. The<br />
court noted that the member had purchased both common stock and options and focused the<br />
typicality analysis on defendants’ alleged misconduct that caused injury to the class. The court<br />
further rejected a challenge to the aggregation of the Querub Group’s losses because the Querub<br />
Group submitted sworn declarations that satisfied the court that the group would act cohesively.<br />
Finally, the court rejected the argument that confusion regarding the relationship between one of<br />
the Querub Group’s member LLCs and the individual who had signed a declaration on the<br />
LLC’s behalf subjected the Querub Group to unique defenses because the signatory was the sole<br />
owner of the LLC. Accordingly, after finding that the Querub Group met the requirements of<br />
Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its choice of counsel.<br />
Turner v. Shengdatech, Inc., 2011 WL 6110438 (S.D.N.Y. Dec. 6, 2011).<br />
After consolidating related securities fraud class actions, the district court considered two<br />
competing motions for appointment as lead plaintiff filed by two groups of individual investors.<br />
The court first rejected the argument that the consolidated action should be stayed for publication<br />
of a new Private Securities <strong>Litigation</strong> Reform Act of 1995 notice. Although one of the movants<br />
had filed a complaint which significantly expanded the class period, the court found that the new<br />
complaint was sufficiently similar to the first filed class action. Next, the court found that there<br />
was no dispute regarding which movant had the greatest financial stake in the outcome of the<br />
litigation and was thus entitled to presumptive lead plaintiff status. Accordingly, after finding<br />
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that the presumptive lead plaintiff met the requirements of Fed. R. Civ. P. 23, the court appointed<br />
that movant lead plaintiff and approved his selection of counsel.<br />
In re Smith Barney Transfer Agent Litig., 2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011).<br />
In a consolidated securities fraud class action, the court had originally appointed a union<br />
trust fund along with an individual investor as lead plaintiff. The court was subsequently<br />
informed by lead counsel that the union trust fund never actually owned any shares of the<br />
security at issue and the court invited the filing of new motions for appointment as lead plaintiff.<br />
The court now considered three competing motions for appointment as substitute lead plaintiff<br />
filed by: (i) a group of investors including Weber, the individual plaintiff who had originally<br />
been appointed as lead plaintiff along with the union trust fund; (ii) Zagunis, an individual<br />
investor who had previously moved for appointment as lead plaintiff; and (iii) an individual<br />
investor who had not previously moved for appointment as lead plaintiff. In considering which<br />
movant should be appointed as substitute lead plaintiff, the court considered: (i) whether the<br />
substitute lead plaintiff has made a timely request for appointment as lead plaintiff; (ii) whether<br />
the substitute lead plaintiff had the largest financial stake in the outcome of the litigation; and<br />
(iii) whether the substitute lead plaintiff otherwise satisfied the requirements of Fed. R. Civ. P.<br />
23. The court also gave priority to movants who had originally timely filed for appointment as<br />
lead plaintiff. In applying this test, the court found that Zagunis was presumptively the most<br />
adequate lead plaintiff because he clearly had the largest financial stake in the outcome of the<br />
litigation and had originally filed a timely motion for appointment as lead plaintiff. The court<br />
rejected defendants’ argument that Zagunis may not be an adequate class representative because<br />
he purchased his shares of the fund at issue through a dividend reinvestment program. The court<br />
noted that defendants had objected to the appointment of each available lead plaintiff and the<br />
court was not required to consider defendants’ argument at this stage of the litigation.<br />
Accordingly, after finding that Zagunis met the requirements of Fed. R. Civ. P. 23, the court<br />
appointed him lead plaintiff and approved his choice of lead counsel, thereby replacing class<br />
counsel who had served for the last six years.<br />
Vandevelde v. China Natural Gas, Inc., 2011 WL 2580676 (D. Del. Jun. 29, 2011).<br />
In a putative securities fraud class action, the district court denied two competing motions<br />
for appointment as lead plaintiff and declined to appoint a lead plaintiff. The court noted that<br />
Third Circuit precedent requires the court to consider whether a potential lead plaintiff has<br />
demonstrated the ability to negotiate a reasonable retainer agreement with counsel. However,<br />
neither plaintiff had submitted materials related to fees or retainer agreements necessary for the<br />
court to determine the adequacy of either movant with respect to this issue. Accordingly, the<br />
court ordered both movants to submit supplemental briefs detailing their respective efforts in<br />
retaining counsel and describing any fees or retainer agreements.<br />
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Vandevelde v. China Natural Gas, Inc., 277 F.R.D. 126 (D. Del. Aug. 12, 2011).<br />
In a putative securities fraud class action, the district court considered two competing<br />
motions for appointment as lead plaintiff after the court had initially denied both movants’<br />
motions and ordered each to submit supplemental briefs detailing information regarding their<br />
efforts to retain counsel and negotiated fee arrangements. The court first determined that the<br />
movant with the greatest losses during the class period was presumptively the most adequate lead<br />
plaintiff. The competing movant attempted to rebut the presumption by arguing that frequent<br />
contact with the defendant company’s public relations and investor relations firm subjected the<br />
presumptive lead plaintiff to a unique non-reliance defense. The competing movant also argued<br />
that the presumptive lead plaintiff’s credibility was in question given his various postings on<br />
Yahoo! message boards regarding the defendant company. The court rejected the former<br />
argument because there was no substantial proof that the presumptive lead plaintiff had received<br />
any non-public information. The court rejected the latter argument because the movant did not<br />
carry his burden of establishing that the posts reflected poorly on the presumptive lead plaintiff’s<br />
credibility. Accordingly, after finding that the presumptive lead plaintiff met the requirements of<br />
Fed. R. Civ. P. 23, the court appointed him lead plaintiff and approved his choice of lead and<br />
liaison counsel.<br />
Burgraff v. Green Bankshares, Inc., 2011 WL 613281 (E.D. Tenn. Feb. 11, 2011).<br />
In a putative securities fraud class action, the court considered competing motions for<br />
appointment as lead plaintiff filed by two groups of investors, one led by Mr. Molnar and another<br />
led by Mr. Blomgren. The court found that Blomgren’s group had the largest financial interest in<br />
the outcome of the case considering: (i) the number of shares purchased during the class period;<br />
(ii) the number of net shares purchased during the class period; (iii) the total net funds expended<br />
during the class period; and (iv) the amount of loss suffered. Specifically, Blomgren’s group had<br />
purchased a greater number of shares and expended more funds than Molnar’s group. While<br />
both groups appeared to have nearly identical losses, Blomgren actually had suffered a greater<br />
financial loss once differences with respect to the average daily share price used to calculate<br />
losses were considered. Thus, the court found Blomgren’s group was presumptively the most<br />
adequate lead plaintiff. Accordingly, after finding that Blomgren’s group satisfied the<br />
requirements of Fed. R. Civ. P. 23, the court appointed the group lead plaintiff and approved its<br />
choice of counsel.<br />
Norfolk County Ret. Sys. v. Cmty. Health Sys., Inc., 2011 WL 6202585 (M.D. Tenn. Nov. 28,<br />
2011).<br />
After recommending that three related putative securities fraud class actions should be<br />
consolidated, the magistrate judge considered two competing motions for appointment as lead<br />
plaintiff filed by a group of related New York City funds (the “NYC Funds”) and a group<br />
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comprised of a retirement system and an investment fund. The court found that the NYC Funds<br />
had the largest financial losses using either a LIFO or FIFO method of calculating losses and,<br />
thus, was presumptively the most adequate lead plaintiff. In doing so, the court rejected the<br />
argument that one of the NYC Fund’s member’s losses should not be considered because it was<br />
subject to unique defenses as a net seller and net gainer during the class period. The court found<br />
that the NYC Funds still had the greater financial losses even if that member’s losses were not<br />
considered. The court also rejected the argument that it should focus on factors other than losses,<br />
such as net shares purchased and net expenditures, given that the difference in total losses<br />
suffered by the competing movants was insignificant. Since there was no evidence that the NYC<br />
Funds would not fairly and adequately represent the class, the court recommended that the NYC<br />
Funds be appointed lead plaintiff after finding that it satisfied the typicality and adequacy<br />
requirements of Fed. R. Civ. P. 23. The court also recommended that the NYC Funds’ choice of<br />
lead counsel be approved.<br />
Bang v. Acura Pharms., Inc., 2011 WL 91099 (N.D. Ill. Jan. 11, 2011).<br />
In a putative securities fraud class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by an individual investor and a group of three investors (the<br />
“Investors Group”). The court found that the Investors Group had a slightly larger combined<br />
loss amount than the individual investor and, thus, the Investors Group was the presumptive most<br />
adequate lead plaintiff. The individual investor argued that the Investors Group had been<br />
improperly cobbled together solely to attain lead plaintiff status. The court found that two of the<br />
members of the Investor Group had a pre-existing relationship and there was no proof that the<br />
group could not adequately serve as lead plaintiff. On the other hand, the court found that the<br />
individual investor’s atypical high trading volume might subject him to unique defenses and,<br />
thus, he was likely an inadequate lead plaintiff. Accordingly, after finding that the Investor<br />
Group met the requirements of Fed. R. Civ. P. 23, the court appointed the group lead plaintiff<br />
and approved its choice of counsel.<br />
Hufnagle v. RINO Int’l Corp., 2011 WL 710704 (C.D. Cal. Feb. 14, 2011).<br />
After consolidating six related securities fraud class actions, the court considered ten<br />
competing motions for appointment as lead plaintiff. The court found that a public investment<br />
company, Stream, reported the largest financial interest in the action and, thus, was<br />
presumptively the most adequate lead plaintiff. The court rejected the argument that Stream did<br />
not have constitutional standing because the court found that Stream had invested its own assets<br />
to purchase the defendant company’s stock and operated like a mutual fund, not as an investment<br />
advisor. The court also noted that courts routinely appoint foreign investors as lead plaintiff and<br />
there was no demonstration that a judgment of the court would not enjoy res judicata effect in<br />
Luxembourg, where Stream was located. Finally, the court rejected the argument that purchases<br />
of defendant’s stock after full or partial disclosures of the alleged fraud disqualified Stream as<br />
lead plaintiff, noting that such purchases “even after the close of the class period do not destroy<br />
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typicality.” Accordingly, the court tentatively found that Stream met the requirements of Fed. R.<br />
Civ. P. 23 and tentatively appointed it as lead plaintiff and approved its choice of counsel.<br />
Hufnagle v. RINO Int’l Corp., 2011 WL 710676 (C.D. Cal. Feb. 16, 2011).<br />
In a consolidated securities fraud class action, the district court had tentatively appointed<br />
a foreign investment company, Stream, as lead plaintiff. Here, the court adopted its previous<br />
decision in Hufnagle v. RINA Int’l Corp., 2011 WL 710676 (C.D. Cal. Feb 14, 2011) for reasons<br />
set forth in that opinion. The court further noted that evidence had now established that Stream<br />
had purchased all of its shares of stock in the defendant company on the NASDAQ exchange<br />
and, thus, was entitled to the protection of U.S. securities laws. The court also found that Stream<br />
had provided evidence that it operated similarly to a U.S. open-ended mutual fund and, thus,<br />
adequately established its standing to pursue claims related to the underlying securities it<br />
purchased on behalf of its shareholders. Finally, the court noted that the movant with the second<br />
largest financial interest was a group comprised of unrelated individuals who had no pre-existing<br />
relationship prior to the litigation. The court noted that while courts disagree as to whether<br />
groups of unrelated investors should be allowed to aggregate their losses for purposes of<br />
obtaining lead plaintiff status, “the emerging majority position looks askance at the appointment<br />
of a group of unrelated persons as lead plaintiff.” Accordingly, the court appointed Stream lead<br />
plaintiff and approved its choice of counsel.<br />
Perlmutter v. Intuitive Surgical, Inc., 2011 WL 566814 (N.D. Cal. Feb. 15, 2011).<br />
In a putative securities fraud class action, the district court considered three competing<br />
motions for appointment as lead plaintiff filed by a police retirement system and two individual<br />
investors. In determining which movant had the largest financial interest, the court found that<br />
recoverable damages were more indicative of financial interest than total losses suffered trading<br />
in a particular stock. Thus, although one of the individual investors had the greatest total losses<br />
using the FIFO methodology of calculating loss, that investor likely had little, if any, recoverable<br />
damages because he was a net seller during the class period and had not retained any shares in<br />
the defendant company’s stock at the end of the class period. Rather, the court found that the<br />
retirement system had the greatest financial interest in the outcome of the litigation because it<br />
had the greatest number of retained shares at the end of the class period. The court declined to<br />
consider claimed tax losses in determining which movant had the greatest financial interest<br />
because no court decisions were cited to support such a method. The court also rejected the<br />
argument that the retirement system’s failure to file a complaint weighed against its appointment<br />
as lead plaintiff because the Private Securities <strong>Litigation</strong> Reform Act of 1995 does not require a<br />
movant to file a complaint. The court also accepted that the retirement system’s certification<br />
regarding its stock trades was correct despite alleged inaccuracies raised by competing movants.<br />
Accordingly, after finding that the retirement system met the requirements of Fed. R. Civ. P. 23,<br />
the court appointed it lead plaintiff and approved its choice of counsel.<br />
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Westley v. Oclaro, Inc., 2011 WL 4079178 (N.D. Cal. Sept. 12, 2011).<br />
In a putative securities fraud class action, the court granted a pension fund’s unopposed<br />
motion for appointment as lead plaintiff. The court noted that it had insufficient information<br />
before it to determine whether the pension fund was presumptively the most adequate lead<br />
plaintiff because it did not know who in the putative class actually had the greatest financial<br />
stake in the outcome of the case. Nevertheless, since the pension fund was the only plaintiff to<br />
move for appointment and had made a prima facie case that it satisfied the requirements of Fed.<br />
R. Civ. P. 23, the court appointed the pension fund as lead plaintiff and approved its choice of<br />
counsel.<br />
Russo v. Finisar Corp., 2011 WL 5117560 (N.D. Cal. Oct. 27, 2011).<br />
In a securities class action, the district court considered competing motions for<br />
appointment as lead plaintiff filed by a pension fund, two individual investors, and a group<br />
comprised of two pension funds and an individual investor. The court found that the pension<br />
fund reported the largest financial losses and was thus entitled to presumptive lead plaintiff<br />
status. Since no other movants attempted to rebut the presumption, the court appointed the<br />
pension fund as lead plaintiff after finding that it met the typicality and adequacy requirements of<br />
Fed. R. Civ. P. 23. The court also approved the pension fund’s choice of counsel.<br />
Krieger v. Atheros Communc’n, Inc., 2011 WL 6153154 (N.D. Cal. Dec. 12, 2011).<br />
In a putative securities fraud class action, the court considered an unopposed motion for<br />
appointment as lead plaintiff filed by an individual investor. Since there were no other movants,<br />
the individual investor was presumptively the most adequate lead plaintiff. Accordingly, after<br />
finding that the individual investor satisfied the requirements of Fed. R. Civ. P. 23, the court<br />
appointed the movant as lead plaintiff and approved his selection of lead counsel.<br />
Mallen v. Alphatec Holding, Inc., 2011 WL 175687 (S.D. Cal. Jan. 19, 2011).<br />
In a putative securities fraud class action, the district court granted an unopposed motion<br />
for appointment of lead counsel filed by a retirement association. The court concluded that the<br />
retirement association had the largest financial interest in the outcome of the litigation since no<br />
other plaintiff had come forward claiming a larger loss. Accordingly, after finding that the<br />
retirement association met the requirements of Fed. R. Civ. P. 23, the court appointed it as lead<br />
plaintiff and approved its selection of counsel.<br />
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Sparano v. Lief, 2011 WL 830109 (S.D. Cal. Mar. 3, 2011).<br />
After consolidating three related shareholder derivative actions, the court denied<br />
competing motions for appointment as lead plaintiff. The court noted that the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 governs the appointment of lead plaintiffs in securities fraud<br />
actions, but that no such authority existed for shareholder derivative suits. While some courts<br />
have appointed lead plaintiffs in derivative suits, the court could not find any benefit to doing so.<br />
Accordingly, the court denied the motions for appointment of lead plaintiff and appointed only a<br />
lead counsel.<br />
Schueneman v. Arena Pharms., Inc., 2011 WL 3475380 (S.D. Cal. Aug. 8, 2011).<br />
After consolidating related securities fraud class actions, the court considered numerous<br />
competing motions for appointment as lead plaintiff. In determining the movant with the<br />
greatest financial stake in the outcome, the court focused on potential recovery and, thus,<br />
primarily considered the number of net shares retained at the end of the class period. In doing<br />
so, the court narrowed the field of potential lead plaintiffs to two individual investors, Ghayour<br />
and Schwartz. The court found that Schwartz had the greatest potential recovery and, thus, was<br />
presumptively the most adequate lead plaintiff because he had a significantly higher number of<br />
retained shares than Ghayour, even though Ghayour had suffered a slighter larger total estimable<br />
loss. The court rejected the argument that Schwartz lacked standing to adequately represent<br />
options purchasers, noting that lead plaintiffs need not have standing to pursue all causes of<br />
action of the class and additional named plaintiffs could be added later to represent sub-sets of<br />
the class. The court further found that alleged inaccuracies in Schwartz’s Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 certification regarding his stock transactions did not make him<br />
unreliable or inadequate as a lead plaintiff. The court also rejected the argument that Schwartz<br />
was subject to unique defenses as a “day trader” because absent evidence that Schwartz did not<br />
rely on the stock’s market price, day-trading was not enough to rebut the presumption that he<br />
was the most adequate lead plaintiff. Accordingly, after finding that Schwartz met the<br />
requirements of Fed. R. Civ. P. 23, the court appointed him lead plaintiff and approved his<br />
choice of counsel.<br />
Moradi v. Adelson, 2011 WL 5025155 (D. Nev. Oct. 20, 2011).<br />
In a consolidated shareholder derivative action, the district court considered two<br />
competing motions for appointment of lead counsel brought by a group of individual<br />
shareholders and a retirement fund. The retirement fund also sought appointment as lead<br />
plaintiff and the shareholders argued that there was no need to appoint a lead plaintiff. The court<br />
noted that while there is a statute to appoint a lead plaintiff in securities fraud actions, there is no<br />
such statute in derivative actions. Nor had the parties cited any Ninth Circuit authority indicating<br />
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that a lead plaintiff should be appointed. Accordingly, the court declined to appoint a lead<br />
plaintiff.<br />
Niederklein v. PCS Edventures!.com, Inc., 2011 WL 759553 (D. Idaho Feb. 24, 2011).<br />
In a putative securities fraud class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by an individual investor and a group of two individual<br />
investors. The court found that the group of investors had no pre-existing relationship and failed<br />
to present evidence that the group was cohesive and not purely lawyer-driven. The group’s<br />
motion failed to set forth an established process of sharing information, a protocol for how<br />
decisions would be made, or any other indication that the individual members would act<br />
cohesively. The court declined to consider the group’s individual members separately for<br />
appointment as lead plaintiff because the group had not requested such relief. Next, the court<br />
rejected several arguments against the adequacy of the individual investor to serve as lead<br />
plaintiff. The court held that the individual investor’s objection to a group serving as lead<br />
plaintiff did not indicate a failure to understand the fiduciary obligations of a lead plaintiff, as the<br />
individual investor’s objection did not suggest any conflict of interest with other class members.<br />
The court also found that clerical errors in the individual investor’s sworn certification did not<br />
undermine his ability to fairly and adequately represent the class. Finally, the court rejected as<br />
conjecture the argument that the individual investor was inadequate because he had selected<br />
counsel that had been subject to non-monetary sanctions for lack of communication with a client<br />
in an unrelated matter three years prior. Accordingly, after finding that the individual investor<br />
satisfied the requirements of Fed. R. Civ. P. 23, the court appointed him lead plaintiff and<br />
approved his choice of counsel.<br />
Moomjy v. HQ Sustainable Maritime Indus., Inc., 2011 WL 4048796 (W.D. Wash. Sept. 12,<br />
2011).<br />
In a putative securities fraud class action, the district court considered six competing<br />
motions for appointment as lead plaintiff. The court found that a foreign investment fund based<br />
in Estonia (the “Estonian Fund”) undisputedly had greater losses than any other movant and<br />
appeared to satisfy the typicality and adequacy requirements of Fed. R. Civ. P. 23. Despite<br />
geographic remoteness, the court found that the fund could adequately protect the interests of the<br />
class because the fund manager was fluent in English, frequently traveled to the US, and<br />
scheduling and communication difficulties would be minimized with the use of modern<br />
technology. One movant argued that the Estonian Fund should not be appointed as lead plaintiff<br />
because a judgment in favor of defendants may not be binding on the Estonian Fund under<br />
Estonian law. Noting that courts routinely appoint foreign investors as lead plaintiffs, the court<br />
found that such res judicata concerns were speculative and insufficient to rebut the presumption<br />
that the Estonian Fund was the most adequate plaintiff. The court also noted that the Estonian<br />
Fund had filed a statement agreeing to be bound by any judgment of the court. The court also<br />
rejected the argument that the Estonian Fund should not be appointed lead plaintiff because<br />
Estonian law would not find a class action judgment binding on other Estonian investors. This<br />
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argument was irrelevant because there was no evidence that any other Estonian investors existed<br />
and the possible lack of preclusive effect as to other Estonian investors would be an issue<br />
regardless of the identity of the lead plaintiff. Accordingly, the court appointed the Estonian<br />
Fund as lead plaintiff and approved its choice of lead and liaison counsel.<br />
Frias v. Dendreon Corp., 2011 WL 6330179 (W.D. Wash. Dec. 19, 2011).<br />
In a putative securities fraud class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by a retirement association and a seven-member group of<br />
investors. Although the group of investors collectively had the greatest financial stake in the<br />
outcome of the litigation, the retirement association objected to aggregating the group’s losses<br />
because the group had no pre-existing relationship and was allegedly formed solely for purposes<br />
of obtaining lead plaintiff status. The court found that the group had been introduced by counsel<br />
and the court was unconvinced that it would act cohesively to protect the interests of the class.<br />
Specifically, the group’s proposed plan for making decisions by a majority vote was susceptible<br />
to failure and lacked provisions to address tie-breaking and potential indecision among married<br />
couples who had agreed to cast only one vote. Accordingly, since the retirement association had<br />
a greater financial stake in the outcome of the litigation over any individual movant and appeared<br />
to satisfy the requirements of Fed. R. Civ. P. 23, the court appointed the retirement association as<br />
lead plaintiff and approved its choice of counsel.<br />
Wolfe v. Aspenbio Pharma, Inc., 2011 WL 2726019 (D. Colo. Jul. 11, 2011).<br />
In a putative securities fraud class action, the court granted an individual investor’s<br />
motion for appointment as lead plaintiff. The court found that the individual investor had timely<br />
filed the requisite motion and there was no evidence that any other class member had a larger<br />
financial interest. Accordingly, after finding that the individual investor met the requirements of<br />
Fed. R. Civ. P. 23, the court granted his motion and approved his choice of counsel.<br />
Kinnett v. Strayer Educ., Inc., 2011 WL 317758 (M.D. Fla. Jan. 31, 2011).<br />
In a putative securities fraud class action, the district court initially considered two<br />
competing motions for appointment as lead plaintiff filed by two pension funds. One of the<br />
pension funds withdrew its motion. Thus, the remaining pension fund was the only movant for<br />
lead plaintiff and there was no dispute that it had the greatest financial stake in the outcome of<br />
litigation. Accordingly, after finding that the remaining movant satisfied the requirements of<br />
Fed. R. Civ. P. 23, the court appointed it lead plaintiff and approved its choice of lead and liaison<br />
counsel.<br />
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3. Safe Harbor/Bespeaks Caution Defense<br />
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New Orleans Emps. Ret. Sys. v. Celestica, Inc., 2011 WL 6823204 (2d Cir. Dec. 29, 2011).<br />
In an unpublished opinion, the Second Circuit reversed and remanded the district court’s<br />
dismissal of a putative securities fraud class action. Plaintiffs asserted that the district court erred<br />
by, among other things, finding that certain allegedly false and misleading statements were<br />
shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor for<br />
forward-looking statements. The Second Circuit found that many of the statements at issue were<br />
not forward-looking statements and, thus, the safe harbor did not apply. Specifically, the Second<br />
Circuit found that defendants did more than offer “rosy predictions,” and instead allegedly made<br />
false statements of present or historical fact related to an ongoing restructuring plan and the<br />
cause of problems associated therewith. Accordingly, the Second Circuit found that dismissal<br />
was not warranted and reversed the decision of the district court.<br />
Hill v. State St. Corp., 2011 WL 3420439 (D. Mass. Aug. 3, 2011).<br />
In a consolidated securities fraud and ERISA class action, the district court denied<br />
defendants’ motion to dismiss claims related to allegedly false and misleading statements<br />
regarding the defendant bank’s exposure to risk due to mortgage-backed securities holdings.<br />
Defendants argued that the alleged misstatements were inactionable under the bespeaks caution<br />
doctrine due to cautionary language in their regulatory filings referenced by defendants.<br />
Although defendants made various disclosures in their regulatory filings regarding the mortgagebacked<br />
securities market and unrealized losses on their portfolio, the court found that such<br />
disclosures were insufficient to render the alleged misstatements at issue immaterial pursuant to<br />
the bespeaks caution doctrine. The court referenced the investing public’s response and the<br />
drastic drop in the defendant bank’s stock price after disclosure of the alleged fraud. Given these<br />
facts, the court found that defendants’ disclosures simply failed to provide sufficient warning or<br />
detail. Accordingly, the court denied defendants’ motion to dismiss.<br />
In re Sturm, Ruger & Co., 2011 WL 494753 (D. Conn. Feb. 7, 2011).<br />
In a putative securities fraud class action, the district court granted in part and denied in<br />
part defendants’ motion to dismiss claims related to the defendant company’s transition to a<br />
“lean” manufacturing model which defendants allegedly knew would jeopardize the company’s<br />
long-term profitability. Essentially, plaintiffs alleged that defendants failed to disclose known<br />
problems with the transition while making materially false and misleading statements regarding<br />
the company’s prospects. Defendants argued that alleged misstatements regarding the expected<br />
liquidation of the defendant company’s inventory and its possession of sufficient raw materials<br />
to meet demand were forward-looking statements shielded from liability by the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995’s safe harbor provisions. The court found that these statements<br />
were forward-looking, accompanied by cautionary language warning about the very risks at<br />
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issue, and therefore qualified for safe harbor protection. The court found that other statements<br />
regarding various financial projections, however, were not eligible for safe harbor protection<br />
because plaintiffs adequately alleged that defendants knowingly omitted relevant information<br />
regarding the impact of its new manufacturing model that would have provided meaningful<br />
context for investors. Accordingly, the court granted in part and denied in part defendants’<br />
motion to dismiss.<br />
Maverick Fund, L.D.C. v. Comverse Tech., Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).<br />
In a securities fraud action, the district court granted defendants’ motion to dismiss<br />
claims related to allegedly false and misleading statements about when the defendant company<br />
would become current with its regulatory filings in the wake of publicized accounting<br />
irregularities. Defendants argued that the alleged misstatements were forward-looking<br />
statements shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe<br />
harbor provisions. Plaintiffs argued that certain portions of the statements at issue, including that<br />
defendants “continue[d] to make substantial progress towards restatement,” were not forwardlooking<br />
but rather misrepresented present fact and, thus, were not eligible for protection under<br />
the safe harbor. The court found that the present-tense portions of the statements were so vague<br />
as to be inseparable from the forward-looking portions and, thus, the statements qualified for safe<br />
harbor protection. Accordingly, since plaintiffs did not challenge the adequacy of cautionary<br />
language that accompanied the statements at issue, the court granted defendants’ motion to<br />
dismiss.<br />
In re Bear Stearns Co., Inc. Sec., Derivative & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y.<br />
2011).<br />
In a set of consolidated actions arising out of the collapse of Bear Stearns, the district<br />
court denied defendants’ motion to dismiss claims related to alleged misstatements and<br />
omissions concerning valuation of mortgage-backed assets, asset write-downs, GAAP violations<br />
and the company’s liquid assets. The Bear Stearns defendants argued that statements about<br />
models used to value mortgage-backed securities were forward-looking statements shielded from<br />
liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor and the bespeaks<br />
caution doctrine. The court found that these statements referred to present risk factors and were<br />
therefore not forward-looking statements. Additionally, to the extent the statements were<br />
forward-looking, they were still not protected by the safe harbor because defendants allegedly<br />
knew at the time the statements were made that their valuation models were fundamentally<br />
flawed but had failed to include meaningful cautionary language to warn investors of the known<br />
risks. Accordingly, the court denied defendants’ motion to dismiss.<br />
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SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
In a securities fraud enforcement action, the district court granted in part the SEC’s<br />
motion for summary judgment. The SEC alleged that the defendant corporation and its officer<br />
made false and misleading statements regarding the company’s anticipated profits, returns on<br />
investments, and NASD approval of an acquisition. Although allegedly misleading profit<br />
projections were forward-looking, the court held that they were not entitled to safe harbor<br />
protection because the corporate officer who made the projections knew the company was<br />
operating at a loss and that fact should have been disclosed. With respect to allegedly<br />
misleading statements referencing “dividends” to be paid to investors, such statements were not<br />
entitled to protection under the bespeaks caution doctrine because the term “dividend”<br />
misleadingly indicated that the company was profitable. Accordingly, the court granted the<br />
SEC’s motion with respect to defendants’ liability for these statements.<br />
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y 2011).<br />
In a securities fraud class action, the district court denied defendants’ motion for<br />
judgment notwithstanding a jury verdict because, inter alia, certain alleged misstatements and<br />
omissions were not entitled to protection under the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor for forward-looking statements. Defendants argued that certain projections<br />
primarily related to Vivendi’s expected EBITDA and cash flow figures were forward-looking<br />
statements as to which the jury could not have found liability under the PSLRA because: (1) they<br />
were accompanied by meaningful cautionary language, or (2) the jury found that Vivendi acted<br />
recklessly, and PSLRA shields forward-looking statements from liability if they are not made<br />
with actual knowledge of their falsity. The court found that the safe harbor did not apply<br />
because plaintiffs had not challenged the forward-looking portions of these statements. Rather,<br />
plaintiffs alleged that defendants had knowingly failed to disclose that a huge one-time purchase<br />
accounting benefit was built into the projections and rendered them misleading. Accordingly,<br />
the court found that the safe harbor did not apply and denied defendants’ motion with respect to<br />
these statements.<br />
In re Barclays Bank PLC Sec. Litig., 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011).<br />
In a putative securities fraud class action, the district court denied in part defendants’<br />
motion to dismiss claims related to defendants’ alleged failure to timely disclose exposure to<br />
risky assets and comply with accounting standards and SEC requirements, as well as allegedly<br />
false and misleading assurances concerning the defendant company’s risk management practices.<br />
Defendants argued that certain statements related to valuation of risky assets were shielded from<br />
liability under the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provision and<br />
the bespeaks caution doctrine. The court rejected defendants’ argument because the statements at<br />
issue were made in connection with an initial public offering and, thus, safe harbor protection<br />
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was not available. Moreover, the court found that defendants’ risk warnings were too generic to<br />
be meaningful. Accordingly, the court denied defendants’ motion to dismiss to the extent it<br />
relied on the safe harbor and/or bespeaks caution doctrine.<br />
In re Merrill Lynch Auction Rate Sec. Litig., 2011 WL 1330847 (S.D.N.Y. Mar. 30, 2011)<br />
In a consolidated multi-district securities fraud action against auction rate securities<br />
(“ARS”) underwriters and managing broker-dealers, the district court denied in part defendants’<br />
motion to dismiss claims related to alleged misstatements and omissions about the deteriorating<br />
state of the ARS markets. Defendants argued that statements reassuring investors about the ARS<br />
markets were not material under the bespeaks caution doctrine. The court rejected this argument<br />
because plaintiffs had adequately alleged that defendants were “aware of actual danger or cause<br />
for concern” but failed to disclose known risks and, thus, defendants could not rely upon generic<br />
disclaimers to shield their statements from liability. Accordingly, the court denied defendants’<br />
motion to dismiss to the extent it relied upon the bespeaks caution doctrine.<br />
City of Roseville Employees’. Ret. Sys. v. EnergySolutions, Inc., 2011 WL 4527328 (S.D.N.Y.<br />
Sept. 30, 2011).<br />
In a putative securities fraud class action, the district court granted in part defendants’<br />
motion to dismiss claims related to allegedly false and misleading statements made in connection<br />
with the defendant company’s IPO. Defendants argued that statements related to the possibility<br />
of a regulator granting a policy change were forward-looking statements accompanied by<br />
adequate warnings entitled to protection under the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor provision and the bespeaks caution doctrine. The court found that<br />
defendants’ failure to disclose that the regulator at issue had repeatedly denied the company’s<br />
proposed rule change in the past rendered cautionary language insufficient since subsequent<br />
rejections of the policy change were virtually certain. The court also rejected defendants’<br />
argument that the regulator’s prior rejections were immaterial because they were publicly<br />
available information. The court held that such rejections were not well-known enough to be<br />
considered part of the “total mix” of information. Accordingly, the court denied defendants’<br />
motion to dismiss to the extent it relied on the safe harbor or bespeaks caution doctrine.<br />
Valentini v. Citigroup Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
The district court denied defendants’ motion to dismiss securities fraud claims related to<br />
losses incurred in connection with investments in equity-linked notes. Plaintiffs alleged that<br />
defendants failed to advise them of the notes’ “knock-in” provision, which was triggered by a<br />
specified decline in the value of the securities linked to the notes and acted to convert the notes<br />
into a specified number of the lowest valued security linked to them. Defendants argued that<br />
certain alleged misstatements were inactionable under the bespeaks caution doctrine given<br />
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extensive disclosures regarding the risks contained in the notes’ offering documents. The court<br />
held that defendants could not avail themselves of the bespeaks caution doctrine because<br />
plaintiffs denied receiving the offering documents which contained the risk disclosures cited by<br />
defendants. The only documents plaintiffs indisputably received in connection with their<br />
investment did not contain disclosures related to the conversion of the notes to securities.<br />
Accordingly, the court found that the bespeaks caution doctrine did not apply and denied<br />
defendants’ motion to dismiss.<br />
Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675<br />
(D. Del. June 14, 2011).<br />
In a consolidated securities fraud class action against former officers and directors of a<br />
leading publisher of yellow pages directories, the district court denied defendants’ motion to<br />
dismiss claims related to an alleged scheme to artificially inflate the publishing company’s stock.<br />
Defendants argued that alleged misstatements regarding future demand for yellow pages and the<br />
publisher’s ability to grow its online business were forward-looking statements shielded from<br />
liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provisions. The<br />
court found that the statements were mixed statements that referenced present and historical facts<br />
and, thus, did not qualify for safe harbor protection. Moreover, defendants failed to warn<br />
investors of an overall industry decline and, thus, cautionary language relied upon by defendants<br />
was not adequate to warn investors of the risk plaintiffs alleged defendants had knowingly failed<br />
to disclose. The court also found that plaintiffs adequately alleged that defendants had actual<br />
knowledge that their stated growth projections were inaccurate given defendants’ attendance at<br />
certain meetings and review of internal company reports. Accordingly, the court denied<br />
defendants’ motion to dismiss.<br />
In re Lincoln Educ. Srvs. Corp. Sec. Litig., 2011 WL 3912832 (D.N.J. Sept. 6, 2011).<br />
In a consolidated securities fraud class action, the court granted defendants’ motion to<br />
dismiss claims related to the defendant school’s admissions process, in part, because the alleged<br />
misstatements were shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor. Plaintiffs alleged that in the wake of new regulations denying funding to<br />
schools that failed to provide “gainful employment” for students, defendants announced plans to<br />
limit enrollment of students without a high school diploma and misled investors regarding the<br />
impact of this new policy on enrollment numbers. Plaintiffs conceded that the statements at<br />
issue were forward-looking but argued that they were not accompanied by meaningful cautionary<br />
language. The court found that cautionary language accompanying the alleged misstatements<br />
discussing the new Department of Education regulations as likely to have short-term impact on<br />
growth was sufficiently “tailored” to warn investors about risks that might affect the projection at<br />
issue. The court further found that plaintiffs’ complaint improperly isolated certain words or<br />
comments from the defendants’ overall remarks in press releases and conference calls in an<br />
attempt to create the impression of fraud. Accordingly, the court found that the alleged<br />
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misstatements were shielded from liability by the safe harbor and granted defendants’ motion to<br />
dismiss.<br />
Love v. Alfacell Corp., 2011 WL 4915874 (D.N.J. Oct. 17, 2011).<br />
In a securities fraud action brought by a CFO against his former employer, the district<br />
court granted defendants’ motion to dismiss claims related to allegedly false and misleading<br />
statements about the completion date of a trial phase for a new cancer treatment drug. The court<br />
found that plaintiff had failed to demonstrate that any of the alleged misrepresentations or<br />
omissions were material given the total mix of information available to investors. Specifically,<br />
defendants had filed multiple quarterly and annual reports during the relevant time period that<br />
warned investors that the defendant company could not predict the completion date of the trials.<br />
Given these warnings, the court found that plaintiff’s alleged reliance on the allegedly false<br />
predictions about the completion date was not reasonable as a matter of law. While the court did<br />
not specifically cite the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor as<br />
grounds for its decision, it did reference the safe harbor in reviewing applicable legal standards.<br />
Underland v. Alter, 2011 WL 4017908 (E.D. Pa. Sept. 9, 2011).<br />
In a securities fraud action, the district court denied defendants’ motion to dismiss claims<br />
related to allegedly false and misleading statements about the defendant company’s loan loss<br />
reserves. Specifically, plaintiff alleged that defendants knowingly failed to adhere to the<br />
defendant company’s stated methodology for calculating required reserves and, therefore,<br />
materially understated the defendant company’s reserves. The court rejected defendants’<br />
argument that the statements at issue were inactionable estimates or opinions shielded from<br />
liability by the bespeaks caution doctrine. The court found that plaintiffs’ claims regarding<br />
defendants’ failure to adhere to the company’s stated methodology involved misstatements of<br />
present or historical fact, such as defendants’ failure to include current known liabilities in its<br />
calculations. Accordingly, the bespeaks caution doctrine did not apply and the court denied<br />
defendants’ motion to dismiss to the extent it relied on that doctrine.<br />
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sep. 30, 2011).<br />
In a putative securities fraud class action, the district court denied in part defendants’<br />
motion to dismiss claims related to allegedly false and misleading statements about the credit<br />
quality of the defendant company’s new customers. Specifically, plaintiffs alleged that<br />
defendants exaggerated the credit quality of new customers in order to induce investments when,<br />
in fact, defendants knew the credit scores of new customers had declined. Defendants attempted<br />
to cast their statements about credit quality as inactionable forward-looking statements shielded<br />
from liability by the bespeaks caution doctrine and the Private Securities <strong>Litigation</strong> Reform Act<br />
of 1995’s safe harbor provisions. The court found that while credit scores may be predictive, the<br />
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actual data collected by defendants was not forward-looking. Thus, the court found that the<br />
alleged misstatements at issue dealt with verifiable facts and neither the safe harbor nor the<br />
bespeaks caution doctrine applied. Accordingly, the court denied defendants’ motion to dismiss<br />
with respect to these alleged misstatements.<br />
In re Conventry Healthcare, Inc. Sec. Litig., 2011 WL 1230998 (D. Md. Mar. 30, 2011).<br />
The district court denied defendants’ motion to dismiss a consolidated securities fraud<br />
class action premised upon the healthcare insurance company’s purported failure to disclose<br />
difficulty in processing claims under a new plan which expanded providers for Medicare-eligible<br />
customers. Defendants argued that the statement that they were “pleased to confirm [their]<br />
businesses continue[d] to perform well [“and were”] fundamentally sound” was a forwardlooking<br />
statement shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor. The court noted that it could construe this statement as mere puffery or an<br />
inactionable statement of future economic performance. However, the statement was not<br />
accompanied by any cautionary language and plaintiffs had adequately alleged that when this<br />
statement was made defendants knew about certain claims processing problems that were<br />
expected to negatively impact their business. Defendants had also failed to disclose the risks<br />
associated with the claims processing issue in their regulatory filings and, thus, reference to<br />
cautionary language contained in their filings was inadequate to warn investors about the risks at<br />
issue. Accordingly, the court found that the safe harbor did not apply and denied defendants’<br />
motion to dismiss.<br />
City of Ann Arbor Employees’ Ret. Sys. v. Sonoco Prod. Co., 2011 WL 5041367 (D.S.C. Oct. 19,<br />
2011).<br />
In a putative securities fraud class action, the district court denied defendants’ motion for<br />
summary judgment with respect to claims that defendants attempted to hide declining revenue by<br />
artificially inflating projected productivity gains to offset losses. Defendants argued that their<br />
revenue forecasts were forward-looking statements shielded from liability by the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor. The court held that a genuine issue of<br />
material fact existed regarding whether cautionary language cited by defendants was sufficiently<br />
meaningful in light of evidence proffered by the plaintiff that defendants knew price concessions<br />
and lost customers were negatively impacting their projections but failed to warn investors. The<br />
court further held that a factual dispute existed with respect to whether the defendants knew the<br />
forecasts were false when they were made, as evidenced by defendants’ use of estimated<br />
productivity gains that exceeded prior productivity gains. Accordingly, the court denied<br />
defendants’ motion for summary judgment.<br />
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D.3<br />
Hopson v. MetroPCS Commc’ns, Inc., 2011 WL 1119727 (N.D. Tex. Mar. 25, 2011).<br />
In a putative securities fraud class action, the district court granted defendants’ motion to<br />
dismiss because the plaintiff class failed to adequately allege scienter. Defendants argued that<br />
certain allegedly false and misleading statements were shielded from liability by the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provision. Specifically, plaintiffs alleged<br />
that defendants made false and misleading statements concerning earning guidance, the strength<br />
of the defendant company’s business model, the impact of increased competition, and the<br />
relationship between subscriber growth and churn. The court found that plaintiffs failed to<br />
adequately allege scienter and, thus, had not established that defendants made any of the<br />
forward-looking statements at issue with actual knowledge of their falsity. Accordingly, the<br />
court found that the safe harbor would shield the forward-looking statements from liability and<br />
granted defendants’ motion to dismiss.<br />
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Ltd. Brands, Inc., 788 F. Supp.2d<br />
609 (S.D. Ohio 2011).<br />
In a securities fraud class action, the district court granted defendants’ motion to dismiss<br />
claims related to an alleged scheme to mislead investors about development of a new system of<br />
internet sales of defendants’ Victoria’s Secret brand. Plaintiffs alleged that defendants touted a<br />
new distribution center and attendant technology as a key initiative that would increase sales but<br />
failed to disclose known problems with the system that caused the company to abandon the new<br />
platform. Defendants argued that some of the statements at issue were forward-looking<br />
statements shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe<br />
harbor provisions or mere non-actionable corporate puffery. The court found that each of the<br />
allegedly misleading and overly optimistic statements were couched as forward-looking and<br />
accompanied by cautionary language which adequately disclosed specific risks associated with<br />
the retail and fashion industry. Accordingly, the court found that the safe harbor applied and<br />
granted defendants’ motion to dismiss with respect to the forward-looking statements at issue.<br />
Garden City Employees’ Ret. Sys. v. Psychiatric Solutions, Inc., 2011 WL 1335803 (M.D. Tenn.<br />
Mar. 31, 2011).<br />
In a putative securities fraud class action, the district court denied defendants’ motion to<br />
dismiss claims premised on alleged misstatements related to the defendant medical provider’s<br />
performance, accounting, and compliance with regulatory rules in the wake of disclosure of<br />
nationwide occurrences of patient harm, neglect, and sexual and physical violence. Plaintiffs<br />
alleged that defendants engaged in a scheme to artificially inflate the company’s stock through<br />
overly optimistic, false, and misleading statements in 10-Ks, press releases, and other public<br />
statements by corporate representatives. Defendants asserted that many of the alleged<br />
misstatements were “soft” statements of a nonfactual nature and/or forward-looking statements<br />
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subject to protection under the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor.<br />
The court found that most of the alleged misstatements related to objectively verifiable facts and,<br />
thus, were not forward-looking statements eligible for safe harbor protection. In addition, the<br />
court found that plaintiffs adequately alleged that defendants knew the forward-looking<br />
statements were false when they were made and, thus, even the forward-looking statements were<br />
not protected by the safe harbor. Accordingly, the court denied defendants’ motion to dismiss.<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys<br />
Healthcare Solutions, Inc., 778 F. Supp. 2d 858 (N.D. Ill. 2011).<br />
In a putative securities fraud class action, the district court granted defendants’ motion to<br />
dismiss claims related to allegedly false and misleading financial forecasts and statements<br />
regarding implementation of new software developed by the defendant company. Defendants<br />
argued that statements related to these issues were forward-looking and accompanied by<br />
meaningful cautionary language which shielded them from liability under the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995’s safe harbor provisions. Plaintiffs argued that defendants’<br />
cautionary language was not meaningful because it was not specific enough and defendants’<br />
allegedly knew that the risks they were warning about were actually occurring. The court<br />
rejected the former argument because cautionary language in the defendant company’s<br />
regulatory filings which was incorporated by reference into the statements at issue discussed at<br />
length twenty-five separate business-specific risk factors, including the very risks plaintiffs<br />
alleged had caused the company’s underperformance. The court rejected the latter argument<br />
because it found that defendants’ state of mind was irrelevant to whether forward-looking<br />
statements qualify for protection under the first prong of the safe harbor. Accordingly, the court<br />
found that safe harbor protection was warranted and granted defendants’ motion to dismiss.<br />
St. Lucie Cty. Fire Dist. Fire-Fighters’ Pension Trust Fund v. Motorola, Inc., 2011 WL 814932<br />
(N.D. Ill. Feb. 28, 2011).<br />
In a putative securities fraud class action, the district court granted defendants’ motion to<br />
dismiss claims related to allegedly false and misleading earnings per share forecasts.<br />
Specifically, plaintiffs alleged that defendants engaged in “channel stuffing” and made various<br />
false and misleading statements regarding the company’s financial performance as a result.<br />
Defendants argued that its earnings per share forecasts were accurate and, even if they were not<br />
accurate, then they were forward-looking statements shielded from liability by the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provisions. The court first noted that<br />
defendants’ forecasts appeared to be accurate once special charges that were specifically<br />
excluded from the forecasts were considered. Next, to the extent that the projections were false<br />
because they did not include the special charges, the court found that cautionary language cited<br />
by defendants rendered the projections inactionable under the safe harbor because the warnings<br />
addressed plaintiffs’ particular allegations in individualized terms. Accordingly, the court<br />
granted defendants’ motion to dismiss.<br />
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D.3<br />
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).<br />
In a putative securities fraud class action, the district court denied defendants’ motion to<br />
dismiss claims predicated on alleged misrepresentations in press releases and quarterly<br />
statements pertaining to the defendants’ alleged practice of artificially inflating revenues through<br />
“channel stuffing.” Specifically, plaintiffs alleged that defendants intentionally sold large<br />
quantities of heavily discounted products at quarter end to customers which artificially inflated<br />
inventories in order to create the false appearance that the company was meeting previous<br />
financial guidance. Defendants argued that allegedly false and misleading financial projections<br />
were forward-looking statements shielded from liability by the Private Securities <strong>Litigation</strong><br />
Reform Act of 1995’s safe harbor provisions. The court found that cautionary language<br />
accompanying defendants’ projections was insufficient to warrant safe harbor protection because<br />
it was boilerplate, related solely to external macroeconomic variables, and did not address<br />
defendants’ alleged practice of “channel stuffing” or other related accounting misconduct. The<br />
court further found that plaintiffs had adequately alleged scienter and that, if plaintiffs’<br />
allegations regarding channel stuffing were true, defendants knew the financial projections at<br />
issue were false when they were made. Accordingly, the court found that the safe harbor did not<br />
apply and denied defendants’ motion to dismiss.<br />
In re Stec Inc. Sec. Litig., 2011 WL 2669217 (C.D. Cal. Jun. 17, 2011).<br />
In a putative securities fraud class action, the district court denied defendants’ motion to<br />
dismiss claims related to an alleged scheme to artificially inflate the defendant company’s stock<br />
prior to a secondary public offering. Plaintiffs alleged, among other things, that defendants<br />
misled investors about the nature of an agreement with one of its largest customers in order to<br />
create the impression that revenue generated from the agreement would be recurring.<br />
Defendants argued that statements regarding the agreement were forward-looking and shielded<br />
from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor. The court<br />
found that cautionary language cited by defendants was generic and simply warned of the<br />
inability to forecast customer demand, whereas plaintiffs alleged that defendants knew that the<br />
agreement was a one-off deal and that the customer would not continue purchasing at the same<br />
volume. Accordingly, the court declined to find that the safe harbor shielded the statements at<br />
issue from liability and denied defendants’ motion to dismiss with respect to these forwardlooking<br />
statements.<br />
MannKind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).<br />
In a putative securities fraud class action, the district court denied defendants’ motion to<br />
dismiss claims premised on allegedly false and misleading statements regarding FDA approval<br />
of the defendant pharmaceutical company’s flagship product. Plaintiffs alleged that defendants<br />
continued to make overly optimistic statements regarding anticipated FDA approval despite<br />
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numerous known complications and delays in the approval process. Defendants argued that<br />
these statements were forward-looking statements shielded from liability by the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provision. The court rejected this<br />
argument because the majority of the alleged misstatements were not forward-looking, but<br />
instead related to past interactions with the FDA. Moreover, the court found that cautionary<br />
language cited by defendants was too generic to be meaningful and did not relate to the specific<br />
complications that had arisen with respect to FDA approval of the product at issue. Accordingly,<br />
the court held that the safe harbor did not apply and denied defendants’ motion to dismiss.<br />
Wozniak v. Align Tech., Inc., 2011 WL 2269418 (N.D. Cal. Jun. 8, 2011).<br />
In a securities fraud action, the district court granted defendants’ motion to dismiss<br />
claims related to defendants’ alleged failure to disclose a backlog created by an agreement to<br />
treat a competitor’s patients. As a result of the failure to disclose this backlog, plaintiffs alleged<br />
that defendants made various false and misleading statements about expected shipments and<br />
growth in press releases and conference calls with analysts. Defendants argued that the alleged<br />
misstatements were shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor for forward-looking statements. The court found that the statements at issue<br />
were identified as forward-looking and accompanied by meaningful cautionary language that<br />
identified the specific risks plaintiffs alleged had materialized. Accordingly, the court found that<br />
the safe harbor applied to these forward-looking statements and granted defendants’ motion to<br />
dismiss.<br />
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2011 WL 3501733 (N.D. Cal. Aug. 10,<br />
2011).<br />
In a putative securities fraud class action, the district court granted defendants’ motion to<br />
dismiss claims related to allegedly false and misleading statements about the defendant<br />
company’s financial prospects during the 2008 economic crisis. Defendants argued that<br />
statements about the defendant company’s projected revenue were forward-looking statements<br />
accompanied by meaningful cautionary language and, thus, shielded from liability under the<br />
Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor. The court found that the<br />
statements at issue were identified as forward-looking and accompanied by a warning that results<br />
could vary based on the risks identified in the company’s SEC filings. The court further found<br />
that cautionary language in the company’s SEC filings was adequate and meaningful because it<br />
detailed a number of risks, including unforeseen economic downturns and slow market adoption<br />
of the company’s product. Accordingly, the court found that safe harbor protection was<br />
warranted and granted defendants’ motion to dismiss.<br />
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D.3<br />
Curry v. Hansen Med., Inc., 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011).<br />
In a putative securities fraud class action, the district court granted defendants’ motion to<br />
dismiss claims premised on alleged misstatements related to the defendant company’s revenue<br />
recognition policy and sales performance. The court noted that while certain alleged<br />
misstatements were of present or historical fact, others were forward-looking and qualified for<br />
safe harbor protection. Ultimately, the court found that plaintiffs had failed to adequately plead<br />
scienter with regards to any of the statements since there was no sufficient basis to find that<br />
defendants had any knowledge of any alleged inaccuracies. Accordingly, plaintiffs’ claims were<br />
dismissed.<br />
Szymborski v. Ormat Techs., Inc., 776 F. Supp. 2d 1191 (D. Nev. 2011).<br />
In a putative securities fraud class action, the district court granted in part defendants’<br />
motion to dismiss claims related to, among other things, allegedly false and misleading<br />
statements about the completion date of a new factory. Defendants argued that statements<br />
regarding the anticipated completion date were shielded from liability by the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995’s safe harbor provision for forward-looking statements. The<br />
court found that the statements at issue were sufficiently identified as forward-looking through<br />
the use of phrases such as “we expect” and “subject to change at any time.” The court further<br />
found that cautionary language cited by defendants warned investors of the very risks plaintiffs<br />
alleged caused the target completion date to be missed. The court rejected plaintiffs’ argument<br />
that reference to the project being “on track” was actually a statement of present fact. The court<br />
acknowledged a circuit split on whether such a statement was forward-looking, but noted that its<br />
holding adhered to Third Circuit precedent that such a statement was not meaningfully distinct<br />
from a prediction. Accordingly, the court granted defendants’ motion to dismiss to the extent it<br />
relied on the safe harbor.<br />
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech., 2011 WL<br />
915115 (D. Nev. Mar. 15, 2011).<br />
In a consolidated securities fraud class action, the district court granted defendants’<br />
motion to dismiss claims related to allegedly false and misleading EPS forecasts and statements<br />
about the defendant company’s future prospects, in part, because the alleged misstatements were<br />
shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor.<br />
Plaintiffs alleged that defendants knowingly announced unrealistic EPS forecasts, misrepresented<br />
operating expenses, and misrepresented that certain technology in development would generate<br />
significant revenue through deals with third parties. The court found that defendants’ EPS<br />
forecasts were forward-looking and accompanied by language that cautioned investors that the<br />
company’s business was vulnerable to changing economic conditions which could result in<br />
reduced revenues. Likewise, with regard to prospective deals with third-parties, defendant had<br />
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specifically cautioned that the deals were subject to approval. Accordingly, these two categories<br />
of alleged misstatements were shielded from liability by the safe harbor. On the other hand, the<br />
court rejected defendants’ argument that risk factors it had identified for investors that might<br />
affect revenue were also clearly applicable to projected operating expenses stated as a percentage<br />
of revenue. Nevertheless, the court found that plaintiffs failed to allege facts creating a strong<br />
inference that defendants knew their operating expense forecasts were false. Accordingly, the<br />
court granted defendants’ motion to dismiss.<br />
Fosbre v. Las Vegas Sands Corp., 2011 WL 3705023 (D. Nev. Aug. 24, 2011).<br />
In a putative securities fraud class action, the district court granted in part defendants’<br />
motion to dismiss claims premised on allegedly false and misleading statements about the<br />
company’s development plans and financial condition. Defendants argued that statements<br />
concerning construction costs in Macao, predictions of future Macao market conditions and the<br />
company’s financing plans, cash flows and future liquidity were forward-looking statements<br />
entitled to protection under the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor<br />
provision. Plaintiffs argued that these statements were not entitled to protection because when<br />
they were made defendants merely referenced cautionary language in other documents, such as<br />
SEC filings, that was boilerplate and insufficient. The court rejected plaintiffs’ argument<br />
because there was meaningful cautionary language referenced by defendants that described<br />
“what kind of misfortunes could befall the company” and legal authority supported crossreferenced<br />
cautionary statements for purposes of the safe harbor. Accordingly, the court granted<br />
defendants’ motion to dismiss to the extent it relied on the safe harbor.<br />
In re Cell Therapeutics, Inc. Class Action Litig., 2011 WL 444676 (W.D. Wash. Feb. 4, 2011).<br />
The district court denied defendants’ motion to dismiss plaintiffs’ federal securities fraud<br />
class action stemming from the defendant pharmaceutical company’s decision to modify drug<br />
evaluation trials and, thus, forfeit eligibility for fast-tracked FDA approval. Defendants claimed<br />
that plaintiffs’ entire complaint should be dismissed because most of the allegedly false and<br />
misleading statements at issue were forward-looking statements accompanied by “cautionary<br />
language concerning the perils of new drug approval” and, thus, were shielded from liability by<br />
the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe harbor provision. The court rejected<br />
this argument because plaintiffs’ allegations centered on statements of present or historical fact<br />
related to the defendant company’s ongoing evaluation trials and the trials’ current qualification<br />
for fast-track approval. Accordingly, the court found that the safe harbor did not apply and<br />
denied defendants’ motion to dismiss.<br />
D.3<br />
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D.3<br />
In re Coinstar Sec. Litig., 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011).<br />
In a putative securities fraud class action, the district court granted in part and denied in<br />
part defendants’ motion to dismiss claims related to allegedly false and misleading revenue<br />
projections for the video-rental company Redbox. Specifically, plaintiffs alleged that<br />
defendants’ revenue projections did not account for several known negative developments and<br />
facts, including that: (a) movie producers were delaying delivery of DVDs to Redbox;<br />
(b) Redbox’s new blu-ray business was not performing well; (c) defendants’ internal financial<br />
projections reflected deteriorating sales; (d) upcoming releases were unlikely to generate<br />
significant revenue; and (e) Redbox was incurring costs associated with migrating DVDs<br />
between locations. Defendants argued that the various statements at issue were forward-looking<br />
statements shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s safe<br />
harbor and that plaintiffs had failed to establish that the statements were false. With respect to<br />
allegedly false projections contained in a press release, the court found that the release warned<br />
investors that results might differ and specifically listed several risks that might affect actual<br />
performance, including the risks plaintiffs alleged defendants failed to disclose to the public.<br />
With regard to allegedly false oral statements made during an analyst conference call, the court<br />
found that defendants’ reference to cautionary language in the defendant company’s regulatory<br />
filings was adequate to warrant safe harbor protection. The court distinguished cases holding<br />
that mere reference to warnings elsewhere was insufficient for written communications and<br />
noted that oral forward-looking statements are protected as long as investors are orally referred<br />
to warnings in a readily available written document. Given the adequate cautionary language<br />
accompanying the allegedly false projections, the court found that defendants’ state of mind was<br />
irrelevant and the forward-looking statements at issue were shielded from liability by the safe<br />
harbor. On the other hand, the court found that certain reiterations of the company’s earnings<br />
projections were not protected by the safe harbor because there was an unresolved issue of fact<br />
regarding whether these reiterations were accompanied by cautionary language. Moreover, the<br />
court found that plaintiffs had adequately pleaded that defendants knew the reiterated guidance<br />
was false and misleading and, thus, the safe harbor did not apply. Accordingly, the court granted<br />
in part and denied in part defendants’ motion to dismiss.<br />
Mishkin v. Zynex Inc., 2011 WL 1158715 (D. Colo. Mar. 30, 2011).<br />
In a securities fraud class action against a supplier of medical devices, the district court<br />
denied defendants’ motion to dismiss claims related to an alleged scheme to inflate reported<br />
revenue. Specifically, plaintiffs alleged that defendants knowingly overbilled insurance<br />
companies and reported revenue based upon the inflated billing rather than revenue it expected to<br />
collect. Defendants argued that certain alleged misstatements made by its CEO in a press release<br />
were forward-looking statements shielded from liability by the Private Securities <strong>Litigation</strong><br />
Reform Act of 1995’s safe harbor provisions. The court found that some parts of the press<br />
release discussed present and historical facts, such as “sales and rentals… continue at a strong<br />
pace,” which were not forward-looking and, thus, did not qualify for protection under the safe<br />
harbor. To the extent the press release contained forward-looking statements, the court found<br />
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that cautionary language in the press release relied upon by defendants did not shield the relevant<br />
statements from liability given that plaintiffs had adequately alleged facts establishing a strong<br />
inference of scienter. Accordingly, the court denied defendants’ motion to dismiss.<br />
Simmons Invs., Inc. v. Conversational Computing Corp., 2011 WL 673759 (D. Kan. Feb. 17<br />
2011).<br />
In a securities fraud action, the district court denied defendants’ motion to dismiss claims<br />
related to an allegedly false and misleading statement about expected investments by other<br />
investors in the defendant company. Defendants argued that the alleged misstatement was<br />
forward-looking and shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995’s safe harbor provisions. The court acknowledged the Tenth Circuit’s recognition that<br />
neither vague statements of corporate optimism nor forward-looking statements accompanied<br />
with sufficient cautionary language were material as a matter of law. The court found, however,<br />
that plaintiff adequately alleged it had relied on optimistic statements about future investments<br />
that defendants knew were false at the time they were made. Accordingly, the court found that<br />
the safe harbor did not apply and denied defendants’ motion to dismiss.<br />
Genesee County Employees’ Ret. Sys. v. Thornburg Mortgage Sec. Trust, 2011 WL 5840482<br />
(D.N.M. Nov. 12, 2011).<br />
In a putative securities fraud class action related to several investment offerings of<br />
mortgage-backed securities (“MBS”), the district court denied in part defendants’ motion to<br />
dismiss claims related to allegedly false and misleading statements regarding the risks associated<br />
with the MBS investments at issue. Plaintiffs alleged that defendants misrepresented several<br />
aspects of the MBS, including loan origination and underwriting standards and failed to disclose<br />
alleged manipulation of appraisal information. Plaintiffs also alleged that credit rating agency<br />
defendants knowingly issued false and misleading credit ratings in connection with the MBS<br />
offerings. The court first rejected defendants’ argument that cautionary language in the MBS<br />
offering documents was sufficient to bar plaintiffs’ claims pursuant to the bespeaks caution<br />
doctrine. The court found that defendants’ warnings were insufficient to warn that loan<br />
originators would systematically abandon underwriting guidelines. The court further found that<br />
an alleged disclosure about loan originators possibly pressuring property appraisers did not help<br />
defendants because the court could not find this disclosure in the MBS offering documents at<br />
issue. Finally, the court found that cautionary language accompanying MBS credit ratings was<br />
insufficient to invoke the protection of the bespeaks caution doctrine because plaintiffs had<br />
adequately alleged that the credit rating agency did not believe its own ratings and/or lacked any<br />
reasonable basis for them. Accordingly, the court denied defendants’ motion to dismiss to the<br />
extent it relied on the safe harbor and/or bespeaks caution doctrine.<br />
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Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys<br />
In re Immucor, Inc. Sec. Litig., 2011 WL 2619092 (N.D. Ga. June 30, 2011).<br />
In a securities fraud action, the district court denied in part defendants’ motion to dismiss<br />
claims related to statements about the defendant company’s compliance with FDA regulations.<br />
Plaintiff alleged that repeated warnings from the FDA about defendants’ maintenance of blood<br />
reagent facilities were glossed over in public filings, where defendants stated that the company<br />
believed “its manufacturing and ongoing quality control procedures conformed to the required<br />
statutes, regulations and standards,” rendering the public filings false and misleading. The court<br />
rejected defendants’ argument that these alleged misstatements were inactionable “corporate<br />
optimism” and shielded from liability by the Private Securities <strong>Litigation</strong> Reform Act of 1995’s<br />
safe harbor for forward-looking statements. The court found that defendants’ blood reagent<br />
facilities were subject to revocation by the FDA at the time the statements at issue were made<br />
and, thus, the statements appeared to be designed to reassure investors. The court further found<br />
that statements regarding defendants’ belief that its “manufacturing and ongoing quality control<br />
procedures” complied with FDA regulations were not forward-looking because the use of the<br />
present tense implied that the company had sufficient quality control procedures already in place.<br />
Accordingly, the court denied defendants’ motion to dismiss to the extent it relied upon the safe<br />
harbor.<br />
D.3<br />
E. Liabilities under the Securities <strong>Litigation</strong> Uniform Standards Act of 1999<br />
E.<br />
Atkinson, MD v. Morgan Asset Mgmt., Inc., 2011 WL 3926376 (6th Cir. Sept. 8, 2011).<br />
In a putative state law class action removed under the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998 (“SLUSA”), the Sixth Circuit affirmed the denial of plaintiffs’ motion for<br />
remand and dismissal of plaintiffs’ claims. In their suit, plaintiffs asserted various state law<br />
claims related to the decline in value of their Morgan Keegan Select mutual fund shares. On<br />
appeal, plaintiffs alleged that their action fell into the “first Delaware carve-out” preserving class<br />
actions involving the purchase or sale of securities by an issuer from holders because plaintiffs<br />
had entered into contracts with the defendant fund obligating it to redeem their shares. The Sixth<br />
Circuit rejected this argument because plaintiffs failed to allege any misconduct related to the<br />
fund’s redemption obligation. Further, plaintiffs provided no authority for their argument that a<br />
redemption obligation amounted to a “purchase” under the carve-out. The court also rejected<br />
plaintiffs’ argument that all “holder” claims involving fraud were covered by the carve-out.<br />
Finally, the court rejected plaintiffs’ argument that certain of their claims lay beyond SLUSA’s<br />
scope because they did not require proof of an untrue statement or omission of a material fact, as<br />
plaintiffs could not avoid SLUSA’s application through artful pleading. Accordingly, the Sixth<br />
Circuit affirmed the denial of plaintiffs’ motion for remand and the dismissal of their suit as<br />
precluded by SLUSA.<br />
207
E.<br />
Brown v. Calamos, 2011 WL 5505375 (7th Cir. Nov. 10, 2011).<br />
In a putative class action brought by common shareholders alleging that company<br />
officials breached their fiduciary duties and were unjustly enriched by causing the redemption of<br />
certain preferred shares in a manner that unfairly benefited preferred shareholders, the trial court<br />
dismissed plaintiffs’ complaint, holding that the action was preempted by Securities <strong>Litigation</strong><br />
Uniform Standards Act of 1998 (“SLUSA”), and the Seventh Circuit affirmed. At the trial court<br />
level, plaintiffs alleged that the preferred shares issued by the company provided favorable<br />
returns to preferred shareholders and benefited common shareholders by providing favorable<br />
investment financing to the company which afforded common shareholders the benefit of<br />
leveraged investing that was not subject to any maturity date. Plaintiffs alleged that defendants<br />
caused the company to redeem the preferred shares and replace them with less advantageous<br />
financing. They asserted that this breached defendants’ fiduciary duties to the common<br />
shareholders and alleged that defendants were motivated by an economic interest in maintaining<br />
their relationships with the investment banks and brokers who initially sold the preferred shares<br />
to investors. The plaintiffs argued that alleged misrepresentations were not at the heart of their<br />
claim, although they did not dispute that the action met the other elements of SLUSA coverage.<br />
The trial court held that substance must triumph over form and found that Plaintiffs’ attempts<br />
within their complaint to expressly characterize their claims as not arising from a<br />
misrepresentation or omission and to argue that these were merely “background facts” were<br />
unavailing because the heart of plaintiffs’ claims was based on the misrepresentation that the<br />
preferred shares were “perpetual” and on omissions as to the defendants’ alleged conflicts of<br />
interest. The Seventh Circuit went further, reasoning that SLUSA requires dismissal if the<br />
complaint’s allegations merely make it “likely that an issue of fraud will arise in the course of<br />
the litigation.” The Seventh Circuit also found that dismissal under SLUSA must be with<br />
prejudice, reasoning that otherwise issues of misrepresentation could be revived during the<br />
course of state court litigation at a point so far down the road that removal and dismissal<br />
pursuant to SLUSA at that time would be impracticable. In so holding, the Seventh Circuit also<br />
rejected the view of the Ninth Circuit that a dismissal under SLUSA can be averted by amending<br />
the complaint so as to delete an allegation that might be seen to inject fraud into the case.<br />
Stoody-Broser v. Bank of Am., 2011 WL 2181364 (9th Cir. June 6, 2011).<br />
The Ninth Circuit affirmed the district court’s order dismissing plaintiff’s class action<br />
complaint, but remanded for leave to amend. The court held that the essence of plaintiff’s<br />
complaint was a fraudulent scheme of self-dealing in connection with an investment in<br />
proprietary mutual funds, which was precluded under the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998. However, the court held that amendment would not necessarily be futile<br />
and, thus, reversed the district court’s denial of leave to amend.<br />
E.<br />
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E.<br />
Backus v. Conn. Cmty. Bank, N.A., 2011 WL 2183984 (D. Conn. March 30, 2011).<br />
In a consolidated state law action that was removed to federal court, the district court<br />
denied plaintiffs’ motion for remand and granted defendant’s motion for judgment on the<br />
pleadings because plaintiffs’ claims were precluded by the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998 (“SLUSA”). Plaintiffs were a group of at least 51 customers of a<br />
nationally chartered bank that had invested plaintiffs’ assets in the Madoff Ponzi scheme.<br />
Plaintiffs brought various state law claims alleging that the bank had breached custodian<br />
agreements and fiduciary duties owed to plaintiffs by misrepresenting that plaintiffs’ assets were<br />
safe and fairly valued. Plaintiffs first argued that the action was not a “covered class action”<br />
because sixteen of the plaintiffs had invested through four profit sharing plans and SLUSA’s<br />
“entity exception” applied. The court rejected this argument because the sixteen members had<br />
sued in their individual capacities and the four profit sharing plans were not plaintiffs in the<br />
action. Relying on the plain language of the statute and Congressional intent that SLUSA should<br />
apply broadly, the court further held that plaintiffs’ consent to consolidation was not required<br />
under SLUSA for their claims to be precluded. Next, the court found that the “in connection<br />
with” requirement was satisfied because plaintiffs’ relationship with the bank clearly<br />
contemplated investments in covered securities and the bank’s alleged facilitation of the Madoff<br />
Ponzi scheme sufficiently coincided with the purchase of covered securities. The court further<br />
rejected plaintiffs’ argument that their claims did not involve “covered securities” because the<br />
purported purchase and sale of covered securities through Madoff’s entities was an integral part<br />
of the alleged misconduct. Finally, the court found that plaintiffs’ breach of contract and<br />
negligence claims were based on the same alleged misconduct as plaintiffs’ fraud-based claims.<br />
Accordingly, the court denied plaintiffs’ motion for remand and dismissed their all of their state<br />
law claims as precluded by SLUSA.<br />
Backus v. Conn. Cmty. Bank, N.A., 2011 WL 2119240 (D. Conn. May 27, 2011).<br />
After the district court had dismissed plaintiffs’ state law class action as precluded by the<br />
Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”), the district court denied<br />
defendant’s motion to permanently enjoin plaintiffs from filing individual actions in state court.<br />
The court noted that SLUSA does not preempt any state law cause of action and its prior order<br />
never barred plaintiffs from filing individual actions in state court. The court held that the filing<br />
of individual actions is precisely what Congress intended by enacting SLUSA. Since none of the<br />
pending state court actions sought damages on behalf of more than 50 persons, the court found<br />
its order dismissing plaintiffs’ class action was not implicated. Finally, the court rejected<br />
defendant’s argument that the individual state law actions were vexatious or harassing because<br />
both parties would face the same costs and difficulties and plaintiffs’ counsel had notified<br />
defendant that it intended to file the individual actions shortly after the court’s ruling but<br />
defendant never objected. Accordingly, the court denied defendant’s motion for a permanent<br />
injunction.<br />
E.<br />
209
E.<br />
In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
In a state law class action that was removed to federal court, the district court granted<br />
defendants’ motion to dismiss plaintiffs’ state law claims as precluded by the Securities<br />
<strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs brought various state law<br />
claims against their investment advisors, an asset management consultant, an accounting firm,<br />
and associated individuals seeking to recover losses incurred as a result of “feeder funds’”<br />
investments in the Madoff ponzi scheme. In determining that plaintiffs’ state law claims were<br />
precluded, the court relied upon the decision in In re Beacon Associates Litig., 745 F.Supp. 2d<br />
386 (S.D.N.Y. 2010), where Judge Leonard Sand had dismissed similar state law claims<br />
involving the Madoff ponzi scheme as precluded by SLUSA. The court added that the<br />
preclusion of plaintiffs’ state law claims was unrelated to the viability of their federal securities<br />
laws claims against certain defendants. While state law claims for breach of contract and<br />
negligence against the accountant defendants were not precluded by SLUSA, the court declined<br />
to exercise supplemental jurisdiction over these claims and dismissed them as well.<br />
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 307 (S.D.N.Y. 2011).<br />
This case was an adversary action brought by Irving Picard (“Picard”), the bankruptcy<br />
trustee for Bernard L. Madoff (“Madoff”) and Bernard L. Madoff Investment Securities, LLC<br />
(“BMIS”), against J.P. Morgan Chase & Co. and numerous related entities (collectively, “JPM”)<br />
in bankruptcy court alleging various common law and clawback causes of action for the putative<br />
benefits of BMIS investors. The district court granted JPM’s motion to withdraw the bankruptcy<br />
reference because it determined that the case raised issues of first impression under federal law<br />
including, inter alia, whether Picard’s common law claims were preempted by the Securities<br />
<strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). It is mandatory to withdraw a<br />
bankruptcy reference under § 157(d) when the case will require a bankruptcy court to interpret,<br />
not merely apply, a federal law outside of Title 11. The issue at hand was whether the<br />
underlying case was a “covered class action” under SLUSA. This question turned on whether<br />
Picard, as the Trusteee, was a single entity not established for the purpose of participating in the<br />
action or whether he was acting in a representative capacity respecting the interests of the many<br />
investors in BMIS. The court first acknowledged that the issue had not yet been addressed by<br />
the Second Circuit. The court then reasoned that “because the Trustee’s common-law claims are<br />
on behalf of BMIS customers, and not the BMIS estate, determining whether the Trustee’s action<br />
is preempted by SLUSA requires substantial interpretation of federal non-bankruptcy law” and,<br />
therefore, held that the bankruptcy reference was subject to mandatory withdrawal.<br />
In re Kingate Mgmt. Ltd. Litig., 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011).<br />
In an action arising from the Madoff Ponzi scheme brought by classes of investors in two<br />
feeder funds, the district court dismissed all of plaintiffs’ state law claims pursuant to the<br />
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Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). In finding that the state law<br />
claims were “covered” claims under SLUSA, the court reasoned that the Supreme Court’s<br />
holding in Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (2010) – that §10(b) of the<br />
1934 Act was not intended by Congress to regulate extraterritorial conduct – did not bar the<br />
application of SLUSA to a class action in a court of the United States, regardless of where<br />
plaintiffs made their investment. Plaintiffs’ argument that they invested in foreign funds, and not<br />
“covered securities,” was equally unavailing. The court concurred with the majority of district<br />
courts within the Second Circuit which have considered this issue, and found that SLUSA only<br />
requires that the claims be “in connection with covered securities” and that the conduct at issue<br />
arising from plaintiffs’ intended purchase and sale of securities by the Madoff fund satisfied this<br />
standard.<br />
Grund v. Delaware Charter Guar. & Trust Co., 2011 WL 2118754 (S.D.N.Y. May 26, 2011).<br />
In a consolidated putative state law class action brought on behalf of IRA investors who<br />
directed investments in a fund which proved to be a Ponzi scheme, the district court denied<br />
defendant’s motion to dismiss plaintiffs’ claims as precluded by the Securities <strong>Litigation</strong><br />
Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged that defendant breached its<br />
fiduciary duties to plaintiffs by improperly delegating control of plaintiffs’ accounts. The court<br />
found that plaintiffs’ claims did not allege any misrepresentation or omission of material fact in<br />
connection with the purchase or sale of any covered security. The court also found that fraud<br />
was not a necessary component of any of plaintiffs’ claims. Additionally, the investment at issue<br />
was an intermediate fund, not a covered security. Accordingly, the court found that SLUSA<br />
preclusion was not warranted and denied defendant’s motion to dismiss.<br />
Brecher v. Citigroup Inc., 797 F.Supp.2d 354 (S.D.N.Y. 2011).<br />
In a class action alleging securities fraud and various state law claims brought on behalf<br />
of employees, the district court granted defendants’ motion to dismiss, in part, because plaintiffs’<br />
state law claims were precluded by the Securities <strong>Litigation</strong> Uniform Standards Act of 1998<br />
(“SLUSA”). Plaintiffs alleged that the defendant company and its board of directors<br />
misrepresented and omitted material information in selling and managing securities purchased by<br />
plaintiffs through the company’s Voluntary Financial Advisor Capital Accumulation Program.<br />
Plaintiffs alleged that they were “prevented from learning” about the defendant company’s<br />
exposure to subprime risk and misled by overly optimistic and false projections about overall<br />
performance. The court dismissed plaintiffs’ federal securities fraud claims as time-barred and<br />
for failure to state a claim. The court then dismissed plaintiffs’ state law claims as precluded by<br />
SLUSA. Plaintiffs argued that SLUSA preclusion only applied when a state law claim is<br />
“coterminous with a federal securities fraud claim.” The court disagreed, citing Second Circuit<br />
precedent precluding claims brought under the same state law statute upon which plaintiffs relied<br />
for their claims. Accordingly, the district court granted defendants’ motion to dismiss.<br />
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E.<br />
In re Refco Inc. Sec. Litig., 2011 WL 4035819 (S.D.N.Y. Sept. 6, 2011).<br />
The special master recommended that defendants’ motion to dismiss plaintiffs’ claims as<br />
precluded by the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”) should be<br />
denied. As liquidators of a family of hedge funds and trustees of a trust formed for purposes of<br />
litigation, plaintiffs sought to recover cash that the hedge funds had diverted from customer<br />
accounts to offshore accounts, where the assets were ultimately lost in the Refco scandal. While<br />
plaintiffs were not entitled to be treated as a single “entity” because their trust was formed solely<br />
for litigation, the special master concluded that the action was not a “covered class action”<br />
because it did not seek damages on behalf of more than 50 persons. The special master rejected<br />
defendants’ argument that the number of plaintiffs should be aggregated with plaintiffs in a<br />
related action because the claims in the two cases were not sufficiently related to warrant<br />
grouping. The special master also concluded that, although the hedge fund shares at issue were<br />
not “covered securities,” the claims did involve “covered securities” as they related to the Refco<br />
LBO and IPO. Nevertheless, the special master held that claims based on unauthorized transfers<br />
of cash did not satisfy the “in connection with” requirement because the alleged wrongdoing did<br />
not coincide with the Refco LBO and IPO. Accordingly, the special master found that SLUSA<br />
preclusion was inappropriate and recommended that defendants’ motion to dismiss should be<br />
denied.<br />
In re Merkin and BDO Seidman Sec. Litig., 2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011).<br />
The district court dismissed plaintiffs’ class action alleging state law claims arising out of<br />
investments in three hedge funds that invested in Madoff’s Ponzi scheme as precluded by the<br />
Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). The court rejected plaintiffs’<br />
argument that their claims did not involve “covered securities” because they had purchased<br />
shares in hedge funds. The court held that it was sufficient that the alleged fraud coincided with<br />
the hedge funds’ subsequent purchases of covered securities. Accordingly, the court dismissed<br />
plaintiffs’ state law claims as precluded by SLUSA and denied plaintiffs’ leave to replead as<br />
futile.<br />
In re Herald, Primeo, and Thema Sec. Litig., 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).<br />
The district court dismissed all three foreign plaintiffs’ class actions brought under New<br />
York State common law as prohibited under the Securities <strong>Litigation</strong> Uniform Standards Act of<br />
1998 (“SLUSA”). The named plaintiffs in each of the three class actions were foreign citizens<br />
who purported to represent other foreign citizens who had invested in foreign investment funds<br />
which had, in turn, invested the plaintiffs’ money in the notorious Ponzi scheme perpetrated by<br />
Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (collectively, “Madoff”).<br />
Their complaints included claims brought against Bank of New York (“BNY”) and various JP<br />
Morgan entities (collectively, “JPM”), alleging that BNY and JPM, as Madoff’s bankers, had<br />
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willfully ignored numerous red flags that should have made them aware of numerous<br />
improprieties committed by Madoff, thereby aiding and abetting Madoff’s Ponzi scheme.<br />
Plaintiffs conceded that they were bringing covered class actions under state law, but asserted<br />
that because Madoff never actually purchased any securities, their claims did not involve<br />
“covered securities” and denied that the fourth prong of SLUSA was met because their complaint<br />
did not allege any misrepresentations or omissions by the defendants. The court held that it was<br />
sufficient that Madoff represented its trading strategy to involve covered securities and it was not<br />
necessary that the securities transactions actually transpired. The court also held that plaintiffs’<br />
allegations that BNY and JPM knew or should have known of Madoff’s fraud and failed to<br />
disclose that to plaintiffs was sufficient to fall squarely within the ambit of SLUSA, even if fraud<br />
was not an essential element of the claims. The court also rejected plaintiffs’ argument that<br />
SLUSA did not apply on the basis that federal securities claims are limited to securities<br />
transactions that take place within the United States, holding that the application of SLUSA<br />
depended only on whether it was brought in a state or federal court in the United States.<br />
In re Mutual Funds Inv. Litig., 767 F. Supp. 2d 542 (D. Md. 2011).<br />
The district court, overseeing a multi-district litigation (“MDL”), considered defendants’<br />
motion to administratively close and terminate an action originally brought in Illinois state court<br />
on behalf of investors who claimed that their mutual fund advisors had charged excessive fees.<br />
The underlying case, Kircher v. Putnam Funds Trust, had been the subject of numerous removal<br />
and remand proceedings in Illinois, as plaintiffs attempted to avoid removal and preclusion under<br />
the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). Most recently, the Illinois<br />
appellate court found that plaintiffs’ action was covered by SLUSA and mandated that the<br />
Illinois circuit court dismiss the case. After the Illinois circuit court dismissed plaintiffs’ action<br />
with prejudice, plaintiffs moved to modify the order so that dismissal would be without prejudice<br />
and for leave to file an amended complaint. In the meantime, defendants removed the action to<br />
federal court in Illinois and plaintiffs again moved to remand. While those motions were<br />
pending, the MDL panel transferred the case to the federal court in Maryland to be considered as<br />
part of the ongoing Mutual Funds MDL. The court first rejected plaintiffs’ argument that<br />
defendants’ most recent removal was improper because it was untimely. The court noted that<br />
defendants’ notice of removal appeared to be timely because SLUSA’s 30-day window for<br />
removal did not begin to run until plaintiffs’ time to appeal the Illinois appellate court’s decision<br />
had expired and the Illinois appellate court issued a mandate enforcing its decision. The court<br />
found, however, that plaintiffs had waived any objection they might have had to any procedural<br />
defect with the removal because plaintiffs had actively engaged for the last six months in<br />
settlement negotiations in the Mutual Funds MDL. Finally, the court rejected plaintiffs’<br />
argument that they could amend their complaint to state a negligence claim that would not be<br />
precluded by SLUSA because plaintiffs “market timing” claims essentially alleged that<br />
defendants misrepresented the value of securities sold or consideration received in return to the<br />
detriment of shareholders. Accordingly, the court granted defendants’ motion and closed the<br />
action.<br />
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E.<br />
Broyles v. Cantor Fitzgerald & Co., 2011 WL 4737197 (M.D. La. Sept. 14, 2011).<br />
In a state law class action that was removed to federal court, the magistrate judge<br />
recommended that plaintiff’s motion to remand the action to state court should be denied. The<br />
named plaintiff sought damages on behalf of a class of investors who had purchased defendants’<br />
investment funds and suffered damages resulting from various allegedly wrongful investment<br />
transactions related to “troubled” mortgage-backed securities held by the funds and the sale of<br />
those assets to form a collateralized debt obligation (“CDO”). The magistrate judge found that<br />
plaintiff’s claims sufficiently coincided with the purchase or sale of covered securities because<br />
he had alleged that he liquidated his retirement portfolio of covered securities due to<br />
misrepresentations that the investment funds would hold conservative securities similar to those<br />
he sold. Thus, plaintiff had specifically asserted a claim based on misrepresentations in<br />
connection with the sale of covered securities and the Securities <strong>Litigation</strong> Uniform Standards<br />
Act of 1998 (“SLUSA”) applied. The magistrate judge rejected plaintiff’s argument that these<br />
allegations were personal to him and that his sale of his retirement portfolio was not the crux of<br />
the class’s claims against defendants. The magistrate judge noted that plaintiff had included the<br />
allegations about his retirement portfolio in a section of his complaint entitled “Allegations<br />
Applicable to All Claims For Relief” and that as a class representative his claims should fairly<br />
represent those of the purported class. The magistrate judge further found that the sale of<br />
plaintiff’s investment portfolio was “the beginning of a chain of events that ma[de] up the<br />
plaintiff’s claim” and, thus, it was germane to his overall claims against defendants.<br />
Accordingly, the magistrate judge found that SLUSA preclusion was appropriate and<br />
recommended that plaintiffs motion to remand should be denied.<br />
Richek v. Bank of Am., 2011 WL 3421512 (N.D. Ill. Aug. 4, 2011).<br />
Plaintiff’s claims which arose from alleged non-disclosure of fees charged by the<br />
defendant bank to customers whose cash balances were automatically “swept” on a daily basis<br />
into certain customer-selected investment vehicles were held to be precluded by the Securities<br />
<strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). Plaintiff alleged that defendant had<br />
undisclosed fee arrangements with various money market mutual funds and other mutual fund<br />
investment vehicles on its “approved list” from which plaintiff and similarly situated customers<br />
could select investments for daily cash “sweeps.” These sweep fees were alleged to be as much<br />
as .35 or .45 percent of the average daily cash balance swept from plaintiff’s account. Plaintiff<br />
alleged that these fees were being charged for a number of years beginning as early as 1985 and<br />
that he first learned of the sweep fees on June 30, 2009, when defendant wrote to inform him that<br />
it was eliminating the fees. Plaintiff did not dispute that the action was a “covered class action,”<br />
that it was based on state law, or that the securities in question were “covered securities” under<br />
SLUSA. Instead, plaintiff argued that any purchase or sale of covered securities was<br />
“incidental” to the alleged misrepresentations and omissions of fact in the complaint. Plaintiff<br />
argued that this did not meet SLUSA’s requirement that defendant misrepresented or omitted a<br />
material fact “in connection with” the purchase or sale of a covered security. However, the court<br />
found that the “essence” of the complaint was alleged misrepresentations and omissions of<br />
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material facts “relating to” the transfer of trust assets into mutual funds which constituted a<br />
purchase and sale of securities. Accordingly, the court held that the case fell within the ambit of<br />
SLUSA and dismissed the complaint.<br />
Bourienne v. Calamos, 2011 WL 3421559 (N.D. Ill. Aug. 4, 2011).<br />
In a putative state law class action brought on behalf of Calamos Convertible<br />
Opportunities and Income Fund common shareholders, the district court granted defendants’<br />
motion to dismiss various state law claims as precluded by the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998 (“SLUSA”). In their complaint, plaintiffs alleged that the Fund had<br />
redeemed and replaced certain preferred shares to the detriment of common shareholders.<br />
Plaintiffs argued that their claims were not precluded by SLUSA because they did not allege that<br />
“any statements attributed to any of the defendants were false.” Nevertheless, the court found<br />
that the premise of plaintiffs’ complaint was that defendants misled common shareholders by<br />
falsely representing that the financing provided by the replaced preferred shares would exist into<br />
perpetuity. The complaint also alleged undisclosed conflicts of interest driving defendants’<br />
decision to redeem the preferred shares. Accordingly, the court concluded that SLUSA<br />
preclusion was appropriate and granted defendants’ motion to dismiss.<br />
Jorling v. Anthem, 2011 WL 6755157 (S.D. Ind. Dec. 23, 2011).<br />
Plaintiffs’ attempt to sustain a class action on behalf of all persons who received shares of<br />
stock instead of cash as part of the defendant insurance company’s demutualization process<br />
failed to survive summary judgment on the basis of preemption under the Securities <strong>Litigation</strong><br />
Uniform Standards Act of 1998 (“SLUSA”). In granting defendant’s motion for summary<br />
judgment, the court found only two other cases that addressed similar issues and relied on the<br />
Eighth Circuit’s holding in Sofonia v. Principal Life Ins. Co., 465 F.3d 873 (2006). In Sofonia,<br />
the Eighth Circuit held that although the mutual interests surrendered by plaintiffs were not<br />
covered securities, the stock they received in exchange for those interests clearly were covered<br />
securities. Moreover, plaintiffs’ claim that defendants made false or deceptive statements in the<br />
information provided to policy holders prior to their vote on accepting the plan was an “integral<br />
step in the exchange of mutual interests for stock” and, therefore, satisfied the SLUSA<br />
requirement that there be fraud in connection with the purchase or sale of covered securities.<br />
The court also distinguished the holding in In re MetLife Demutualization Litig., 2006 WL<br />
2524196 (E.D.N.Y. Aug. 28, 2006). The MetLife court found that SLUSA did not preclude the<br />
action because it fell within the Delaware Carve-Out. That case included a step in the<br />
demutualization process whereby policyholders were given common stock, which was then<br />
traded for either cash, policy credits, or shares of the trust holding the stock of the defendant.<br />
The Metlife court viewed this extra step as establishing plaintiffs as “holders of equity securities”<br />
and reasoned that the Delaware Carve-Out applies to claims which arise from an issuer’s offering<br />
of securities to its existing equity security holders. However, because the court found that this<br />
extra step was absent from the Anthem demutualization, it held that the Delaware Carve-Out was<br />
inapplicable, embracing the reasoning of the district court in Sofonia. Sofonia v. Principal Life<br />
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Ins. Co., 378 F.Supp.2d 1124, 1133 (S.D. Iowa 2005). The court also rejected plaintiffs’<br />
argument that their failure to expressly plead a material misrepresentation or omission rendered<br />
SLUSA inapplicable, reasoning that to hold otherwise would be to elevate form over substance,<br />
allowing plaintiffs to evade SLUSA through artful pleading.<br />
Hanson v. Morgan Stanley Smith Barney, LLC, 762 F. Supp. 2d 1201 (C.D. Cal. 2011).<br />
The district court dismissed a putative state law class action on behalf of defendant’s<br />
employees and their immediate family members as precluded under the Securities <strong>Litigation</strong><br />
Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged defendant misrepresented its<br />
obligations under securities industry rules related to its policy that required employees to<br />
maintain personal investment accounts with the defendant brokerage firm, as well as “postage<br />
and handling” fees charged in connection therewith. Plaintiffs argued that SLUSA did not apply<br />
because they had not alleged that defendant made any material misrepresentations “in connection<br />
with” the purchase or sale of a security and their state law claims did not require proof of any<br />
misrepresentation. The court held that, in essence, plaintiffs alleged misrepresentations that<br />
coincided with the purchase or sale of covered securities in their personal investment accounts<br />
and plaintiffs could not circumvent SLUSA preclusion through artful pleading. Accordingly, the<br />
court granted defendant’s motion to dismiss but granted plaintiffs leave to amend.<br />
West Va. Laborers Trust Fund v. STEC Inc., 2011 WL 6156945 (C.D. Cal. Oct. 7, 2011).<br />
The district court granted plaintiffs’ motion to remand their action alleging violations of<br />
the 1933 Act, finding that the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 did not<br />
provide a right to remove covered class actions that were not based upon state law. In reaching<br />
this conclusion - which was the antithesis of that reached by the court in Northumberland Cty.<br />
Retirement Sys. v. GMX Resources, Inc., 2011 WL 5578963 (W.D. Okla. Nov. 16, 2011) – the<br />
California Central District Court reasoned that the statutory language of subsection (c) providing<br />
that “any covered class action” was removable to federal court, “as set forth in subsection (b),”<br />
and “shall be subject to subsection (b)” meant that the right to removal was limited to those<br />
actions precluded entirely under the language of subsection (b). This approach which first read<br />
subsection (c) and then read subsection (b) as limiting its scope is in stark contrast to the<br />
approach taken by the Oklahoma Western District Court, which read subsection (b) as merely<br />
setting forth actions that were wholly precluded and then reading subsection (c) as providing a<br />
basis for removal that was independent of the limited grounds for preclusion set forth in<br />
subsection (b). In reaching this conclusion, the court relied on the dicta in Kircher v. Putnam<br />
Funds Trust, 547 U.S. 633, 643-44 (2006), as well as the Ninth Circuit’s holdings in Luther v.<br />
Countrywide Home Loans Serv. LP, 533 F.3d 1031, 1033 (9th Cir. 2008) and Madden v. Cowen<br />
& Co., 576 F.3d 957, 965 (9th Cir. 2009).<br />
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E.<br />
Northstar Fin. Advisors, Inc. v. Schwab Invs., 781 F. Supp. 2d 926 (N.D. Cal. 2011).<br />
In a putative state law class action brought on behalf of investors in the Schwab Total<br />
Bond Market Fund (the “Fund”), the district court granted in part and denied in part defendants’<br />
motion to dismiss plaintiffs’ state law claims as precluded by the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998 (“SLUSA”). Plaintiffs asserted various state law claims alleging that<br />
defendants’ deviated from the Fund’s investment objective to track the Lehman Brothers U.S.<br />
Aggregate Bond Index (the “Index”) by investing in high risk non-U.S. agency collateralized<br />
mortgage obligations (“CMOs”) and over-concentrating the Fund’s assets in mortgage-backed<br />
securities and CMOs. The court rejected plaintiffs’ argument that it did not allege<br />
misrepresentations because all of plaintiffs’ claims were based on alleged reliance on the Fund’s<br />
fundamental investment objectives and harm as a result of defendants’ alleged failure to follow<br />
stated investment objectives. Thus, the gravamen of plaintiffs’ complaint alleged<br />
misrepresentations for purposes of SLUSA preclusion. The court also found that the “in<br />
connection with” requirement was met because plaintiffs’ claims coincided with the purchase or<br />
sale of covered securities on the Index. Finally, the court found that SLUSA’s “Delaware Carve<br />
Out” saved plaintiffs’ breach of fiduciary duty claim to the extent the claim was based on the law<br />
of Massachusetts, where the Fund was organized. Accordingly, the court dismissed all of<br />
plaintiffs’ claims precluded by SLUSA except for its breach of fiduciary duty claim and granted<br />
leave to amend.<br />
Tuttle v. Sky Bell Asset Mgmt., LLC, 2011 WL 208060 (N.D. Cal. Jan. 21, 2011).<br />
The district court held that plaintiffs’ state law claims were not preempted under the<br />
Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”), but found jurisdiction under<br />
the Class Action Fairness Act and denied plaintiffs’ motion to remand. Plaintiffs had amended<br />
their original complaint to remove allegations of fraud and defendants argued that plaintiffs had<br />
changed the language, but not the substance of their claims. The court held that plaintiffs’ state<br />
law claims were not “predicated” upon a misrepresentation in connection with a securities<br />
transaction and references to misrepresentations or omissions were simply “extraneous details.”<br />
Accordingly, SLUSA did not apply. However, the court denied plaintiffs’ motion to remand<br />
pursuant to the Class Action Fairness Act, but granted leave to amend.<br />
Smit v. Charles Schwab & Co., 2011 WL 846697 (N.D. Cal. Mar. 8, 2011).<br />
In a putative state law class action brought on behalf of Schwab Total Bond Fund<br />
investors, the district court granted defendants’ motion to dismiss plaintiffs’ claims as precluded<br />
by the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). Plaintiffs alleged that<br />
their investments declined in value because the fund deviated from its stated objective of<br />
tracking the Lehman Brothers U.S. Aggregate Bond Index (the “Index”) by investing in high risk<br />
non-U.S. agency Collateralized Mortgage Obligations (“CMOs”) and over-concentrating its<br />
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holdings in mortgage backed securities and CMOs. Plaintiffs had previously amended their<br />
complaint in an attempt to avoid references to any alleged misrepresentations by defendants.<br />
Nevertheless, the court found that plaintiffs’ amended complaint still alleged that defendants<br />
“did not keep their word” about how the fund would be managed and that plaintiff suffered<br />
losses as a result. The court also rejected plaintiffs’ argument that their claims were not barred<br />
by SLUSA because they were not “in connection with the purchase or sale of a covered security”<br />
because plaintiffs’ allegations centered around defendants’ alleged deviation from the Index and,<br />
thus, plaintiffs’ allegations sufficiently “coincided” with the purchase or sale of covered<br />
securities. Accordingly, the court granted defendants’ motion to dismiss but allowed plaintiffs<br />
leave to amend their complaint in order to state a claim based on an alleged violation of §§ 13(a)<br />
and 48(a) of the Investment Company Act for deviating from the investment objective of the<br />
Fund without a shareholder vote – a claim the court found could be stated without implicating<br />
SLUSA.<br />
Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).<br />
The district court held that plaintiffs’ proposed class action on behalf of victims of an<br />
alleged Ponzi scheme was precluded by the Securities <strong>Litigation</strong> Uniform Standards Act of 1998<br />
(“SLUSA”). Plaintiffs alleged that defendant brokerage firm knew that a non-party actor<br />
misappropriated funds that plaintiffs believed were being used to purchase securities. The court<br />
rejected plaintiffs’ argument that SLUSA did not apply because some of the securities at issue<br />
were not “covered securities.” The court also held that the “in connection with” requirement was<br />
satisfied because defendant was alleged to have actively participated in misleading plaintiffs to<br />
give their funds to the non-party actor, who plaintiffs believed would use their funds to purchase<br />
covered securities. The court rejected plaintiffs’ argument that the alleged misrepresentations<br />
were only tangential or extraneous to a fraudulent securities transaction because plaintiffs<br />
themselves alleged that their losses resulted directly from what they believed to be legitimate<br />
transactions involving covered securities. The court distinguished the securities purchase<br />
agreements at issue from a mere pledge of a security as collateral, which the Ninth Circuit had<br />
held did not satisfy the “in connection with” requirement. The court also held that SLUSA<br />
applied to plaintiffs’ aiding and abetting claims even though § 10(b) of the 1934 Act does not<br />
permit a private right of action against secondary actors. Accordingly, the court dismissed<br />
plaintiffs’ claims as precluded by SLUSA but granted leave to amend.<br />
West Palm Beach Police Pension Fund v. Cardionet, Inc., 2011 WL 1099815 (S.D. Cal. Mar. 24,<br />
2011).<br />
The district court granted plaintiff’s motion to remand a federal securities class action to<br />
state court pursuant to the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”).<br />
Plaintiff alleged that defendants’ registration statements and prospectuses for an IPO and<br />
secondary offering contained false and misleading statements and omissions in violation of the<br />
1933 Act. The court concluded that because plaintiff’s action was brought in state court alleging<br />
only federal claims under the Securities Act of 1933 and no claims under state law, it was not<br />
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precluded or removable under SLUSA. Accordingly, the district court remanded the case to state<br />
court.<br />
Good v. DeLange, 2011 WL 6888649 (S.D. Cal. Nov. 29, 2011).<br />
In a federal court class action, the district court granted defendants’ motion to stay all<br />
discovery in three concurrent state court class actions during the pendency of defendants’ notyet-filed<br />
motions to dismiss, pursuant to the Securities <strong>Litigation</strong> Uniform Standards Act of 1998<br />
(“SLUSA”). Defendants’ motion was opposed only by the state court plaintiffs, who argued that<br />
the motion should be denied because there was an applicable exemption to SLUSA’s stay<br />
provision, there was little risk of the federal court plaintiff obtaining state court discovery, the<br />
federal and state claims did not overlap, and defendants would not be burdened if required to<br />
respond to state court discover requests. The court rejected all four bases of the state plaintiffs’<br />
arguments. First, the court held that the “Savings Clause” or “Delaware Carve-Out” exemption<br />
was only applicable to removability, which issue was not before the court. Second, the court<br />
held that although protective orders barred the federal plaintiff from direct access to state court<br />
discovery, it did not preclude the federal court plaintiff from obtaining the fruits of that discovery<br />
through public channels, such as state court motion practice or amendments to the state court<br />
complaints. Third, the court found that although the state court actions were based only on<br />
alleged breaches of fiduciary duty, the federal and state claims overlapped because they were<br />
based on nearly identical factual allegations. Finally, the likelihood of wasted judicial resources<br />
and inefficiency resulting from potential litigation of discovery disputes in multiple fora also<br />
weighed in favor of the stay.<br />
Mandelbaum v. Fiserv, Inc., 2011 WL 1225549 (D. Colo. Mar. 29, 2011).<br />
In an action arising from the Madoff Ponzi scheme, a putative class of holders of selfdirected<br />
IRAs complained that the IRA administrators, as fiduciaries/trustees of the IRAs,<br />
breached their duties to safeguard the IRA funds and to avoid commingling the IRA funds with<br />
other assets. The district court held that plaintiffs’ state law claims were barred under the<br />
Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). The court noted that plaintiffs<br />
made all investment decisions for the IRA accounts at issue and, pursuant to plaintiffs’ express<br />
instructions, defendants sent plaintiffs’ funds to Bernard L. Madoff Investment Securities LLC<br />
for investment in securities. The court found that plaintiffs’ argument that their claims were not<br />
in connection with the purchase or sale of securities simply because their account statements<br />
falsely reported that plaintiffs’ funds were held in cash and treasuries was without merit. The<br />
court held that all that was necessary was that plaintiffs submitted their funds with the<br />
understanding that they would be used to purchase securities. Further, relying on numerous<br />
precedential cases, the court held that plaintiffs’ argument that any fraud was committed by a<br />
third party and not by defendants was unavailing. The court reasoned that where defendants’<br />
alleged conduct is connected to a fraud tied to the purported purchase and sale of securities, the<br />
claims are within the ambit of SLUSA. The fact that plaintiffs’ allegations against defendants<br />
did not include the words “misrepresentations” or “omissions” was of no moment. The court<br />
E.<br />
E.<br />
219
found that such pleading tactics used in an attempt to evade the reach of SLUSA were<br />
unavailing. The court further held that that SLUSA is not a preemption statute, but rather, “it<br />
denies plaintiffs the right to use the class-action device to vindicate certain claims.”<br />
Northumberland Cty. Ret. Sys. v. GMX Resources, Inc., 2011 WL 5578963 (W.D. Okla. Nov. 16,<br />
2011).<br />
The district court denied plaintiffs’ motion to remand their action alleging violations of<br />
the Securities Act of 1933 because it found that the Securities <strong>Litigation</strong> Uniform Standards Act<br />
of 1998 (“SLUSA”) conferred a right to remove the action. Plaintiffs argued that SLUSA’s §<br />
77p(b) restriction on class actions applies only to state law claims and that the removal rights<br />
conferred by § 77p(c) had to be read together with subsection (b) and, therefore, actions based on<br />
Federal law could not be removed. The court disagreed, reasoning that while subsection (b)<br />
prohibited a covered class action based upon state law being brought in either a state or federal<br />
forum, the express language of subsection (c) providing that “any covered class action” was<br />
removable to Federal court stood on its own. The court acknowledged a clear division of<br />
authority among courts which had considered the issue. Interestingly, it noted that both parties<br />
in the case and courts on both sides of the issue cited to Supreme Court dicta in Kircher v.<br />
Putnam Funds Trust, 547 U.S. 633 (2006). Accordingly, the court looked to the legislative<br />
history and found that Congress had an overarching goal of making the federal courts the<br />
“exclusive venue” for the overwhelming preponderance of securities class actions. Viewing the<br />
literal language of the statute together with the legislative history, the court concluded that<br />
securities class actions were removable to federal court, regardless of whether they alleged<br />
violations of state or federal law.<br />
RGH Liquidating Trust v. Deloitte & Touche <strong>LLP</strong>, 955 N.E.2d 329 (N.Y. 2011).<br />
In an action brought by a Chapter 11 bankruptcy liquidating trust, the New York Court of<br />
Appeals reversed the lower court’s decision dismissing the action as precluded by the Securities<br />
<strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”). The trust had brought the action on<br />
behalf of the bankrupt company’s creditors and bondholders alleging that the defendant<br />
accounting firm had committed fraud in connection with various accounting and actuarial<br />
services rendered. In the lower court, defendant moved to dismiss, arguing in part that the trust’s<br />
claims on behalf of bondholders were precluded by SLUSA. The trial court found that the trust<br />
was a single entity within the meaning of SLUSA because it was formed for broader purposes<br />
than bringing the fraud claims at issue and denied defendant’s motion to dismiss in that regard.<br />
The appellate court disagreed, finding that the trust’s claims originally belonged to the individual<br />
bondholders, were not being asserted on behalf of the bankruptcy’s estate and, thus, SLUSA<br />
applied. The Court of Appeals disagreed with the appellate court and found that the trust was<br />
one person within the meaning of SLUSA because the trust was the debtor’s successor. The<br />
Court of Appeals relied upon legislative history to find that SLUSA was not intended to prevent<br />
entities “duly authorized by law ... to seek damages on behalf of another person or entity.” Since<br />
the trust was not formed only for the purpose of bringing the fraud claim or to otherwise<br />
E.<br />
E.<br />
220
circumvent SLUSA, the Court of Appeals reversed the appellate court’s decision as to the<br />
preclusion of the bondholder’s claims and reinstated the decision of the trial court.<br />
Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789 (Cal. Ct. App. 2011).<br />
The California appellate court reversed the trial court’s holding that plaintiff’s claims<br />
were precluded by the Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“SLUSA”) and held<br />
that the state trial court had concurrent jurisdiction over investors’ claims asserted under the<br />
1933 Act. The trial court had found that although the Securities Act of 1933, as amended under<br />
SLUSA, generally provides for concurrent state and federal jurisdiction, SLUSA expressly<br />
provides an exception with respect to “covered class actions.” The appellate court held that this<br />
exception was not broad enough to include all “covered class actions” and, instead, only applies<br />
to covered class actions that involved misrepresentations, omissions, or deceptive devices or<br />
contrivances in connection with the purchase or sale of a “covered security.” Here, plaintiff’s<br />
claims concerned mortgage-backed securities that were not traded nationally and listed on a<br />
regulated national exchange and, thus, were not covered securities. In reaching its conclusion<br />
the California appellate court rejected the reasoning in Knox v. Agria Corp., 613 F. Supp. 2d 419<br />
(S.D. N.Y. 2009), that SLUSA exempted all covered class actions from concurrent jurisdiction,<br />
while distinguishing the Knox holding as a case involving covered securities.<br />
E.<br />
F. Liabilities under State Statutory and Common Law<br />
1. Blue Sky Laws<br />
F.1<br />
Ashland, Inc. v. Oppenheimer & Co. Inc., 648 F.3d 461 (6th Cir. 2011).<br />
Plaintiff purchased auction rate securities (“ARS”) and student-loan-backed ARS<br />
(“SLARS”) from defendant, a securities broker-dealer that brokered ARS and SLARS. When<br />
the ARS and SLARS market collapsed in early February 2008, plaintiff held $194 million in<br />
illiquid SLARS. Plaintiff sued defendant in the Eastern District of Kentucky asserting numerous<br />
claims including violation of Kentucky Blue Sky Laws. Plaintiff claimed that defendant knew<br />
about the ARS collapse and withheld material information. The district court dismissed the<br />
claims and plaintiff appealed. The Sixth Circuit affirmed, stating that because the Kentucky<br />
Blue Sky Law provision claimed by plaintiff is nearly identical to its federal counterpart, Rule<br />
10b-5 promulgated under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must<br />
allege the same elements as under Rule 10b-5. The court found that many of defendant’s<br />
supposed misstatements and omissions were not actionable because they lacked materiality or<br />
because there was no duty to disclose them. The court held that in this instance there was no<br />
duty to disclose the incentives the defendant provided to its employees and that the correlation<br />
between ARS’ credit ratings and low penalty rates is public information. As to plaintiff’s crucial<br />
claim, that defendant withheld vital market factors relating to underwriters abandoning the ARS<br />
market, the court held that there were no facts showing why or how defendant possessed<br />
221
advanced, non-public knowledge that underwriters would leave the ARS market and cause its<br />
collapse.<br />
Anwar v. Fairfield Greenwich Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).<br />
Plaintiffs opened accounts with a broker-dealer firm that was later acquired by defendant.<br />
Defendant recommended that plaintiffs invest in a feeder fund that in turn invested in Bernard L<br />
Madoff Investor Securities, a now well-known Ponzi scheme. Plaintiffs filed suit against<br />
defendant claiming fraud under the Florida securities statutes. The court found that the elements<br />
for a cause of action for fraud under the Florida securities statutes are identical to those under<br />
Section 10(b) of the Securities Exchange Act of 1934, except that the scienter requirement under<br />
Florida law is satisfied by a showing of negligence. The court held that plaintiffs’ state fraud<br />
claim, under the Florida securities statutes, should be dismissed for a number of reasons. First,<br />
plaintiffs did not allege where misstatements were made or when all misstatements occurred;<br />
second, plaintiffs failed to show what defendant obtained from the fraud; and third, plaintiffs<br />
failed to show that defendant acted with the requisite state of mind, which requires conscious<br />
misbehavior or recklessness. Additionally, plaintiffs did not show the buyer-seller privity<br />
required by the Florida securities statutes.<br />
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)<br />
Fulton Bank (“Fulton”) brought an action against UBS Securities (“UBS”) for violation<br />
of sections 1-401 and 1-403 of the Pennsylvania Securities Act. Fulton held institutional<br />
investment accounts with two broker-dealers, PNC and NatCity. Using these accounts, Fulton<br />
purchased Auction Rate Securities (“ARS”) at an auction managed by UBS. In its complaint,<br />
Fulton stated that UBS was Fulton’s broker-dealer and improperly misled Fulton by placing<br />
support bids that artificially inflated the value of ARS. Fulton also alleged that had it known<br />
about the instability of the ARS market, or been told that UBS supported the auctions despite<br />
insufficient investor demand, it would not have continued investing in ARS. The court granted<br />
UBS’ motion to dismiss and barred Fulton’s claim under section 1-401 because the facts as<br />
alleged failed to satisfy any element of the offense. The court also found that UBS had not<br />
conducted any market manipulation in violation section 1-402. In order to violate section 1-402,<br />
a party must employ “intentional and willful conduct designed to deceive or defraud investors by<br />
controlling or artificially affecting the price of securities.” Here, the court did not find any<br />
conduct which satisfied the elements of section 1-402.<br />
Fishman v. Morgan Keegan & Co., 2011 WL 4853367 (E.D. La. Oct. 13, 2011).<br />
Defendant, a registered securities broker-dealer, was a major participant in the market for<br />
Auction Rate Securities (“ARS”). In 2005, at the direction of plaintiffs, an institutional customer<br />
F.1<br />
F.1<br />
F.1<br />
222
of defendant purchased ARS bonds from defendant and distributed the ARS bonds to plaintiffs’<br />
accounts. In 2006 the Securities and Exchange Commission (SEC) reported that it had settled an<br />
investigation into fifteen firms, including defendant, who were participants in the ARS market.<br />
As part of the settlement, defendant posted disclosures on its public website containing<br />
information regarding its practices. The disclosures included statements that defendant could bid<br />
for its own accounts to prevent auction failures, but that investors should not assume that<br />
defendant would bid or that failed auctions would not occur. The ARS market collapsed in 2008<br />
and in 2010 plaintiffs filed a suit alleging various claims, including violations of Louisiana Blue<br />
Sky Law. The court held that loss causation is an essential element of fraud under Louisiana<br />
Blue Sky Law and that plaintiffs failed to establish loss causation. The court found that even<br />
accepting that defendant materially misrepresented or omitted the truth regarding the liquidity<br />
risks of ARS or defendant’s participation in the ARS auctions, the corrected disclosures required<br />
by the SEC order occurred before the plaintiffs’ economic losses occurred in 2008. Additionally,<br />
the court found that any alleged misrepresentations or omission regarding the ARS bonds could<br />
have been discovered by the institutional investor who purchased the ARS bonds for plaintiffs.<br />
Because fraud under Louisiana Blue Sky Law limits recovery where reasonable care would<br />
reveal the untruth or omission, the court held that plaintiffs could not recover.<br />
Perfecting Church v. Royster, Carberry, Goldman & Assocs., Inc., 2011 WL 4407439 (E.D.<br />
Mich. Sept. 22, 2011).<br />
Plaintiff filed a complaint claiming that defendants, a financial services company and<br />
some of its employees, violated section 451.810 of the Michigan Uniform Securities Act<br />
(MUSA). In 2007 and 2008, defendant claimed to be a financial services company that<br />
specialized in commodity futures contracts. Plaintiff collectively invested $504,171.04 with the<br />
defendants. In November 2008, plaintiff sought to recover its investment and interest accrued,<br />
but defendants were unable to repay. Plaintiff filed a motion for partial summary judgment<br />
arguing that the defendants violated section 451.810(a) of MUSA, which creates a cause of<br />
action against those who either (1) transact business as a broker-dealer or agent without<br />
registering as such, or (2) offers to sell a security that is not registered, exempted, or covered by<br />
federal securities law. The court ruled that although the company was liable for conducting the<br />
transaction, certain employees were not because plaintiff did not buy the securities from those<br />
employees. Plaintiff also claimed that defendants violated section 451.810(b), which extends<br />
liability for the sale of unregistered securities to “[e]very person who directly or indirectly<br />
controls a [liable] seller.” The court agreed and recognized numerous facts which revealed that<br />
the employees named by the plaintiff were in control of the financial services company.<br />
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D. Mich. Feb. 28, 2011).<br />
Plaintiffs filed a complaint against the stock broker and investment advisor (“<strong>Broker</strong>”)<br />
who solicited them into investing in telecommunication companies that never existed. Plaintiffs<br />
also named the securities broker-dealers that employed <strong>Broker</strong> as a registered representative.<br />
F.1<br />
F.1<br />
223
One of the broker-dealer defendants (“BD”) filed a motion to dismiss the claims filed against it<br />
by plaintiff, including plaintiff’s claims that BD violated the Michigan Uniform Securities Act<br />
(“MUSA”) by selling unregistered securities and selling securities by means of an untrue<br />
statement or omission of a material fact. The court held that BD was not a statutory seller<br />
subject to MUSA liability because BD did not urge the sale of the securities or actively<br />
participate in the solicitation.<br />
Louisiana-Pacific Corp. v. Money Market 1 Institutional Investment <strong>Dealer</strong>, 2011 WL 1152568<br />
(N.D. Cal. 2011).<br />
Louisiana Pacific Corporation (“LP”) brought an action against Deutsche Bank Securities<br />
Inc. (“DBSI”) and Money Market 1 Institutional Investment <strong>Dealer</strong> (“MM1”) for violation of the<br />
California Corporate Securities Law of 1968 (the “Code”), §§ 25500 and 25501. These sections<br />
of the Code prohibit misrepresentation and market manipulation in the sale of securities. In its<br />
complaint, LP alleged that DBSI, in its capacity as sole broker-dealer, placed support bids on<br />
Auction Rate Securities (“ARS”), which artificially inflated their value. In addition, LP claimed<br />
that MM1, in its capacity as LP’s financial advisor and broker-dealer, made representations that<br />
ARS were highly liquid and safe cash equivalents that posed virtually no risk of principal loss.<br />
In reliance on MM1’s advice, LP invested more than $300 million of its working capital in ARS.<br />
The court dismissed LP’s claim because (1) LP failed to allege strict contractual privity in the<br />
purchase of the subject securities, and (2) the facts alleged did not establish scienter under<br />
California law.<br />
Gibbons v. Nat’l Real Estate Investors, LC, 2011 WL 1086364 (D. Utah Mar. 23, 2011).<br />
Defendant, an individual, was the manager and 50% owner of a limited liability company<br />
that invested in various real estate projects. Defendant sold plaintiffs a total 15% interest in the<br />
LLC for $1.1 million. Plaintiffs brought suit against defendant under Utah Code Ann. Section<br />
61-1-22(1)(b) for violation of Utah Uniform Securities Act. Specifically, plaintiffs alleged that<br />
defendant violated Utah Code Ann. Sections 61-1-3(1) and 61-1-7 by acting as a broker-dealer<br />
without the proper license and selling unregistered securities. The court found that defendant<br />
was never licensed as a broker-dealer, that under Utah law a security includes an interest in a<br />
limited liability company (notwithstanding certain exceptions), and that the securities sold by<br />
defendant were never registered and did not fit into any exception. The court granted plaintiffs’<br />
motion for summary judgment on the Utah Securities Act claims. Additionally, the court found<br />
that the defendant knew and intentionally sold interests in the limited liability company, which<br />
made his conduct intentional and reckless, and the court awarded plaintiffs treble damages under<br />
Utah Code. Ann. Section 61-1-22(2).<br />
F.1<br />
F.1<br />
224
2. Consumer Protection and Other Statutes<br />
F.2<br />
No cases decided in 2011.<br />
3. Common Law Fraud<br />
F.3<br />
Ashland, Inc. v. Oppenheimer & Co. Inc., 648 F.3d 461 (6th Cir. 2011).).<br />
Plaintiff purchased auction rate securities (“ARS”) and student-loan-backed ARS<br />
(“SLARS”) from defendant, a securities broker-dealer that brokered ARS and SLARS. When<br />
the ARS and SLARS market collapsed in early February 2008, plaintiff held $194 million in<br />
illiquid SLARS. Plaintiff sued defendant in the Eastern District of Kentucky asserting numerous<br />
claims including common law fraud. Plaintiff claimed that defendant knew about the ARS<br />
collapse and withheld material information. The district court dismissed the claims and plaintiff<br />
appealed. The Sixth Circuit affirmed, holding that although common law fraud claims do not<br />
need to meet the heightened pleading requirements of the Private Securities <strong>Litigation</strong> Reform<br />
Act, such claims must still fulfill Federal Rule of Civil Procedure 9(b)’s particularity<br />
requirements and there were no facts showing that defendant acted with recklessness or knowing<br />
and deliberate intent to manipulate, deceive or defraud.<br />
In re Kingate Mgmt. Limited <strong>Litigation</strong>, 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011)<br />
Plaintiffs filed an Amended Consolidated Class Action Complaint against defendants<br />
asserting common law claims for fraud, negligent misrepresentation, gross negligence,<br />
negligence, breach of fiduciary duty, constructive fraud, third-party beneficiary breach of<br />
contract, mutual mistake, aiding and abetting breach of fiduciary duty, aiding and abetting fraud,<br />
and unjust enrichment. Plaintiffs alleged that defendants, both of which were investment funds,<br />
acted as “feeder funds” by channeling capital into Bernie Madoff’s fraudulent operations.<br />
Defendants filed a motion to dismiss asserting that the state law claims presented by the<br />
plaintiffs were pre-empted under federal law. The court opined that under the Securities<br />
<strong>Litigation</strong> Uniform Standard Act (“SLUSA”), each of the state claims presented in the class<br />
action suit must be dismissed. Under SLUSA, covered class actions, based on the statutory or<br />
common law of state or subdivision, may not be maintained in any state or federal court by a<br />
private party that alleges (1) an untrue statement or omission of material fact in connection with<br />
the purchase or sale of a covered security, or (2) that defendant used or employed any<br />
manipulative or deceptive device or contrivance in connection with the purchase or sale of a<br />
covered security.<br />
F.3<br />
225
F.3<br />
Berman v. Morgan Keegan & Co., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).<br />
Using proceeds from the sale of stock, plaintiffs acquired floating rate notes with a<br />
market value of approximately $8.3 million. Under section 1042 of the Internal Revenue Code,<br />
the plaintiffs could defer capital gains tax on the sale of the stock as long as they did not sell the<br />
replacement property, the floating rate notes. The plaintiffs participated in a 90% loan program,<br />
which was run by two affiliated companies (the “Companies”). The Companies claimed that the<br />
90% loan program would allow the plaintiffs to pledge their floating rate notes as loan collateral<br />
and in return receive 90% of the collateral value in cash without selling the replacement property<br />
and triggering the tax consequences. Instead of holding the collateral, the Companies<br />
immediately sold the collateral upon receipt. The Companies had an account with defendant, a<br />
securities broker-dealer. The collateral was deposited into the Companies’ account with<br />
defendant, and the Companies instructed the defendant to direct a trader to sell the pledged<br />
collateral. The defendant then wired the sale proceeds to the Companies’ bank account. The<br />
Internal Revenue Service informed plaintiffs that because the replacement property was sold,<br />
plaintiffs did not qualify for the deferred capital gains tax and were liable for taxes and penalties.<br />
Plaintiffs alleged that defendant aided and abetted the Companies’ common law fraud. The court<br />
found that plaintiffs pleaded the underlying fraud with the requisite particularity, but that<br />
plaintiffs failed to plead facts with the requisite particularity to support their claim that defendant<br />
had actual knowledge of the underlying fraud. Defendant did not know, nor was it responsible<br />
for knowing how the 90% loan program was marketed to customers. Additionally, the “Know<br />
Your Customer Rules” refer to what broker-dealers should know, but do not reflect actual<br />
knowledge required for aiding and abetting fraud.<br />
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)<br />
Fulton Bank (“Fulton”) brought a claim against UBS Securities (“UBS”) for (1) common<br />
law fraud, and (2) aiding and abetting common law fraud. Fulton held institutional investment<br />
accounts with two broker-dealers, PNC and NatCity. Using these accounts, Fulton purchased<br />
Auction Rate Securities (“ARS”) at an auction managed by UBS. In its complaint, Fulton stated<br />
that UBS was Fulton’s broker-dealer and improperly misled them by placing support bids that<br />
artificially inflated the value of ARS. Fulton also alleged that had it known about the instability<br />
of the ARS market, or been told that UBS supported the auctions despite insufficient investor<br />
demand, it would not have continued investing in ARS. The court granted UBS’ motion to<br />
dismiss. With respect to the common law fraud claim, the court concluded that the complaint did<br />
not allege facts sufficient to establish that (1) UBS had a duty to disclose, (2) Fulton justifiably<br />
relied on UBS’s omissions, or (3) UBS acted with scienter. In addition, the court found that<br />
there was no allegation that UBS knew of any fraud being perpetuated by PNC or NatCity. The<br />
only role UBS played in this transaction was running an auction at the request of issuers and<br />
paying commissions to brokers, neither of which constituted aiding and abetting.<br />
F.3<br />
226
F.3<br />
Borsellino v. Putnam, 2011 WL 6090694 (Ill. App. 1st Dist. Dec. 2, 2011).<br />
Plaintiff and defendant were business associates whose companies were members of an<br />
Illinois limited liability company (the “LLC”). One of the companies owned by the defendant<br />
was a broker-dealer that specialized in options trading. Plaintiff filed a derivative suit on behalf<br />
of the LLC claiming that defendant and its respective companies used the LLC’s resources to<br />
create a competing company run by defendant. Defendant’s broker-dealer was allegedly tasked<br />
with providing broker-dealer services to this new company. Shortly after the suit was filed, the<br />
parties entered a Settlement Agreement and Mutual Release (the “Release”). The Release<br />
provided that plaintiff would not bring any claims against defendant in exchange for a payment<br />
of $250,000. Soon after the Release was executed, plaintiff filed suit alleging that numerous<br />
misrepresentations were made during the parties’ settlement negotiations. Plaintiff claimed that<br />
he was entitled to monetary damages due to fraud committed by defendant. The court explained<br />
that fraud in the inducement of a contract renders the contract void. Although the perpetrator of<br />
the fraud cannot enforce it, the innocent party may either (1) rescind the contract, or (2) choose<br />
to waive the defect, ratify the contract, and enforce it. However, under the facts of this case, the<br />
court found that plaintiff ratified the Release even after learning of the alleged fraud. The court<br />
explained that plaintiff’s retention of payment after discovering the fraudulent nature of the<br />
release, and statements that he remained bound by the Release, were sufficient to uphold its<br />
enforcement. Therefore, the language barring plaintiff from bringing claims against defendant<br />
was upheld and the plaintiff’s claim was dismissed.<br />
4. Breach of Fiduciary Duty and Other Common Law Claims<br />
F.4<br />
Anwar v. Fairfield Greenwich Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).<br />
Plaintiffs opened accounts with a broker-dealer firm that was later acquired by defendant.<br />
Defendant recommended that plaintiffs invest in a feeder fund that in turn invested in Bernard L<br />
Madoff Investor Securities, a now well-known Ponzi scheme. Plaintiffs filed suit against<br />
defendant claiming, among other things, breach of fiduciary duty and negligent<br />
misrepresentation. The breach of fiduciary duty claim was based on two separate theories:<br />
(1) that the defendant failed to conduct due diligence prior to recommending the feeder fund and<br />
(2) that defendant failed to monitor plaintiffs’ investments in the feeder fund. The court held that<br />
defendant owed only a limited set of duties to plaintiffs because plaintiffs held nondiscretionary<br />
accounts with defendant, but that even nondiscretionary broker-dealers have a duty to become<br />
sufficiently informed before recommending investments. Because the lawsuit was part of<br />
multidistrict litigation (“MDL”) the court looked to the fiduciary duty claims in defendant’s<br />
other lawsuits. In another case against defendant the plaintiffs’ cause of action for breach of<br />
fiduciary duty, similarly pled, defeated dismissal. In order to ensure uniformity among the<br />
rulings in the MDL, the court held that plaintiffs sufficiently stated causes of action for breach of<br />
fiduciary duty. The negligent misrepresentation claim was dismissed as being essentially<br />
identical to plaintiffs’ fraud claim under Florida securities laws.<br />
227
F.4<br />
Berman v. Morgan Keegan & Co., Inc., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).<br />
Using proceeds from the sale of stock, plaintiffs acquired floating rate notes with a<br />
market value of approximately $8.3 million. Under section 1042 of the Internal Revenue Code,<br />
the plaintiffs could defer capital gains tax on the sale of the stock as long as they did not sell the<br />
replacement property, the floating rate notes. The plaintiffs participated in a 90% loan program,<br />
which was run by two affiliated companies (the “Companies”). The Companies claimed that the<br />
90% loan program would allow the plaintiffs to pledge their floating rate notes as loan collateral<br />
and in return receive 90% of the collateral value in cash without selling the replacement property<br />
and triggering the tax consequences. Instead of holding the collateral, the Companies<br />
immediately sold the collateral upon receipt. The Companies had an account with defendant, a<br />
securities broker-dealer. The collateral was deposited into the Companies’ account with<br />
defendant, and the Companies instructed the defendant to direct a trader to sell the pledged<br />
collateral. The defendant then wired the sale proceeds to the Companies’ bank account. The<br />
Internal Revenue Service informed plaintiffs that because the replacement property was sold,<br />
plaintiffs did not qualify for the deferred capital gains tax and were liable for taxes and penalties.<br />
Plaintiffs alleged that defendant aided and abetted the Companies’ breach of fiduciary duty.<br />
Under New York law, a claim for aiding and abetting a breach of fiduciary duty requires: (1) a<br />
breach by a fiduciary of obligation to another, (2) that the defendant knowingly induced or<br />
participated in the breach, and (3) that plaintiff suffered damage as a result of the breach. The<br />
court found that plaintiffs failed to show that defendant had actual knowledge of the breach.<br />
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)<br />
Fulton Bank (“Fulton”) brought a claim against UBS Securities (“UBS”) for breach of<br />
fiduciary duty. Fulton held institutional investment accounts with two broker-dealers, PNC and<br />
NatCity. Using these accounts, Fulton purchased Auction Rate Securities (“ARS”) at an auction<br />
managed by UBS. In its complaint, Fulton stated that UBS was Fulton’s broker-dealer and<br />
improperly misled them by placing support bids that artificially inflated the value of ARS.<br />
Fulton also alleged that had it known about the instability of the ARS market, or been told that<br />
UBS supported the auctions despite insufficient investor demand, it would not have continued<br />
investing in ARS. The court dismissed and found that UBS did not breach any fiduciary duty<br />
because “no such relationship developed between UBS and Fulton.” In order to prove that a<br />
breach of fiduciary duty occurred, a party must show confidence reposed by one side and<br />
domination and influence exercised by another. The court emphasized that it is not enough to<br />
show that plaintiff reposed its trust in defendant. Instead, defendant must have accepted the<br />
fiduciary relationship. Here, the court explained that Fulton’s interaction with UBS was solely<br />
through its retail brokers. This indirect relationship was not enough to create any fiduciary duty.<br />
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F.4<br />
Haase v. GunnAllen Fin., Inc., 2011 WL 768045 (E.D. Mich. Feb. 28, 2011).<br />
Plaintiffs filed a complaint against the stock broker and investment advisor (“<strong>Broker</strong>”)<br />
who solicited them into investing in telecommunication companies that never existed. Plaintiffs<br />
also named the securities broker-dealers that employed <strong>Broker</strong> as a registered representative.<br />
One of the broker-dealer defendants (“BD”) filed a motion to dismiss the numerous claims filed<br />
against it by plaintiff, including plaintiff’s common law causes of action against BD, which<br />
consisted of: failure to supervise <strong>Broker</strong>, respondeat superior, apparent authority, negligence,<br />
unjust enrichment, and breach of fiduciary duty. The court found that although failure to<br />
supervise, respondeat superior, apparent authority, and negligence were stated as being grounded<br />
in negligence, the claims were rooted in fraud. Because the court found that plaintiffs’ federal<br />
fraud claims did not meet the heightened pleading standards, the court held that the plaintiffs’<br />
common law claims rooted in fraud were also dismissed. The court held that the breach of<br />
fiduciary duty claim must be dismissed because plaintiffs failed to show that the accounts<br />
allegedly held by BD were discretionary. Under Michigan law, a fiduciary relationship only<br />
arises between a broker and his client where the account is discretionary. The unjust enrichment<br />
claim also failed because plaintiff did not establish: (1) the receipt of a benefit to BD from<br />
plaintiff and (2) an equity resulting to plaintiff because of the retention of the benefit by BD.<br />
Louisiana-Pacific Corp. v. Money Market 1 Institutional Investment <strong>Dealer</strong>, 2011 WL 1152568<br />
(N.D. Cal. 2011).<br />
Louisiana Pacific Corporation (“LP”) brought an action against Deutsche Bank Securities<br />
Inc. (“DBSI”) for common law fraud, and against Money Market 1 Institutional Investment<br />
<strong>Dealer</strong> (“MM1”) for common law fraud, common law negligent misrepresentation, and common<br />
law breach of fiduciary duty. In its complaint, LP alleged that DBSI, in its capacity as sole<br />
broker-dealer, placed support bids on Auction Rate Securities (“ARS”), which artificially<br />
inflated their value. In addition, LP claimed that MM1, in its capacity as LP’s financial advisor<br />
and broker-dealer, made representations that ARS were highly liquid and safe cash equivalents<br />
that posed virtually no risk of principal loss. In reliance on MM1’s advice, LP invested more<br />
than $300 million of its working capital in ARS. To successfully present a claim of common law<br />
fraud under California law, a party must prove (1) misrepresentation, either false representation,<br />
concealment, or nondisclosure; (2) knowledge of the falsity; (3) intent to defraud; (4) justifiable<br />
reliance; and (5) resulting damage. Here, the court dismissed LP’s common law fraud claim<br />
because it failed to establish scienter and justifiable reliance.<br />
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G. Liabilities Involving Clearing <strong>Broker</strong>s<br />
G.<br />
Katz v. Pershing, LLC, 2011 U.S. Dist. LEXIS 94107 (D. Mass. Aug. 23, 2011).<br />
Plaintiff investor, on behalf of herself and those similarly situated, brought suit against<br />
defendant clearing broker alleging its use of a proprietary software program made investor’s<br />
non-public personal information (NPPI) vulnerable to unauthorized access by third parties.<br />
Plaintiff alleged violations of Massachusetts Unfair and Deceptive Trade Practices Act, Mass.<br />
Gen. Laws ch. 93A; various other state unfair trade practices statutes, including Chapter 93H;<br />
breach of express and implied contract; negligent breach of contract; and unjust enrichment. The<br />
court found that plaintiff failed to establish statutory standing under Massachusetts Unfair and<br />
Deceptive Trade Practices Act, as she alleged only potential, not actual misappropriation of<br />
NPPI and thus failed to show any injury-in-fact. This divested the court of subject matter<br />
jurisdiction. The court also found that Chapter 93H does not include a private right of action and<br />
may be enforced only by the State Attorney General. Plaintiff did not have standing as a thirdparty<br />
beneficiary of the contract between the introducing firm and defendant clearing broker, as<br />
the contract expressly stated that it was not intended to confer any benefits on third parties,<br />
including customers. Plaintiff’s implied-in-fact contract claims also failed, as defendant was<br />
already required to safeguard NPPI pursuant to its contract with the introducing broker, and any<br />
alleged promise to plaintiff to do the same was thus not valid consideration. Finding no express<br />
or implied contract existed, the court dismissed plaintiff’s negligent breach of contract claim.<br />
Finally, plaintiff’s unjust enrichment claim was dismissed because she failed to allege that<br />
defendant requested, or that plaintiff conferred, any benefit on the defendant. Defendant’s<br />
motions for lack of subject matter jurisdiction and failure to state a claim were thus granted.<br />
Alki Partners, L.P. v. Vatas Holdings GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).<br />
Plaintiffs, hedge funds, brought suit against various defendants alleging defendants<br />
created and carried out a market-manipulation scheme to inflate the price of a stock. The stock<br />
was traded on the over-the-counter bulletin board (“OTCBB”). The stock collapsed, causing<br />
plaintiffs to sustain large losses. Plaintiffs alleged that one defendant, a limited liability<br />
company, purposely avoided acquiring shares of the stock on the open market by instructing<br />
others to purchase large blocks of shares of the stock with the understanding that the company,<br />
through institutions in Europe, including a co-defendant investment bank, would thereafter<br />
repurchase the shares in an off-market transaction on a delivery-versus-payment (“DVP”) basis.<br />
To conduct a DVP trade, plaintiffs had their clearing broker deliver the shares to the investment<br />
bank which would pay the clearing broker for the shares upon their receipt. Defendants brought<br />
motions to dismiss for failure to state a claim. The court found that plaintiffs could not claim<br />
their damages were caused by reliance on the assumption of an efficient market, as OTCBB had<br />
never been held as such. The court held that the complaint failed to sufficiently allege scienter<br />
with regard to the investment bank and its broker since the only profit these defendants received<br />
were the normal transaction costs, which courts have held insufficient to establish motive. The<br />
court found plaintiffs’ failure to allege scienter also caused their Section 10(b) claim, under the<br />
Securities Exchange Act of 1934, based on misstatement or omission, to fail. The court also held<br />
G.<br />
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that the complaint failed to allege that these defendants acted recklessly. Furthermore, plaintiffs’<br />
claim for control person liability under Section 20(a) of the Exchange Act failed as the plaintiffs<br />
failed to plead a primary violation by any person named in the complaint. The court declined to<br />
exercise supplemental jurisdiction over the remaining claims, all of which were Washington state<br />
law and common law claims. Finding any amendment would be futile, the court granted<br />
defendants’ motions to dismiss, dismissing plaintiffs’ federal claims with prejudice.<br />
Litchfield Capital, LLC v. BNY Clearing Services LLC, 2011 U.S. Dist. LEXIS 120207<br />
(S.D.N.Y. Oct. 14, 2011).<br />
Plaintiff, an investment advisory firm, brought suit against defendant bank and a clearing<br />
broker, alleging breach of contract and various tort claims arising from the firm’s transfer of<br />
$5 million worth of cash or bonds into an account established at the bank by a broker-dealer.<br />
When the firm instructed the bank to transfer the contents of the account to another firm, the<br />
bank notified the broker-dealer. When the broker-dealer refused to authorize any transfers from<br />
the account, the bank refused to follow the firm’s directive. The bank brought a motion for<br />
summary judgment alleging that the relationship between the firm and broker-dealer was illegal<br />
and, thus, the firm was not entitled to judicial recourse. Specifically, the bank alleged that the<br />
broker-dealer was seeking a subordinated loan to help it address its regulatory “net capital” needs<br />
under Rule 15(c)(3)-1 of the Securities Exchange Act of 1934. Although the firm denied that the<br />
relationship was as the bank had alleged, it provided no alternative explanation of the<br />
relationship nor did it explain why the broker-dealer filed forms with the NASD consistent with<br />
such a relationship. The court found that the agreement between the firm and the bank was<br />
unenforceable as a matter of public policy, as enforcing it would permit the parties to commit a<br />
fraud on the NASD. The court therefore refused to enforce any agreement between the firm and<br />
the bank and thereby dismissed the firm’s breach of contract claim. The court also dismissed the<br />
firm’s tort claims finding they were duplicative of its breach of contract claims. Accordingly,<br />
the court granted the bank’s motion for summary judgment.<br />
Javitch v. Prudential Sec. Inc., 2011 U.S. Dist. LEXIS 6925 (N.D. Ohio Jan. 25, 2011).<br />
Plaintiff, a court-appointed receiver of two entities that had been controlled by a common<br />
principal, brought suit against defendant clearing broker for conduct related to brokerage<br />
accounts that the principal had entered into in his individual capacity. Upon opening the<br />
accounts, the principal signed the introducing broker’s new account agreement. The agreement<br />
contained an arbitration clause expressly providing that defendant clearing broker was a thirdparty<br />
beneficiary to the agreement, and that the arbitration provision applied to “all matters”<br />
between the principal and defendant clearing broker. Plaintiff argued that the arbitration<br />
provision was void, because it was executed after the court had appointed a receiver for the<br />
entities. The court dismissed this argument because when the agreement was executed the<br />
receiver did not yet have authority over the accounts opened by the principal in his individual<br />
capacity, and defendant clearing broker had no notice of the receivership state. The court<br />
pointed out that the clearing broker performed only recordkeeping and ministerial functions and<br />
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G.<br />
231
had no direct contact with the principal. The court found plaintiff receiver equitably estopped<br />
from avoiding the arbitration provisions found in the agreement. Although plaintiff receiver was<br />
not a signatory to this agreement, he was nonetheless bound to its provisions because the claims<br />
he asserted against the clearing broker would not have existed but for the agreement between the<br />
principal and the introducing broker. The receiver was thus seeking a direct benefit from the<br />
relationship created by the agreement. The court refused to allow plaintiff receiver to<br />
simultaneously assert claims arising from the agreement while avoiding the arbitration<br />
provisions contained therein. Defendant’s motion to compel arbitration was granted.<br />
Prestwick Capital Mgmt. Ltd. v. Peregerine Fin. Group, Inc., 2011 U.S. Dist. LEXIS 95324<br />
(N.D. Ill. Aug. 25, 2011).<br />
Plaintiff investment advisory firm brought suit for commodities fraud under the<br />
Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq. against an introducing broker and<br />
certain of its principals. Plaintiffs alleged that the introducing broker engaged in unauthorized<br />
trading in an account opened with a clearing firm resulting in losses of roughly $4 million. The<br />
firm also sought to hold the clearing firm liable for the introducing broker’s alleged fraud by<br />
virtue of a guarantee agreement between the clearing firm and the introducing broker. The<br />
clearing firm moved for summary judgment arguing that the guarantee agreement was not<br />
effective at the time of the introducing broker’s fraudulent activities. The court applied contract<br />
interpretation principals and found that at the time the introducing broker engaged in the fraud<br />
the guarantee agreement between the clearing firm and the introducing broker had terminated<br />
and no new agreement had been put in its place. The court also noted that the Commodity<br />
Futures Trading Commission has promulgated regulations designed to address the problem of<br />
judgment-proof introducing brokers in that introducing brokers are required to meet certain net<br />
capitalization requirements unless they have a guarantee agreement with a futures commission<br />
merchant such as the defendant. The court rejected plaintiff’s assertion of equitable estoppel as<br />
plaintiff failed to make clear precisely when any alleged misrepresentation was made. Although<br />
plaintiff requested it be allowed to take additional discovery pursuant to Federal Rule of Civil<br />
Procedure 56(d)(2), the court found that such discovery would be futile and granted the<br />
introducing broker’s motion for summary judgment.<br />
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2011 N.Y. App. Div. LEXIS 8829 (N.Y. App. Div.<br />
Dec. 13, 2011).<br />
Plaintiffs, an introducing broker and its clearing firm, brought suit against defendant<br />
insurance company for breach of contract in a declaration that defendant had a duty to indemnify<br />
plaintiffs for a disgorgement payment that plaintiffs made pursuant to a settlement with the<br />
Securities and Exchange Commission. The insurance program at issue obligated defendant to<br />
indemnify plaintiffs for all “loss which the insured shall become legally obligated to pay as a<br />
result of any claim . . . for any wrongful act.” Defendant filed a motion to dismiss arguing the<br />
payment was not an insurable loss or was excluded from coverage. The trial court denied<br />
defendant’s motion to dismiss. On appeal, the court found that under New York law the risk of<br />
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G.<br />
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eing directed to return improperly acquired funds is not insurable and, thus, disgorgement of illgotten<br />
gains or restitution damages does not constitute an insurable loss. As the SEC order<br />
illustrated how plaintiff’s trading desk actively collaborated with its clients to execute an illegal<br />
late trading and market timing scheme, the court rejected plaintiff’s arguments that it was merely<br />
found guilty of inadequate supervision and failure to place adequate controls on its electronic<br />
entry system. The court also rejected plaintiff’s arguments that the fact that the SEC did not<br />
itemize how it reached the disgorgement figure raised an issued as to whether the disgorgement<br />
payment was in fact compensatory, thus bringing it within the ambit of the insurance program.<br />
The court noted that the amount disgorged must only be a reasonable approximation of profits<br />
causally connected to the violation. Accordingly, the appellate court reversed the trial court’s<br />
order denying defendant’s motion to dismiss.<br />
Brooks v. Transamerica Fin. Advisors, 57 So. 3d 1153 (La. Ct. App. 2011).<br />
Plaintiff customer brought suit against defendant clearing broker alleging defendant paid<br />
unauthorized checks from plaintiff’s brokerage checking account without obtaining proper<br />
identification and approval from plaintiff. Defendant moved for summary judgment claiming it<br />
was entitled to the preclusive effects of Chapter 4 of the Uniform Commercial Code (“U.C.C.”),<br />
codified by Louisiana Revised Statute 10:4-101 et seq., which requires customers to exercise<br />
reasonable promptness in examining the account statements issued to them by a bank, to<br />
determine if any payment was unauthorized, and if so, to promptly notify the bank of the relevant<br />
facts. If the bank proves the customer failed to exercise reasonable care, the customer is<br />
precluded from asserting her unauthorized signatures against the bank. Here, it was undisputed<br />
that the customer did not exercise reasonable care in handling her brokerage account; she failed<br />
to examine account statements for five years and did not notify the clearing broker of alleged<br />
forgeries until she amended her petition to add the clearing broker as a defendant, sixteen months<br />
after filing her initial suit. As such, the case turned on whether the clearing broker was a “bank”<br />
under the U.C.C./Louisiana Revised Statutes. The court noted that the U.C.C. broadly defines<br />
“bank” as a “person engaged in the business of banking.” Here, the clearing broker provided a<br />
checking account as a service to customers who opened a brokerage account with a particular<br />
introducing firm. The clearing broker created the account and administered the checking account<br />
in connection with a bank to which it supplied the customers’ names and account numbers. As<br />
part of its regular business, the clearing broker maintained the checking accounts to allow<br />
customers easy access to, and use of, their funds. The court found that considering the U.C.C.’s<br />
broad definition of “bank” and the U.C.C.’s directive that its provisions be liberally construed,<br />
the clearing broker engaged in the business of banking and was therefore entitled to the<br />
protections of Louisiana Revised Statute 10:4-406. Defendant’s motion for summary judgment<br />
was granted.<br />
G.<br />
G.<br />
Howard Family Charitable Found., Inc. v. Trimble, 259 P.3d 850 (Okla. Civ. App. 2011).<br />
Plaintiffs, investors in a hedge fund, brought suit against a Futures Commission Merchant which<br />
acted as a clearing broker for the hedge fund’s principal and manager. The clearing broker<br />
233
provided clearing and execution services for accounts opened with it by the fund’s principal and<br />
manager, and provided them software allowing them to execute trades. Plaintiffs brought suit<br />
under the Oklahoma Uniform Securities Act of 2004, specifically Oklahoma Statute<br />
Section 1-509(G), which imposes joint and several liability “to the same extent” as those liable<br />
for conducting an unlawful sale of securities, and those who materially aid “in the conduct giving<br />
rise to a liability.” The issues on appeal relevant to defendant clearing broker’s liability were<br />
whether plaintiffs had a cause of action under the Oklahoma Uniform Securities Act, and<br />
whether the Federal Commodities Exchange Act preempted the Oklahoma state court’s exercise<br />
of jurisdiction. The court found that because plaintiffs’ claims against defendant clearing broker<br />
arose solely from commodity transactions, the Oklahoma Uniform Securities Act was<br />
inapplicable; Congress had placed jurisdiction over private rights of action in violation of federal<br />
commodities regulations solely within the federal district court. As such, plaintiffs’ causes of<br />
action against defendant clearing broker were preempted. As no further amendment of their<br />
petition could cure this jurisdictional defect, defendant’s motion for summary judgment was<br />
granted and plaintiffs’ claims were thereby dismissed as a matter of law.<br />
H. Secondary Liability<br />
1. Respondeat Superior<br />
City of Roseville Employees Ret. Sys. v. Horizon Lines, Inc., 2011 U.S. App. LEXIS 17701 (3d<br />
Cir. June 23, 2011).<br />
Defendants pleaded guilty to price fixing. Plaintiffs sued for losses under the doctrine of<br />
respondeat superior. The district court dismissed the claims, finding an insufficient showing of<br />
scienter. Plaintiffs appealed the district court’s dismissal of securities fraud allegations arising<br />
out of the defendant’s statements that defendant corporation was financially healthy when that<br />
wellbeing was based on price fixing and not other reasons identified. With regard to the<br />
defendant corporation, the district court found plaintiffs did not allege that an individual<br />
defendant made material false statements on behalf of the corporation that were relied upon by<br />
plaintiffs, and acted with scienter. The appellate court agreed with the district court’s reasoning<br />
that securities fraud allegations require heightened pleading, including alleging a strong<br />
inference that the defendant acted with scienter. The district court found no strong inference of<br />
the requisite state of mind as to the senior executives, and therefore the defendant corporation’s<br />
scienter could not be based on an individual’s scienter. While plaintiffs argued that scienter<br />
could be attributed to the defendant corporation without pleading a successful claim against an<br />
underlying individual, the district and appellate courts disagreed. The appellate court determined<br />
that the facts as alleged would not survive a motion to dismiss even if no individual was needed.<br />
The dissent believed the plaintiffs alleged sufficient facts to show an inference that defendant<br />
senior executives acted with scienter. The defendant also noted that the Seventh Circuit has<br />
approved the doctrine of respondeat superior in determining whether an individual defendant’s<br />
scienter could be attributable to the corporate defendant and did not interpret Congress’<br />
heightened pleadings requirement as a bar against pleading corporate scienter in the absence of<br />
establishing a named executive officer’s scienter.<br />
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H.1<br />
U.S. v. Reyes, 660 F.3d 454 (9th Cir. 2011).<br />
Appellant, chief executive officer of a corporation, appealed from a conviction for<br />
securities fraud, making false filings to the Securities and Exchange Commission, falsifying<br />
corporate books and records, and making false statements to auditors with regard to backdated<br />
and improperly recorded stock options. Appellant asserted prosecutorial misconduct, which<br />
included a claim that the prosecution’s focus on corporate responsibility and rejection of<br />
proposed jury instructions gave no significance to the legal concept of respondeat superior. The<br />
appellate court found that the lower court did not abuse its discretion because the instructions<br />
provided to the jury made clear that the appellant could not be found guilty simply due to his<br />
position of CEO.<br />
Ledford v. Peeples, 657 F.3d 1222 (11th Cir. 2011).<br />
Appellants related to limited liability company (“LLC 1”) sued appellee-financier for<br />
federal and state securities violations, including alleged violations of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934. LLC 1 specifically alleged it would not<br />
have sold its interest in another company (“LLC 2”) had it known the financier was supplying<br />
financing to the buyers. Financier was sued under the doctrine of respondeat superior for the<br />
board of directors’ fraudulent conduct and breach of fiduciary duty for failure to inform LLC 1<br />
of financier’s intent to provide the buy-out funds. The district court granted summary judgment<br />
to financier, despite financier’s denial of its involvement in the purchase transaction. The<br />
appellate court found that the district court did not abuse its discretion because it found no<br />
evidence that the financier’s denial of involvement in the purchase transaction affected LLC 1’s<br />
decision to sell its interest in the corporation. Thus, the financier could not be held liable under<br />
the doctrine of respondeat superior.<br />
STMicroelectronics v. Credit Suisse Group, 775 F. Supp. 2d 525 (E.D.N.Y. 2011).<br />
Plaintiff alleged control person liability under Section 20(a) of the Securities Exchange<br />
Act of 1934 against defendant, the bank of a non-party subsidiary. Among plaintiff’s claims was<br />
a Section 10(b) allegation, for which the district court determined the plaintiff could not<br />
prosecute under a respondeat superior theory imputing liability directly from the subsidiary’s<br />
registered representatives to the parent company. The district court reasoned that the agents’<br />
misrepresentations were made simultaneously on behalf of the subsidiary and parent company,<br />
and thus both were considered principals. Because plaintiff previously secured an arbitration<br />
award against the subsidiary for misrepresentations made by the registered representatives, the<br />
plaintiff could not now assert the same respondeat superior theory of liability as against the<br />
parent corporation as well.<br />
H.1<br />
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H.1<br />
In re Tronox, Inc. Sec. Litig., 769 F. Supp. 2d 202 (S.D.N.Y. 2011).<br />
These federal securities class action suits were brought on behalf of all purchasers of a<br />
corporation’s stock. A wholly-owned subsidiary materially misstated financial results<br />
throughout and following the subsidiary’s initial public offering. Defendants are the original<br />
parent company and the successor in interest to the original parent company. The class sued the<br />
parent company and successor in interest under control person liability arising out of the<br />
misstatements. The successor in interest was also sued under respondeat superior theory for the<br />
original parent company’s primary control person liability. After the class filed their amended<br />
complaint, the defendants (parent and successor company) moved to dismiss certain claims. The<br />
district court noted that an independent corporation may assume the role of a second<br />
corporation’s agent if the facts show such a relationship and found the class alleged sufficient<br />
facts to show the original parent company was acting as the successor’s agent. The court held<br />
that plaintiff’s allegations supported a finding that: (1) the successor consented to the original<br />
parent company’s implementation of the master separation agreement on its behalf; and (2) the<br />
successor controlled and directed the original parent company’s actions. The court found the<br />
successor’s consent in implementing the master separation agreement was plausible based on the<br />
original parent company’s reimbursement obligations and control over the parent company was<br />
shown by alleging the successor’s “deep involvement in implementing the terms of the master<br />
separation agreement.” The original parent company’s motion to dismiss was denied in whole.<br />
The successor in interest’s motion to dismiss was granted in part and denied in part. It was<br />
denied with respect to the respondeat superior claim.<br />
In re Platinum & Palladium Commodities Litig., 2011 U.S. Dist. LEXIS 105040 (S.D.N.Y.<br />
Sept. 13, 2011).<br />
Plaintiffs were a class who sued defendant-advisors for violations of the Commodity<br />
Exchange Act, the Sherman Act, and the Racketeer Influenced and Corrupt Organizations Act.<br />
The class alleged the advisors’ portfolio manager manipulated settlement prices of palladium and<br />
platinum futures contracts. The class sued the advisors for their portfolio manager’s actions on<br />
the basis of respondeat superior. Defendants moved to strike certain allegations in the complaint<br />
and to dismiss the action for failure to state a claim. The court found the respondeat superior<br />
allegation did not fail merely because the class failed to establish advisor’s complete control over<br />
the portfolio manager; it was sufficient that class pleaded that the portfolio manager was “acting<br />
for” the advisors in executing the trades. Defendants’ motion to dismiss the complaint was<br />
granted, with leave to amend.<br />
Puskala v. Koss Corporation, 799 F. Supp.2d 941 (E.D. Wis. July 28, 2011).<br />
Plaintiffs, alleged victims of an embezzlement scheme, brought a claim against the<br />
embezzler, who was the corporation’s Vice President of Finance, as well as the corporation’s<br />
CEO and former accounting firm. Defendants, other than the Vice President of Finance, moved<br />
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to dismiss the complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(6) for failure to<br />
state a claim. Defendant corporation argued it could not be held liable for the Vice President of<br />
Finance’s embezzlement because the embezzlement was outside the scope of his employment.<br />
While the court held that no vicarious liability through respondeat superior could be established<br />
for that reason, the court found vicarious liability through apparent authority could be<br />
established. The court held that because scienter of controlling officers of a corporation may be<br />
attributed to the corporation itself to establish a primary violator under Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934, then the senior officers were acting within<br />
the scope of their apparent authority. The court granted the corporation’s motion to dismiss in<br />
part because the plaintiff-victims failed to plead facts ruling out an inference that the<br />
corporation’s internal controls were reasonably effective, but denied the motion in part with<br />
respect to respondeat superior.<br />
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).<br />
Plaintiffs, a pension trust fund, sued a corporation and four officers for alleged violations<br />
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for false statements of<br />
material fact, as well as violation of Section 20(a) for control person liability. The trust fund<br />
alleged the corporation engaged in “channel stuffing,” or seeking or pressuring its customers to<br />
acquire large quantities of the corporation’s products at the end of a final quarter, so as to<br />
artificially inflate the corporation’s revenues and earnings for a particular quarter. The trust fund<br />
further alleged that the corporation indicated growing revenues to the public while in reality the<br />
company’s revenues were slowing. Eventually the corporation had to disclose the loss.<br />
Defendants moved for dismissal of the complaint. The court noted that liability under<br />
respondeat superior is appropriate in securities fraud cases; however, to establish corporate<br />
liability for a violation of Rule 10b-5 the court would have to find scienter by looking to the state<br />
of mind of the individual corporate officer who made the statements. The court found that the<br />
complaint alleged sufficient facts to support a strong inference of scienter with respect to at least<br />
some of the individual corporate officers and that the requisite showing may be imputed to the<br />
corporation itself. The court granted the motion to dismiss in part by dismissing the Rule 10b-5<br />
claim against two of the four corporate officers. The court denied the remainder of the motion to<br />
dismiss.<br />
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D. Cal. 2011).<br />
Plaintiffs are family enterprises whose real estate investment advisor claimed that he<br />
acted as an independent contractor for the defendant broker-dealer. The plaintiffs alleged he was<br />
an agent of the broker-dealer for purposes of establishing he was a statutory seller and violated<br />
the Securities Act of 1933 and unfair competition laws. The real estate investment advisor was<br />
required by agreement to funnel securities sales exclusively through the broker-dealer, to obtain<br />
authorization from the broker-dealer prior to a sale, and to inform the firm prior to engaging in<br />
outside business. The families alleged that the broker-dealer was vicariously liable for the<br />
advisor’s representations through the doctrine of respondeat superior. Defendants, real estate<br />
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and securities firms and their representatives, moved for summary judgment on all alleged<br />
violations of the Securities Act. The court denied summary judgment, finding that control<br />
person liability may reach beyond respondeat superior liability, which does away with the<br />
distinction between an independent contractor and an agent. However, it found that the claim for<br />
respondeat superior was improper because: (1) a Section 20(a) claim would only be proper for a<br />
control person claim; (2) the advisor had no actual authority from the broker-dealer; and (3) the<br />
facts as to apparent authority remained in dispute, and therefore proper for determination by the<br />
trier of fact. Because the facts did not preclude a finding of vicarious liability based on apparent<br />
authority, the motion for summary judgment was denied.<br />
Hosier v. Citigroup Global Markets, Inc., 2011 U.S. Dist. LEXIS 1446670 (D. Colo. Dec. 21,<br />
2011).<br />
Petitioners petitioned the court to confirm an arbitration award for entry of judgment and<br />
respondent, a broker-dealer, moved to vacate the arbitration award. The petitioners brought an<br />
arbitration action for breach of fiduciary duty, breach of contract, constructive fraud, violation of<br />
FINRA rules, unsuitability, failure to supervise, and respondeat superior, alleging they lost<br />
money in investments they made through the broker-dealer because the risk involved was<br />
misrepresented. The registered representatives were not named in the action. The broker-dealer<br />
alleged the petitioners received and understood the written risk disclosure. The court confirmed<br />
the award issued in favor of the petitioners and denied the broker-dealer’s motion to vacate the<br />
arbitration award.<br />
Cianci v. Sentaurus Fin., 2011 Cal. App. Unpub. LEXIS 3346 (May 5, 2011).<br />
A broker-dealer appealed from an order denying its petition to compel arbitration with<br />
respect to 12 of the plaintiffs and to stay the civil action as to another 11 plaintiffs. The<br />
underlying claims involved the broker-dealer’s failure to supervise one of its registered<br />
representatives who defrauded the plaintiffs. The broker-dealer argued there was no possibility<br />
for a conflicting ruling in a civil action and arbitration and that the plaintiffs in the case should be<br />
distinguished according to their legal relationship to the broker-dealer. The court found that<br />
allowing the registered representatives to use the broker-dealer’s name for purposes of<br />
misleading people was relevant to many of the causes of action, including respondeat superior.<br />
The fact that use of the broker-dealer’s name on the issue of respondeat superior would not<br />
render different results in an arbitration or civil proceeding was not dispositive, thus, there was<br />
no error in denying the motion to compel arbitration.<br />
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2. Control Person<br />
H.2<br />
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).<br />
Plaintiff representing a class of shareholders filed suit against a corporation and its<br />
wholly-owned subsidiary for violating Section 10(b) and Rule 10b-5 of the Securities Exchange<br />
238
Act of 1934 alleging it made false statements in a mutual fund prospectus which affected the<br />
price of the corporation’s stock. Defendants filed a motion to dismiss. The subsidiary was the<br />
investment advisor and administrator for an investment fund. Although the corporation made the<br />
statements at issue, plaintiff sought to hold the subsidiary liable as a control person under<br />
Section 20(a) of the Exchange Act for statements made by the corporation. The court held that<br />
for purposes of Rule 10b-5, the maker of a statement is the person or entity with the ultimate<br />
authority over the statement, including its content and how to communicate it and refused to<br />
expand liability beyond the person or entity that has ultimate authority over a false statement.<br />
Though the court noted that the relationship influence between the subsidiary and the investment<br />
fund resembled the liability imposed by Congress for control, it noted that to find that the<br />
subsidiary was a control person for the purpose of Section 20(a) liability would broaden the<br />
application of Section 20(a). The court declined to do so, and granted the motion to dismiss.<br />
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011).<br />
Plaintiff investors alleged that defendant rating agencies were statutory underwriters<br />
because they helped structure securities transactions to achieve desired ratings and because rating<br />
agencies provided advice and direction to primary actors and violators of the Securities Act of<br />
1933. As such, plaintiff investors alleged that defendant rating agencies were liable for control<br />
person liability under Section 15 of the Securities Act. The defendant rating agencies’ motion to<br />
dismiss was granted. Plaintiff investors appealed. The appellate court held that to qualify as an<br />
underwriter and be liable as a control person, the rating agency must have either participated<br />
directly or indirectly in the purchase of securities with a view toward distribution or participated<br />
in the sale or offer of securities in connection with a distribution. Because defendant rating<br />
agencies’ provision of advice and guidance regarding transaction structures was insufficient to<br />
permit an inference that they had the power to direct the management or policies of alleged<br />
primary violators, the Section 15 control person claims were properly dismissed.<br />
Wyo. State Treasurer v. Moody’s Investors Serv., 2011 Fed. Sec. L. Rep. (CCH) 96,310 (2d<br />
Cir. May 11, 2011).<br />
Plaintiff pension funds brought three separate suits against defendant rating agencies as<br />
underwriters alleging violations of Sections 11 and 15 of the Securities Act of 1933 based on<br />
misstatements or omissions of material facts in securities offering documents. Plaintiffs also<br />
alleged that defendants were liable as control persons because they provided advice and direction<br />
to primary violators regarding transaction structures. The district court dismissed the three<br />
separate complaints. Because all three appeals raised common questions of law, the court<br />
disposed of them in one opinion. The court held that because there was no dispute as to primary<br />
Section 11 violations, the only question was whether the defendants controlled the primary<br />
violators. The court noted that it had previously defined “control” for the purpose of<br />
Section 20(a) of the Securities Exchange Act of 1934 as the power to direct or cause the<br />
direction of the management and policies of the primary violators whether through the ownership<br />
of voting securities by contract or otherwise. The court explained that because Section 15 and<br />
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Section 20(a) are roughly parallel control provisions of the Securities Act and the Securities<br />
Exchange Act of 1934, respectively, it would extend the definition of “control” used with<br />
Section 20(a) to Section 15. The court held that plaintiffs’ allegations of advice, feedback, and<br />
guidance failed to raise a reasonable inference that the rating agencies had the power to direct<br />
rather than to merely inform. The court noted that although Section 20(a) requires an additional<br />
element of “culpable participation,” it did not need to address whether that requirement applied<br />
to Section 15 because plaintiffs failed to plead the undisputed element of control. The appellate<br />
court affirmed the district court’s dismissal of the control person liability claims.<br />
Inter-Local Pension Fund GCC/IBT v. GE, 2011 U.S. App. LEXIS 19271 (2d Cir. Sept. 19,<br />
2011).<br />
Shareholders filed a class action suit against a corporation and its officers alleging<br />
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and control<br />
person liability under Section 20(a). The district court dismissed the claims for failure to state a<br />
claim and plaintiffs appealed. The Second Circuit held that plaintiffs failed to plead facts<br />
creating a strong inference of scienter related to the alleged misstatements of quarterly earning<br />
prospects. Finding that the complaint failed to state an underlying primary securities violation,<br />
the Court of Appeals held that it also failed to state a claim for Section 20(a) control person<br />
liability, thus affirming the district court’s dismissal.<br />
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).<br />
Plaintiff investors brought a class action suit against a corporation and its executives for<br />
securities fraud under Section 10(b) of the Securities Exchange Act of 1934 for allegedly making<br />
false statements regarding the financial health of the corporation. Plaintiffs also alleged<br />
violations of Section 20(a) control person liability by two individuals—the chief executive<br />
officer and chief financial officer. The district court granted defendants’ motion to dismiss the<br />
Section 10(b) claim for failure to meet the heightened pleading standard based on plaintiffs’<br />
failure to plead facts from which scienter is the most plausible inference. The district court<br />
dismissed the Section 20(a) claim stating that plaintiffs failed to allege that the individuals did<br />
not act in good faith. On appeal, the court reversed the district court’s order granting dismissal<br />
holding that the facts pleaded must show only that scienter was at least as plausible as another<br />
non-culpable inferences. Further, the court held that the good faith defense to Section 20(a) is an<br />
affirmative defense and plaintiffs need not plead that defendants acted without it.<br />
SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011).<br />
The Securities and Exchange Commission filed suit against senior officers of a<br />
corporation claiming it unlawfully misrepresented the corporation’s financial condition to meet<br />
the earning and revenue expectations of financial analysts. The district court granted the former<br />
president and CEO’s motion for summary judgment as to the alleged violations of Section 10(b)<br />
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and Rule 10b-5 of the Securities Exchange Act of 1934 and control person liability under<br />
Section 20(a). The SEC appealed the district court’s granting of the officer’s motion for<br />
summary judgment asserting that: (1) there were genuine issues of material fact as to whether<br />
that officer was a control person for purposes of finding liability under Section 20(a); and (2) the<br />
district court erred in ruling that the officer met his burden of establishing a good faith defense of<br />
relying on others. The court found that the indicia of control include whether the person<br />
managed the company on a day-to-day basis and was involved in the formulation of financial<br />
statements. It further held that the actual authority over the preparation and presentation to the<br />
public of financial statements is sufficient to demonstrate control. In this case, the court held that<br />
there was sufficient evidence to create a genuine issue of material fact as to whether the officer<br />
was properly considered a control person because the corporation’s bylaws gave the officer<br />
“general management and control of the business and the officers and the employees.”<br />
Additionally, the court held that the officer did not meet his burden of showing that he was<br />
entitled to a good faith defense. The court held that the use of the good faith defense requires<br />
defendant to demonstrate an absence of scienter and that defendant did not directly or indirectly<br />
induce the act or acts constituting the violation. In this case, evidence of the officer’s scienter<br />
existed, as he engaged in the dissemination of misleading information to the public. As such, the<br />
appellate court reversed the district court’s dismissal and held that there was a genuine issue of<br />
material fact as to whether the officer was a control person under Section 20(a) and further held<br />
that the officer’s good faith defense failed at the summary judgment stage.<br />
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Me. Aug. 4, 2011).<br />
Plaintiff filed suit against a financial company and its directors and officers for fraud<br />
under Maine state laws and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934<br />
and control person liability under Section 20(a) based on alleged misstatements and omissions<br />
regarding who would control and invest plaintiff’s assets. Defendants moved to dismiss. The<br />
court found that sufficient facts existed for the Section 10(b) claims to survive the motion to<br />
dismiss. The court then turned to the control person liability issue under Section 20(a). The<br />
court found that the complaint alleged that two individuals were managers and directors who<br />
played an active role and thus was sufficiently pleaded to overcome a motion to dismiss. The<br />
motion to dismiss was denied.<br />
Akamai Techs., Inc. v. Deutsche Bank AG, 764 F. Supp. 2d 263 (D. Mass. 2011).<br />
Plaintiff brought suit against a financial institution alleging that its subsidiary had made<br />
inappropriate investments in toxic auction rate securities. Plaintiff asserted that defendant was<br />
liable under Section 20(a) of the Securities Exchange Act of 1934 and Massachusetts General<br />
Laws ch. 110A, § 410(b). Defendant argued that plaintiff’s “control person” liability claims<br />
should be dismissed both for failure to plead facts that support any underlying claim of securities<br />
fraud and for failure to plead facts that support a claim that defendant was a “control person.” In<br />
pointing to the original pleadings, the court held that the plaintiff had adequately shown<br />
defendant’s control over its wholly-owned subsidiary that had made the investments; thus,<br />
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defendant’s challenge of the Section 20(a) claim was premature. The motion to dismiss was<br />
denied.<br />
In re Credit Suisse-AOL, 2011 U.S. Dist. LEXIS 95889 (S.D. Mass. Aug. 26, 2011).<br />
Shareholders filed a consolidated class action suit against a corporation and its officers<br />
and directors based on allegations that defendants intentionally ignored material information<br />
regarding the corporation’s financial future in formulating recommendations to the investing<br />
public in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.<br />
Plaintiffs also alleged control person liability under Section 20(a). Defendants moved for<br />
summary judgment. The court found that plaintiffs’ claims of transactional causation and loss<br />
causation for the Section 10(b) and Rule 10b-5 allegations necessarily relied on expert witnesses<br />
and that summary judgment without a full hearing and analysis of Daubert factors would be<br />
inappropriate, thus denying the motion for summary judgment. See Daubert v. Merrell Dow<br />
Pharms., Inc., 509 U.S. 579 (1993). The court further denied the motion for summary judgment<br />
on the control person liability claim reasoning that whether a defendant is a control person is an<br />
intensely factual question.<br />
In re Textron, Inc., 2011 U.S. Dist. LEXIS 103775 (D.R.I. Sept. 13, 2011).<br />
Plaintiff filed a shareholder derivative action on behalf of a corporation against two of the<br />
corporation’s officers and eleven of its thirteen directors. Plaintiff based his claims on a stock<br />
purchase plan that the company’s board of directors approved in a series of allegedly misleading<br />
statements that the corporation’s CEO and CFO made concerning the company’s backlog of<br />
aircraft and helicopter orders, violating Section 10(b) and Section 20(a) of the Securities<br />
Exchange Act of 1934. Defendants responded with a motion to dismiss based on the argument<br />
that plaintiff filed the action without first demanding that the company bring the suit itself. The<br />
court, evaluating whether a pre-suit demand would have been futile, assessed plaintiff’s demand<br />
futility argument on the claim that the directors were not disinterested because they faced<br />
substantial likelihood of liability. However, the court held that plaintiff failed to adequately<br />
plead why defendants’ omissions regarding the backlog were actually misleading in anything<br />
other than conclusory terms. As such, the court held that because plaintiff had not pleaded a<br />
viable primary violation under Section 10(b), the Section 20(a) claim against the directors failed<br />
as well.<br />
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, 792 F. Supp.2d 328 (D. Conn. 2011).<br />
Plaintiff filed claims against a broker-dealer and registered investment advisors for<br />
securities fraud under Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange<br />
Act of 1934. One defendant, sued only for control person liability pursuant to Section 20(a),<br />
brought a motion to dismiss. The court found that the plaintiff’s complaint plausibly alleged that<br />
the defendant had the ability to control the alleged primary violators, including the ability to<br />
H.2<br />
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242
exert control over the content of communications. In addition, the court concluded that plaintiff<br />
alleged with the particularity required that the defendant was a culpable participant in the alleged<br />
underlying primary violations. The motion to dismiss was denied.<br />
STMicroelectronics v. Credit Suisse Group, 775 F. Supp. 2d 525 (E.D.N.Y. 2011)<br />
Plaintiff invested in auction-rate securities backed by federally guaranteed student loans<br />
sold by a subsidiary of defendant, a multinational banking institution. On several occasions, the<br />
securities were touted as virtually risk-free and highly liquid. Following plaintiff’s discovery of<br />
the fraud, it brought suit against defendant under Section 20(a) of the Securities Exchange Act of<br />
1934. First, the court held that an investor’s successful arbitration against a financial institution<br />
does not bar a claim for control person liability against it. Second, the court held that plaintiff<br />
sufficiently pleaded control on the part of the defendant to survive defendant’s motion to dismiss<br />
by pleading a mix of substantial stock ownership, shared officers and principals, and at least<br />
some direct involvement by the individuals to survive a motion to dismiss.<br />
Maverick Fund L.D.C. v. Comverse Tech. Inc., 801 F. Supp.2d 41 (E.D.N.Y. 2011).<br />
Plaintiffs, a group of seven broker-dealers, filed suit after opting out of a class action<br />
against a defendant corporation, its officers, and its compensation/audit committee for violations<br />
of Sections 10(b), 18, and 20(a) of the Securities Exchange Act of 1934. Defendants moved to<br />
dismiss. The court found that plaintiffs adequately pleaded a primary violation of the federal<br />
securities laws by defendant for some of the alleged misstatements, but not all. The court found<br />
that plaintiffs adequately pleaded that the officer defendants were control persons until they left<br />
the company and that they may be held liable as control persons for the fraudulent disclosures<br />
that occurred while they were officers, including material misrepresentations concerning the<br />
company’s financial statements as well as partial disclosures that continued to conceal the nature<br />
and scope of the fraud. Even if the company did not fully disclose the nature and scope of the<br />
fraud until sometime after the officers’ departure from the company or make additional<br />
fraudulent statements that helped conceal the nature and scope of the fraud, that did not excuse<br />
the officer defendants from control person liability for the fraudulent disclosures or omissions<br />
while they were officers. The motion to dismiss was denied.<br />
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).<br />
Plaintiff, a limited partnership, alleged that defendant investment advisors and affiliates<br />
carried out a market manipulation scheme to inflate the price of a corporation’s stock causing it<br />
to sustain a large loss. Plaintiff claimed that, through market manipulation, defendants violated<br />
Section 10(b) of the Securities Exchange Act of 1934. Plaintiffs also alleged defendants were<br />
control persons subject to liability under Section 20(a) of the Exchange Act. Defendants moved<br />
to dismiss. Plaintiff’s Section 10(b) claims were dismissed because they failed to allege<br />
manipulative acts with specificity. Further, plaintiff could not show that its damages were<br />
H.2<br />
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H.2<br />
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caused by defendants nor did plaintiff’s allegations demonstrate that defendants acted with the<br />
required scienter. Because plaintiff failed to adequately plead a primary violation the court<br />
dismissed the derivative claim for control person liability.<br />
In re Bear Stearns Cos. Sec., Derivative & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y. 2011).<br />
Shareholders brought a class action against an investment bank and its senior officers and<br />
directors arising out of the collapse of a major financial institution. The complaint alleged<br />
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and violations<br />
of Section 20(a) of the Exchange Act against various officers. The defendant officers moved to<br />
dismiss the complaint. With respect to the Section 20(a) claims, the court noted that three<br />
elements must be met to establish a prima facie case of liability under Section 20(a): (1) a<br />
primary violation by a controlled person; (2) control of the primary violator by the defendant;<br />
and (3) that the controlling person was in some meaningful sense a culpable participant in the<br />
primary violation. Plaintiffs alleged that each of the officer/director defendants were<br />
“controlling persons” of the investment bank by reason of their positions as officers and/or<br />
directors, their ability to approve the issuance of statements, their ownership of the investment<br />
bank’s securities, and/or by contract. As defendants did not challenge such allegations, the court<br />
held that the facts pleaded were sufficient to establish the first two elements. Finally, the court<br />
held that the plaintiffs had adequately pleaded scienter to satisfy the third element. Thus,<br />
defendants’ motion to dismiss the complaint was denied.<br />
In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
Plaintiff investors filed a class action, seeking to recover from feeder funds and their<br />
fiduciaries. The defendants invested client assets with Bernard L. Madoff. Plaintiffs alleged<br />
various federal securities law violations as well as state law claims. With respect to<br />
Section 20(a) violations of the Securities Exchange Act of 1934, the first motion to dismiss<br />
against the majority of fiduciaries was granted because the court found that the plaintiffs did not<br />
plead the facts with sufficient particularity to establish their culpable participation in any<br />
fraudulent activity. However, the second motion to dismiss against a different fiduciary was<br />
denied. That fiduciary was alleged to have been a control person by virtue of his role as Director<br />
of Research. The court found that because the complaint contained very specific allegations<br />
rather than vague assertions of control, the motion to dismiss was denied. Finally, plaintiffs also<br />
alleged Section 20(a) violations against a third set of fiduciaries. The court denied this motion to<br />
dismiss because the complaint clearly alleged that the individuals were high-level executives at<br />
the company with discretion over the investment advice, oversight, and administrative services<br />
that the company provided to clients generally.<br />
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H.2<br />
In re Sanofi-Aventis Sec. Litig., 774 F. Supp. 2d 549 (S.D.N.Y. 2011).<br />
Investors asserted claims against a major pharmaceutical company and certain related<br />
individuals for violations of Section 10(b) of the Securities Exchange Act of 1934, and<br />
Rule 10b-5 thereunder, and for control party liability pursuant to Section 20(a) of the Exchange<br />
Act, all relating to statements concerning the production of a developing drug. Defendants filed<br />
a motion to dismiss on all counts. The court denied defendants’ motion to dismiss the securities<br />
fraud claims, but dismissed control person liability claims against all but two individual<br />
defendants. The court found that two of the individual defendants were decision-making<br />
officials who had made allegedly fraudulent statements about the drug. The court found that<br />
each also had knowledge of, or access to, the omitted facts that allegedly rendered his statements<br />
misleading and thus, for purposes of the pleading stage, engaged in conduct that would constitute<br />
recklessness. The court found that the plaintiffs’ factual allegations with respect to the<br />
remaining defendants, however, were insufficient to survive a motion to dismiss. The court<br />
noted that none of those individual defendants were alleged to have made statements that<br />
constituted actionable omissions. Plaintiffs failed to allege any particularized facts indicating<br />
that those defendants had “actual control” over the statements that were made or otherwise<br />
played some discernable role in the making of those statements. The court held that merely<br />
generally alleging persons were decision-making officials or had access to material information<br />
was inadequate circumstantial evidence that did not indicate involvement in perpetrating the<br />
fraud. Thus, the plaintiffs failed to establish culpable participation as to any of those individual<br />
defendants. The motion to dismiss as to those defendants was granted.<br />
In re Tronox, Inc. Sec. Litig., 769 F. Supp. 2d 202 (S.D.N.Y. 2011).<br />
Plaintiffs brought a class action alleging that a corporation and its fiduciaries made false<br />
and misleading statements during and following an initial public offering and asserted claims<br />
under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. Defendants<br />
moved to dismiss the claims. The court held that the plaintiffs properly alleged that the<br />
corporation was liable as a controlling person under Section 20(a) because the allegations<br />
supported the plausible inference that the corporation controlled the dissemination of the<br />
statements in the Securities and Exchange Commission filings that were materially false and<br />
misleading. Additionally, the plaintiffs made a successful showing that certain defendants had<br />
the power to direct or cause the direction of the management and policies of the corporation.<br />
Thus, the motion to dismiss as to those defendants was denied. In addition, the court found that<br />
the plaintiffs properly alleged that the successor-in-interest to the corporation was also liable as a<br />
controlling person.<br />
Wachovia Equity Sec. Litig. v. Wachovia Corp., 753 F. Supp. 2d 326 (S.D.N.Y. 2011).<br />
Plaintiffs brought claims, under the Securities Act of 1933 and the Securities Exchange<br />
Act of 1934, against defendant and a variety of related entities and individuals. Defendants<br />
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H.2<br />
245
ought numerous motions to dismiss. The motions to dismiss the claims alleging control person<br />
liability under Section 20(a) of the Exchange Act were granted because of a lack of a primary<br />
violation necessary to reach the secondary liability issues. However, the motion to dismiss the<br />
alleged violation of Section 15 of the Securities Act was denied because the plaintiffs had<br />
adequately pleaded a primary violation under Section 11 of the Securities Act and had<br />
sufficiently pleaded that the individual defendants had exercised control over the documents in<br />
question.<br />
Employees’ Ret. Sys. v. JP Morgan Chase & Co., 2011 Fed. Sec. L. Rep. (CCH) 96,278<br />
(S.D.N.Y. Mar. 23, 2011).<br />
A putative class of purchasers of mortgage pass-through certificates brought a claim<br />
against the defendant issuer. The lead plaintiff alleged causes of action against the defendant<br />
along with six officers or directors under Sections 11, 12(a)(2), and 15 of the Securities Act of<br />
1933. The defendants moved to dismiss. For the control person liability Section 15 claim, the<br />
court granted the motion to dismiss as to the corporation, but denied the motion to dismiss as to<br />
the individual defendants. The court first noted that allegations that an entity was the parent<br />
corporation of a primary violator, standing alone, were insufficient to state a claim of control<br />
person liability. Nor did the fact that the corporate name appeared prominently on the prospectus<br />
supplement lending the investment the approval of the larger corporation, establish control<br />
person liability. Further, the court found that the plaintiffs’ allegation that the corporation “had<br />
the power to, and did, direct [the subsidiary]” was too conclusory to warrant an inference in the<br />
plaintiffs’ favor. However, the court found that the plaintiffs’ allegations of liability as to the<br />
individual defendants were sufficient. The plaintiffs alleged that the individual defendants were<br />
officers or directors of the corporation, and that they directly participated in the alleged primary<br />
violation because their signatures enabled the corporation’s participation in the allegedly<br />
unlawful conduct. The court found this to be sufficient to sustain control person liability at the<br />
motion to dismiss stage. The motion to dismiss as to those defendants was thus denied.<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC, 2011 Fed. Sec. L. Rep. (CCH)<br />
96,303 (S.D.N.Y. Apr. 28, 2011).<br />
Plaintiff investors alleged misrepresentations and omissions in the offering documents for<br />
certain mortgage-backed securities the plaintiffs purchased from defendants. Plaintiffs filed<br />
claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Defendants moved to<br />
dismiss. The court held that the allegations of control in the claim were insufficient to sustain<br />
the Section 15 claims. The court noted that “control” was not the mere ability to persuade but<br />
rather the practical ability to direct the actions of people who issue or sell securities. The court<br />
found the conclusory allegations made by plaintiffs that the individual defendants had the power<br />
to influence, and exercised power and influence insufficient to claim violations of Section 15.<br />
The court had previously found identical allegations were insufficient under Section 15;<br />
therefore, the court dismissed the plaintiffs’ amended complaint since they failed to correct the<br />
original anemic allegations. Thus, the Section 15 claims were dismissed.<br />
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Camofi Master LDC v. Riptide Worldwide Inc., 2011 U.S. Dist. LEXIS 31237 (S.D.N.Y.<br />
Mar. 23, 2011).<br />
Plaintiffs brought a wide range of securities claims, including Section 20(a) violations of<br />
the Securities Exchange Act of 1934, against defendants alleging a multimillion-dollar fraud,<br />
stemming from a failed acquisition and related loan repayment. Defendants moved to dismiss<br />
each and every claim against them. The court held that to establish a prima facie case of liability<br />
under Section 20(a) a plaintiff must show: (1) a primary violation by a controlled person;<br />
(2) control of the primary violator by the defendant; and (3) that the controlling person was in<br />
some meaningful sense a culpable participant in the primary violation. Moreover, the court<br />
noted that Section 20(a) also contains the requirement that “plaintiff allege culpable participation<br />
in some meaningful sense by the controlling person in the fraud.” In this case, the individual<br />
defendants were President and Senior Vice President of the corporation. The court found that the<br />
most plausible inference to be drawn from their positions was that the individual defendants were<br />
familiar with the company’s day to day financial outlook and, as such, should have known that<br />
the company was misrepresenting its ability to repay the loan in the transaction documents and<br />
Securities and Exchange Commission filings. The court found that the plaintiffs sufficiently pled<br />
particularity of facts that raised a strong inference of scienter. Thus, the motion to dismiss was<br />
denied.<br />
Bd. of Trs. of Fort Lauderdale Gen. Emps. Ret. Sys. v. Oao, 2011 U.S. Dist. LEXIS 88143<br />
(S.D.N.Y. Aug. 9, 2011).<br />
Plaintiffs brought a putative class action suit against a corporation and its officers for<br />
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 based on<br />
failure to disclose that a portion of the company’s income and revenue during the class period<br />
derived from unlawful conduct which, upon discovery, would subject the corporation to<br />
significant fines and penalties. Plaintiffs also brought claims for control person liability under<br />
Section 20(a). Defendants moved to dismiss. The court found that plaintiffs did not plead a<br />
sufficiently strong inference of scienter and dismissed the Section 10(b) and Rule 10b-5 claims.<br />
The court further found that because plaintiffs failed to sufficiently plead Section 10(b) and<br />
Rule 10b-5 claims, the Section 20(a) claims must also be dismissed.<br />
In re Deutsche Bank AG, 2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).<br />
Shareholders in a consolidated class action against a corporation and related individuals<br />
alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 based on<br />
misstatements and omissions related to the corporation’s prospectus and registration statement.<br />
Shareholders also alleged control person liability under Section 15. Defendants moved to<br />
dismiss. The court found that although some of the Section 11 claims merely pleaded legal<br />
conclusions and should be dismissed, other Section 11 claims and the Section 12(a)(2) claims<br />
survived the motion to dismiss. The court further held that the control person liability claims<br />
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ased on the failed Section 11 claims had to be dismissed for failure to state a primary violation.<br />
However, the court, finding that there was no culpable participation requirement under<br />
Section 15 because the primary violation under Section 11 contains no intent element, allowed<br />
the remaining Section 15 control person claims to proceed despite the complaint failing to allege<br />
culpable participation.<br />
Roseville Emps. Ret. Sys. v. Nokia Corp., 2011 U.S. Dist. LEXIS 101264 (S.D.N.Y. Sept. 6,<br />
2011).<br />
Plaintiff investors brought a class action against a defendant corporation and related<br />
individuals for allegedly making false and misleading statements about defendant’s market<br />
position which constituted fraud on the market by causing shares of the corporation to be<br />
overvalued. Plaintiffs brought fraud claims under Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 and a control person liability claim under Section 20(a). Defendants<br />
moved to dismiss. The court found that plaintiffs failed to plead actionable misstatements or<br />
omissions, scienter, or loss causation and thus granted defendants’ motion to dismiss on the<br />
Section 10(b) and Rule 10b-5 claims. The court then found that because plaintiffs failed to<br />
allege an underlying securities violation of Section 10(b) or Rule 10b-5, the claim for control<br />
person liability under Section 20(a) failed as a matter of law and was also dismissed.<br />
In re Sec. Capital Assur. Sec. Litig., 2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011).<br />
Shareholders filed a consolidated, amended class action suit against a corporation and its<br />
officers alleging a claim for securities fraud under Section 10(b) of the Securities Exchange Act<br />
of 1934 and for control person liability under Section 20(a) based on defendants’<br />
misrepresentation and use of their FICO scores. The court held that plaintiffs failed to plead<br />
causation of damages by such misrepresentation and therefore dismissed plaintiffs’<br />
Section 10(b) claims. The court then dismissed the control person claims under Section 20(a)<br />
based on plaintiffs’ failure to plead a primary violation.<br />
Int’l Fund Mgmt. S.A. v. Citigroup Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Plaintiff investors were members of a putative class action and two class action suits<br />
against two corporate defendants and their officers. Plaintiffs filed their own suit which mirrored<br />
the complaints in the class actions. Defendants moved to dismiss. The complaints alleged<br />
defendants made material misrepresentations and omissions of material facts in violation of<br />
Sections 10(b) and 18 of the Securities Exchange Act of 1934. Plaintiffs also brought claims<br />
under the Securities Act of 1933 and the common law of New York. Plaintiffs alleged that the<br />
violations arose from material misrepresentations and omissions concerning defendants’<br />
exposure to collateralized debt obligations, structured investment vehicles, alternative A class<br />
residential mortgage-backed securities, auction-rate securities, mortgage lending practices, and<br />
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solvency. The district court held that the prior rulings of the courts in the two class action suits<br />
controlled this case. As such, the court allowed the Section 10(b) claims to move forward<br />
against one of the class action defendants and defendants conceded that those claims should not<br />
be dismissed. Plaintiffs also alleged control person liability against the corporate officers under<br />
Section 20(a). The court found that because plaintiffs stated primary violations of Section 10(b)<br />
which were allowed to proceed and because plaintiffs adequately pled scienter for control person<br />
defendants, the claims for control person liability under Section 20(a) were allowed to proceed as<br />
well.<br />
Roseville Emps. Ret. Sys. v. EnergySolutions, Inc., 2011 U.S. Dist. LEXIS 113630 (S.D.N.Y.<br />
Sept. 30, 2011).<br />
Shareholders brought a class action suit against a corporation, its officers, and its sole<br />
stockholder prior to public offerings under Sections 11, 12(a)(2), and 15 of the Securities Act of<br />
1933, and Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated<br />
thereunder, and Section 20(a). Defendants moved to dismiss. The court found that the<br />
allegations of material misrepresentations and omissions which must be assumed to be true for<br />
the purposes of the motion to dismiss were well pleaded and could go forward. Further, because<br />
defendants’ only defense to the control person claims was that plaintiffs failed to show a primary<br />
violation, the motion to dismiss the Section 20(a) and Section 15 claims for control person<br />
liability was denied.<br />
Wilamowsky v. Take-Two Interactive Software Inc., 2011 WL 4542754 (S.D.N.Y. Sept. 30,<br />
2011).<br />
Plaintiff opted out of a class action that settled for an amount in excess of $20 million.<br />
He then brought his own suit against the corporation and its executives. Plaintiff’s complaint<br />
alleged breach of fiduciary duty, violations of Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934, and control person liability under Section 20(a) based on defendant’s<br />
routine manipulation of the dates of stock option grants making them fall on days with the lowest<br />
stock prices. The court found plaintiff failed to sufficiently plead loss causation and dismissed<br />
the securities claims. The court held that because the complaint did not adequately allege a<br />
primary violation under Section 10(b) or Rule 10b-5, the claim for control person liability under<br />
Section 20(a) must also be dismissed.<br />
Mandell v. Reeve, 2011 U.S. Dist. LEXIS 114804 (S.D.N.Y. Oct. 4, 2011).<br />
Plaintiffs sought to vacate, and defendant sought to confirm, an arbitration award<br />
rendered by a FINRA arbitration panel in favor of investor plaintiffs against defendant securities<br />
firm. In the FINRA hearing, the investors brought securities claims against the securities firm,<br />
including claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The<br />
arbitration panel ruled in favor of the investors and found control person liability violations.<br />
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First, the court noted that corporate officers are usually presumed to possess the requisite power<br />
to control the actions of their employees and are often held accountable as controlling persons.<br />
The court also found that the arbitration panel was plainly entitled to find that as founder, CEO,<br />
sole shareholder, and registered principal of the securities firm, that the officer had at least “some<br />
indirect means of discipline or influence” over the controlled person, and did not dispute the<br />
liability of the controlled person. Thus, the award was upheld.<br />
Local 731 I.B. of T. Excavators & Pavers Pension Trust Fund v. Swanson, 2011 WL 2444675<br />
(D. Del. June 14, 2011).<br />
Plaintiff brought a consolidated class action suit against officers and a director of a<br />
corporation for securities fraud in violation of Section 10(b), Rule 10b-5, and for control person<br />
liability under Section 20(a) of the Securities Exchange Act of 1934. The complaint alleged that<br />
defendants deliberately misrepresented the financial performance of the corporation which<br />
resulted in artificial inflation of the stock price. Defendants filed a motion to dismiss. The court<br />
found that plaintiff adequately pleaded a claim for primary securities fraud under Section 10(b)<br />
and Rule 10b-5. Because the complaint alleged that defendants had high level positions within<br />
the corporation, participated in and were aware of the corporation’s operations and decision<br />
making, sufficient facts were alleged to allow the Section 20(a) claim to survive the motion to<br />
dismiss.<br />
In re Heckmann Corp. Sec. Litig., 2011 WL 2413999 (D. Del. June 16, 2011).<br />
Plaintiff brought a class action suit against a corporation and its officers for violation of<br />
Section 10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934 based on<br />
materially false and misleading statements regarding a shareholder-approved merger.<br />
Defendants moved to dismiss. The court found that plaintiff had pleaded with particularity<br />
omitted facts that were material to the merger at issue and therefore satisfied the pleading<br />
requirement for Section 10(b) and Rule 10b-5. Defendants’ only defense to the Section 20(a)<br />
control person liability claim was that plaintiff failed to adequately plead a primary violation and<br />
that the individual defendants had control over the corporation. The court found that in addition<br />
to adequately pleading a primary violation, the complaint alleged control by the individual<br />
defendants as well. As such, the motion to dismiss was denied.<br />
In re Wash. Mut., Inc., 2011 Bankr. LEXIS 5008 (Bankr. D. Del. Dec. 20, 2011).<br />
Plaintiff investment fund alleged that defendant investment corporations solicited,<br />
offered, and sold trust certificates to plaintiff pursuant to offering documents containing material<br />
misrepresentations and omissions. Plaintiff alleged that defendant investment corporations were<br />
liable as control persons under Section 15 of the Securities Act of 1933 and the California<br />
Corporations Code Section 25504 for the misstatements made by the issuing bank. The<br />
investment corporations objected to plaintiff’s control person liability claims on two grounds:<br />
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(1) the investment corporations’ lack of control over the underlying violator, the bank; and<br />
(2) plaintiff’s failure to sufficiently plead culpable participation by the investment corporations.<br />
Defendants claimed that plaintiff’s claims should be subrogated and the parties agreed to have<br />
the court treat the matters as a motion to dismiss. The court found that plaintiff had sufficiently<br />
pleaded facts to state a claim that the investment corporations controlled the bank as required for<br />
control person liability. Though the use of the term “control” in Securities and Exchange<br />
Commission filings was not dispositive, plaintiff alleged several other facts to support its<br />
contention that defendants were control persons. The court further found that plaintiff was not<br />
required to plead culpable participation as a part of its prima facie case under either the state or<br />
federal control person liability claims. A prima facie case for control person liability only<br />
requires a plaintiff to plead facts showing the underlying violation and establishing the<br />
defendants’ control over the underlying violator. As such, the court found that the investment<br />
corporations failed to demonstrate that the plaintiff investment fund’s control person claims<br />
should be subrogated.<br />
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011).<br />
Plaintiff shareholders brought a class action suit against a pharmaceutical corporation and<br />
its officers alleging violations of Sections 10(b) and Rule 10b-5 of the Securities Exchange Act<br />
of 1934 based on material misrepresentations or omissions regarding the safety of its product.<br />
Plaintiffs also brought suit under Section 20(a) for control person liability. Further, plaintiffs<br />
alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 15 of the<br />
Securities Act for control person liability. Defendant corporation and defendant officers filed a<br />
motion to dismiss, and individual defendants filed a separate motion to dismiss. The court found<br />
that due to plaintiff’s “group pleading” the complaint failed to plead scienter adequately under<br />
Section 10(b) with regard to all but two individual defendants. The court then found that<br />
because the only defense presented to the Section 20(a) claims was failure to state an underlying<br />
claim, and because the court found that the complaint did state underlying claims, the<br />
Section 20(a) claims were allowed to proceed as to those two individuals for whom scienter was<br />
found. Accordingly, the court found that the claims based on Sections 11, 12(a)(2), and 15 also<br />
survived the motion to dismiss as to the corporation and those two individuals for whom scienter<br />
was found.<br />
In re Lincoln Educ. Srvs. Corp. Sec. Litig., 2011 WL 3912832 (D.N.J. Sept. 6, 2011).<br />
Plaintiff filed a putative class action on behalf of shareholders against a corporation and<br />
its officers and directors for violations of Section 10(b) and Section 20(a) of the Securities<br />
Exchange Act of 1934. Defendants moved to dismiss. Plaintiff alleged that defendants, a forprofit<br />
school, misled investors about the implementation of certain reforms to admissions<br />
standards that would affect the student enrollment growth rate predicted for 2010. The court<br />
found that the alleged misleading statements fell squarely within the safe-harbor provision<br />
protecting forward looking statements, and, as such, dismissed the claims under Section 10(b).<br />
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The court further found that in the absence of primary liability, the claim for control person<br />
liability under Section 20(a) must fail and granted defendants’ motion to dismiss.<br />
In re Anadigics, Inc., 2011 WL 4594845 (D.N.J. Sept. 30, 2011).<br />
Plaintiff investors brought a putative class action against defendant corporation and its<br />
officers for violations of Section 10(b) and Rule 10-5 of the Securities Exchange Act of 1934 and<br />
for Section 20(a) control liability based on defendants allegedly misleading investors by making<br />
statements regarding Anadigics’ capability to meet demand for its products. Defendants filed a<br />
motion to dismiss. The court held that such statements were forward looking, accompanied by<br />
meaningful language and/or immaterial. As such, the court found that plaintiffs had not<br />
established a material misrepresentation or omission as required for the securities fraud claims.<br />
Further, the court held that because plaintiffs did not plead a primary securities violation under<br />
Section 10(b) and Rule 10b-5 with adequate particularity, there could be no control person<br />
liability under Section 20(a). The motion to dismiss was granted.<br />
Steamfitters Local 449 Pension Fund v. Alter, 2011 WL 4528385 (E.D. Pa. Sept. 30, 2011).<br />
Plaintiff brought a class action suit on behalf of shareholders against a bankrupt<br />
corporation and its officers and directors under Section 10(b) and Section 20(a) of the Securities<br />
Exchange Act of 1934 for making misrepresentations that artificially inflated the corporation’s<br />
financial results and stock prices. Defendants moved to dismiss. The court found that the<br />
Section 10(b) claims against the management defendants were adequately pleaded, and control<br />
was also adequately pleaded, so the Section 20(a) claims were allowed to proceed against the<br />
management defendants. However, the court found that the plaintiff failed to plead adequate<br />
scienter against outside directors, and thus the Section 10(b) allegations against outside directors<br />
were dismissed, and the derivative Section 20(a) claims were dismissed for lack of an underlying<br />
violation. The court found that the Section 20(a) claims against the chief credit officer failed<br />
because the inference that defendant did not intend to be involved in fraudulent activity was<br />
more compelling than the inference that he acted with scienter. Moreover, the Section 20(a)<br />
claim against the former president of a subsidiary of defendant corporation failed because<br />
plaintiff did not plead adequate control and because the role as a subsidiary’s president is<br />
insufficient alone to indicate control for Section 20(a).<br />
Aubrey v. Barlin, 2011 U.S. Dist. LEXIS 15332 (W.D. Tex. Feb. 16, 2011).<br />
Plaintiffs brought suit after suffering financial losses stemming from real estate-backed<br />
investments that were created, packaged, marketed, and sold to plaintiffs by defendants.<br />
Plaintiffs brought numerous federal and state securities claims. One individual defendant moved<br />
to dismiss. She argued that plaintiffs had failed to state a claim that she was liable as a “control<br />
person” under Section 20 of the Securities Exchange Act of 1934. Specifically, the defendant<br />
argued that plaintiffs’ claims were merely conclusory allegations of control. However, the court<br />
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held that, in taking plaintiffs’ allegations as true, the defendant was the “incorporator, registered<br />
agent, active owner, director, president, and employee” and, therefore, the court found such<br />
allegations sufficient to state a plausible claim for control person liability. Thus, the motion to<br />
dismiss was denied.<br />
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).<br />
Plaintiff filed suit against a securities firm and related individual defendants to recover<br />
damages for allegedly wrongful trading of securities in plaintiff’s investment accounts. Plaintiff<br />
brought numerous claims, including violations of Section 20(a) of the Securities Exchange Act<br />
of 1934. The court found that because the plaintiff had failed to make any allegations of control<br />
as to one of the individual defendants, the motion to dismiss with respect to that defendant was<br />
granted.<br />
Cumberland & Ohio Co. of Tex. v. Goff, 2011 U.S. Dist. LEXIS 52897 (M.D. Tenn. May 17,<br />
2011).<br />
Investors filed suit against a corporation and its affiliates alleging that it fraudulently sold<br />
unregistered securities based on certain memoranda issued by defendants that contained material<br />
misstatements and omissions in violation of federal and Tennessee securities laws, and based on<br />
control person liability under the Tennessee Securities Act. Defendant moved for summary<br />
judgment. The court found that plaintiffs provided evidence that individual defendant was in<br />
charge of sales, directed the “cold calling” operations, supervised the sales staff, and set<br />
commission levels. The court found sufficient evidence to overcome defendant’s summary<br />
judgment motion on the claim of control person liability under the Tennessee Securities Act.<br />
Silverman v. Motorola, Inc., 772 F. Supp. 2d 923 (N.D. Ill. 2011).<br />
Plaintiffs brought a securities fraud class action against a large corporation and certain of<br />
its officers alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5 against all defendants, as well as Section 20(a) of the Exchange Act against the<br />
individual defendants. Defendants moved for summary judgment. The court found that two<br />
corporate executives who had authority only as to their particular divisions were entitled to<br />
summary judgment on the control person claims brought against them under Section 20(a)<br />
because the alleged wrongdoing was in another division and the evidence did not show general<br />
control of operations. The court noted that had the plaintiffs provided evidence supporting their<br />
contentions that the other executives collaborated with each other to solve general problems of<br />
the company, and that earnings releases were reviewed together as a group, this may have raised<br />
an issue of material fact as to the general control of those executives. The chief strategy officer,<br />
however, whose responsibilities were not limited to a particular business segment, was not<br />
entitled to summary judgment on the Section 20(a) claim.<br />
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Elipas v. Jedynak, 2011 WL 1706059 (N.D. Ill. May 5, 2011).<br />
Plaintiff brought suit against registered representatives of a company under Rule 10b-5 of<br />
the Securities Exchange Act of 1934 and for violations of Illinois securities law Sections 12(G)<br />
and 13(A) for control person liability. Plaintiff alleged defendants made false statements<br />
concerning the company’s performance . The court granted plaintiff’s summary judgment<br />
motion on the federal securities claims. The court found that plaintiff established that defendants<br />
committed Section 12(G) violations. The court then turned to the issue of control person liability<br />
under Section 13(A). The court noted that for the purposes of Illinois securities laws, one is<br />
subject to control person liability if he directly or indirectly controls the activities of the issuer.<br />
Because there was no evidence of an individual’s actual participation in the securities sale,<br />
liability turned on whether a defendant was part of the “group of persons acting in concert” to<br />
sell such securities. The court noted that there must be some showing of assent, approval, or<br />
concurrence, albeit tacit approval, in an action of the group selling securities before an individual<br />
will be liable for the actions of the controlling group. Unlike under federal securities law,<br />
however, the court noted that there is no defense based on a defendant’s lack of knowledge of the<br />
facts giving rise to the underlying securities fraud. As such, the court found that defendant was<br />
liable under Illinois securities law Section 13(A) for the fraudulent sales of securities to which he<br />
was connected.<br />
Puskala v. Koss Corporation, 799 F. Supp.2d 941(E.D. Wis. July 28, 2011).<br />
Plaintiff filed a class action against a corporation and its officers for violations of<br />
securities fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934<br />
based on the embezzlement of over $30 million by an officer of the corporation. Plaintiff also<br />
brought claims under Section 20(a) for control person liability. Defendants filed a motion to<br />
dismiss. The court found that the corporation was liable for securities fraud and then turned to<br />
the issue of control person liability. Defendant did not deny that he exerted control over the<br />
corporation, but asserted that he acted in good faith and that plaintiff’s pleadings established that<br />
good faith, granting him the protection of the good faith defense. The court held, however, that<br />
the good faith defense is an affirmative defense, and only when a plaintiff pleads elements<br />
constituting an impenetrable defense may a complaint that otherwise states a claim be dismissed<br />
because of the existence of a defense. Therefore, the court denied the motion to dismiss the<br />
Section 20(a) claim.<br />
In re Meta Financial Group Inc., 2011 WL 2893625 (N.D. Iowa July 18, 2011).<br />
Plaintiff shareholders filed a class action suit against a broker-dealer and its individual<br />
employees alleging that defendants issued a number of misleading statements regarding the<br />
operations and finances of the broker-dealer with knowledge or recklessness of their falsity in<br />
violation of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act of<br />
1934. Defendants filed a motion to dismiss. The court found that plaintiffs’ Section 10(b) and<br />
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Rule 10b-5 claims were pleaded with sufficient particularity to survive a motion to dismiss.<br />
Defendants alleged that the Section 20(a) control person claims should be dismissed for two<br />
reasons: (1) failure to adequately plead an underlying violation; and (2) failure to offer more<br />
than conclusory allegations of the individual defendants’ control over the broker-dealer. The<br />
court found that the underlying Section 10(b) and Rule 10b-5 claim was adequately pleaded. In<br />
addition, the court held that the plaintiffs properly pleaded that the particular positions that the<br />
individual defendants held and the specific Securities and Exchange Commission disclosures<br />
signed and certified by them substantiated a Section 20(a) claim. As such, the court denied the<br />
motion to dismiss the Section 20(a) control person claims.<br />
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011<br />
Plaintiff pension trust fund filed a class action suit against a medical center and four of its<br />
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The<br />
Section 10(b) claim was based on the allegedly misleading forecasted revenues and earnings of<br />
defendant medical center. When the actual revenue and earnings were disclosed, stock values<br />
declined 12.7% in one day. Plaintiff also brought a Section 20(a) claim for control person<br />
liability against four named officers and directors. Defendants moved to dismiss all claims. The<br />
court granted the motion to dismiss the Section 10(b) claim against two individual defendants<br />
and denied the motion to dismiss against the other defendants. The court then turned to the<br />
Section 20(a) claim. Because the remaining defendants’ only defense to the Section 20(a) claim<br />
was that plaintiff failed to adequately plead a primary violation, and because the court found the<br />
plaintiff did adequately plead a primary violation under Section 10(b) as to certain defendants,<br />
the court denied the motion to dismiss the Section 20(a) claim for control person liability.<br />
Yary v. Voight, 2011 WL 6781003 (D. Minn. Dec. 27, 2011).<br />
Asserting claims under the Securities Exchange Act of 1934 and the Minnesota Securities<br />
Act, Minn. Stat. § 80A.01 et seq., plaintiff investors brought suit against an individual. Plaintiffs<br />
specifically asserted claims under Sections 10(b) and 20(a) of the Exchange Act and the<br />
equivalent provisions under the Minnesota Securities Act. Defendant moved to dismiss. The<br />
court granted the motion to dismiss the Section 10(b) claims for which the statute of limitations<br />
had lapsed, but found that the remainder of the claims were sufficiently pleaded. Turning to the<br />
control person claim, the court ruled that because plaintiffs did not respond to defendant’s<br />
argument that plaintiffs failed to properly plead Section 20(a) control person liability, those<br />
claims must be dismissed. The court further ruled that because the exact same arguments were<br />
made by both parties under the Minnesota Securities Act as under federal law, the motion to<br />
dismiss the state securities claims was granted and denied to the same extent as it was for the<br />
claims under federal law.<br />
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Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong>, 781 F. Supp. 2d 913 (N.D. Ariz. 2011).<br />
In a case arising from the collapse of a real estate lender, investors alleged securities<br />
fraud under Arizona securities statutes against the managers at a private mortgage lender<br />
company and a related company. The Arizona securities statutes impose presumptive liability<br />
for every person who directly or indirectly controls any person liable for a primary violation<br />
under the statute. A.R.S. § 44.1997(B). Arizona courts have held that the controlling person<br />
need not have actually participated in the specific action upon which the securities violation is<br />
based. Eastern Vanguard Forex Ltd., 206 Ariz. 399, 411 (2003). The court noted that titles can<br />
be sufficient to allege control person liability under the Arizona statutes since “control liability<br />
may be premised on the power to control and does not require actual participation in the<br />
wrongful conduct.” Moreover, the court found that the defendants were incorrect in stating that<br />
the plaintiffs had only alleged in a conclusory fashion that they controlled the primary violators.<br />
Thus, the court found that the allegations were sufficient to support a claim for control person<br />
liability under the Arizona statutes because the plaintiffs had shown that the defendants<br />
controlled, reviewed, and had the ability to prevent the publication of materially misleading<br />
information. The motions to dismiss were denied.<br />
Petrie v. Elec. Game Card Inc., 2011 U.S. Dist. LEXIS 6203 (C.D. Cal. Jan. 12, 2011).<br />
Plaintiffs filed a class action alleging that a small company and its officers engaged in<br />
fraud to conceal from and misstate to the company’s investors the true financial condition and<br />
performance of the company. The individual defendants filed motions to dismiss, arguing that<br />
plaintiffs failed to state viable claims against them for violations of Section 10(b), Rule 10b-5,<br />
and Section 20(a) of the Securities Exchange Act of 1934. The court first found that the<br />
plaintiffs had adequately pleaded a primary violation, a prerequisite to defining defendants’<br />
status as control persons. The court then applied the pleading standards of F.R.C.P. 8(a) to<br />
plaintiffs’ control person allegations, as opposed to the more demanding standard of<br />
F.R.C.P. 9(b). Under the relatively lenient standards of Rule 8(a), the court held that the<br />
plaintiffs successfully alleged each individual defendant’s status as a control person as each<br />
defendant served as either an officer or director of the company. That, in conjunction with the<br />
allegations that the company was small in size, with no more than 10 employees, and that each<br />
moving defendant participated in the company’s day-to-day operations, allowed the court to find<br />
plaintiffs’ control person allegations sufficiently plausible to survive a motion to dismiss.<br />
Homestore.com, Inc. Sec. Litig., 2011 U.S. Dist. LEXIS 46552 (C.D. Cal. Apr. 22, 2011).<br />
Plaintiffs filed consolidated securities class actions on behalf of common stock<br />
purchasers against an internet-based company that provided links to various services related to<br />
home ownership, including real estate sales, home renovation, and relocation services. Plaintiffs<br />
brought two claims against all defendant for violations of Section 10(b), Rule 10b-5, and<br />
Section 20(a) of the Securities Exchange Act of 1934. Defendant contended that he was entitled<br />
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to judgment as a matter of law because the evidence at trial failed to establish that the defendant<br />
made false or misleading statements to the public with the requisite scienter and that he was a<br />
control person with respect to plaintiffs’ claim under Section 20(a). The court found that<br />
sufficient evidence was presented at trial to support the jury’s finding regarding defendant’s<br />
control person liability under Section 20(a). Specifically, the court found that the plaintiffs<br />
presented testimony at trial regarding defendant’s power to direct or cause the direction of<br />
management, as well as his power to direct or cause the direction of the policies of persons that<br />
prepared the relevant financial statements at issue. Thus, the court denied defendant’s motion for<br />
judgment as a matter of law.<br />
In re Toyota Motor Corp. Securities <strong>Litigation</strong>, 2011 WL 2675395 (C.D. Cal. July 7, 2011).<br />
Plaintiff shareholders brought suit against a corporation and its officers for material<br />
misrepresentations regarding the quality and safety of its products in violation of Section 10(b)<br />
and Section 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss. After<br />
finding that there were violations of Section 10(b), the court found that the complaint failed to<br />
plead facts that sufficiently established that the individual defendants had actual control or power<br />
over the individuals who made the misrepresentations. As such, the Section 20(a) claims were<br />
dismissed.<br />
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 80 F. Supp.2d 1125 (C.D. Cal. 2011).<br />
Plaintiff sued a corporation, its affiliates, and certain individuals based on Sections 11,<br />
12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934. Defendants moved to dismiss on multiple grounds. The court found that<br />
because Section 13 of the Securities Act provides a one-year statute of limitations and a threeyear<br />
statute of repose on claims under Sections 11 and 12(a)(2), and because the statute of repose<br />
had run, the claims under Sections 11 and 12(a)(2) must be dismissed. Further, because a claim<br />
under Section 15 for control person liability requires an adequately pled claim under Sections 11<br />
or 12(a)(2), it was dismissed as well. The court found that the Section 10(b) claims were also<br />
precluded either by the statute of repose or the statute of limitations, and because Section 20(a)<br />
control person liability requires a predicate violation, those claims were dismissed as well.<br />
Nguyen v. Radient Pharms. Corp., 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011).<br />
Plaintiffs brought a federal securities class action against a pharmaceutical corporation<br />
and its officers on behalf of all persons and entities who purchased the common stock of<br />
defendant during a particular time period. Plaintiffs argued that defendants issued a materially<br />
false and misleading press release stating that the corporation had combined with a prestigious<br />
medical organization to conduct a clinical trial together. Plaintiffs alleged that the individual<br />
defendants acted as “control persons” of the corporation within the meaning of Section 20(a) of<br />
the Securities Exchange Act of 1934. Plaintiffs alleged that the individual defendants:<br />
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(1) directly participated in the corporation’s management and had the power to influence and<br />
control; (2) were directly involved in the corporation’s day-to-day operations at the highest level;<br />
(3) were privy to confidential proprietary information concerning the corporation’s business and<br />
operations; (4) were involved in the drafting, producing, reviewing, and/or dissemination of the<br />
allegedly false and misleading statements; and (5) approved or ratified the allegedly false and<br />
misleading statements. Defendants moved to dismiss. The court found the allegations to be<br />
sufficient to support an inference that the individual defendants controlled the corporation and its<br />
operations. Finally, the court held that a plaintiff need not show that a defendant was a culpable<br />
participant in the wrongful conduct or exercised actual power to be derivatively liable under<br />
Section 20(a). Thus, the court denied the individual defendants’ motion to dismiss plaintiffs’<br />
Section 20(a) claim.<br />
Dean v. China Agritech, Inc., 2011 U.S. Dist. LEXIS 124264 (C.D. Cal. Oct. 27, 2011).<br />
Investors brought suit against a corporation and members of its executive management<br />
team and board of directors for violations of Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 against the company and the individual defendants, Section 20(a) of the<br />
Exchange Act against the individual defendants, Section 11 of the Securities Act of 1933 against<br />
all defendants, and Section 15 of the Securities Act against the individual defendants. Based on<br />
the allegations of each individual’s title and position with the company, the court found that the<br />
individual defendants were actively involved in the day-to-day operations of the company such<br />
that there was a reasonable inference that they were controlling persons involved with the<br />
creation and approval of the fraudulent financial statements at issue. Therefore, the court found<br />
that the plaintiffs had adequately pleaded that the individual defendants had control over the<br />
company for purposes of liability under Section 20(a). Thus, the individual defendants’ motion<br />
to dismiss was denied.<br />
Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).<br />
Plaintiff shareholders brought a securities fraud class action against a corporation and a<br />
number of its senior officers alleging that defendants serially misrepresented to investors facts<br />
relating to the existence and likelihood of FDA approval for a new drug. Defendants moved to<br />
dismiss. Plaintiff shareholders alleged that defendants violated Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 by making various untrue statements of material facts and by<br />
omitting to state material facts with the intent to deceive the investing public and artificially<br />
inflate and maintain the market price of stock. The court found that the Section 10(b) claim was<br />
adequately pleaded and therefore denied the motion to dismiss. The court further found that<br />
plaintiffs adequately pleaded a Section 20(a) cause of action because plaintiffs pleaded a primary<br />
violation of federal securities laws under Section 10(b) and alleged that defendants were<br />
controlling persons within the meaning of the Exchange Act. Further, because defendants made<br />
no showing of good faith to rebut the prima facie case of control person liability, defendants’<br />
motion to dismiss plaintiffs’ cause of action under Section 20(a) was denied.<br />
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Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).<br />
Plaintiff investors brought a putative class action against a mutual fund. Defendants<br />
included entities and officers responsible for issuing, managing, and distributing shares of the<br />
fund, and also individuals that were independent trustees of the fund. Plaintiffs alleged that the<br />
defendants violated Sections 11, 12, and 15 of the Securities Act of 1933, by alleging misleading<br />
disclosures by entities and officers of the fund as to who was an appropriate investor and other<br />
potential risks associated with the fund. Section 15 of the Securities Act makes any person who<br />
controls a person who violates certain sections of the Securities Act (11 or 12), liable jointly and<br />
severally “with and to the same extent as the controlled person.” To state a claim under<br />
Section 15, plaintiffs must establish: (1) a primary violation of the pertinent federal securities<br />
laws; and (2) that defendants exercised actual power or control over the primary violator. The<br />
defendants brought a motion to dismiss the claims against them. The court noted that “whether<br />
the defendant is a controlling person is an intensely factual question, involving the scrutiny of the<br />
defendant’s participation in the day-to-day affairs of the corporations and the defendant’s power<br />
to control corporate actions.” The court found that the plaintiff satisfied the first prong by<br />
establishing an underlying Section 11 and Section 12(a)(2) violation. Plaintiffs alleged that<br />
defendants exercised control by virtue of their positions as high-level officers and the existence<br />
of their signing registration statements. The court found that it was “plausible” that high-level<br />
officers, such as the independent trust defendants who signed registration statements, would be<br />
in a position to exercise control over the fund and its disclosures. Accordingly, the court denied<br />
the independent trustee defendants’ motion to dismiss the Section 15 claim.<br />
In re Verifone Holdings Inc. Securities <strong>Litigation</strong>, 2011 WL 1045120 (N.D. Cal. Mar. 8, 2011).<br />
Plaintiffs filed a securities fraud class action against a major corporation and certain of its<br />
officers and directors on behalf of purchasers of the corporation’s common stock. The company<br />
released financial statements that were subsequently found to be incorrect, due to errors in<br />
accounting. These accounting errors were caused by manual adjustments made by an individual<br />
who was the company’s supply chain controller. Plaintiffs’ alleged a violation of Section 20(a)<br />
of the Securities Exchange Act of 1934 for control person liability against the company’s officers<br />
and directors. Defendants moved to dismiss on grounds that the allegations that they exercised<br />
control over the controller were insufficient. The court noted that merely holding an executive<br />
position within a company is insufficient for control person liability. Further, the court noted<br />
that plaintiffs’ allegations relied upon a Securities and Exchange Commission complaint which<br />
specifically stated that management did not review or approve the controller’s adjustments, and<br />
that there was a lack of particularity in the pleading. In sum, the court found that the<br />
Section 20(a) claims failed because the claims were meager and conclusory, and therefore,<br />
insufficient to survive a motion to dismiss.<br />
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SEC v. Daifotis, 2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011).<br />
In an enforcement action, the Securities and Exchange Commission brought numerous<br />
claims alleging securities law violations by defendant executives of a registered broker-dealer in<br />
their management of a particular fund. The SEC sought to amend their complaint to include<br />
control person liability claims under Section 20(a) of the Securities Exchange Act of 1934<br />
against one of the individual defendants. The defendant objected, claiming that the SEC did not<br />
qualify as a “person” under the statute. The court noted that federal securities laws should be<br />
construed “not technically and restrictively, but flexibly to effectuate [their] remedial purposes.”<br />
Thus, the court found that to hold that the SEC, the very agency charged with enforcing federal<br />
securities laws, could not allege control person liability contradicted the purpose of securities<br />
laws. Further, a plain reading of the statute as it existed at the time of the misconduct—and as it<br />
is interpreted by a majority of the circuits—was that the SEC was considered a “person” under<br />
Section 20(a). Accordingly, the SEC’s motion to add this claim was granted.<br />
Shepard v. S3 Partners, LLC, 2011 U.S. Dist. LEXIS 117957 (N.D. Cal. Oct. 12, 2011).<br />
Plaintiffs claimed defendants were liable for federal securities fraud under Sections 10(b)<br />
and 20(a) of the Securities Exchange Act of 1934 as well as securities fraud under several<br />
California statutes. Defendants moved for summary judgment. With respect to the control<br />
person allegations, the court found that several defendants could be proven liable for securities<br />
fraud as direct violators or controlling entities. The court noted that the plaintiffs need not show<br />
that a defendant was a culpable participant in the violation or that there was an exercise of actual<br />
power, but also that the defendant may assert a good faith defense if he can show no scienter and<br />
an effective lack of participation. The court found ample evidence that the moving defendants<br />
were the principals and primary decision-makers of the company. The defendants each had an<br />
equal ownership stake in the company and partook in numerous discussions about the<br />
investments. Thus, the motion for summary judgment was denied.<br />
Meram v. Citizens Title & Trust, Inc., 2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011).<br />
Plaintiffs alleged that defendant and two non-parties ran a Ponzi scheme that caused<br />
losses to plaintiffs. Plaintiffs alleged that two non-parties would not have been successful but for<br />
the role defendant, an Arizona escrow company, played in the scheme. Plaintiffs alleged, inter<br />
alia, causes of action against defendant for violations of Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934. The court found there were no allegations that the defendant<br />
exercised control over the two individual non-parties or any person or entity in an effort to<br />
induce them to engage in acts that violated securities laws. Further, the allegations lacked the<br />
times, dates, and places that such control allegedly occurred. The court held that the plaintiffs<br />
failed to make any allegation regarding the defendant’s management responsibilities or direct or<br />
indirect control over the outside parties to cause them to engage in the alleged conduct. For<br />
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those reasons, the court granted the defendant’s motion to dismiss the plaintiffs’ Section 20(a)<br />
claim.<br />
King County v. Merrill Lynch & Co., 2011 U.S. Dist. LEXIS 16483 (W.D. Wash. Feb. 18, 2011).<br />
Plaintiff was an investor for a municipality, charged with the task of investing the cash<br />
reserves of the municipality. Plaintiff brought claims against a financial institution and its<br />
subsidiaries under the Washington State Securities Act (“WSSA”), alleging that defendants had<br />
violated RCW 21.20.010 and RCW 21.20.430 of the WSSA. To establish liability under the<br />
WSSA, the purchaser of a security must prove that the seller and/or others made material<br />
misrepresentations or omissions about the security, and that the purchaser relied on those<br />
misrepresentations or omissions. Plaintiff alleged defendants “played an integral role in the<br />
transactions and breaches at issue.” The court noted that the relationship between a corporation<br />
and its wholly-owned subsidiaries created a greater likelihood of control and authority than do<br />
other forms of associations for which Washington courts had refused to dismiss claims brought<br />
on the theory of control person liability. Further, Washington courts have held associates of<br />
sellers to be control persons who could be liable for a seller’s actions under the WSSA, even<br />
though the company in which the associate participated was not the company through which the<br />
fraudulent notes were sold, and even though there was no evidence that the associate actually<br />
controlled the sellers’ companies or that he had authority over the sale of notes by the sellers’<br />
other companies. As such, the court found that plaintiff’s allegations were sufficient to state a<br />
claim against defendants under the theory of control person or participant liability.<br />
Richard v. Nw. Pipe Co., 2011 U.S. Dist. LEXIS 96200 (W.D. Wash. Aug. 26, 2011).<br />
Plaintiff, on behalf of itself and other similarly situated shareholders, brought a<br />
consolidated class action suit against a corporation and its officers alleging accounting<br />
improprieties which inflated the corporation’s financial results, violated generally accepted<br />
accounting principles and Securities and Exchange Commission disclosure rules, and made<br />
contradictory representations. Specifically, plaintiff alleged that the corporation violated<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and that the officers were<br />
subject to Section 20(a) control person liability. Defendants filed a motion to dismiss. The court<br />
found that plaintiff had adequately pleaded primary securities violations. Next, the court<br />
analyzed the control person claim under Section 20(a). The chief financial officer joined the<br />
company seven months after the alleged impropriety began. The court held that she could not be<br />
liable as a control person for the time period prior to her employment. Subsequent to the<br />
commencement of her employment, the court found that although she could not control her boss<br />
who made many of the statements at issue, her daily control of the company and control over its<br />
financial disclosures allowed the Section 20(a) claim against her to survive a motion to dismiss.<br />
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In re Oppenheimer Rochester Funds Group Sec. Litig., 2011 WL 5042066 (D. Colo. Oct. 24,<br />
2011).<br />
Shareholders in seven different municipal bond funds brought a total of 32 putative<br />
securities fraud class actions in federal courts throughout the country naming the individual<br />
funds, fund managers, and trustees as defendants. The principal claims were asserted under<br />
Sections 11, 12, and 15 of the Securities Act of 1933 and were based on allegations that the<br />
funds were falsely marketed as stable investments when in fact they employed extremely risky<br />
investment strategies. Plaintiffs contended that their factual allegations were sufficient to<br />
demonstrate that each of the moving defendants possessed the requisite power to direct or cause<br />
the direction of management necessary to survive dismissal. As “senior officers” of the funds,<br />
the officer defendants controlled the funds’ operations and disclosures made by the funds in<br />
registration statements. In addition, plaintiffs alleged that documents filed with the Securities<br />
and Exchange Commission by the defendants stated the company “has the power to direct or<br />
cause the direction of the management or policies of the manager, whether through ownership of<br />
securities, by contract or otherwise.” The court held these allegations to be sufficient to support<br />
an inference that the officer defendants had the direct or indirect means of influencing the<br />
content of the registration statements at issue in the litigation. With regard to the trustee<br />
defendants, under Section 15 of the Securities Act the trustee defendants’ authority to sign or not<br />
sign the registration statements at issue were sufficient indicia of “control” over the<br />
representations and disclosures that went out to potential investors to support “control person”<br />
liability at the pleading stage of the litigation. Thus, defendants’ joint motion to dismiss<br />
plaintiffs’ “control person” claims against the officer and trustee defendants was denied.<br />
In re Thornburg Mort., Inc. Sec. Litig., 2011 WL 2429189 (D.N.M. June 2, 2011).<br />
Plaintiff shareholders filed suit against a corporation, its officers and directors, and its<br />
underwriters for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933<br />
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on<br />
misrepresentations and omissions regarding the financial condition of the corporation. Plaintiffs<br />
filed an Omnibus Motion requesting, among other things, that the court reconsider ruling on the<br />
dismissal of the issue of control person liability under Section 20(a) against certain directors and<br />
officers. The court ruled that it would reconsider the ruling on dismissal of certain directors and<br />
officers because the second amended complaint cured deficiencies in the plaintiffs’ allegations<br />
against those individual defendants. However, the court refused to reconsider ruling on the<br />
dismissal of the control person claims against other individual defendants because even in the<br />
second amended complaint, plaintiffs failed to plead that those defendants had control over any<br />
primary violations.<br />
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Genesee County Employees Ret. Sys. v. Thornburg Mortgage Sec. Trust 2006-3, 2011 U.S. Dist.<br />
LEXIS 133462 (D.N.M. Nov. 12, 2011).<br />
In a securities class action suit involving mortgage-backed securities, defendants’ motion<br />
to dismiss was denied because plaintiffs met the requirements to plead their standing under<br />
Section 12(a)(2) of the Securities Act of 1933 and 15 U.S.C.S. § 77l(a), by sufficiently alleging<br />
that they purchased the certificates pursuant to the offering documents in question, that<br />
defendants sold the certificates to them by the use of communication in interstate commerce<br />
and/or the United States mails, and that defendants orchestrated all activities necessary to effect<br />
the sale of the certificates. With regards to the control person claims, the court held that the<br />
plaintiffs had adequately pleaded their claims as to the individual defendants/officers as well as<br />
to the corporate owner of a finance subsidiary that was organized for the limited purpose of<br />
acquiring, owning, and transferring mortgage assets and selling interests in those assets or bonds<br />
secured by those assets. With respect to the individual defendants, the plaintiffs alleged that they<br />
all: (1) made the decision to offer the certificates for sale to investors; (2) drafted, revised,<br />
and/or approved the offering documents; (3) finalized the offering documents and caused them to<br />
become effective; (4) conceived and planned the sale of the certificates and orchestrated all<br />
activities necessary to effect the sale of the certificates to the investing company, by issuing the<br />
certificates, promoting the certificates, and supervising their distribution and ultimate sale to<br />
investors; (5) participated in the preparation and dissemination of the false and misleading<br />
offering documents for their own benefit; (6) by virtue of their positions were privy to and were<br />
provided with actual knowledge of the material facts concealed from the plaintiffs and members<br />
of the class; and (7) had the power and authority to cause, and did in fact cause, the primary<br />
violators to engage in the alleged wrongful conduct. The court concluded that the plaintiffs had<br />
adequately and sufficiently pleaded a Section 15 claim against the individual defendants. With<br />
respect to the control person claim against the corporate owner of the finance subsidiary, the<br />
court held that allegations that an entity was the parent corporation of a primary violator standing<br />
alone is insufficient for a claim of control. Additionally, simply that an entity’s name appears<br />
prominently on offering documents, lending credibility of the larger corporation is not sufficient<br />
to establish control person liability. Here, however, the court held that the plaintiffs had<br />
specifically pleaded facts that demonstrated the corporate owner had the practical ability to direct<br />
the actions of the primary violator. The plaintiffs pointed to significant overlap in the controlling<br />
executives and directors of each entity. The plaintiffs alleged that the corporate owner created<br />
the subsidiary and received basically all of its revenue from securitizations. They also pointed<br />
out that various Securities and Exchange Commission filings demonstrated that the corporate<br />
owner exercised significant control over the subsidiary. These allegations were sufficient to state<br />
a control person claim under Section 15. Thus, the defendants’ motions to dismiss were denied.<br />
Wirth v. Taylor, 2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).<br />
Plaintiff customer brought suit against a (1) financial company, (2) a firm with which the<br />
financial company had a consulting agreement, and (3) an individual with whom the financial<br />
company had a sub-advisor agreement. Plaintiff alleged fraud, breach of contract, breach of<br />
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fiduciary duty, conversion, accounting, unjust enrichment, negligence, federal and Utah state<br />
securities violations, and control person liability, Utah Code Ann. § 61-1-22(4)(a). The matter<br />
before the court was a motion for summary judgment by all defendants, a cross-motion for<br />
summary judgment by plaintiff, and a motion to strike. The court found that there was no<br />
evidence that the corporation made any misrepresentations or omissions to plaintiff, or that<br />
plaintiff suffered any damages as a result of those alleged misrepresentations. The court further<br />
found that there was insufficient evidence that the corporation had control over the individual<br />
who made false representations to plaintiff for the purposes of either federal securities law or<br />
Utah securities law. As such, the court granted the corporation’s motion for summary judgment<br />
in full. The court found that the evidence of primary securities violations against the firm was<br />
not supported by evidence, and therefore granted summary judgment on that claim. However,<br />
the court found that the evidence against the firm for control person liability was largely in<br />
dispute, because there were issues of material fact regarding the sub-advisor’s actions.<br />
Therefore, summary judgment was not appropriate on the control person liability claim.<br />
Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enters., 2011 WL 4591541 (S.D. Fla. Sept. 30, 2011).<br />
Plaintiff shareholders filed suit against a corporation and its officers alleging that<br />
defendants made material misrepresentations and omissions in Securities and Exchange<br />
Commission filings, press releases, and other public statements violating Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs also alleged that two individuals<br />
were liable as control persons under Section 20(a). The court found that plaintiffs failed to<br />
adequately allege that defendants made false or misleading material statements or plead facts that<br />
presented a strong inference that defendants made statements they knew were false. As such, the<br />
Section 10(b) and Rule 10b-5 claims failed. The court further held that because plaintiffs had<br />
not adequately pleaded a primary securities fraud claim under Section 10(b) or Rule 10b-5, the<br />
control person claim under Section 20(a) also failed.<br />
Darocy v. Abildtrup, 345 S.W.3d 129 (Tex. App. 2011).<br />
Plaintiff shareholders brought suit against an officer and director of a corporation for<br />
control person liability under the Texas Security Act. Tex. Rev. Civ. Stat. art. 581-33. The trial<br />
court ruled against defendant. Defendant appealed, alleging that the evidence did not support the<br />
trial court’s finding. The court of appeals held that defendant’s role as an officer and director<br />
combined with the evidence that defendant had general control over the corporation was<br />
sufficient to subject defendant to control person liability and thus affirmed the lower court’s<br />
judgment.<br />
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Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.<br />
July 12, 2011).<br />
A registered representative owned two corporations that were unrelated to his<br />
employment at a broker-dealer. The registered representative disclosed his ownership of the two<br />
corporations to the broker-dealer and later mentioned selling them. The investor who bought the<br />
corporations alleged that the registered representative fraudulently induced him to purchase<br />
unregistered stock in the corporations and brought suit against the registered representative and<br />
broker-dealer alleging control person liability under the Texas Securities Act. Tex. Rev. Civ.<br />
Stat. art. 581-33. The broker-dealer moved for summary judgment, and the trial court granted<br />
the broker-dealer’s motion. The investor appealed the trial court’s grant of summary judgment.<br />
To prove control person liability, the plaintiff must prove that the alleged control person: (1) had<br />
actual power or influence over the controlled person; and (2) had the power to control or<br />
influence the specific transaction or activity that gave rise to the underlying violation. The court<br />
of appeals concluded that the evidence presented established a question of fact regarding the<br />
element of control. First, the policies required that the registered representative obtain<br />
permission to own and participate in his outside business. Second, it prohibited the registered<br />
representative “from engaging in any private securities transaction without full disclosure to and<br />
prior written approval from [the broker-dealer].” Thus, as a condition of the registered<br />
representative’s employment, he agreed not to enter into any outside securities transactions<br />
without the broker-dealer’s permission. In sum, the court of appeals held that the broker-dealer<br />
had neither conclusively negated one of the elements of the control person claims, nor<br />
conclusively established both elements of the relevant affirmative defense. Accordingly, the<br />
summary judgment on the claim alleging control person liability was reversed and remanded.<br />
Narnia Investments Ltd. v. Harvestons Sec. Inc., 2011 Tex. App. LEXIS 6182 (Tex. Civ. App.<br />
Aug. 9, 2011).<br />
Plaintiff investment company brought suit against a broker-dealer and its individual<br />
employees for violations of Texas securities laws, including deceptive trade practices, fraud, and<br />
control person liability. Tex. Rev. Civ. Stat. Ann. Art. 581-33(F)(1). Defendants moved for<br />
summary judgment asserting, among other things, that the individual defendants alleged to be<br />
control persons were not acting within the course and scope of employment and therefore could<br />
not be control persons. The trial court granted defendants’ motion for summary judgment.<br />
Plaintiff appealed. The appellate court held that plaintiff need not prove culpability of the<br />
alleged control person or that he acted within the course and scope of his employment in order to<br />
be liable as a control person. As such, the court reversed the trial court’s granting of summary<br />
judgment.<br />
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Hellum v. Breyer, 194 Cal. App. 4th 1300 (2011).<br />
Investors bought unregistered securities and sustained losses. They then brought a class<br />
action lawsuit against the company and its corporate officers based on alleged violations of<br />
California and federal securities laws. The trial court sustained a demurrer and dismissed claims<br />
of securities violations brought against the outside directors. In their complaint, the investors<br />
alleged that the outside directors had the power to influence and control the corporation with<br />
regard to the issuance and sale of unregistered securities. The trial court found that the investors<br />
had not stated a claim against the outside directors because they had not alleged sufficient facts<br />
to show control. The Court of Appeal reversed, holding that director liability under California<br />
Corporations Code Section 25504, does not require pleading and then proving that the director<br />
controlled the primary violator. Rather, the statute expressly subjects outside directors to<br />
collateral liability based solely on their status as directors. As to controlling person liability, the<br />
court found the investors’ allegations of control to be sufficient because the actual exercise of<br />
power did not have to be pleaded because the definitions of “control” focused on the power to<br />
direct, not to exercise. The court found that plaintiffs’ allegations of outside directors’<br />
ownership interests in the company, the responsibility under the company’s bylaws for managing<br />
the company, their presumptive authority to sign key corporate documents (such as regulatory<br />
filings), their significant voting power by virtue of their stock holdings and voting agreement,<br />
and their affiliation with venture capital firms upon which the company relied for its continuing<br />
financing, all supported the inference that they possessed the power to directly or indirectly<br />
influence corporate policies and decision making. Therefore, the court found that the control<br />
person causes of action were sufficient to withstand the defendants’ demurrer.<br />
Moss v. Kroner, 197 Cal. App. 4th 860 (2011).<br />
Plaintiff brought claims against insurance agents under California Corporations Code<br />
Section 25401 and Sections 25504 and 25504.1 for control person liability, based on six<br />
misrepresentations of material fact. The trial court sustained defendants’ demurrer and<br />
dismissed plaintiff’s claims. Plaintiff appealed the trial court’s dismissal. Plaintiff alleged that<br />
defendants materially assisted in the transaction as the issuer’s agents and that they possessed<br />
knowledge of the true facts. In evaluating the control person claims, the court held that<br />
Sections 25504 and 25504.1 expressly extended liability from the original, direct violator of<br />
Section 25401 to specific secondary actors who share equal liability with the original actor.<br />
Specifically, Section 25504 provided that control persons, partners in liable firms, directors, and<br />
principal executive officers of liable corporations, employees of liable actors, broker-dealers, and<br />
agents who materially aid in the violation of Section 25401 are all liable jointly and severally<br />
with and to the same extent as the person who directly violated Section 25401. Accordingly, the<br />
court held that plaintiff stated a viable cause of action for control person liability and reversed<br />
the lower court’s ruling.<br />
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3. Aiding & Abetting<br />
H.3<br />
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).<br />
Investors filed a private action under Section 10(b) of the Securities Exchange Act of<br />
1934 and Rule 10b-5 promulgated thereunder against a mutual fund advisor and its parent fund<br />
creator. The investors alleged that the mutual fund advisor and mutual fund parent aided and<br />
abetted violations of Rule 10b-5 for alleged false statements in the mutual fund prospectuses<br />
filed by the mutual fund. At issue was the meaning of the word “make” in Rule 10b-5. In<br />
holding that the “maker” of a statement for Rule 10b-5 purposes is the person or entity with<br />
ultimate authority and control over the statement, the court relied on its previous ruling that a<br />
private right of action under Rule 10b-5 does not include suits against aiders and abettors who<br />
contribute substantial assistance to the making of a statement, but do not actually make it. Thus,<br />
the court held that the mutual fund advisor and the mutual fund parent were not liable for aiding<br />
and abetting a violation of Rule 10b-5 because the mutual fund itself “made” the false statements<br />
in the prospectuses.<br />
MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011).<br />
Plaintiff investors sued defendants, a broker-dealer and its subsidiary bank, alleging<br />
conspiracy to violate RICO. The investors claimed that defendants conspired with Bernard L.<br />
Madoff to perpetuate a Ponzi scheme by failing to freeze Madoff’s accounts after defendants<br />
allegedly become aware of the fraud as a result of a “due diligence” investigation conducted by<br />
defendants. Plaintiffs argued that an exception should be created to Section 1964(c) of the<br />
Private Securities <strong>Litigation</strong> Reform Act of 1995 (“PSLRA”), which bars civil RICO claims<br />
predicated on allegations of securities fraud, because securities fraud laws do not create private<br />
cause of action for aiding and abetting, thus foreclosing plaintiffs’ avenue for relief. Defendants<br />
moved to dismiss the complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of<br />
Civil Procedure, arguing that the plaintiffs did not adequately plead the required elements of<br />
their claims. The district court dismissed plaintiffs’ claims in their entirety. The Court of<br />
Appeals affirmed the dismissal of plaintiffs’ claims, but on different grounds for plaintiffs’ civil<br />
RICO claim. The Court of Appeals held that Section 1964(c) of the PSLRA bars civil RICO<br />
claims predicated on acts of securities fraud even where a plaintiff cannot itself pursue a private<br />
cause of action for aiding and abetting securities fraud against a defendant.<br />
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).<br />
The Securities and Exchange Commission filed a complaint against defendants, a fund<br />
portfolio manager and a fund advisor’s chief operating officer (“COO”), alleging violations of<br />
the Securities Exchange Act of 1934, Rule 10b-5, the Securities Act of 1933, and the Investment<br />
Advisors Act of 1940. The SEC alleged that a mutual fund’s Registered Investment Advisor<br />
secretly permitted one investor to “market time” the fund in exchange for an investment in a<br />
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hedge fund managed by the portfolio manager. The SEC sought civil penalties under the<br />
Advisors Act for aiding and abetting. The district court granted the defendants’ motion to<br />
dismiss the civil penalties for aiding and abetting. The Second Circuit overturned the district<br />
court, holding that civil penalties may be assessed under the Advisors Act for aiding and abetting<br />
violations because a “violation” includes the aiding and abetting of principal violations. Thus,<br />
the civil penalty provision encompasses both primary and secondary violators.<br />
VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011).<br />
Petitioner, a former registered representative, sought review of an order of the Securities<br />
and Exchange Commission, which found that he willfully violated the antifraud and<br />
recordkeeping provisions of the Securities Exchange Act of 1934 by orchestrating a scheme that<br />
allowed favored customers to engage in late trading of future funds, and by aiding and abetting<br />
his firm to keep inaccurate books and records. Rule 17a-3(a)(6), promulgated under<br />
Section 17(a)(1) of the Exchange Act, provides that covered brokers and dealers shall make and<br />
keep a memorandum of each brokerage order for the purchase or sale of securities. In<br />
October 2001 an amendment was added to the rule, requiring the order memo to include the time<br />
the order was received. It was uncontested that the firm failed to timestamp or otherwise record<br />
the times it received final trading decisions. The registered representative argued, however, that<br />
he could not be held liable for aiding or abetting the firm’s recordkeeping violations because he<br />
lacked the requisite scienter due to the fact that it was someone else’s job to keep current with<br />
the requirements of technical rules such as recordkeeping. The court held that there was ample<br />
evidence in the record that supported the SEC finding that the registered representative had<br />
actual knowledge that the firm’s records were inaccurate because he himself had designed a<br />
scheme to make them so, and that he therefore deliberately aided and abetted the firm’s<br />
violations of Rule 17a-3(a)(6) and Section 17(a)(1).<br />
Amacker v. Renaissance Asset Mgmt. LLC, 657 F.3d 252 (5th Cir. 2011).<br />
Appellants, investors in a commodity pool, filed suit against appellees, futures<br />
commission merchants, alleging violations of the Commodity Exchange Act (“CEA”) for<br />
willfully aiding and abetting an investment pool operator in his scheme to defraud investors. The<br />
investors alleged that the merchants willfully aided and abetted the fraud by not conducting<br />
background investigations into the investment pool operator and his company as required by the<br />
Patriot Act amendments to the Bank Secrecy Act. The investors acknowledged that the<br />
merchants had no actual knowledge of the fraud, but rather argued that the failure to investigate<br />
demonstrated extreme recklessness sufficient to satisfy the “willful” requirement under the CEA,<br />
a lower standard than knowledge or intent. Investors relied on the court’s prior holding in Abbot<br />
v. Equity Group, Inc., 2 F.3d 613 (5th Cir. 1993). In that case, the court held that “extreme<br />
recklessness” could serve as the proper scienter if: (1) the defendant had some special duty of<br />
disclosure; or (2) if the assistance provided to the primary violator was unusual in character and<br />
degree. The court held that, assuming extreme recklessness could serve as the proper scienter,<br />
plaintiffs failed to establish that either of the two exceptions applied. Thus, the routine execution<br />
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of trades by defendants did not amount to substantial assistance sufficient to trigger aider and<br />
abettor liability. The Court of Appeals affirmed the district court’s granting of the merchants’<br />
motion to dismiss.<br />
SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011).<br />
Plaintiff brought a civil action against defendant director for, among other claims, aiding<br />
and abetting under Section 20(e) of the Securities Exchange Act of 1934 for his participation in<br />
the granting of backdated stock options to corporate officials. Defendant filed a motion to<br />
dismiss. To establish aiding and abetting liability, plaintiff must prove: (1) a primary violation<br />
of the securities laws; (2) ”knowledge” of the primary violation on the part of the alleged aider<br />
and abettor; and (3) ”substantial assistance” by the alleged aider and abettor in achieving the<br />
primary violation. The court held that even assuming a primary violation of Section 13(a) of the<br />
Exchange Act and Rules 12b-20 and 13a-1 by the corporation occurred, plaintiff’s failure to<br />
prove that the director was severely reckless or negligent regarding the secondary violations<br />
alleged against him was a failure to prove “knowledge” of the corporation’s primary violations.<br />
Thus, the court affirmed the dismissal of the Section 20(e) claim.<br />
SEC v. Locke Capital Mgmt. Inc., 794 F. Supp. 2d 355 (D.R.I. 2011).<br />
The Securities and Exchange Commission brought suit against defendant, the founder<br />
and sole owner of an investment advisory firm, asserting claims including aiding and abetting<br />
fraud in violation of Section 206 of the Investment Advisors Act of 1940, aiding and abetting in<br />
the making of false statements and filings with the SEC in violation of Section 207 of the<br />
Advisors Act, aiding and abetting in the making of false statements in advertising materials in<br />
violation of Section 206(4) of the Advisors Act, and aiding and abetting in the falsification of<br />
records in violation of Section 204 of the Advisors Act. The court found that the undisputed<br />
facts revealed that defendant fabricated a Swiss client to create business among potential<br />
advisors. Defendant then included the fictitious client and its fictitious assets in her investment<br />
advisory firm’s records, SEC filings, and marketing materials, inflating the firm’s apparent<br />
assets. The court found these established facts all constituted Advisors Act violations. The court<br />
denied defendant’s motion for summary judgment and granted the SEC’s motion for summary<br />
judgment for all claims set forth in its complaint. The court also enjoined defendant from<br />
committing future securities violations and, upon finding that the firm’s and defendant’s<br />
violations were closely intertwined, held defendant jointly and severally liable with the firm for<br />
disgorgement of profits. Finally, the court ordered defendant to pay civil penalties.<br />
SEC v. Sponge Tech. Delivery Sys. Inc., 2011 Fed. Sec. L. Rep. (CCH) 96,246 (E.D.N.Y.<br />
Mar. 14, 2011).<br />
The Securities and Exchange Commission brought a motion for preliminary injunctive<br />
relief seeking to enjoin defendants from aiding and abetting violations of various statutory and<br />
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egulatory provisions. The SEC alleged that defendants “pumped” the value of a publicly-traded<br />
company’s shares and “dumped” the shares into the public market in unregistered transactions.<br />
Defendants included an individual acting as the company’s president and CEO, an individual<br />
acting as the company’s COO, CFO, and CAO, and an individual acting as a self-employed<br />
consultant associated with the company. The company, defendant president, and defendant COO<br />
allegedly made material false or misleading statements in press releases and public SEC filings<br />
with respect to the company’s reduction in the number of its outstanding shares, business with<br />
five customers, and a company’s revenue. The president and COO reviewed and authorized the<br />
press releases and signed and certified the public filings before they were issued. Defendant<br />
consultant allegedly created Internet sites and virtual office space for the fictitious customers.<br />
He maintained the Internet sites and forwarded all e-mails sent to the Internet sites to his own<br />
e-mail account. He also arranged for physical space for the fictitious customers. Based upon<br />
these facts, the court found that the SEC had sufficiently shown that defendant president and<br />
defendant COO knowingly provided substantial assistance to the company in its commission of<br />
violations of Securities Exchange Act of 1934 Sections 13(a), 13(b)(2)A, 13(b)(2)B, and 15(d),<br />
and Exchange Act Rules 12b-20, 13a-13, 15d-1, 15d-11, and 15d-13. The court also found that<br />
the SEC had shown a reasonable likelihood of future violations absent the injunction given that<br />
the parties’ conduct involved a high degree of scienter, as demonstrated by the substantial efforts<br />
taken to hide the fraudulent scheme. The court found that the SEC did not provide sufficient<br />
evidence or explanation in support of its contention that the defendant consultant provided<br />
substantial assistance in violating Section 10(b) or Rule 10b-5. It therefore declined to issue an<br />
injunction prohibiting the aiding and abetting violations of these sections. The court noted,<br />
however, that the absence of an injunction against these provisions should not be interpreted as<br />
an endorsement of the alleged violation. Preliminary injunctions were issued according to the<br />
court’s findings.<br />
In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. 2011).<br />
Investors filed a class action suit against an asset management corporation and an<br />
investment advisory firm for losses arising from a Ponzi scheme. Plaintiffs alleged that the<br />
investment advisor aided and abetted violations of Section 10(b) of the Securities Exchange Act<br />
of 1934 and Rule 10b-5 in its role as secondary actor for brokering or facilitating the asset<br />
management corporation’s ability to place funds into the Ponzi scheme. In its motion to dismiss,<br />
defendants argued that plaintiffs’ claims were barred because “aiders and abettors” cannot be<br />
held liable under Section 10(b), and Rule 10b-5, for statements made to the investing public by<br />
the issuing firm, even if the secondary actor helped craft those statements. The court held that<br />
holding such a person liable for misstatements by another is plainly barred. Defendants’ motion<br />
to dismiss was granted.<br />
SEC v. Espuelas, 767 F. Supp. 2d 467 (S.D.N.Y. 2011).<br />
The Securities and Exchange Commission brought an enforcement action against<br />
defendants, former executives of a company, for aiding and abetting accounting fraud in<br />
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violation of securities laws. To state a claim for aiding and abetting violations of the Securities<br />
Exchange Act of 1934, the SEC must allege: (1) a primary violation of the Exchange Act;<br />
(2) actual knowledge of the violation by the aider and abettor; and (3) that the aider and abettor<br />
substantially assisted the primary violation. One of the former executives moved to dismiss on<br />
grounds that the SEC failed to allege sufficient facts that the former executive had knowledge of<br />
the precise accounting treatment which constituted the accounting fraud. In denying the former<br />
executive’s motion to dismiss, the court held that the SEC need not allege that a defendant know<br />
the precise accounting treatment triggering the Exchange Act violation, but rather need only<br />
demonstrate that a defendant knew enough to be cognizant that a violation has occurred.<br />
Horvath v. Banco Comercial Portuges, S.A., 2011 U.S. Dist. LEXIS 15865 (S.D.N.Y. Feb. 15,<br />
2011).<br />
Plaintiff investor brought suit against a Portuguese bank and its U.S. subsidiary,<br />
including aiding and abetting breach of fiduciary duty. Plaintiff was a customer of the U.S.<br />
bank, and sought a recommendation for a European bank at which he could open an account.<br />
The U.S. bank recommended the Portuguese bank, and plaintiff opened an account at the<br />
Portuguese bank. Plaintiff alleged that thereafter the Portuguese bank engaged in various<br />
securities violations. The court, however, found that a forum selection clause contained in<br />
plaintiff’s new account document with the Portuguese bank was operative and required plaintiff<br />
to pursue the claims in Portugal. The court also found that plaintiff’s common law claims for<br />
aiding and abetting breach of fiduciary duty against the U.S. bank were precluded by the New<br />
York Martin Act, N.Y. Gen. Bus. Law § 352 et seq. It noted that the Martin Act’s purpose is to<br />
create a statutory mechanism by which the attorney general would have exclusive authority to<br />
investigate and intervene in possible securities fraud on the public. Although the Martin Act<br />
applies only if underlying transactions occur “within or from” New York, courts have interpreted<br />
this as requiring “a substantial portion of the event” giving rise to the claim occurring in New<br />
York. This was satisfied as plaintiff had meetings with the U.S. bank in New York. Further, the<br />
court noted that even if the claims were not precluded by the Act, plaintiff had failed to properly<br />
plead an aiding and abetting claim for breach of fiduciary duty as he pleaded no non-conclusory<br />
facts indicating the U.S. bank had actual knowledge of the Portuguese bank’s breach of fiduciary<br />
duty, or that the U.S. bank provided substantial assistance to the Portuguese bank. Accordingly,<br />
plaintiff’s complaint was dismissed in its entirety.<br />
Berman v. Morgan Keegan & Co., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).<br />
Plaintiff investors brought suit against defendant broker-dealer alleging it aided and<br />
abetted companies in conducting a fraudulent Ponzi scheme. Specifically, plaintiffs brought<br />
claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and aiding and<br />
abetting conversion. Defendant brought a motion to dismiss the complaint on the grounds that<br />
plaintiffs failed to state a claim for relief as fraud was not pleaded with particularity and the<br />
claims were barred by the statute of limitations. The court noted that the heightened pleading<br />
requirements of F.R.C.P. Rule 9b apply to all three claims asserted by the plaintiffs. Further, it<br />
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noted that plaintiffs’ aiding and abetting claims founded in fraud must also plead the elements of<br />
aiding and abetting with particularity. The court dismissed the aiding and abetting fraud claim as<br />
plaintiffs failed to plead facts reflecting defendant’s actual knowledge of the fraud. The fact that<br />
defendant managed and monitored the companies’ accounts was not enough. The court rejected<br />
plaintiffs’ contention that defendant knew of the alleged fraud based on “know your customer”<br />
rules and other various stock exchange rules and monitoring requirements, as these rules spoke<br />
only to whether defendant should have known of the fraud, they did not reflect actual<br />
knowledge. Plaintiffs’ aiding and abetting breach of fiduciary duty claim was likewise dismissed<br />
as plaintiffs did not sufficiently allege defendant was aware of the companies’ fraudulent<br />
conduct, and asserted no additional facts indicating how defendant knew of the breach of<br />
fiduciary duty. Plaintiffs’ claims for aiding and abetting conversion, premised on fraud, failed to<br />
plead knowledge of fraud with sufficient particularity; thus, the aiding and abetting conversion<br />
claim failed. Further, the court noted that even if it were to assume that a conversion<br />
independent of the fraud was alleged, plaintiffs had not provided facts to support a reasonable<br />
inference that defendant knew of any underlying conversion. The court granted defendant’s<br />
motion to dismiss the complaint and denied leave to amend as plaintiffs had already been<br />
afforded an opportunity to amend and failed to set forth any additional facts indicating how the<br />
pleading deficiencies would be cured.<br />
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011).<br />
The Securities and Exchange Commission brought an action against defendants, a father<br />
and his two sons, allegedly engaged in an insider trading scheme. The SEC alleged that the<br />
father, an employee of a publicly-traded pharmaceutical company, opened a brokerage account<br />
in the names of his sons, and traded the pharmaceutical company’s securities in these accounts<br />
while he possessed non-public, material information about the company. The SEC further<br />
alleged that the sons knew about the trading; however, they did not take any steps to stop the<br />
illegal use of their accounts. The SEC charged the sons with violating Section 20(e) of the<br />
Securities Exchange Act of 1934 by aiding and abetting their father’s trades in the accounts held<br />
under their names. Defendants filed a motion to dismiss. In order to make out a prima facie<br />
case for aiding and abetting, the SEC must prove: (1) the existence of a securities law violation<br />
by the primary party; (2) knowledge of this violation on the part of the aider and abettor; and<br />
(3) substantial assistance by the aider and abettor in the achievement of the primary violation.<br />
To properly allege “substantial assistance,” the complaint must contain allegations that the aider<br />
and abettor’s conduct was a substantial causal factor in the perpetuation of the underlying<br />
violation. In denying the defendants’ motion to dismiss, the court held that the SEC’s allegation<br />
that the sons did not take any action to prevent the insider trading in their named accounts was<br />
sufficient “substantial assistance” because it was at a minimum “plausible” that the sons’<br />
inaction was designed intentionally to aid the father’s primary violations of the securities laws.<br />
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H.3<br />
Merkin v. Gabriel Capital, L.P., 2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011).<br />
Investors in three different hedge funds brought suit against defendants, the investment<br />
advisor to the funds and the auditors of the funds, for fraud, perpetuated by Bernard L. Madoff<br />
through his investment firm. Plaintiffs asserted, among other claims, common law claims for<br />
aiding and abetting breach of fiduciary duty. Defendants moved to dismiss arguing that New<br />
York Blue Sky law, commonly known as the Martin Act, provides for the attorney general to<br />
regulate and enforce New York’s securities laws, and thus precludes private causes of action.<br />
The court held that the Martin Act preempts plaintiffs’ claim for aiding and abetting breach of<br />
fiduciary duty, and thus granted defendants’ motion to dismiss.<br />
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).<br />
Plaintiff investors claimed that defendants operated a Ponzi-like scheme targeting<br />
members of the Chinese-American community to obtain direct and indirect investments in the<br />
Overseas Chinese Fund (“OCF”). Defendants raised capital for OCF from U.S. investors by<br />
selling interests in a partnership managed by a limited liability company. The limited liability<br />
company was never registered with the Securities and Exchange Commission but was registered<br />
with the Texas Securities Board. Plaintiffs and other investors were told that the limited liability<br />
company was managing their investments, but were never informed that the responsibilities for<br />
managing their investments were transferred to a third-party individual. Plaintiffs alleged that<br />
the limited liability company was aware of the third-party individual’s Ponzi scheme and,<br />
therefore, defrauded investors through their actions in promoting the underlying partnership<br />
investment. Plaintiffs brought claims against the third-party individual for violations of the<br />
Texas Securities Act under Articles 581-33 and 581-33-1. Article 581-33 contains a provision<br />
for finding liability under Section 33(A) for aiding and abetting a seller or issuer of a security. In<br />
their motion to dismiss, defendants argued that Article 581-33 applies specifically to investment<br />
advisors, and because plaintiffs and the third-party individual lacked an investment advisor<br />
relationship, the claim should be dismissed. The court held that although plaintiffs do not<br />
explicitly state in the complaint that the third-party individual acted as investment advisor, they<br />
nonetheless found enough facts to show that the third-party individual may have been asking for<br />
compensation in advising the plaintiffs to invest. Thus, the court denied defendants’ motion to<br />
dismiss claims under the Texas Securities Act.<br />
Newby v. Enron Corp. (In re Enron Corp. Sec. Derivative & ERISA Litig.), 761 F. Supp. 2d 504<br />
(S.D. Tex. 2011).<br />
Investors alleged in 1999 and 2000 that a defendant bank fraudulently induced plaintiffs<br />
to purchase beneficial ownership interests in a special purpose entity (“SPE”), allegedly secured<br />
by worthless or nearly worthless assets purchased from Enron Corporation purportedly through<br />
“arm’s-length” transactions and dumped into the SPE as a part of a larger conspiracy with Enron<br />
to manipulate Enron’s financial statements and defraud investors. Specifically, the plaintiff<br />
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investors allege that defendant bank engaged in common law aiding and abetting, fraud, and civil<br />
conspiracy with Enron as part of a larger scheme to hide liabilities and improve Enron’s financial<br />
statements. Common law aiding and abetting of fraud under New York law requires pleading<br />
facts showing (1) the existence of fraud; (2) defendant’s actual knowledge of the fraud; and<br />
(3) that defendant provided substantial assistance to advance the fraud’s commission. Anzerill v.<br />
Am. Tobacco Co., 2000 WL 34016364 (N.Y. Sup. Ct. Oct. 27, 2000). Allegations of<br />
constructive knowledge or recklessness are insufficient to allege the required state of mind of<br />
actual and concrete knowledge of the underlying fraud. An allegation that a defendant “should<br />
have known” about the fraud is also insufficient. In the complaint, plaintiffs alleged that the<br />
bank structured certain tax transactions to help Enron achieve its fraudulent account objectives.<br />
However, the complaint does not plead facts that establish that anyone at the bank knew at the<br />
time of entering into the transactions how Enron would disclose them, that they were improper,<br />
or that Enron was entering into them to commit fraud. The court held that absent such details,<br />
the aiding and abetting claim must be dismissed for failure to plead actual knowledge of the<br />
underlying fraud. Allegations of an intention to realize accounting income benefits do not<br />
translate into knowledge of improper benefits or knowledge of fraud. The court granted<br />
defendant’s motion to dismiss as to all claims.<br />
HMV Props., LLC v. IDC Ohio Mgmt., LLC, 2011 U.S. Dist. LEXIS 1161 (S.D. Ohio Jan. 4,<br />
2011).<br />
Purchasers of various investment properties sued sellers of the properties, alleging that<br />
the collective defendants participated in a conspiracy and perpetuated a scheme to dupe plaintiffs<br />
into purchasing overvalued real estate in Ohio, violating RICO. Plaintiffs claimed defendants<br />
aided and abetted the advancement of this scheme in connection with their RICO claim.<br />
Defendants brought a motion to dismiss. The court held that there is no provision within RICO<br />
that permits a private right of action for aiding and abetting. Furthermore, the court noted that in<br />
Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994), the Supreme Court ruled<br />
that private aiding and abetting suits were not authorized under Section 10(b) of the Securities<br />
Exchange Act of 1934. Additionally, even if such a right exists, plaintiffs failed to state a claim<br />
because they failed to allege all elements of the underlying substantive RICO claim. Therefore,<br />
the court dismissed the aiding and abetting claim with prejudice as to all defendants.<br />
Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong>, <strong>LLP</strong>, 781 F. Supp. 2d 913 (D. Ariz. 2011).<br />
Plaintiff investors brought suit arising from the collapse of a real estate lender.<br />
Specifically, among other claims, plaintiffs asserted that management at both a private mortgage<br />
lender and a related company aided and abetted statutory securities fraud and breach of fiduciary<br />
duty. Defendant private mortgage lender was engaged in making high interest secured loans to<br />
real estate developers. It formed a relationship with defendant company where the company<br />
brought together investors to invest in various real estate projects, including pass-through<br />
interests in loans originated by defendant mortgage lender. Plaintiffs alleged that management of<br />
the private mortgage lender was aware of financial excess at the mortgage lender and the<br />
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allegedly illegal fundraising at defendant company, but did nothing to warn investors. It further<br />
alleged these defendants assisted in preparing private offering memoranda which they knew were<br />
false and misleading. Plaintiffs alleged that managers at the company made false and misleading<br />
statements in soliciting investors. The management defendants each brought motions to dismiss,<br />
asserting that aiding and abetting securities fraud is not a cognizable claim under A.R.S.<br />
§ 44-1991. The court rejected this claim as the Arizona Supreme Court in State v. Superior<br />
Court, 123 Ariz. 324 (1979), previously ruled that there is a private right of action for aiding and<br />
abetting securities fraud under the state statute. Next, defendants argued that plaintiffs failed to<br />
adequately plead that defendant mortgage broker and defendant company owed fiduciary duties<br />
to their investors. The court rejected this contention as plaintiffs alleged that defendants were<br />
agents of their investors, managers of their investments, and engaging in a joint venture. The<br />
court found these allegations were sufficiently pleaded. The court also found that plaintiffs<br />
alleged sufficient facts from which knowledge and substantial assistance may be inferred, as they<br />
alleged that the mortgage company disseminated false and misleading information of which they<br />
were aware and that the company managers were aware of the real estate broker’s insolvency,<br />
yet arranged financing that allowed the company to appear solvent. Accordingly, the court<br />
denied both motions to dismiss.<br />
Scala v. Citicorp Inc., 2011 WL 900297 (N.D. Cal. Mar. 15, 2011).<br />
Alleged fraud victims brought a class action lawsuit against financial institutions alleging<br />
defendants aided and abetted one of their customers in perpetrating a “Madoff-style” Ponzi<br />
scheme. Plaintiffs asserted claims under California state law. Defendants brought a<br />
Rule 12(b)(6) motion to dismiss on the ground that the claim was preempted by the Federal<br />
Securities <strong>Litigation</strong> Uniform Standards Act of 1998 (“FSLUSA”). Although the court agreed<br />
with plaintiffs that FSLUSA does not require dismissal of aiding and abetting claims, it found<br />
that dismissal was required based upon the facts alleged in this case, as the complaint, on its face,<br />
alleged misrepresentations and omissions occurring “in connection with” the purchase or sale of<br />
covered securities. Here, defendants were aware of its customer’s prior fraud conviction, yet<br />
allowed this customer to open multiple accounts. In so doing, defendants did not request<br />
appropriate identification, thereby violating its own policies and federal banking regulations. As<br />
this conduct could be actionable by the SEC (i.e., it was not “tangential” to a securities action),<br />
the court found plaintiffs’ aiding and abetting claim preempted by FSLUSA. Defendants’<br />
Rule 12(b)(6) motion to dismiss was granted without prejudice.<br />
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).<br />
The Securities and Exchange Commission brought an enforcement action against two<br />
executives at a registered investment advisor, arising from their management of an ultra-short<br />
term bond fund. One defendant, an executive vice president and the lead portfolio manager of<br />
the fund, reported to the other defendant who oversaw the head of the product development and<br />
management group responsible for the fund. The complaint alleged a series of misleading<br />
statements and fraudulent acts were made in connection with the fund, by both defendants. The<br />
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complaint stated eight claims for relief against the defendants, including: aiding and abetting<br />
violations of Section 10(b) of the Securities Exchange Act of 1934, aiding and abetting<br />
violations of Section 206(4) of the Investment Advisors Act of 1940, and Rule 2064-8, aiding<br />
and abetting violations of Section 34(b) of the Investment Company Act, aiding and abetting<br />
violations of Section 13(a) of the Investment Company Act, and aiding and abetting violations of<br />
Sections 206(1) and (2) of the Advisors Act against the executive vice president. Defendants<br />
separately filed motions to dismiss and strike portions of the complaint. They argued the claims<br />
against them for aiding and abetting must be dismissed as the complaint failed to plead fraud<br />
with particularity under F.R.C.P. Rule 9(b), as it failed to allege factual allegations of primary<br />
violations and that they aided and abetted or that they substantially assisted in the primary<br />
violations. The court found that the complaint contained multiple direct statements by both<br />
defendants that could serve as a basis for the direct liability claims against them and that the<br />
misrepresentations by one defendant could serve as a primary violation underlying the aiding and<br />
abetting by the other defendant and vice versa. Alternatively, the complaint alleged<br />
misstatements attributable to other entities, which could also serve as a primary violation. The<br />
court found the complaint sufficiently stated that the defendants substantially assisted each<br />
other’s alleged misstatements, noting that the complaint alleged that where one defendant made a<br />
misleading statement in a filing, the other defendant reviewed the filing and failed to remedy the<br />
misstatement. The court rejected the executive vice president’s assertion that the complaint did<br />
not adequately allege aiding and abetting liability under Section 206 of the Advisors Act. The<br />
court noted that the Advisors Act did not require the SEC to allege a personal benefit to the<br />
defendant in order to state a claim. Further, the court found that defendants cited no authority<br />
that would require the SEC to comply with the heightened pleading requirements of the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995 when asserting claims under the Advisors Act. The<br />
court noted that although the Dodd-Frank Act gave the SEC standing to bring a claim in federal<br />
court for aiding and abetting violations of the Investment Company Act of 1940, because the<br />
alleged misconduct occurred before passage of the Dodd-Frank Act and in light of considerations<br />
of fairness, dictated that individuals should have an opportunity to know what the law is and<br />
conform their conduct and, accordingly, the SEC did not have authority to retroactively bring<br />
claims for aiding and abetting Investment Company Act violations. With the exception of the<br />
claims for aiding and abetting Investment Company Act violations, defendants’ motions to<br />
dismiss were denied.<br />
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).<br />
The Securities and Exchange Commission brought an enforcement action against two<br />
executives of a registered investment advisor arising from their conduct in managing an ultrashort<br />
term bond fund. Before the court were defendants’ motions to reconsider a prior order<br />
granting in part and denying in part defendants’ motions to dismiss and strike portions of the<br />
complaint, in light of the subsequent Supreme Court decision Janus Capital Group, Inc. v. First<br />
Derivative Traders, 131 S. Ct. 2296 (2011). In Janus, the Supreme Court held that a mutual<br />
fund investment advisor could not be held liable in a private action under Securities Exchange<br />
Act of 1934 Section 10(b) and Rule 10b-5 for false statements included in its client’s mutual<br />
funds prospectuses, because the advisor did not “make” the statements therein. The court noted<br />
that, as an initial matter, defendants were not granted leave to file a motion for reconsideration as<br />
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to any of the claims except the “primary liability” claims. The court nevertheless noted that<br />
modification as to the denial of defendants’ motion to dismiss aiding and abetting Rule 10b-5<br />
violations under Janus was inappropriate. The court noted that the complaint contained direct<br />
statements by both defendants that could serve as a basis for direct liability claims against them<br />
and underlie the aiding and abetting claim against the other. The court recognized that the<br />
complaint alleged various misstatements made by the investment advisor, which, under Janus,<br />
were insufficient for a Rule 10b-5 violation. It found this unsurprising, however, as the<br />
complaint had been filed prior to Janus. The court suggested that the SEC may choose to move<br />
for leave to file an amended complaint where it could more clearly attribute misstatements to<br />
specific entities or persons. Accordingly, the court did not modify the ruling on the motion to<br />
dismiss as to aiding and abetting liability.<br />
SEC v. Retail Pro, Inc., 2011 U.S. Dist. LEXIS 68863 (S.D. Cal. June 23, 2011)._<br />
The Securities and Exchange Commission sought a permanent injunction prohibiting a<br />
CFO from future violations of Section 10(b), and from aiding and abetting violations of<br />
Section 13(a) of the Securities Exchange Act of 1934. In order to obtain a permanent injunction,<br />
the SEC had the burden of showing that there was a reasonable likelihood of future violations of<br />
the securities laws. The factors considered include: (1) the degree of scienter involved; (2) the<br />
isolated or recurrent nature of the infraction; (3) defendant’s recognition of the wrongful nature<br />
of his conduct; (4) the likelihood of future violations given defendant’s occupation; and (5) the<br />
sincerity of assurances against future violations. On balance, the court found that an injunction<br />
was appropriate because the CFO had a high degree of scienter as established by evidence<br />
presented at summary judgment and at trial, the nature of the infractions were connected with<br />
two related transactions over a nine-month period, and because of the CFO’s position presented<br />
ongoing opportunities to violate the securities laws at issue.<br />
Wirth v. Taylor, 2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).<br />
Plaintiff investors sued defendants, an investment fund manager and the investment<br />
recruiters, for violations of federal securities laws, 15 U.S.C. §§ 78j(b) and 78t(a), and Utah state<br />
securities laws, Utah Code Ann. Sections 61-1-1 and 61-1-22(4)(a). Defendants brought a<br />
motion for summary judgment. Plaintiffs argued that their claims under the Utah Uniform<br />
Securities Act remain because Utah law allows for a private right of action against aiders and<br />
abettors. In denying defendants’ motion for summary judgment on the Utah aider and abettor<br />
liability claim, the court held that a private right of action for aider and abettor liability did exist<br />
under Utah securities law, and that there were disputed issues of fact concerning defendants’<br />
alleged federal securities violations.<br />
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SEC v. Big Apple Consulting U.S.A., Inc., 2011 U.S. Dist. LEXIS 95292 (M.D. Fla. Aug. 25,<br />
2011).<br />
The Securities and Exchange Commission brought an action alleging violations of the<br />
Securities Act of 1933 and Securities Exchange Act of 1934 against defendant, an investment<br />
consulting firm. The SEC alleged that officers of the investment consulting firm aided and<br />
abetted the consulting firm’s violations of Section 15(a) of the Securities Act and Section 20(e)<br />
of the Exchange Act. Aider and Abettor liability is established: (1) if another party has<br />
committed a securities law violation; (2) if the accused party has general awareness that his role<br />
was part of an overall activity that is improper; and (3) if the accused aider and abettor<br />
knowingly and substantially assisted the violation. In determining whether a defendant has<br />
general awareness, the surrounding circumstances and expectations of the parties are critical.<br />
Knowledge can be shown by circumstantial evidence or by reckless conduct. Defendant argued<br />
that only actual knowledge, not severe recklessness, satisfies the scienter requirement, noting the<br />
trend in recent years for courts to require actual knowledge, not just recklessness. The court, in<br />
denying defendant’s motion to dismiss, held that none of the cases cited by defendant were from<br />
the Eleventh Circuit; thus, defendant provided no authority that would enable the court to<br />
disregard the binding precedent set forth in prior cases which allows severe recklessness to<br />
satisfy the scienter requirement. Furthermore, the court noted that Congress has put an end to<br />
such a trend argued by the defendant, by amending the Exchange Act to specifically include<br />
recklessness.<br />
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.<br />
July 12, 2011).<br />
A purchaser of a company sued a broker-dealer asserting various causes of action arising<br />
from its alleged failure to adequately supervise its employee in the sale of a portion of the<br />
employee’s outside business to the purchaser. The broker-dealer moved for summary judgment<br />
which was granted by the trial court. The purchaser appealed. The employee was a licensed<br />
registered representative who also owned two direct marketing corporations that were unrelated<br />
to his employment at the broker-dealer. The underlying action involved the registered<br />
representative soliciting the purchaser to purchase shares in the two direct marketing<br />
corporations. The purchaser filed suit against the registered representative and the broker-dealer<br />
seeking damage and rescission of the transaction, and, among other allegations, filed suit against<br />
the broker-dealer for violation of Section 33 of the Texas Securities Act, the “aider and abettor”<br />
liability provision. Under the Texas Securities Act, to prove aider and abettor liability, the<br />
plaintiff must demonstrate: (1) that a primary violation of the securities law occurred; (2) that<br />
the alleged aider had general awareness of its role in this violation; (3) that the actor rendered<br />
substantial assistance in this violation; and (4) the alleged aider either: (a) intended to deceive<br />
plaintiff; or (b) acted with reckless disregard for the truth of the representations made by the<br />
primary violator. Upon review of the testimony, the court determined that while the evidence<br />
could lead a reasonable fact finder to conclude that the broker-dealer had a general awareness<br />
that the registered representative was trying to sell his companies, it does not create more than a<br />
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mere suspicion that the broker-dealer knew of the specific transaction with the purchaser. The<br />
court concluded that because the purchaser presented no more than a scintilla of evidence as to<br />
the general awareness element of the aider and abettor test, the trial court did not err in granting<br />
summary judgment in favor of the broker-dealer on this claim.<br />
Narnia Investments, Ltd. v. Harvestons Sec., Inc., 2011 Tex. App. LEXIS 6182 (Tex. App.<br />
Aug. 9, 2011).<br />
Investment company sued registered representatives and their broker-dealer for violations<br />
of the Texas Securities Act. Specifically, the company alleged that the broker-dealer was the<br />
control person for the registered representatives who had allegedly defrauded the investment<br />
company through numerous securities transactions and, thus, were liable under aider and abettor<br />
liability. The broker-dealer moved for summary judgment which was granted by the trial court.<br />
The investment company appealed. In reversing the trial court’s decision, the appellate court<br />
held that proof that the registered representatives acted outside the course and scope of their<br />
employment did not eliminate a cause of action for aiding and abetting. The broker-dealer’s<br />
motion for summary judgment neither conclusively disproved any element of the investment<br />
company’s causes of action for aider and abettor liability nor challenged the existence of<br />
evidence of any element supporting the investment company’s aider and abettor liability claim.<br />
Murphy v. Reynolds, 2011 WL 4502523 (Tex. App. Sept. 29, 2011).<br />
An investor sued a technology sector stock analyst and author of a newsletter, book, and<br />
telephone hotline for losses incurred from investments made based on the stock analyst’s<br />
newsletter. The investor claimed, among other things, that the analyst violated Texas Business<br />
and Commerce Code Section 27.01, Articles 581-33 and 581-33-1 of the Texas Securities Act,<br />
and FINRA Rules. The stock analyst moved for summary judgment, which was denied. The<br />
analyst appealed, arguing that the trial court erred because he was not an investment advisor, a<br />
primary violator, or aider and abettor in the purchase or sale of a security, thus, he did not violate<br />
the relevant statutes or FINRA Rules. In overturning the trial court’s decision on aider and<br />
abettor liability, the appellate court noted that appellee provided no evidence that appellant or<br />
another party “offered or sold” appellee the stock in question by means of an untrue statement or<br />
omission of a material fact, as required to invoke the protection of the Texas Securities Act.<br />
Howard Family Charitable Found., Inc. v. Trimble, 259 P.3d 850 (Okla. Ct. App. 2011).<br />
Investors in a hedge fund sued defendants, a commodities pool operator, its manager, the<br />
distributor, and the distributor of a Web-based software application for fund managers. Plaintiffs<br />
sought damages against defendants pursuant to Oklahoma statute Title 71, § 1-509(G) as aiders<br />
and abettors of a fraudulent commodities transaction. The trial court held that the various<br />
allegations were preempted under federal law. The investors appealed. The futures commission<br />
merchant and the Web-based software application distributor claimed that preemption applies to<br />
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plaintiffs’ causes of action against them. However, plaintiffs argued that federal preemption<br />
does not extend to their private causes of action, but rather, only extends to state’s statutory<br />
measures embodying administrative agency regulatory functions. As a prerequisite for the<br />
liability of an aider or abettor, the one who allegedly is aided or abetted must be liable under one<br />
of the specified statutory grounds in the act. The futures commission merchant argued that it had<br />
no liability because Oklahoma’s Act arose from the Uniform Securities Act from the National<br />
Conference of Commissioners on Uniform State Laws which provides that performance by<br />
clearing broker of the clearing broker’s contractual functions, even though necessary for the<br />
processing of the transaction, without more, would not constitute material aid. The court<br />
concluded that plaintiffs’ causes of action against the futures commission merchant based upon<br />
aiding and abetting fraudulent commodities transactions were preempted under federal law and<br />
no amendments to the pleadings could cure this defect and, thus, the claims against the futures<br />
commission merchant were properly dismissed. However, the software distributor argued that it<br />
merely recorded information provided by defendants. Under Section 1-509, the software<br />
designer must meet the burden of proof that it did not know and, in the exercise of reasonable<br />
care, could not have known, of the existence of the conduct by reason of which liability is<br />
alleged to exist. Plaintiffs produced e-mails raising facts about which reasonable minds could<br />
differ whether the software distributor exceeded the highly restricted role it claims to have<br />
undertaken when performing accounting services. The court held that the question whether aid<br />
is “material” presents a factual determination which is dependent upon the development of<br />
evidence and not appropriate for determination on a motion to dismiss. Thus, the court held that<br />
the dismissal of the software distributor’s secondary liability due to aiding and abetting based<br />
upon federal preemption should be reversed.<br />
4. Conspiracy<br />
H.4<br />
U.S. v. Skilling, 638 F.3d 480 (5th Cir. 2011).<br />
In 2006, defendant was convicted of twelve counts of securities fraud, five counts of<br />
making false representations to auditors, one count of insider trader, and one count of<br />
conspiracy. The indictment alleged several possible objects of the conspiracy, including<br />
securities fraud and honest-services fraud. The district court’s jury instructions permitted the<br />
jury to convict based on any of the alleged theories of guilt and the jury found the defendant<br />
guilty of conspiracy without identifying the specific object of the conspiracy. The appellate<br />
court affirmed the convictions. The United States Supreme Court then invalidated the<br />
government’s honest-services theory of liability and remanded the case to the appellate court to<br />
determine whether the jury instruction was harmless error. On remand, the appellate court<br />
reasoned that the jury had overwhelming evidence at trial that defendant and his co-conspirators<br />
under-reported and shifted losses to make struggling business divisions look profitable, falsely<br />
portrayed a business division as a low risk investment, and manipulated accounting reserves to<br />
achieve earnings targets. Accordingly, the court held that the honest-services instruction was<br />
harmless error beyond reasonable doubt.<br />
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U.S. v. Speer, 419 F. App’x 562 (6th Cir. 2011).<br />
In 2006, defendant was convicted of one count of conspiracy to commit securities and<br />
wire fraud, three counts of securities fraud, one count of wire fraud, one count of conspiracy to<br />
commit money laundering, and five counts of money laundering in connection with improper<br />
advances to health care providers. Many of the health care providers had no reasonable<br />
possibility of ever repaying the advance. Defendant challenged his conspiracy to commit<br />
securities and wire fraud conviction asserting that there was a lack of evidence relating both to<br />
his direct involvement and his knowledge that the advances to health care providers were<br />
improper. Defendant was the chief financial officer and executive vice president at the company<br />
and witnesses testified that he was the most knowledgeable person regarding the advances.<br />
Additionally, a witness testified that she had falsified the monthly investor reports so that the<br />
reports would comply with program requirements. Testimony also showed that defendant met<br />
with employees to discuss problems and how to move money around between the programs to<br />
satisfy monthly reporting requirements. The appellate court held that combined with the proof of<br />
fraud at the company, the testimony provided sufficient evidence for a rational trier of fact to<br />
conclude that defendant knowingly participated in the conspiracy to commit securities and wire<br />
fraud. Defendant also challenged his conviction for conspiracy to commit money laundering in<br />
violation of 18 U.S.C. § 1956, arguing that the evidence was insufficient to support the<br />
conviction. The government made no attempt to argue that the evidence was sufficient.<br />
Accordingly, the appellate court reversed defendant’s conspiracy to commit money laundering<br />
conviction.<br />
U.S. v. Sumeru, 2011 U.S. App. LEXIS 18713 (9th Cir. Sept. 7, 2011).<br />
The defendant was convicted by a jury of seven counts of securities fraud, aiding and<br />
abetting securities fraud, seven counts of wire fraud, aiding and abetting wire fraud, and<br />
conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h). Defendant argued<br />
on appeal that the money laundering conspiracy merged with the other convictions. The other<br />
convictions were premised on encouraging investment in a Ponzi scheme, whereas the money<br />
laundering conspiracy conviction was premised on defendant’s agreement to transfer proceeds<br />
from the illegal activity to defendant’s offshore accounts to fund personal purchases. In<br />
affirming the trial court conviction, the appellate court held that because the money laundering<br />
conspiracy conviction was not premised on a “central component of the scheme to defraud” there<br />
was no merger. The court noted, “We will not endorse the merger rule that would reward<br />
criminals for increasingly nefarious behavior by taking additional steps to avoid justice.”<br />
U.S. v. Bachynsky, 415 F. App’x 167 (11th Cir. 2011).<br />
In 1989, defendant was convicted for racketeering and defrauding the IRS and<br />
subsequently lost his medical license. Defendant later established a company with a partner<br />
purportedly intended to develop and obtain government approval for an experimental cancer<br />
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treatment. The partner had felony convictions and was permanently barred by the SEC from<br />
trading securities or raising investment capital. Defendant’s research had proven that the cancer<br />
treatment was ineffective. Nevertheless, defendant and his partner marketed the cancer treatment<br />
as effective. Defendant was convicted of conspiracy to commit securities fraud, three counts of<br />
wire fraud, and one count of securities fraud. On appeal, defendant challenged the district<br />
court’s denial of his motion for judgment of acquittal due to insufficient evidence for his<br />
conspiracy conviction. The appellate court reasoned that defendant’s relations with one investor<br />
were sufficient to prove his conviction. Defendant falsely represented to the potential investor<br />
that he was a doctor and a medical director for the company marketing the cancer treatment,<br />
falsely represented to the investor that drug trials in Mexico with the cancer treatment had been<br />
successful, misrepresented the success of the cancer treatments in the company’s business plan,<br />
and did not disclose that his partner had been convicted of securities fraud and was barred from<br />
selling securities. The appellate court reasoned that defendant knew none of this information<br />
was correct, but succeeded in obtaining $10,000 from the investor. Accordingly, the appellate<br />
court held there was sufficient evidence for a rational jury to find, beyond reasonable doubt, that<br />
defendant knowingly entered into a conspiracy with his partner to make false material<br />
representations and omissions in order to solicit money from would-be investors.<br />
U.S. v. Rajaratnam, 2011 U.S. Dist. LEXIS 91365 (S.D.N.Y. Aug. 16, 2011).<br />
On May 11, 2011, a jury found defendant guilty on five counts of conspiracy to commit<br />
securities fraud and nine counts of securities fraud. Defendant moved for acquittal on all counts<br />
pursuant to Federal Rule of Criminal Procedure 29 arguing that there was insufficient evidence<br />
to sustain his convictions. The evidence at trial included testimony from various witnesses,<br />
numerous e-mail and telephone communications with tippers, and trading records all tending to<br />
establish that defendant made the trades after receiving material, non-public information.<br />
Accordingly, the court held that there was sufficient evidence to convict defendant of all five<br />
counts of conspiracy to commit securities fraud.<br />
Wu v. Tang, 2011 WL 145259 (N.D. Tex. Jan. 14, 2011).<br />
Plaintiff investors claimed that defendants operated a Ponzi-like scheme targeting<br />
members of the Chinese-American community to obtain direct and indirect investments in the<br />
Overseas Chinese Fund (“OCF”). Defendants allegedly raised capital for the OCF from U.S.<br />
investors by selling interests in a partnership managed by a limited liability company that was<br />
not registered with the Securities and Exchange Commission. The limited liability company was<br />
registered with the Texas Securities Board. Plaintiffs and other investors were told that the<br />
limited liability company was managing their investments when, in fact, the investment<br />
management duties were transferred to a third-party individual. Plaintiffs alleged that the limited<br />
liability company was aware of the third-party individual’s Ponzi-scheme and, therefore,<br />
defrauded investors through their actions in promoting the underlying partnership investment.<br />
Among the plaintiffs’ fraud-based claims was a claim for civil conspiracy. As to two codefendants,<br />
the court found that the plaintiffs failed to meet the heightened pleading<br />
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equirements of Federal Rule of Civil Procedure 9(b) to sustain a claim for civil conspiracy. As<br />
to the third co-defendant, the court reasoned that the plaintiffs’ allegation that “[t]he defendants<br />
and the non-parties conspired with each other . . .” and that “Each defendant is liable for the<br />
wrongful acts of the other defendants . . .” was insufficient to sustain a claim for civil conspiracy.<br />
Specifically, the court noted that it was not clear from the complaint whether the plaintiffs<br />
intended to state a claim for civil conspiracy. In addition, the court reasoned that the plaintiffs<br />
did not allege facts going to each element of civil conspiracy. In particular, nowhere in the<br />
complaint did the plaintiffs allege facts which established a meeting of the minds between<br />
defendants and any other party. Accordingly, the court granted defendants’ motion to dismiss<br />
plaintiffs’ conspiracy claim against the third co-defendant.<br />
5. Failure to Supervise<br />
H.5<br />
Busacca v. SEC, No. 10-15918, 2011 U.S. App. LEXIS 25933 (11th Cir. Dec. 28, 2011).<br />
The Eleventh Circuit upheld a final order of the Securities and Exchange Commission<br />
sustaining a disciplinary action against the former president of a broker-dealer which resulted in<br />
a total fine of $30,000 and six months’ suspension from serving in any principal securities<br />
capacity. FINRA found that the former president failed to exercise reasonable supervision over<br />
the broker-dealer’s operations and compliance functions in violation of NASD Conduct<br />
Rules 3010 and 2110. Specifically, the president knew that the broker-dealer’s conversion to a<br />
new computer program for preparing required books and records created widespread errors in the<br />
firm’s fundamental operations, yet failed to take reasonable steps to solve the problems. The<br />
court found that substantial evidence supported the finding that the president failed to act with<br />
the requisite vigor, decisiveness, and vigilance to address known operational deficiencies, as well<br />
as to prevent the occurrence of future regulatory violations. The president was not denied any<br />
due process rights during the FINRA proceeding. Assuming, without deciding, that FINRA<br />
constitutes a governmental entity subject to the due process clause, the court found that the<br />
president was afforded a meaningful opportunity to be heard during the disciplinary proceedings.<br />
The court also found that the president failed to show that he was improperly singled out for<br />
prosecution and punishment based on his criticisms of FINRA and the securities industry. The<br />
president had not shown any evidence that FINRA’s prosecution of him was based on a<br />
constitutionally impermissible motive. Rather, the prosecution was based on the numerous<br />
customer complaints and operational violations uncovered during FINRA’s investigation of the<br />
broker-dealer. The president also failed to provide evidence that similarly situated individuals in<br />
the securities industry were not targeted by FINRA. Finally, the court rejected the president’s<br />
argument that the sanctions imposed against him by FINRA were impermissibly punitive. The<br />
disciplinary sanctions imposed by FINRA, which were upheld by the SEC, fell within the<br />
recommended guidelines for failure to supervise. In upholding the sanctions, the SEC<br />
appropriately gave appropriate weight to the president’s failures to adequately respond to known<br />
operational problems at the firm.<br />
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H.5<br />
Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
A district court granted a motion to dismiss filed by a group of investment banks<br />
(“defendants”) against an investor’s negligent supervision claim. The plaintiff-investor<br />
purchased almost two dozen structured notes from defendants for a face value of over<br />
$130 million. Most, if not all, of these notes were equity-linked notes, which are typically<br />
considered conservative investments. However, some of the particular notes plaintiff purchased<br />
contained additional features that made them riskier than ordinary equity-linked notes. At first,<br />
plaintiff obtained positive returns on the notes. However, in 2007 and 2008, plaintiff suffered a<br />
series of losses resulting from the global financial crisis. As the value of the notes declined,<br />
plaintiff borrowed tens of millions of dollars from defendants to purchase additional notes in an<br />
attempt to cover his losses. Nonetheless, as the financial crisis deepened, the value of the notes<br />
continued to decline. Eventually, defendants liquidated plaintiff’s entire investment portfolio of<br />
notes in order to satisfy one of plaintiff’s debts. Plaintiff brought suit in the Southern District of<br />
New York asserting multiple claims, including a tort claim for negligent supervision.<br />
Defendants moved to dismiss the negligent supervision claim on the grounds that they owed<br />
plaintiff no ongoing due to supervise and monitor his investments. The district court rejected<br />
this argument. Even if defendants did not owe plaintiff an ongoing duty to supervise and<br />
monitor his investments, employers can still be held liable for negligence supervision whenever<br />
an employee acts negligently on the employer’s premises and his or her employer knew or<br />
should have known about the employee’s propensity for the conduct. Nevertheless, plaintiff<br />
failed to allege any facts to support a claim for negligent supervision. Plaintiff did not allege any<br />
facts demonstrating that any of the named defendants knew or should have known of their<br />
stockbrokers’ propensity for tortious conduct prior to the wrongdoing alleged in the complaint.<br />
Nor did plaintiff establish which individual employee committed the tortious conduct. While the<br />
court disagreed with defendants’ reasoning, it still granted their motion to dismiss the negligent<br />
supervision claim. The court granted plaintiff leave to amend the complaint to correct the<br />
deficiencies in the complaint with respect to the negligent supervision claim.<br />
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.<br />
July 12, 2011).<br />
A purchaser of a company sued a broker-dealer asserting various causes of action arising<br />
from its alleged failure to supervise its employee who engaged in an outside business activity,<br />
namely, selling a company to the plaintiff. The trial court granted the broker-dealer’s motion for<br />
summary judgment and plaintiff appealed. The appellate court held that the trial court did not err<br />
in granting summary judgment in favor of the broker-dealer against the plaintiff’s claim for<br />
negligent supervision. The broker-dealer conclusively established that it did not receive<br />
sufficient notice of the registered representative’s outside business transaction with plaintiff to<br />
trigger its supervisory duty under NASD Conduct Rule 3040. The broker-dealer presented the<br />
affidavit of its local compliance officer who declared that the registered representative never<br />
gave the broker-dealer written notice that he intended to sell his shares in two businesses he<br />
owned to plaintiff. The affidavit was not deficient for lack of personal knowledge because the<br />
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compliance officer testified as a representative of the broker-dealer. A corporate employee is<br />
generally presumed to possess knowledge of facts that she would learn in the usual course of her<br />
employment. Because the plaintiff could not prove that the broker-dealer received written notice<br />
of the transaction, he could not establish the duty element of a claim for negligent supervision.<br />
Summary judgment was affirmed.<br />
In re BNY Mellon Sec. LLC, Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).<br />
Without admitting or denying the allegations, a broker-dealer settled charges brought by<br />
the Securities and Exchange Commission arising out of the broker-dealer’s alleged failure to<br />
reasonably supervise an order desk manager on its institutional order desk and traders under his<br />
supervision over a nine-year period. The order desk manager failed to meet his duty of best<br />
execution on orders for certain plan customers by executing cross-trades for the benefit of a<br />
favored handful of accounts held by hedge funds and select individuals. The broker-dealer’s<br />
supervisory procedures failed to establish adequate procedures on how to follow-up on red flags<br />
raised in exception reports. In addition, the broker-dealer never conducted a thorough review to<br />
determine whether the order desk manager was fulfilling his best execution responsibilities to<br />
provide the best price a customer could likely obtain on the open market. If the broker-dealer<br />
had such procedures in place, it likely would have prevented and detected the violations by the<br />
order desk manager and traders. Pursuant to the settlement, the broker-dealer was censured and<br />
agreed to pay disgorgement of $19,297,016, prejudgment interest of $3,748,431, and a civil<br />
monetary penalty of $1 million.<br />
In re Merrill Lynch, Release No. 63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).<br />
The Securities and Exchange Commission instituted administrative proceedings against a<br />
broker-dealer pursuant to Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934.<br />
The SEC alleged the broker-dealer operated a proprietary trading desk which traded securities<br />
solely for the firm’s benefit and had no role in executing customer orders. The broker-dealer<br />
represented to customers that their order information would be maintained on a strictly<br />
confidential basis. However, traders from the proprietary trading desk obtained information<br />
about institutional customer orders from traders on the market making desk and used it to place<br />
trades in the broker-dealer’s proprietary accounts. In doing so, the broker-dealer misused the<br />
institutional customers’ information and acted contrary to its representations to the customers. In<br />
addition, the broker-dealer had agreements with certain institutional and high net worth<br />
customers that it would charge only a commission equivalent for executing riskless principal<br />
trades. However, in certain instances, the broker-dealer also charged customers, in addition to<br />
the riskless commission equivalent, undisclosed markups and markdowns by filling customer<br />
orders at prices less favorable to the customer than the prices at which the broker-dealer<br />
purchased or sold the securities in the market. As a result of this conduct, the broker-dealer<br />
failed to reasonably supervise traders associated with the proprietary trading desk and its market<br />
making operations, with a view to detecting and preventing violations of the Exchange Act. The<br />
broker-dealer, without admitting or denying the allegations, consented to a censure, a cease and<br />
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desist order from committing or causing any further securities violations, and a fine in the<br />
amount of $10 million.<br />
In re Smith, Release Nos. 63834 & 3152, 2011 SEC LEXIS 390 (Feb. 3, 2011).<br />
The Securities and Exchange Commission instituted administrative proceedings against<br />
the president of a broker-dealer. In anticipation of the institution of those proceedings, the<br />
president submitted an offer of settlement, which the SEC agreed to accept. The SEC alleged<br />
that one of the broker-dealer’s registered representatives acted as an unregistered broker-dealer<br />
in violation of Section 15(a) of the Securities Exchange Act of 1934, when he conducted a<br />
private, unregistered offering of securities outside the scope of his employment with the brokerdealer.<br />
The president failed to establish reasonable policies and procedures to assign<br />
responsibility for supervising the registered representative. No one reviewed the registered<br />
representative’s daily correspondence or telephone calls, other than in cursory annual audits.<br />
The president’s delegation of most of the office’s daily responsibilities to the registered<br />
representative resulted in the registered representative supervising himself. If the registered<br />
representative had not been left to supervise himself, his outside sales activities likely would<br />
have been detected and prevented. Without admitting or denying the allegations, the president<br />
consented to a censure, a suspension from supervision of any broker or dealer or investment<br />
advisor for a period of nine months, and a civil money penalty in the amount of $25,000.<br />
In re TD Ameritrade, Inc., Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011).<br />
The Securities and Exchange Commission instituted administrative proceedings against a<br />
broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. In anticipation<br />
of the institution of those proceedings, the broker-dealer submitted an offer of settlement which<br />
the SEC agreed to accept. The SEC alleged that the broker-dealer offered and sold shares in a<br />
diversified mutual fund, even though its registered representatives marketed the fund as though it<br />
was a money market fund that generated higher returns. The fund-specific training materials<br />
accurately characterized the fund and described the various risks associated with investing in the<br />
fund. Nevertheless, registered representatives at times mischaracterized the fund as a “money<br />
market fund”, “enhanced money market fund” or a “higher yielding money market.” They also<br />
at times equated the fund to a money market fund in terms of “safety and liquidity” or offered the<br />
fund in response to a customer’s specific request for a money market fund or an instrument with<br />
similar risk, without discussing the nature or riss of the fund. As a result, the registered<br />
representatives violated securities laws by disseminating false or misleading information about<br />
the funds. The broker-dealer, in turn, failed to have a system to implement procedures for the<br />
training and education of its representatives regarding the fund which would reasonably be<br />
expected to prevent and detect the improper conduct by its representatives. For instance, the<br />
broker-dealer did not take adequate steps, such as providing additional training, refresher<br />
courses, or continuing education about the fund to ensure that its representatives actually<br />
understood the product. Without admitting or denying the allegations, the broker-dealer<br />
accepted a censure. No monetary penalty was imposed.<br />
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In re Torrey Pines Sec. Inc., Release Nos. 63835 & 3153, 2011 SEC LEXIS 391 (Feb. 3, 2011).<br />
The Securities and Exchange Commission initiated administrative proceedings against a<br />
broker-dealer. After an investigation, the SEC alleged that a registered representative and part<br />
owner of the broker-dealer raised over $17 million from friends, family, and customers of the<br />
broker-dealer in a private, unregistered offering of securities. In doing so, the representative<br />
acted as an unregistered broker-dealer in violation of Section 15(a) of the Securities Exchange<br />
Act of 1934, as he conducted the offering outside the scope of his employment with the brokerdealer.<br />
The broker-dealer failed to establish reasonable policies and procedures to assign<br />
responsibility for supervising the representative. No one reviewed the registered representative’s<br />
daily correspondence or telephone calls, other than in cursory annual audits. The broker-dealer<br />
delegated the daily responsibilities of the office to the registered representative. If the registered<br />
representative had not been left to supervise himself, his outside sales activities likely would<br />
have been detected. Although the broker-dealer had a policy prohibiting selling securities<br />
outside the firm, and a policy for registered representatives to report outside business activities,<br />
the firm failed to develop systems for supervisors and the compliance department to monitor<br />
adherence to these policies. A number of suspicious events concerning the representative’s<br />
outside business activities came to the attention of supervisors and compliance staff, but the<br />
broker-dealer did not have procedures and systems in place requiring them to follow up on these<br />
events. The SEC ordered that a public hearing be convened before an administrative law judge<br />
at a time and place to be fixed.<br />
In re Clifton, Release Nos. 9188 & 63926, 2011 SEC LEXIS 644 (Feb. 17, 2011).<br />
The Securities and Exchange Commission instituted public administrative and cease and<br />
desist proceedings against the principal and president of a registered broker-dealer. The brokerdealer,<br />
on behalf of an oil and gas exploration business, offered limited partnership interests in<br />
an oil and gas drilling project. The project encountered numerous problems, including excessive<br />
amounts of water in some of the wells, which ultimately caused the company to shut down the<br />
entire project. The company timely informed the broker-dealer’s president of these<br />
developments. The president, however, failed to ensure that all the broker-dealer’s registered<br />
representatives were informed of these developments. As a result, investors were not adequately<br />
informed about the project before investing. In addition, the president failed to reasonably<br />
supervise the broker-dealer’s registered representatives, who violated Section 17(a) of the<br />
Securities Act by transmitting the misrepresentations in the sale and offer of the project. The<br />
broker-dealer’s written supervisory procedures, which were drafted by the president, failed to<br />
establish a formal correspondence review system to prevent and detect materially misleading<br />
statements in the sales representatives’ outgoing correspondence to investors in connection with<br />
the limited partnership interests. The procedures also failed to establish a mechanism to follow<br />
up with investors after the sale to confirm that the investors had received adequate, updated<br />
information about the project at the time of their investment. Finally, the president failed to<br />
implement day-to-day supervision over the registered representatives. At a minimum, the<br />
president failed to ensure that all representatives were informed about the status of the projects.<br />
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As a result of this conduct, the president violated multiple securities laws prohibiting fraudulent<br />
conduct in the offer and sale of securities. The SEC ordered that a hearing take place within 30–<br />
60 days.<br />
In re Pagliarini, Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011).<br />
The Securities and Exchange Commission instituted public administrative cease-anddesist<br />
proceedings against the compliance officer of a broker-dealer. The compliance officer<br />
submitted an offer of settlement in anticipation of the institution of the proceedings, which the<br />
SEC agreed to accept. The SEC alleged that the compliance officer failed to reasonably<br />
supervise a registered representative who helped manipulate the prices of stocks of several<br />
microcap issuers. The compliance officer failed to comply with the firm’s procedures for<br />
following up on suspicious transactions, such as those where the customer engages in<br />
transactions that lacked business sense or exhibited a lack of concern regarding risks,<br />
commissions, or other transaction costs. In addition, the compliance officer failed to file<br />
suspicious activity reports (“SARs”) on behalf of the broker-dealer in response to some of the<br />
questionable transactions. The compliance officer knew of her obligation to assist the brokerdealer<br />
in fulfilling its requirements to file SARs and knew or should have known that significant<br />
suspicious activity was not being reported by the broker-dealer as a result of her actions.<br />
Without admitting or denying the allegations, the compliance officer consented to cease and<br />
desist from committing or causing any violations of Section 17(a) of the Exchange Act, a<br />
suspension from acting in a supervisory capacity with any broker or dealer for 12 months and a<br />
fine in the amount of $20,000.<br />
In re Divine Capital Mkts., LLC, Release No. 63980, 2011 SEC LEXIS 722 (Feb. 25, 2011).<br />
The Securities and Exchange Commission instituted public administrative and cease and<br />
desist proceedings against a broker-dealer, its chief executive officer, and one of its registered<br />
representatives. After an investigation, the Division of Enforcement alleged that the chief<br />
executive officer was responsible for the supervision of the broker-dealer’s equities, institutional,<br />
and retail sales. The chief executive officer failed to reasonably supervise the representative by<br />
ignoring red flags that a large volume of his sales constituted an unregistered distribution. The<br />
broker-dealer’s supervisory policies were inadequate to provide guidance to supervisors<br />
regarding the appropriate inquiry to determine whether the public sale of shares acquired from an<br />
issuer was prohibited by Section 5 of the Securities Act of 1933. If the chief executive officer<br />
and the broker-dealer had developed reasonable policies and procedures requiring appropriate<br />
diligence in these situations, the firm likely would have prevented and detected the registered<br />
representative’s violations of the Securities Act. The SEC ordered that a hearing take place<br />
within 30–60 days before an administrative law judge.<br />
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In re Torrey Pines Sec. Inc., Release Nos. 64317 & 3188, 2011 SEC LEXIS 1394 (Apr. 20,<br />
2011).<br />
Following the institution of administrative proceedings against a broker-dealer, the<br />
broker-dealer submitted an offer of settlement which the Securities and Exchange Commission<br />
accepted. The SEC alleged that the broker-dealer failed to reasonably supervise a registered<br />
representative and part-owner of the firm. The representative acted as an unregistered brokerdealer<br />
in violation of Section 15(a) of the Securities Exchange Act of 1934, as he conducted an<br />
unregistered, private offering outside the scope of his employment with the broker-dealer. The<br />
broker-dealer failed to establish reasonable policies and procedures to assign responsibility for<br />
supervising the representative. No one oversaw the daily activities of the office in which the<br />
representative worked. No one reviewed the representative’s daily correspondence or telephone<br />
calls, other than in cursory annual audits. Although the broker-dealer had a policy prohibiting<br />
the selling of securities outside of the firm, the firm failed to develop systems for supervisors and<br />
the compliance department to monitor for adherence to these provisions. If the broker-dealer had<br />
established systems providing for better monitoring, a supervisor or the compliance officer<br />
would reasonably have been expected to detect the representative’s outside business activities. A<br />
number of suspicious events concerning the representative’s outside business activities came to<br />
the attention of supervisors and compliance staff, but the broker-dealer did not have procedures<br />
that required supervisors or the compliance officer to follow up on these events. Without<br />
admitting or denying the allegations, the broker-dealer consented to a censure. No monetary<br />
penalty was imposed.<br />
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)<br />
The Securities and Exchange Commission brought public administrative and cease-anddesist<br />
proceedings against a broker-dealer and the broker-dealer’s head of institutional trading<br />
(collectively, “respondents”). In anticipation of the institution of those proceedings, the<br />
respondents submitted an offer of settlement, which the SEC accepted. The SEC alleged that the<br />
respondents failed to reasonably supervise a registered representative who was engaged in<br />
“marking the close,” which involves placing orders at or near the close of the market to<br />
artificially effect the closing price of a stock. The respondents failed to establish procedures or<br />
to have a system to implement existing policies and procedures reasonably designed to prevent<br />
and detect the representative’s marking the close trading. The broker-dealer’s procedures did not<br />
call for certain daily trading exception reports to be directed to compliance personnel. While its<br />
written procedures directed daily review of trade tickets, such daily review was suspended. Had<br />
there been daily review of trading exception reports and of trade tickets, the representative’s<br />
illegal trading could have been prevented and detected. Without admitting or denying the<br />
allegations, the broker-dealer consented to a censure and undertaking to adopt and implement<br />
procedures requiring daily review of trade execution blotters and exception reports by<br />
compliance personnel. The head of institutional trading consented to a bar from association with<br />
any broker or dealer or participating in the offering of any penny stock for one year. He also<br />
agreed to a fine of $15,000.<br />
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In re Bloomfield, Release No. 416-A, 2011 SEC LEXIS 1457 (Apr. 26, 2011).<br />
An administrative law judge held that a chief compliance officer failed to reasonably<br />
supervise registered representatives in violation of the Securities Exchange Act of 1934. The<br />
registered representatives participated in a market manipulation scheme which involved the<br />
acquisition of large quantities of penny stocks, inflating the stock price, and then selling the<br />
shares at artificially inflated prices. The chief compliance officer could not establish an<br />
affirmative defense under the Exchange Act that there were established procedures and a system<br />
for applying those procedures, which would reasonably be expected to prevent and detect<br />
securities violations. The broker-dealer’s supervisory procedures manual did not contain any<br />
operational procedures for transactions involving low-priced securities like the ones at issue in<br />
the case. The supervisory procedures also did not specify how reviews were to be conducted or<br />
how the chief compliance officer’s quarterly audits would occur. The chief compliance officer<br />
argued that he was not in the direct supervisory chain, that he did not have the ability to control<br />
the actions of the representatives, and that he made tremendous efforts over time to address the<br />
relevant issues. He argued that he ultimately had no choice but to leave the firm when it became<br />
apparent that none of his demands or suggestions would be implemented. The administrative<br />
law judge did not find this testimony credible as it was contradicted by the evidence and the<br />
testimony of other witnesses. Nothing in the record indicated that the registered representatives<br />
attempted to hide their illegal conduct from the chief compliance officer or anyone else at the<br />
firm. The chief compliance officer should have been aware of the red flags and failed to remedy<br />
them. He was also ordered to pay a third tier civil penalty.<br />
In re Divine Capital Mkts., LLC, Release Nos. 9247 & 64998, 2011 SEC LEXIS 2609 (Aug. 1,<br />
2011).<br />
After the initiation of public administrative proceedings against them, a broker-dealer and<br />
its chief executive officer submitted an offer of settlement which the Securities and Exchange<br />
Commission accepted. The chief executive officer acted as the broker-dealer’s chief compliance<br />
officer and was responsible for the supervision of equities, institutional, and retail sales. The<br />
SEC alleged that the chief executive officer failed to reasonably supervise one of the brokerdealer’s<br />
registered representatives by ignoring red flags that a large volume of the registered<br />
representative’s sales constituted an unregistered distribution. The chief executive officer failed<br />
to take appropriate steps to ensure that the sales were either registered or exempt from<br />
registration after being alerted to the registered representative’s activities. In addition, the<br />
broker-dealer’s supervisory policies were inadequate to provide guidance to supervisors<br />
regarding the appropriate inquiry to determine whether the public sale of shares acquired directly<br />
or indirectly from an issuer was prohibited by the Securities Act of 1933. Without admitting or<br />
denying the allegations, the broker-dealer accepted the terms of the settlement, including a<br />
censure, suspension from participating, directly or indirectly, in any offering of a penny stock,<br />
and disgorgement of $33,762, prejudgment interest of $6,921, and a fine of $60,000. The chief<br />
executive officer consented to suspension from association in a supervisory capacity with any<br />
broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent,<br />
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or nationally-recognized statistical rating organization for a period of four months. He was also<br />
ordered to pay a fine in the amount of $25,000.<br />
In re Gautney, Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011).<br />
The Securities and Exchange Commission agreed to settle proceedings, brought pursuant<br />
to Section 15(b)(6) of the Securities Exchange Act of 1934, against R.A.B., a branch manager<br />
(“respondent”) of a broker-dealer. The SEC alleged that the respondent failed to supervise two<br />
registered representatives under his supervision who were allegedly engaged in “churning” or the<br />
excessive buying and selling of securities in a customer’s account for the purpose of generating<br />
commissions and without regard to the customer’s investment objectives. The level of trading<br />
activity in the accounts of the two customers was highly indicative of potential churning. The<br />
turnover ratios in these accounts were far in excess of the standard turnover ratio and warranted<br />
immediate attention and review by a supervisor. Pursuant to the broker-dealer’s written<br />
supervisory procedures, the respondent was required to send active account letters to all<br />
customers with accounts that exceeded a certain turnover ratio, but he was unable to provide<br />
proof that he followed this procedure. The respondent did not keep a log or otherwise track<br />
whether the letters were returned. The respondent failed to take any steps to modify his practice<br />
in face of repeated red flags of excessive trading in the customer accounts. Moreover, one of the<br />
registered representatives was on heightened supervision due to his prior disciplinary history;<br />
thus, the respondent was required to follow the firm’s heightened supervisory procedures for that<br />
registered representative, such as reviewing all of the incoming and outgoing correspondence,<br />
reviewing all of the trade tickets, and checking the registered representative’s orders for<br />
suitability. It was not clear if the respondent actually performed these extra procedures. Had he<br />
done so, additional red flags of the representative’s churning would have been apparent. Without<br />
admitting or denying the allegations, the respondent consented to pay disgorgement of $5,959.00<br />
and prejudgment interest of $901.40. He also agreed to a bar from participating in any offering<br />
of a penny stock and from association in any capacity with any broker, dealer, investment<br />
advisor, municipal securities dealer, municipal advisor, transfer agent, or nationally-recognized<br />
statistical rating organization.<br />
In re Gautney, Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011).<br />
The Securities and Exchange Commission agreed to settle administrative proceedings<br />
that were brought pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 against<br />
E.S.B., a branch manager of a broker-dealer. The branch manager was responsible for<br />
supervising a registered representative who engaged in churning and selling of securities in<br />
customers’ accounts. The high levels of trading within the registered representative’s customer<br />
accounts was repeatedly brought to the branch manager’s attention. The branch manager sent<br />
out active account letters to the customers in response to the quarterly compliance reports.<br />
However, he conceded that sometimes the letters were returned with missing information. The<br />
branch manager expected the letter to be returned only if the customer had a problem with the<br />
account. If the letters were not returned or were missing information, his practice was not to<br />
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contact the customers himself. Instead, the branch manager left it to the registered representative<br />
to follow up with the customers. The branch manager failed to take any steps to modify his<br />
practice in the face of repeated red flags. The representative supervised by the branch manager<br />
was the subject of complaints that would have reinforced the need to contact customers where<br />
unusual trading was apparent. If the branch manager had reasonably followed up, it is likely that<br />
he would have prevented or detected the registered representative’s violations of securities laws.<br />
As a result of this conduct, the branch manager failed to reasonably supervise the representative<br />
within the meaning of the Exchange Act. Pursuant to the settlement, the branch manager was<br />
barred from association in any supervisory capacity with any broker, dealer, investment advisor,<br />
municipal securities dealer, or transfer agent with the right to reapply for association after two<br />
years. He was also ordered to pay disgorgement of $4,753.00, prejudgment interest of $355.47,<br />
and a civil penalty of $10,000.00.<br />
In re Application of Kamiski, Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).<br />
The Securities and Exchange Commission upheld a FINRA enforcement decision which<br />
included an 18-month suspension and $50,000 fine against a senior executive officer for<br />
violating NASD Conduct Rules 3010 and 2110 by failing to supervise the firm’s review of its<br />
variable annuity trading. The SEC agreed with FINRA that the officer ignored staffing<br />
shortages, failed to diligently inform senior management of compliance needs, placed individuals<br />
from other departments in compliance positions for which they were not qualified, failed to<br />
effectively communicate the need for increased supervision to senior management, and failed to<br />
limit the firm’s activities when resources were not made available. The officer received<br />
numerous red flags from members of his staff that the firm’s compliance department was having<br />
difficulty meeting its responsibilities in the face of increased regulatory requirements and rapid<br />
expansion of the firm’s business, but he did not adequately address those concerns. By failing to<br />
devote adequate attention and resources to the compliance department, the officer demonstrated<br />
a significant failure of supervision. In affirming the NASD’s sanctions, the SEC noted the<br />
officer’s conduct was egregious and supported by the record. The officer’s lack of disciplinary<br />
history and the absence of a finding of customer harm were not considered to be mitigating<br />
factors.<br />
In re Lopez-Tarre, Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011).<br />
The Securities and Exchange Commission instituted administrative proceedings against a<br />
chief compliance officer of a registered broker-dealer pursuant to Section 15(b) of the Securities<br />
Exchange Act of 1934. In anticipation of the institution of these proceedings, the chief<br />
compliance officer submitted an offer of settlement which the SEC accepted. The SEC alleged<br />
that the chief compliance officer failed to reasonably supervise the president and an employee of<br />
the broker-dealer. The president, with the assistance of an employee, engaged in tens of millions<br />
of dollars of unauthorized trades in a customer’s accounts. The president and employee<br />
attempted to hide the fraud by providing false account statements to the customer. The chief<br />
compliance officer had sole responsibility for all supervisory reviews of customer account<br />
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activity, including activity in the accounts of the president’s customers. The chief compliance<br />
officer was also responsible for reviewing correspondence, including reviewing e-mail and other<br />
electronic correspondence on a regular basis. The chief compliance officer did not adequately<br />
review electronic correspondence or activity in the president’s customer accounts. The president<br />
sent the false trade confirmations and account statements to the customer by e-mail which was<br />
not customary and should have raised a red flag. If the chief compliance officer had reviewed<br />
the transactions in the customer’s accounts for suitability in accordance with the supervisory<br />
guidelines, he likely would have discovered the discrepancy between the actual activity in the<br />
accounts and the activity that was being reported to the customer. The chief compliance officer<br />
also failed to follow up on red flags including insufficient funds in the customer’s accounts and<br />
shortfalls being paid from another account. As a result of this conduct, the chief compliance<br />
officer failed to reasonably supervise within the meaning of Section 15(b)(4)(E) of the Exchange<br />
Act, with a view to preventing and detecting violations of the federal securities laws. Without<br />
admitting or denying the allegations, the chief compliance officer accepted a bar from<br />
association with any broker, dealer, or investment advisor with the right to reapply for<br />
association after one year. No monetary penalty was imposed.<br />
In re Gilford Sec., Inc., Release Nos. 9264 & 65450, 2011 SEC LEXIS 3419 (Sept. 30, 2011).<br />
The Securities and Exchange Commission instituted public administrative cease-anddesist<br />
proceedings against a broker-dealer and several of its corporate officers (collectively,<br />
“respondents”). In anticipation of the institution of the proceedings, the respondents submitted<br />
an offer of settlement which the SEC accepted. The SEC alleged that respondents failed to<br />
reasonably supervise a registered representative who was making unregistered sales of millions<br />
of shares in connection with international pump-and-dump schemes. The registered<br />
representative, along with individuals unconnected with the broker-dealer, perpetuated the fraud<br />
by paying for false spam e-mail campaigns that often caused sudden spikes in both price and<br />
volume of certain mid-cap stocks. The registered representative and his cohorts then sold<br />
millions of shares of these securities into the hyped market through the customer accounts at the<br />
broker-dealer and another firm, reaping millions of dollars in profits. The broker-dealer<br />
allegedly did not have a system to implement policies and procedures regarding the prevention<br />
and detection of violations of Section 5 of the Securities Act of 1933. The broker-dealer<br />
allegedly ignored obvious red flags concerning the unregistered re-sales and did not implement<br />
its policies with respect to reviewing order tickets to detect unusual trading patterns. The CEO<br />
failed to ensure that the broker-dealer had systems to implement its policies and procedures<br />
regarding sales of securities through customer accounts in potential violation of the Securities<br />
Act. He also failed to reasonably supervise the registered representative because he failed to<br />
respond to red flags that should have alerted him to the illegal sales. The sales manager failed to<br />
follow the broker-dealer’s policies and procedures relating to the review of internal e-mail<br />
correspondence and failed to respond to red flags that should have alerted him to the<br />
representative’s misconduct. The research and compliance officer knew or should have known<br />
that the registered representative’s suspicious activity would trigger the broker-dealer’s<br />
obligation to file a suspicious activity report. Without admitting or denying the allegations, the<br />
broker-dealer consented to a censure and disgorgement of $275,000, prejudgment interest of<br />
$77,113, and a fine of $260,000. The corporate officers accepted varying penalties, some<br />
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including censure, suspension from association in a supervisory capacity, and orders to pay<br />
disgorgement, prejudgment interest, and civil monetary penalties.<br />
In re Gallardo, Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011).<br />
The Securities and Exchange Commission instituted public administrative proceedings<br />
against a broker-dealer and its president (“respondents”). In anticipation of the institution of the<br />
proceedings, the respondents submitted an offer of settlement which the SEC accepted. The SEC<br />
alleged the respondents failed to reasonably supervise a registered representative within the<br />
meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934. A registered<br />
representative in a New York branch office convinced a group of Bolivian investors to name him<br />
as their registered representative. The registered representative promised the investors that he<br />
would invest their funds in a separate investment company that the registered representative<br />
operated, which would guarantee a 9% to 15% monthly return. In fact, the registered<br />
representative’s investment company was a complete sham, and the registered representative<br />
misappropriated most of the funds by transferring the money into his personal checking account.<br />
The broker-dealer and its president allegedly failed to reasonably supervise the representative,<br />
because they hired him knowing that he had little to no previous supervisory experience and had<br />
never run a branch office before. The president also hired the registered representative knowing<br />
that he never took the examination to become a licensed branch manager. The president failed to<br />
follow up on the series of red flags which would have put him on notice as to suspicious activity<br />
between the registered representative and the Bolivian investors. For example, the president<br />
failed to follow up on e-mails showing that the registered representative was considering a profitsharing<br />
arrangement with a firm customer and may have promised a firm customer exorbitant<br />
returns on investments. The president and the broker-dealer also allegedly failed to develop<br />
reasonable systems to implement written standards and procedures with respect to prohibited<br />
transactions. Pursuant to the terms of the settlement, without admitting or denying the<br />
allegations, the president consented to a bar from association in a supervisor capacity with any<br />
broker, dealer, or investment advisor for three years. He also agreed to pay a fine of $35,000.<br />
The broker-dealer was censured and ordered to pay a fine of $50,000.<br />
In re Clifton, Release No. 443, 2011 SEC LEXIS 4185 (Nov. 29, 2011).<br />
An administrative law judge found that the president of a broker-dealer willfully violated<br />
Section 17(a) of the Securities Act of 1933 and Section 15(b)(6) of the Securities Exchange Act<br />
of 1934. The broker-dealer, on behalf of an oil and gas exploration business, offered limited<br />
partnership interests in an oil and gas drilling project. The president of the broker-dealer was<br />
responsible for supervising sales representatives and, if necessary, taking disciplinary action<br />
against them. He was also the person primarily responsible for providing information updates on<br />
the project to the sales representatives. The president violated the broker-dealer’s written<br />
standards and procedures by failing to review the outgoing written and electronic correspondence<br />
of the sales representatives to the investors. The evidence showed that the sales representatives<br />
provided prospective investors with misleading information. The president also failed to provide<br />
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timely and complete information updates about the project to the sales representatives. He<br />
infrequently walked the floor listening to the sales representatives’ phone conversations with<br />
investors, and on one occasion failed to correct inaccurate information provided by a sales<br />
representative to a potential investor. Finally, the president made his own misrepresentations to<br />
investors by, among other things, misrepresenting the production potential of the wells and<br />
omitting material information from them. The judge found that the president’s conduct was<br />
egregious. The president was barred from associating with any broker, dealer, investment<br />
advisor, municipal securities dealer, or transfer agent. He was also ordered to pay a civil<br />
monetary penalty in the amount of $130,000.<br />
In re Inv. Placement Group, Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011).<br />
The Securities and Exchange Commission instituted public administrative proceedings<br />
against a broker-dealer and the broker-dealer’s chief operating officer. In anticipation of the<br />
institution of those proceedings, respondents submitted offers of settlement which the SEC<br />
accepted. The SEC alleged that the respondents failed to reasonably supervise a former<br />
registered representative and trader who engaged in a fraudulent interpositioning scheme.<br />
During the interpositioning scheme, the registered representative violated Section 17(a) of the<br />
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5<br />
by needlessly interposing a Mexican brokerage firm into certain securities transactions. As a<br />
result of the representative’s misconduct, certain institutional clients, including four Mexican<br />
pension funds, paid approximately $65 million more for certain credit-linked notes than they<br />
would have paid had the Mexican brokerage firm not been interposed as a “middle man.” The<br />
representative’s fraudulent scheme went undetected by the broker-dealer due to its failure to<br />
establish adequate policies and procedures and a system for implementing those procedures<br />
which would reasonably be expected to prevent and detect interpositioning by its traders. During<br />
the relevant period, the chief operating officer was directly responsible for supervising the<br />
registered representative and overseeing the trading room. The chief operating officer, however,<br />
delegated supervisory oversight of the trading to the registered representative, which effectively<br />
allowed the registered representative to supervise himself. Further, the chief operating officer<br />
failed to respond to red flags regarding the registered representative’s fraudulent scheme,<br />
including a dramatic rise in revenue resulting from the interpositioned transactions. Without<br />
admitting or denying the allegations, the broker-dealer consented to a censure and fine of<br />
$260,000. The broker-dealer also paid disgorgement of over $3.5 million and prejudgment<br />
interest of $240,000. The chief operating officer accepted suspension from association in a<br />
supervisory capacity with any broker, dealer, or investment advisor for a period of three months.<br />
H.5<br />
I. Private Rights of Action for Violations of SRO Rules<br />
I.<br />
Fiero v. Fin. Ind. Reg. Auth., Inc., 660 F.3d 569 (2d Cir. 2011).<br />
A brokerage firm brought an action in federal court against FINRA seeking declaratory<br />
judgment that the SRO did not have authority to bring a court action to collect disciplinary fines<br />
295
against its members. FINRA had previously imposed a $1 million fine, plus costs, against the<br />
brokerage firm and had obtained a judgment for the amount of the fine in state court. The<br />
District Court dismissed the brokerage firm’s complaint and granted FINRA summary judgment<br />
on its counterclaim for the amount of the fine. The Second Circuit reversed and vacated the<br />
judgment. Under the Securities Exchange Act of 1934, FINRA has the power to initiate a<br />
disciplinary proceeding against any member or associated person for violating its rules, SEC<br />
regulations, or securities laws, and it may impose any sanction, including fines and revocation of<br />
the member’s registration. However, FINRA is not given authority to enforce the collection of<br />
fines through the courts. Such authority is expressly granted to the SEC, but not to SROs.<br />
Murphy v. Reynolds, 2011 WL 4502523 (Tex. App. Sept. 29, 2011).<br />
Investor Reynolds brought an action against technology-sector stock analyst Murphy for,<br />
inter alia, violating NASD and NYSE rules. Reynolds alleged that Murphy published a<br />
newsletter and book and maintained a telephone hotline providing investment recommendations,<br />
which Reynolds followed. After Reynolds incurred losses, he commenced suit claiming that<br />
Murphy had made material misrepresentations in his recommendations on specific securities, as<br />
such terms are defined in the NASD and NYSE rules. However, because Murphy was not an<br />
investment advisor, he was not subject to NASD or NYSE rules. Even if he was subject to<br />
NASD and NYSE rules, it is not clear that Reynolds would have a private right of action to<br />
enforce those rules.<br />
Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.<br />
July 12, 2011).<br />
Plaintiff sued Merrill Lynch for failure to supervise its employee, a licensed securities<br />
broker, in connection with the broker’s sale of stock in his outside direct-marketing businesses to<br />
plaintiff. Plaintiff alleged that the broker made several misrepresentations and omissions in<br />
connection with the sale of the stock, which was unregistered, and that the broker failed to<br />
deliver the shares to plaintiff. Plaintiff further alleged that Merrill Lynch violated NASD and<br />
NYSE rules because it knew that the broker intended to sell shares of his outside businesses and<br />
failed to adequately supervise the subject sale, its terms, and the registration of the securities.<br />
Merrill Lynch moved to dismiss these claims, arguing that there is no private right of action for<br />
violation of NASD and NYSE rules or internal company policies. The trial court agreed and<br />
granted the portion of the motion seeking to dismiss claims for violation of these SRO rules. On<br />
appeal, the Texas Court of Appeals affirmed, finding that although the Seventh Circuit had<br />
previously recognized a private right of action for violation of NASD and NYSE rules, the great<br />
weight of authority rejects the existence of a private right of action, and there is a serious<br />
question as to whether the Seventh Circuit authority remains good law.<br />
I.<br />
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296
J. RICO<br />
J.<br />
MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011).<br />
In a suit brought by a Madoff investor, the Second Circuit ruled in a case of first<br />
impression that the Private Securities <strong>Litigation</strong> Reform Act (“PSLRA”) bars a civil RICO<br />
conspiracy claim predicated on allegations of aiding and abetting securities law violations. The<br />
court ruled that the PSLRA prohibition at issue (18 U.S.C. § 1964(c)) – stating in relevant part<br />
that “no person may rely upon any conduct that would have been actionable as fraud in the<br />
purchase or sale of securities to establish a violation of section 1962” – applied even though the<br />
defendant in this case could not have been sued under the securities laws for aiding and abetting<br />
securities laws violations.<br />
Ritchie Capital Mgmt., L.L.C. v. Jeffries, 653 F.3d 755 (8th Cir. 2011).<br />
In a lawsuit claiming civil RICO violations arising out of an allegedly fraudulent<br />
securities transaction against two individuals who worked for a bankrupt company in<br />
receivership, the Eighth Circuit held that a federal receivership court’s injunction prohibiting<br />
actions against the company did not apply to actions against the individuals who worked for the<br />
company. The Eighth Circuit disagreed with the District Court – which had held that the<br />
injunction applied to bar the suit – that the lawsuit would interfere with the possession of any<br />
company documents, since the case would only involve the interpretation of those documents.<br />
Milo v. Galante, 2011 WL 1214769 (D. Conn. Mar. 28, 2011).<br />
Plaintiff brought civil RICO claims against defendant alleging that he misappropriated<br />
funds in the trash companies that plaintiff and defendant co-owned (plaintiff was the minority<br />
shareholder in the companies, defendant the majority shareholder). The court granted the<br />
defendant’s motion to dismiss the RICO claims because they were time-barred, since plaintiff<br />
did not bring them within four years after she should have known – from news reports – about<br />
the conduct that gave rise to her claims. The court declined plaintiff’s request to toll the fouryear<br />
limitations period based on defendant’s allegedly fraudulent concealment of the conduct,<br />
because plaintiff did not offer any details about any supposed concealment; nor, the court found,<br />
did she exercise diligence in seeking to discover her claim. The court also declined plaintiff’s<br />
request to apply the “separate accrual rule,” which would allow the four-year RICO limitations<br />
period to run afresh for each separate RICO act. In order for the limitations period to begin<br />
anew, each act must be independent from one another; yet, plaintiff failed to alleged separate and<br />
distinct fraudulent acts by defendant.<br />
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J.<br />
Marini v. Adamo, 2011 WL 4442710 (E.D.N.Y. Sept. 26, 2011).<br />
The court denied defendants’ motion for summary judgment on plaintiffs’ RICO claim,<br />
which alleged that defendants participated in a years-long scheme to induce plaintiffs to<br />
fraudulently buy rare coins at inflated prices that resulted in millions of dollars in losses.<br />
Rejecting defendants’ argument, the court found that plaintiffs had established the requisite<br />
continuity of racketeering activity. Plaintiffs’ evidence supported a finding that the scheme<br />
lasted about six years and involved several victims and dozens of fraudulent acts. The court also<br />
rejected defendants’ argument that a RICO enterprise could not consist of a closed corporation<br />
and a person who co-owned it because the co-owner and defendant were not sufficiently distinct.<br />
The court found that the corporation and co-owner are distinct where the corporation was<br />
incorporated under New York law, and as such was a distinct legal entity with rights, obligations<br />
and powers different from those of the natural person who owned it.<br />
Morris v. Zimmer, 2011 WL 5533339 (S.D.N.Y. Nov. 10, 2011).<br />
Defendant Zimmer was an attorney who represented plaintiffs in a National Association<br />
of Securities <strong>Dealer</strong>s (“NASD”) arbitration in 2004. The arbitration settled prior to hearing for<br />
about $80,000. Defendant did not pay over the settlement to plaintiffs, however, and told<br />
plaintiffs that he had invested some of the money in his business. Plaintiffs said they did not<br />
agree to such an investment, and demanded the return of their money. Defendant eventually<br />
pleaded guilty to petit larceny misdemeanor in New York, and was disbarred in Maryland. In<br />
this action, plaintiffs brought a variety of state-law claims against defendants, and sought leave<br />
to amend to add a civil RICO claim alleging that defendant Zimmer’s conversion of the NASD<br />
settlement money, and consequent misrepresentations, indicated a pattern of racketeering activity<br />
in violation of RICO. The court denied plaintiffs’ motion, finding that the proposed additional<br />
claim failed as a matter of law, because defendant Zimmer’s conduct all related to a single event,<br />
and so did not amount to the requisite pattern of racketeering activity.<br />
Picard v. Kohn, 2011 U.S. Dist. LEXIS 101261 (S.D.N.Y. Sept. 6, 2011).<br />
The Trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC<br />
filed suit against Sonja Kohn, UniCredit Bank and others alleging their participation in the<br />
Madoff Ponzi scheme. The District Court stated its reasons for withdrawing the bankruptcy<br />
reference with respect to the Trustee’s RICO claims. Among the reasons stated was the fact that<br />
the issues raised by defendants would require significant interpretation of RICO, including the<br />
“RICO Amendment” that prevents securities law violations from being the predicate act for<br />
RICO claims.<br />
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298
J.<br />
In re Refco Inc. Sec. Litig., 2011 WL 1219265 (S.D.N.Y. Mar. 30, 2011).<br />
Investment manager of hedge fund and hedge fund brought suit against hedge fund<br />
administrator, as well as the CEO and president of the administrator, alleging various claims<br />
under New Jersey’s RICO Act arising out of the transfer of excess cash to the broker’s<br />
unprotected offshore accounts. Although plaintiffs were entitled to name the enterprise and the<br />
various individuals who constitute the “enterprise” as defendants under New Jersey’s RICO Act<br />
(which is broader than its federal counterpart), plaintiffs failed to plead sufficient “organization”<br />
because the amended complaint did not show how the members of the “enterprise” were<br />
associated with each other, whether the participants performed discrete roles, the level of<br />
planning involved, how decisions were made, or the coordination involved in implementing<br />
those decisions. Nor did it describe the division of labor or separation of functions among the<br />
enterprise members. Thus, no inference could be made that defendants collectively engaged in a<br />
high degree of planning, cooperation and coordination, as required under New Jersey law. Thus,<br />
even though plaintiffs adequately demonstrated a pattern of racketeering and proximate cause,<br />
and adequately pleaded their allegations of mail and wire fraud under the heightened pleading<br />
standards, the court affirmed the Special Master’s recommendation that the New Jersey RICO<br />
count be dismissed with prejudice.<br />
Indus. Enters. of Am., Inc. v. Brandywine Consultants, 2011 Bankr. LEXIS 3560 (Bankr. Del.<br />
Sept. 16, 2011).<br />
In this Chapter 11 bankruptcy proceeding, plaintiff commenced an adversarial proceeding<br />
alleging that two former executives of the bankrupt corporation defrauded the corporation and its<br />
shareholders by inflating the value of the corporation’s stock, illegally issuing shares of stock,<br />
and wrongfully retaining proceeds of stock sales. Defendants moved to dismiss plaintiff’s civil<br />
RICO claims, arguing that they were barred by the statute of limitations and improperly<br />
predicated on securities law violations. The court accepted plaintiff’s argument that the fouryear<br />
statute of limitations had not expired and began to run only in April 2009, when the former<br />
executives who were accused of wrongdoing left the corporation and their actions could have<br />
first been discovered. The court also rejected defendants’ argument that plaintiff’s RICO claims<br />
were improperly based on securities law violations, finding that plaintiff had properly alleged<br />
mail fraud and stock transfers without value as RICO predicates.<br />
Leibholz v. Hariri, 2011 WL 1466139 (D.N.J. Apr. 15, 2011).<br />
Plaintiff asserted violations of the New Jersey RICO Act arising out of an alleged<br />
contract between defendant and plaintiff, whereby defendant agreed to give equity in his<br />
company to plaintiff in exchange for plaintiff’s consulting services. Plaintiff alleged that<br />
defendant (1) executed a scheme to obtain and/or retain for himself stock promised to employees<br />
and consultants of his company in exchange for their services, and (2) fraudulently valued<br />
J.<br />
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299
equipment he contributed to the company in order to increase his equity in the company. Despite<br />
the fact that plaintiff adequately pleaded “enterprise” under New Jersey’s broad definition, there<br />
was no evidence in the record that defendant engaged in a pattern of racketeering activity.<br />
Accordingly, the court granted defendant’s motion for summary judgment.<br />
In re Jamuna Real Estate, LLC, 460 B.R. 661 (Bankr. E.D. Pa. 2011).<br />
In denying defendant’s motion for summary judgment on a civil RICO claim, the<br />
Bankruptcy Court held that the claim was not predicated on a securities sale, and therefore the<br />
bar on predicating RICO claims on securities law violations (at 18 U.S.C. § 1964(c)) did not<br />
apply. The court found that the transactions that formed the basis for the claim were mortgage<br />
and equipment loans for defendants’ fast-food businesses. The plaintiff was therefore not an<br />
investor in the businesses, but rather an ordinary commercial lender.<br />
McCoy-McMahon v. Godlove, 2011 WL 4820185 (E.D. Pa. Sept. 30, 2011).<br />
The court granted defendants’ motion to dismiss plaintiff’s RICO claim, arising from her<br />
“squeeze-out” as a minority shareholder of a corporation. The court, while finding that plaintiff<br />
alleged the requisite two or more RICO predicate acts of mail and wire fraud, said that the acts<br />
nonetheless did not constitute a pattern of related activity. The court found that defendants’ acts,<br />
as alleged, were part of two separate schemes, as the purpose of each scheme, as well as its<br />
respective victims, were different.<br />
Amos v. Franklin Fin. Servs. Corp., 2011 WL 2111991 (M.D. Pa. May 26, 2011).<br />
Former shareholders of CFI, a company that was merged into defendant corporation, sued<br />
defendant corporation and other former shareholders and officers of CFI, alleging among other<br />
things, violations of RICO for operating CFI in a way that diluted the value of the payment to<br />
plaintiff shareholders upon the merger relative to the payments received by defendant<br />
shareholders. The court dismissed the action, finding that plaintiffs failed to state RICO claims<br />
because of the statutory exception for fraud in the sale of securities. Here, the allegations in the<br />
complaint constituted actionable securities fraud claims under Rule 10b-5, as plaintiffs alleged<br />
that defendants made misrepresentations as to the value of CFI in connection with the sale of<br />
securities during the merger. Accordingly, they were barred by the Private Securities <strong>Litigation</strong><br />
Reform Act.<br />
J.<br />
J.<br />
J.<br />
300
Beaman v. Barth, 2011 Bankr. LEXIS 819 (E.D.N.C. Mar. 2, 2011).<br />
J.<br />
In this Chapter 7 bankruptcy proceeding, the trustee filed suit alleging that individuals<br />
who controlled the bankrupt corporation engaged in a scheme to loot its assets, in violation of<br />
RICO (among other laws). The court, however, granted defendants’ motion to dismiss, finding<br />
that the fraudulent acts amounted to a single scheme with one victim and one goal, and not the<br />
requisite pattern of racketeering activity.<br />
In re Amerlink, Ltd., 2011 WL 802794 (Bankr. E.D.N.C. Mar. 2, 2011).<br />
Bankruptcy trustee brought an adversary proceeding alleging violations of RICO and<br />
North Carolina’s RICO statute arising out of defendants’ alleged scheme to deplete Amerlink’s<br />
resources for personal gain. Although the alleged facts highlighted instances of separate conduct<br />
over a course of several years, the conduct was in furtherance of one intended goal.<br />
Furthermore, Amerlink was the sole victim. The court, following jurisprudence in the Fourth<br />
Circuit, held that a solitary scheme aimed at a single victim does not fit within the scope of a<br />
RICO pattern and allowed the motion to dismiss the trustee’s RICO claims.<br />
Alack v. Jaybar, LLC, 2011 WL 3626687 (E.D. La. Aug. 17, 2011).<br />
Plaintiffs alleged fraudulent sales of securities by defendants. Intervenor-Plaintiff moved<br />
to alter the court’s order that dismissed with prejudice her RICO claims as asserted against<br />
defendants. The court dismissed the RICO claims because they were barred by the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995, which precludes securities fraud from serving as a<br />
predicate for a private cause of action under RICO. The court declined to alter its order<br />
dismissing the RICO claims for two reasons. First, Intervenor-Plaintiff alleged that the bank<br />
fraud was undertaken in connection with the purchase of a security, even though a plaintiff<br />
cannot avoid the RICO amendment’s bar by pleading bank fraud as a predicate offense in a civil<br />
RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud.<br />
Second, the court found that the argument now made by Intervenor-Plaintiff – that the predicate<br />
act for her RICO claims was bank fraud – is one that could and should have been raised in her<br />
opposition to defendants’ motion for partial dismissal, and Intervenor-Plaintiff’s failure to do so<br />
also justified the denial of her motion.<br />
Abene v. Jaybar, LLC, 2011 WL 2847436 (E.D. La. July 14, 2011).<br />
Plaintiffs alleged fraudulent sales of securities by defendants. Intervenor-Plaintiff<br />
adopted most of plaintiffs’ allegations and asserted, among others, additional RICO claims. The<br />
court dismissed the RICO claims because they were barred by the Private Securities <strong>Litigation</strong><br />
Reform Act of 1995, which precludes securities fraud from serving as a predicate for a private<br />
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J.<br />
J.<br />
301
cause of action under RICO. Though civil RICO claims may proceed if they are specifically<br />
asserted against a defendant who had been criminally convicted in connection with the alleged<br />
securities fraud, Intervenor-Plaintiff made no such allegations in her complaint.<br />
Conwill v. <strong>Greenberg</strong> <strong>Traurig</strong>, <strong>LLP</strong>, 2011 WL 1103728 (E.D. La. Mar. 22, 2011).<br />
Plaintiff claimed that defendants made false and misleading statements promising that<br />
plaintiff would legally be able to take tax deductions based on the losses generated in the subject<br />
transaction, which misled him into entering into the transaction in the first instance. Although<br />
plaintiff identified mail and wire fraud as the predicate acts supporting his RICO claim, those<br />
predicate acts were actually allegations of fraud in connection with the sale of securities. Thus,<br />
as the alleged fraud coincided with a purchase of securities and that purchase of securities was<br />
made to further a fraudulent scheme, the claims were actionable as securities fraud and plaintiff<br />
could not rely on them as the basis for a RICO claim.<br />
Baldwin v. Cavett, 2011 U.S. Dist. LEXIS 117755 (E.D. Tex. Sept. 12, 2011).<br />
Plaintiffs filed suit against defendants and their investment advisors asserting a bevy of<br />
claims, including RICO claims, based on poor investment advice that defendants allegedly gave<br />
plaintiffs with the aim of generating greater fees. On defendants’ motion to dismiss, the court<br />
ordered plaintiffs to file a RICO case statement within 14 days, and permitted defendants to<br />
renew their motion to dismiss after plaintiffs’ filing of the case statement.<br />
In re ClassicStar Mare Lease <strong>Litigation</strong>, 2011 WL 4591927 (E.D. Ky. Sept. 30, 2011).<br />
In this civil suit, the court granted plaintiffs’ motion for summary judgment on their<br />
RICO claims, finding that defendants used the mails and wires over the course of three years to<br />
fraudulently sell investments in a horse-breeding operation that did not have sufficient horses to<br />
breed. Defendants’ main defense was that plaintiffs could not succeed because of the in pari<br />
delicto doctrine, which counsels courts to avoid finding in favor of a plaintiff where both parties<br />
are at roughly equal fault. The court, assuming in pari delicto to be applicable to a civil RICO<br />
claim, found the doctrine to be inapplicable here because defendants did not present evidence<br />
that plaintiffs knew about the problems with the horse-breeding operation when they made their<br />
investments or even well into their participation as investors.<br />
J.<br />
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302
General Retirement System of City of Detroit v. Onyx Capital Advisors, LLC, 2011 WL 4528304<br />
(E.D. Mich. Sept. 29, 2011).<br />
On defendants’ motion to dismiss, the court dismissed plaintiffs’ RICO claims, finding<br />
them to be predicated on securities law violations and, therefore, barred by 18 U.S.C. § 1964(c).<br />
Plaintiffs claimed that their RICO claims did not relate to the purchase or sale of securities, but<br />
to misappropriation and poor post-investment management. However, the court found that the<br />
securities laws (and specifically Section 10(b) of the Securities Exchange Act of 1934) covered<br />
fraudulent conduct beyond an initial purchase or sale, and that “[a] surgical presentation of the<br />
cause of action cannot avoid the determination that the conduct giving rise to the predicate<br />
offenses amount to securities fraud.” Here, the court found that since plaintiffs purchased<br />
securities over a period of several years and alleged that defendants’ misappropriation and bad<br />
management occurred during the same time, the actions alleged as predicates for the RICO<br />
claims could not be separated from the purchases and sales of securities.<br />
Moorehead v. Deutsche Bank AG, 2011 WL 4496221 (N.D. Ill. Sept. 26, 2011).<br />
On defendants’ motion to dismiss, the court dismissed plaintiffs’ RICO claims, finding<br />
that while the claims were not barred by the statute of limitations, they were prohibited under the<br />
Private Securities <strong>Litigation</strong> Reform Act (“PSLRA”). Plaintiffs alleged that defendants induced<br />
them into pursuing faulty tax-reducing investment strategies. As to the statute of limitations, the<br />
court found that while the four-year limitation period for plaintiffs’ RICO claims had passed, it<br />
had been adequately tolled by a class-action lawsuit, in which plaintiffs participated, that<br />
included a RICO claim. As for the PSLRA, which bars RICO claims predicated on securities<br />
law violations (18 U.S.C. § 1864(c)), the court found the bar to be applicable even though<br />
plaintiffs contended that their claims were predicated on purportedly faulty tax-planning<br />
strategies, not securities transactions. The court concluded that the tax strategies at issue<br />
involved “significant securities transactions” in which defendants repeatedly made<br />
misrepresentations about their tax effects and profitability. Accordingly, the RICO claims could<br />
not be brought.<br />
Bobrowski v. Red Door Group, 2011 WL 3555712 (D. Ariz. Aug. 11, 2011).<br />
Plaintiff investor sued defendant entities alleging, among others, securities fraud and<br />
RICO claims. The court dismissed plaintiff’s securities fraud claims on defendants’ motion for<br />
summary judgment, finding that the Purchase Agreement coupled with the Asset Management<br />
Agreement, though an investment contract, was not a security under SEC v. W.J. Howey Co., 328<br />
U.S. 293 (1946). The court found that there was no horizontal commonality here because<br />
plaintiff purchased fee simple title to eight units and was entitled to a fixed monthly rent and a<br />
set repurchase price for his units alone. The court also found that there was no vertical<br />
commonality because payment under the lease was not conditioned upon the successful rental of<br />
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303
the units, and rental of the units beyond what is necessary to pay the lease amount results in<br />
greater revenue for defendants only. Because the court found that defendants did not commit<br />
any violations of securities laws, the court also dismissed the plaintiff’s RICO claims since no<br />
other predicate act remained.<br />
Negrete v. Allianz Life Ins. Co. of N. America, 2011 WL 4852314 (C.D. Cal. Oct. 13, 2011).<br />
In this class action lawsuit brought on behalf of about 200,000 senior citizens, defendant<br />
life insurance company filed a motion for summary judgment seeking dismissal of plaintiffs’<br />
RICO claims, which alleged that defendant conspired with its network of Field Marketing<br />
Organizations (FMOs) to make misleading statements and omissions in order to induce plaintiffs<br />
to purchase erroneously priced annuities. Defendant argued that plaintiffs could not prove a<br />
RICO enterprise among it and its FMOs, which sell its annuity products, because the FMOs were<br />
independent and competed with one another in the marketplace, and as such could not be said to<br />
belong to a common enterprise. Defendant also argued that the FMOs could not share a common<br />
purpose, another prerequisite for finding a RICO enterprise. The court denied defendant’s<br />
motion and found that enough material facts existed for a jury to find that (1) the Marketing<br />
Advisory Committee served as an intermediary for communications among the FMOs, (2) the<br />
FMOs had a common purpose because FMOs are not required to share every purpose, just one<br />
common purpose (here, to sell defendant’s annuities), and (3) defendant participated in the<br />
management of a RICO enterprise, since it had considerable control over the FMOs.<br />
Coquina Investments v. Rothstein, 2011 WL 4971923 (S.D. Fla. Oct. 19, 2011).<br />
A now-disbarred attorney ran a Ponzi scheme whereby he convinced investors to<br />
purchase legal settlements that did not actually exist. As part of the scheme, the attorney<br />
maintained accounts at a major national bank, held meetings at a Florida branch of that bank<br />
(where the attorney’s co-conspirators would impersonate bank employees), and falsified bank<br />
statements. In a lawsuit naming the bank as one of the defendants, the court granted the bank’s<br />
motion to dismiss plaintiff’s civil RICO claim, holding that the bank was an unwitting conduit<br />
for criminal activity, and not a participant in the criminal enterprise or any pattern of<br />
racketeering activity. Even assuming that acts by a bank employee could be imputed to the bank,<br />
plaintiff failed to show that the bank derived any benefit from the Ponzi scheme (a requirement<br />
for vicarious liability), such as high balances in the law firm’s bank accounts that led to<br />
improved cash flow and interest earnings. In fact, the court found that the bank may have<br />
actually suffered because the accounts had low monthly balances and the bank was owed<br />
uncollected funds.<br />
J.<br />
J.<br />
304
K. Damages and Other Relief in Private Actions<br />
1. Damages as Element of Claim<br />
K.1<br />
Moriarty v. Equisearch Services, Inc., 2011 WL 4485176 (6th Cir. Sept. 29, 2011).<br />
Plaintiff sued for fraud, breach of contract, and violation of Delaware securities statutes<br />
based on defendants’ failure to notify the plaintiff of the issuance of stock to plaintiff in<br />
connection with the demutualization of an insurance company. Plaintiff was issued stock in<br />
2001 that was valued at $167,573 at that time. In May 2007, plaintiff was contacted by<br />
Equisearch, a search company, and informed of its ownership of the stock, which by then had<br />
appreciated to $573,000. Plaintiff authorized Equisearch to recover and sell the stock, which it<br />
did in August 2007. Equisearch charged plaintiff a 25% search fee. Plaintiff received $398,908<br />
net after deduction of the search fee and the stock’s price decline from May 2007 to August<br />
2007. Plaintiff sued to recover the difference between $398,908 and $573,000. The court<br />
rejected plaintiff’s argument that the alleged breach had left plaintiff worse off, finding that<br />
plaintiff had failed to provide evidence that the total return to plaintiff would have exceeded<br />
$398,908 if plaintiff had received the stock worth $167,573 in 2001.<br />
Baxi v. Ennis Krupp & Assocs., Inc., 2011 WL 3898034 (N.D. Ill. Sept. 2, 2011).<br />
Plaintiff brought claims for violations of section 10(b), breach of fiduciary duty,<br />
negligent misrepresentation, and breach of contract (among others), based on plaintiff’s<br />
allegations that the defendants defrauded him by inducing him to sell his shares at $100 per share<br />
when the defendants knew that the shares would be worth far more than that in a few months<br />
because of a pending, undisclosed merger. The court dismissed plaintiff’s claims (with leave to<br />
replead) on the grounds that plaintiff was contractually obligated to sell his shares for no more<br />
than $100 per share regardless of the market price of the stock, and thus could not have suffered<br />
any damages.<br />
K.1<br />
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D. Cal. 2011).<br />
Plaintiffs brought suit under Section 12 of the Securities Act of 1933 and for breach of<br />
fiduciary duty (among other claims) based on their ownership of tenancy-in-common interests in<br />
a real estate investment (which there was a disputed issue of fact as to whether they were<br />
“securities”). Defendants argued that any damages were speculative, because foreclosure on the<br />
underlying properties had not taken place, and plaintiffs therefore still held their interests.<br />
Defendants further argued that until the interests were sold, plaintiffs had not suffered a<br />
quantifiable loss. Plaintiffs countered that they had also been promised coupon income on their<br />
K.1<br />
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investment, that the coupons had not been paid, and that this constituted a quantifiable loss. The<br />
court held that the loss of the coupons was a quantifiable damage, even if relatively small<br />
compared with the total amount plaintiffs hoped to recover, and denied defendants’ motion for<br />
summary judgment on this basis.<br />
Emposimato v. CIFC Acquisition Corp., 932 N.Y.S.2d 33 (App. Div. 2011).<br />
CIFC sought damages based on alleged violations of a stock purchase agreement.<br />
Defendants sought summary judgment, arguing (among other things) that the fair market value<br />
of the stock to be sold was equal to the contract price for the stock at the time of the purported<br />
breach, and thus that there were no damages. The court of appeals held that the motion court<br />
properly denied summary judgment, because there was a difference of opinion regarding fair<br />
market value, even though the contract price constitutes evidence of fair market value that is<br />
entitled to significant weight. The court of appeals further held that the damages sought by CIFC<br />
were not consequential damages (which would have been precluded by the agreement). Rather,<br />
CIFC sought expectation damages, and expectation damages in the case of a breach of a contract<br />
to sell securities are calculated as the difference between the agreed price of the shares and the<br />
fair market value at the time of the breach. This formulation awards expectation damages to the<br />
extent of putting plaintiff in the same economic position he would have occupied had the<br />
breaching party performed the contract.<br />
K.1<br />
2. Measure of Damages<br />
K.2<br />
Probate Court of Warwick v. Bank of America, N.A., 2011 WL 3740478 (D.R.I. Aug. 24, 2011).<br />
Plaintiffs, who were beneficiaries named in a will, brought suit against an executor of the<br />
will for breach of fiduciary duty. The court found that the executor breached its duties in its<br />
handling of the sale of stock of a closely-held corporation, by allowing the stock to be sold at<br />
$145.36 or $200 per share when shares of the same stock sold for $1,667.38 per share shortly<br />
thereafter. In determining damages, the court noted the general principle that tort damages<br />
should restore the aggrieved party to the position he would have occupied had the tort not<br />
occurred. The court rejected the argument that the measure of damages should be the difference<br />
between the sale price and fair value at the time of the sale, because the effect would be to give<br />
the executor (or broker) control of the stock, subject only to nominal damages. The court found<br />
that the real injury was not merely the sale for less than fair value, but the sale at an unfavorable<br />
time. The court held that the proper measure of damages for those plaintiffs who would have<br />
held on to their stock until the time of the $1,667.38 per share offer was the difference between<br />
that price and the price they received, plus interest. However, the court also held that those<br />
plaintiffs who would not have held their stock until that time were not entitled to any damages,<br />
and then made individualized factual determinations as to whether each plaintiff would have held<br />
their stock.<br />
306
K.2<br />
U.S. v. Gushlak, 2011 WL 3159170 (E.D.N.Y. July 26, 2011).<br />
Defendant pleaded guilty to conspiracy to commit securities fraud and conspiracy to<br />
commit money laundering in relation to a scheme to manipulate the price of GlobalNet common<br />
stock. After sentencing, the court received submissions from the government regarding<br />
restitution to victims pursuant to the Mandatory Victim Restitution Act. The government<br />
initially submitted a letter indicating that victims lost approximately $20 million, but did not<br />
provide its methodology or a list of the victims. Based on that submission, the court found that<br />
the government had yet to prove any victim losses and ordered the government to explain its<br />
methodology, provide the trading records on which it relied for in camera review, and provide a<br />
list of victims and the amount each had lost. The government then submitted additional<br />
evidence, but the court found that it still failed to establish that the full amount of losses suffered<br />
by the victims were attributable to Gushlak’s offense. The government’s third submission<br />
analyzed the S&P 500, Nasdaq Composite, and Russell 2000 indices, found that these indices<br />
declined by 20% during the relevant period, and thus discounted the victim loss calculations by<br />
20% to reflect the portion of the victims’ losses that were caused by market movement rather<br />
than fraud. The court again rejected the government’s analysis, finding that while index<br />
performance may be of some relevance in a case where fraud is publicly revealed and a stock’s<br />
price subsequently declines, it was not relevant here, where the public remained unaware of the<br />
fraud. The court found that Gushlak’s expert’s comparisons of GlobalNet’s performance to<br />
telecommunications stocks such as Level 3 were more useful than the government’s comparison<br />
to broad indices. The court allowed the government to provide additional submissions as to the<br />
amount of restitution, and provided several examples of potentially relevant evidence, including<br />
evidence showing the percentage of the daily trading volume for GlobalNet shares that was<br />
attributable to the conspiracy, a detailed factual explanation of how the conspiracy was carried<br />
out, evidence related to the value of GlobalNet shares in the absence of manipulation (such as<br />
prices of the shares when the conspirators initially acquired them), and evidence of the<br />
performance of comparable companies.<br />
New Jersey Carpenters Health Fund v. Novastar Mortgage, Inc., 2011 WL 1338195 (S.D.N.Y.<br />
Mar. 31, 2011).<br />
Plaintiff brought a putative class action based on defendant’s lending practices in<br />
originating subprime home mortgages and sale of securities backed by the mortgages. Plaintiff<br />
alleged that its injury was a 93% loss of market value in the securities since its initial value in the<br />
offering. Defendant sought to dismiss plaintiff’s claim on the grounds that market value loss<br />
should not apply in the mortgage-backed securities context, because the purchasers could not<br />
have reasonably relied on the opportunity to sell the securities in the market, and instead could<br />
only reasonably expect to receive the cash flow from the securities. The court held that<br />
defendant’s position was without support under Section 11(e) of the Securities Act of 1933. The<br />
text of Section 11(e) itself did not support defendant’s argument or single out fixed-income debt<br />
securities for special treatment. Furthermore, the lack of a secondary market for the securities<br />
K.2<br />
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was, according to plaintiff’s allegations, due in part to the defendant’s own actions. The court<br />
further found that purchasers of mortgage-backed securities did in fact have an expectation that<br />
they would be able to utilize a secondary market. Finally, accepting defendant’s argument would<br />
place severe limits on the application of the ‘33 Act to securities such as bonds.<br />
Elton v. McClain, 2011 WL 6934812 (W.D. Tex. Dec. 29, 2011).<br />
The court entered default judgment for plaintiffs on claims under the Securities Exchange<br />
Act of 1934 and RICO, and under Texas law for breach of contract and fraud, among others. On<br />
the issue of damages, the court noted that out-of-pocket losses are the appropriate measure of<br />
damages under Rule 10b-5. Because one plaintiff had suffered out of pocket losses of $10,000,<br />
the court found he was entitled to trebling of damages under RICO and awarded $30,000.<br />
Another plaintiff sought lost profits (as an alternative to treble damages). The plaintiff’s wellpleaded<br />
allegations showed he had purchased 100,000 shares of the stock for $25,000, and that<br />
the stock had traded for several months at $5.00 per share. The court found that the appropriate<br />
measure for lost profits was the actual price of the stock, and awarded lost profits of $500,000.<br />
Wehrs v. Benson York Group, Inc., 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).<br />
After entering default judgment against defendant Wells on the issue of liability, the court<br />
considered arguments on the issue of damages. The allegations in the complaint established that<br />
Wells breached a duty to the plaintiff by failing to faithfully execute a stock purchase order,<br />
failing to execute a stop loss order, and repurchasing the stock without plaintiff’s authorization.<br />
The court found that the proper measure of damages was the amount needed to restore plaintiff<br />
to the position he would have been in had the breach not occurred. Because neither party had<br />
presented any cases addressing damages in an analogous factual situation, the court noted that it<br />
was in an awkward position and would consider motions under Rule 59(e) to alter or amend the<br />
judgment if appropriate. On the claim of failure to faithfully execute the purchase order, the<br />
court found Wells liable for $17,659, which was the difference between the price at which<br />
plaintiff had authorized the purchase and the price at which it was actually made. On the failure<br />
to execute a stop loss order, the court found that Wells was only liable for the amount of losses<br />
that exceeded the stop loss amount. Wells was not liable for the commission on that trade,<br />
because the sale would have happened in any event. On the unauthorized purchase claim, Wells<br />
was liable for the difference between the total purchase price and the total sale price. Although<br />
Wells argued that he was not liable for losses that occurred after the unauthorized purchase,<br />
because of a failure to mitigate, the court held that failure to mitigate was an affirmative defense<br />
and Wells had waived it by failing to answer the complaint.<br />
K.2<br />
K.2<br />
308
K.2<br />
Elipas v. Jedynak, 2011 WL 1706059 (N.D. Ill. May 5, 2011).<br />
Plaintiffs moved for summary judgment against defendant Howard under Rule 10b-5 and<br />
Illinois securities law. Plaintiffs had invested in UWT, and the court had previously found that<br />
Howard had taken part in a scheme to divert funds from UWT that had been a significant factor<br />
in UWT’s demise. The court noted that if UWT had been as profitable as Howard represented it<br />
to be, it was reasonable to infer that plaintiffs would have received some return on their<br />
investments. Howard was not participating in the litigation in any meaningful way. The court<br />
held that, although it is ordinarily the plaintiff’s burden to isolate the effects of fraud from other<br />
effects that may have contributed to his loss, under these circumstances the burden shifted to<br />
Howard to show that other factors besides her fraud contributed to UWT’s demise. Because<br />
there was no such evidence in the record, the court concluded that Howard’s fraud was the sole<br />
cause of the loss. Accordingly, the appropriate measure of damages against Howard was the<br />
amount of plaintiffs’ investments in UWT less any distributions they may have received.<br />
Benincasa v. Lafayette Life Ins. Co., 2011 WL 5967300 (D. Minn. Nov. 29, 2011).<br />
Plaintiffs brought claims alleging (among other things) breach of fiduciary duty based on<br />
the unsuitability of an insurance investment. The court found that the appropriate measure of<br />
damages for breach of fiduciary duty based on an unsuitable investment is the difference<br />
between the value of the plaintiff’s current investment and the value of the plaintiff’s investment<br />
had it been suitably invested. Plaintiffs presented a damages calculation that related only to<br />
rescission damages and not to unsuitability damages. Because plaintiffs failed to present<br />
evidence as to a required element of a breach of fiduciary duty claim, the court granted<br />
defendants’ motion for summary judgment.<br />
Genesee County Employees’ Retirement System v. Thornburg Mortgage Securities Trust 2006-3,<br />
2011 WL 5840482 (D.N.M. Nov. 12, 2011).<br />
Plaintiffs brought a class action asserting federal and state securities claims relating to<br />
mortgage-backed securities. Defendants argued under Section 11 of the Securities Act of 1933<br />
(which requires plaintiffs to plead a decline in market value) that plaintiffs’ claims could not<br />
succeed because the offering documents for the securities warned that there may be no secondary<br />
market for the securities. The court disagreed, finding that Section 11 prescribes a particular<br />
measure of damages and that statements in a prospectus cannot limit the purchaser’s remedies<br />
under federal law.<br />
K.2<br />
K.2<br />
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K.2<br />
Emposimato v. CIFC Acquisition Corp., 932 N.Y.S.2d 33 (App. Div. 2011).<br />
CIFC sought damages based on alleged violations of a stock purchase agreement.<br />
Defendants sought summary judgment, arguing (among other things) that the fair market value<br />
of the stock to be sold was equal to the contract price for the stock at the time of the purported<br />
breach, and thus that there were no damages. The court of appeals held that the motion court<br />
properly denied summary judgment, because there was a difference of opinion regarding fair<br />
market value, even though the contract price constitutes evidence of fair market value that is<br />
entitled to significant weight. The court of appeals further held that the damages sought by CIFC<br />
were not consequential damages (which would have been precluded by the agreement). Rather,<br />
CIFC sought expectation damages, and expectation damages in the case of a breach of a contract<br />
to sell securities are calculated as the difference between the agreed price of the shares and the<br />
fair market value at the time of the breach. This formulation awards expectation damages to the<br />
extent of putting plaintiff in the same economic position he would have occupied had the<br />
breaching party performed the contract.<br />
Allen v. Devon Energy Holdings, L.L.C., 2011 WL 3208234 (Tex. App. Hous. (1st Dist.) July 28,<br />
2011).<br />
The trial court granted summary judgment in favor of defendants on securities fraud<br />
claims under the Texas Securities Act (TSA) and other state law. Defendants argued that<br />
summary judgment was proper because plaintiff had not suffered damages as a matter of law and<br />
because any damages would be speculative. The court of appeals noted that disgorgement of<br />
profits was an equitable remedy for fraud and violations of securities law, and should have been<br />
available as a remedy in this case. The court further found that “income” under the TSA could<br />
include capital appreciation. The court found that whether plaintiff’s damages were speculative<br />
was a factual question that should not have been resolved on summary judgment under the facts<br />
presented.<br />
K.2<br />
3. Punitive Damages<br />
K.3<br />
Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 458 B.R. 87 (Bankr. S.D.N.Y. 2011).<br />
A trustee appointed under the Securities Investor Protection Act to liquidate assets<br />
belonging to a business operated as a Ponzi scheme filed an adversary proceeding against four<br />
individuals who worked for the business. The trustee claimed that the four individuals breached<br />
their fiduciary duties when they did not discover and report the fact that the business was a Ponzi<br />
scheme and accepted millions of dollars from the business. The court found that the defendants<br />
were unjustly enriched. Under New York law, a defendant is liable for punitive damages if the<br />
defendant’s actions “constitute willful or wanton negligence or recklessness.” Furthermore, acts<br />
310
are wanton and reckless when done in a manner “showing heedlessness and an utter disregard for<br />
the rights and safety of others.” The court found that the trustee sufficiently alleged<br />
“heedlessness and utter disregard” because defendants ignored numerous red flags and<br />
irregularities in order to enrich themselves at the expense of customers.<br />
Hosier v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 146670 (D. Colo. Dec. 21, 2011).<br />
Petitioners filed a Statement of Claim with FINRA seeking to recover losses from<br />
investments they made with Citigroup. Petitioners requested $48.1 million in compensatory<br />
damages, along with punitive damages, attorneys’ fees and costs. The FINRA panel awarded<br />
compensatory damages in the amount of $33.9 million, punitive damages in the amount of $17<br />
million, and attorneys’ fees in the amount of $3 million. Petitioners asked the court to affirm the<br />
award, while Citigroup filed a motion to vacate the award. Although Citigroup argued that the<br />
panel provided no basis for the punitive damages award, the court found that the panel did not<br />
exceed its authority by awarding punitive damages because the Arbitrator’s Guide does not<br />
obligate arbitrators to include the basis for punitive damages in an award. Additionally, the court<br />
observed that the panel had no obligation to request that the parties brief the issue of punitive<br />
damages as the Arbitrator’s Guide recommends additional briefing only if the “panel needs<br />
additional information.”<br />
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 927 N.Y.S.2d 517 (N.Y. Sup. Ct. 2011).<br />
Insurer filed suit against financial services group and affiliated entities claiming that it<br />
had been fraudulently induced to enter financial guaranty insurance policy, guaranteeing<br />
payments on $900 million in securitized residential second mortgages held in trust that issued<br />
mortgage-backed securities. The insurer sought damages - including punitive damages -<br />
incurred from alleged breach of contractual representations and warranties, as well as other<br />
breaches of contract. The court held that the insurer’s claim for punitive damages due to the<br />
alleged fraudulent inducement was not actionable, where the insured’s alleged<br />
misrepresentations were either puffery, duplicative of breach of contract claims, or not<br />
sufficiently alleged.<br />
K.3<br />
K.3<br />
4. Attorneys’ Fees and Costs<br />
K.4<br />
Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).<br />
The Sixth Circuit held that the district court committed plain error by awarding costs and<br />
attorneys’ fees based on conduct not raised in one of the defendants’ motions for sanctions. The<br />
plaintiffs brought an action asserting security claims and other claims against the defendants<br />
relating to the alleged conversion of Indonesian mines. The Sixth Circuit found that the lower<br />
311
court’s crucial finding for purposes of its sanctions award was that plaintiffs failed to conduct a<br />
reasonable inquiry before filing suit. The Sixth Circuit determined that this finding went far<br />
beyond the basis for the defendant’s sanctions motion, which was that the plaintiffs’ proposed<br />
third amended complaint completely failed to address the fatal absence of personal jurisdiction.<br />
The Sixth Circuit also held that the district court did not ensure that the plaintiffs had sufficient<br />
notice of the basis for sanctions before making its sanctions finding.<br />
In re United Health Gr. Shareholder Derivative Litig., 631 F.3d 913 (8th Cir. 2011).<br />
The Eighth Circuit offered the district court’s award of online research costs. The district<br />
court approved the settlement of a derivative action involving the granting of backdated stock<br />
options and awarded $175,000 for online legal research costs. A shareholder appealed the<br />
award, arguing that counsel was not entitled to recover such costs.<br />
The Eighth Circuit affirmed the award, holding that online research costs may be<br />
recovered as part of litigation expenses in a settlement proceeding. The court distinguished prior<br />
cases that had denied recovery of such costs on the grounds that those cases involved fee shifting<br />
statutes, not settlement.<br />
Lynch v. Whitney, 419 F. App’x 826 (10th Cir. 2011).<br />
The Tenth Circuit affirmed the district court’s affirmation of a FINRA arbitration panel’s<br />
award of attorneys’ fees. The court noted that the defendant’s submission of an affidavit that<br />
listed its attorneys’ fees, though not preferable to submitting detailed fee records, did not provide<br />
a basis for reversal. The court further concluded that the appellants’ challenge to attorneys’ fees<br />
was meritless and warranted sanctions.<br />
Suess v. FDIC, 770 F. Supp. 2d 32 (D.D.C. 2011).<br />
The court granted the FDIC’s summary judgment motion, finding that the plaintiff, a<br />
shareholder of an insolvent thrift, was not entitled to recover the attorneys’ fees and costs that he<br />
incurred unsuccessfully defending an appeal. The court held that absent an express agreement,<br />
the fact that the FDIC reimbursed the plaintiff’s attorneys’ fees and costs for his efforts in the<br />
trial court as a part of a settlement agreement did not mean that he had an automatic right to<br />
claim fees and costs for the appeal. The court further found that the FDIC did not breach its<br />
statutory responsibility to the shareholders of the thrift, including the plaintiff, as it did in fact<br />
represent their interests on appeal.<br />
The court held that none of the exceptions to the American Rule was applicable The court<br />
also rejected the plaintiff’s argument that the FDIC’s payment of fees and costs pursuant to the<br />
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K.4<br />
K.4<br />
312
settlement agreement constituted an implied in fact contract to reimburse him for his efforts on<br />
appeal. Finally, the court determined that the plaintiff was not entitled to fees based on unjust<br />
enrichment because his efforts did not confer a benefit on the FDIC and because he had as much,<br />
if not more, to gain from defending the appeal than the FDIC.<br />
In re Access Cardiosystems, Inc., 460 B.R. 67 (Bankr. D. Mass. 2011).<br />
The court denied plaintiffs’ request for attorneys’ fees. The plaintiff corporation and the<br />
plaintiff shareholders moved for summary judgment on damages and attorneys’ fees after<br />
prevailing on their breach of fiduciary duty and Massachusetts securities law claims. The court<br />
determined that plaintiffs had waived their request for attorneys’ fees because no evidence<br />
relative to attorneys’ fees was presented during the proceedings.<br />
SEC v. Smith, 798 F. Supp. 2d 412 (N.D.N.Y. 2011).<br />
The court permitted the SEC to recover reasonable attorneys’ fees against a responsible<br />
party in connection with a motion for reconsideration of a preliminary injunction. The SEC<br />
brought an action against various individuals and a company, alleging that they had defrauded<br />
investors and committed various securities violations. It sought a preliminary injunction to<br />
freeze a trust account held by one of the defendants and his wife; the trust sought to lift the TRO<br />
that had been imposed. Because the court found that the defendant and his wife no longer held<br />
any interest in the trust, it dissolved the TRO and denied the SEC’s request for a preliminary<br />
injunction.<br />
The SEC later discovered evidence that the defendant and his wife had retained interests<br />
in the trust and that this information had been withheld during the preliminary injunction<br />
proceeding. The SEC therefore moved for reconsideration of its motion. It also sought sanctions<br />
against various parties under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the<br />
court’s inherent power for the costs incurred in bringing the motion for reconsideration. While<br />
the court awarded the SEC fees, it reduced the SEC’s lodestar calculation based on what a<br />
reasonable client would pay for the services at issue in the relevant geographical area. The court<br />
also reduced the number of hours for which the SEC could be reimbursed. The court permitted<br />
reimbursement of the costs the SEC incurred engaging a tax law expert. It did not, however,<br />
award attorneys’ fees and costs against those parties for whom there was no demonstrated<br />
connection between their misconduct and harm to the SEC.<br />
In re Sadia S.A. Secs. Litig., 2011 WL 6825235 (S.D.N.Y. Dec. 28, 2011).<br />
As part of its approval of the settlement of a class action, the court awarded plaintiffs’<br />
counsel attorneys’ fees of $8.1 million representing 30% of the settlement amount. Plaintiffs’<br />
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counsel had requested an award of $9 million representing 33 1/3% of the settlement amount.<br />
The court lowered the rates for support staff and eliminated the fees for investigatory work<br />
performed by non-lawyers. Using the lodestar method as a “cross-check”, the court determined<br />
that $7,797,961.50 was a reasonable lodestar. After assessing the factors set forth in Goldberger<br />
v. Integrated Res., Inc., 209 F.3d 43 (2d Cir. 2000) and found that they required only a minimal<br />
multiplier of the lodestar.<br />
Kingsley Capital Mgmt., LLC v. Sly, 2011 WL 5008520 (D. Ariz. Sept. 30, 2011).<br />
In response to the plaintiffs’ securities fraud and other fraud claims, the defendants<br />
moved to compel arbitration pursuant to an LLC operating agreement. With one exception, the<br />
court held that the defendants were not subject to the arbitration clause and refused to stay the<br />
instant litigation as to them. One defendant, however, was an agent of the LLC and the claims<br />
against him were therefore subject to arbitration. That defendant requested attorneys’ fees as a<br />
prevailing party since he had successfully enforced the arbitration clause.<br />
The court declined to award fees because the LLC agreement was governed by Kentucky<br />
law, not Arizona law, such that Arizona’s attorneys’ fees statute might not apply. Further, the<br />
Arizona fee statute gave the court discretion to determine the appropriate circumstances for<br />
awarding fees. The court exercised its discretion and determined that an award of fees was not<br />
appropriate.<br />
Pub. Emps.’ Ret. Ass’n of N.M. v. Clearlend Secs., 798 F. Supp. 2d 1265 (D.N.M. 2011).<br />
The court denied the plaintiff’s request for attorneys’ fees and costs incurred in<br />
connection with its motion to remand its action against the defendant investment firm. The<br />
plaintiff asserted that removal was improper on its face because, as a state pension program, the<br />
plaintiff was not a citizen of any state for purposes of diversity jurisdiction. Although the court<br />
determined that the case should be remanded, it was not willing to conclude that the defendants<br />
had no objectively reasonable basis for concluding that removal was proper under the<br />
circumstances. The plaintiff did not state in the complaint that it was an arm of the state (and<br />
therefore not a citizen). The court therefore refused to shift fees under 28 U.S.C. § 1447(c).<br />
Durden v. Citicorp Trust Bank, FSB, 763 F. Supp. 2d 1299 (M.D. Fla. 2011).<br />
The court granted in part a trustee’s motion for attorneys’ fees. A beneficiary sued the<br />
trustee for fraud and mismanagement and asserted claims under the Florida Securities and<br />
Investor Protection Act (FSIPA) and common law. The trustee moved for attorneys’ fees<br />
following his successful defense of the lawsuit.<br />
K.4<br />
K.4<br />
K.4<br />
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The court held that the trustee was entitled to an award of fees under the FSIPA which<br />
specifically provides for an award of attorneys’ fees to the prevailing party. The court<br />
determined that the award should include the fees the trustee incurred defending against the<br />
FSIPA claim and also the fees he incurred defending against the beneficiary’s other fraud claims<br />
to the extent the claims were interrelated. Utilizing the lodestar method, the court held that the<br />
hourly rates sought were reasonable for the area. The court also determined that some of defense<br />
counsel’s bills were excessive. To account for this, the court reduced the base number and hours<br />
of the request by 20%. The court then discounted the base figure by 50%, since the billing<br />
records did not permit an easy division between compensable and non-compensable hours.<br />
U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011).<br />
The minority shareholders in a corporation sued when a reverse stock split forced them to<br />
take cash in exchange for their shares. The Minnesota Supreme Court upheld the lower courts’<br />
holding dismissing all of the plaintiffs’ claims. The court held that because the plaintiffs were<br />
not entitled to dissenter’s rights, they were not entitled to interest, costs, or fees under Minnesota<br />
Statute 302A.473. Additionally, they were not entitled to attorneys’ fees or expenses under<br />
Minnesota Statute 302A.467 since they were not prevailing parties.<br />
Taylor v. AIA Servs. Corp., 261 P.3d 829 (Idaho 2011).<br />
The court held that recovery of attorneys’ fees is not appropriate where the commercial<br />
transaction at issue is illegal. The defendant corporation entered into a stock redemption<br />
agreement with the plaintiff – the corporation’s majority shareholder – to purchase all of his<br />
shares. When the corporation ultimately defaulted on payments under the agreement, the<br />
plaintiff sued. The lower court found the redemption agreement illegal and unenforceable<br />
because of Idaho statutory provisions that restrict the funds a corporation can use to redeem its<br />
shares.<br />
On appeal, the Idaho Supreme Court declined to consider whether the lower court erred<br />
in refusing to consider the corporation’s promises to release the plaintiff and indemnify him.<br />
The court noted that the illegality of the redemption agreement was a defense to this argument.<br />
Because the redemption agreement was illegal, the defendants were not entitled to attorneys’ fees<br />
under Idaho Code § 12-120(3), which permits a prevailing party in a civil action on any<br />
commercial transaction to recover reasonable attorneys’ fees. The plaintiff was not entitled to<br />
fees because he was not a prevailing party.<br />
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Doucet v. First Fed. Guar., 72 So.3d 478 (La. Ct. App.), cert. denied, 76 So.3d 1207 (La. 2011).<br />
On appeal in a suit for breach of fiduciary duty under Louisiana securities law, the court<br />
reduced the plaintiff’s damages award, which had been improperly calculated by the trial court,<br />
but held that the award of attorneys’ fees of 33.33% of the total amount of damages was not<br />
excessive. The court noted that the trial court has discretion in awarding attorneys’ fees and the<br />
amount would not be modified on appeal absent an abuse of discretion.<br />
K.4<br />
Bachman v. A.G. Edwards, Inc., 344 S.W.3d 260 (Mo. Ct. App. 2011).<br />
The Missouri Court of Appeals affirmed the lower court’s award of attorneys’ fees,<br />
finding that the award was neither unreasonable nor an abuse of discretion. In the settlement of a<br />
class action involving the defendants’ receipt of payments from affiliates of mutual fund<br />
companies, the class received $26 million in cash and $34 million in vouchers. Class counsel<br />
was awarded $21.6 million in attorneys’ fees and expenses.<br />
Certain class members argued that the fee award was excessive in light of the amount<br />
recovered and that vouchers should not be valued at face value for purposes of calculating<br />
attorneys’ fees. In affirming the fee award, the court noted that fee awards are reviewed under<br />
an abuse of discretion standard, and the party challenging the award must show that the “trial<br />
court’s decision was against the logic of the circumstances and so arbitrary and unreasonable as<br />
to shock one’s sense of justice.” The court found no abuse of discretion, noting that: (1) there<br />
was no evidence (or allegation) of fraud or collusion behind the settlement, (2) the litigation<br />
lasted five years and was substantively and procedurally complex; (3) the settlement was reached<br />
weeks before trial after extensive discovery; and (4) given the weakness in plaintiffs’ claims, no<br />
recovery was a possibility. The court further noted that in complex litigation and class actions, a<br />
one-third contingent fee award was not unreasonable.<br />
Bear Stearns & Co., Inc. v. Int’l Capital & Mgmt. Co., LLC, 926 N.Y.S.2d 826 (N.Y. Sup. Ct.<br />
2011).<br />
The court affirmed a FINRA arbitration panel’s award of attorneys’ fees to the claimant,<br />
finding that the panel did not exceed its authority in making the award. The respondent argued<br />
that the panel exceeded its authority as neither the parties’ contract nor FINRA rules provided for<br />
such an award. The court rejected this argument and held that the parties, including the<br />
respondent, acquiesced to the arbitration panel determining the issue of fees by making<br />
reciprocal fee demands in their submissions. The court noted that the arbitration panel might<br />
have also found that the parties’ agreement to arbitrate “controversies arising under or relating to<br />
this agreement” was broad enough to encompass an agreement to arbitrate the issue of attorneys’<br />
fees.<br />
K.4<br />
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L. Contribution, Indemnification<br />
L.<br />
Loumiet v. Office of Comptroller of Currency, 650 F.3d 796 (D.C. Cir. 2011).<br />
The D.C. Circuit held that outside counsel that was retained by a bank’s audit committee<br />
to investigate alleged fraud was entitled to attorneys’ fees under the Equal Access to Justice Act,<br />
5 U.S.C. § 504. Outside counsel prevailed in an administrative proceeding the Office of<br />
Comptroller brought against him under to the Financial Institutions Reform, Recovery, and<br />
Enforcement Act. The D.C. Circuit concluded that the government was not substantially<br />
justified in bringing the administrative proceedings and awarded attorneys’ fees to outside<br />
counsel.<br />
MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152 (2d Cir. 2011).<br />
The Second Circuit held that, under Connecticut law, costs incurred by a special litigation<br />
committee were covered as “defense costs” or expenses incurred in defending or investigating<br />
claims. The court concluded that a New York Attorney General’s subpoena regarding the<br />
insured’s purchase of reinsurance for its guarantee of bonds transaction and an SEC oral request<br />
for documents constituted “Securities Claims” and were covered under the policies at issue.<br />
IAC/InterActiveCorp v. O’Brien, 26 A.3d 174 (Del. 2011).<br />
The Delaware Supreme Court affirmed the trial court’s holding that, given the unusual<br />
circumstances of the case, an indemnification claim was not controlled by the statute of<br />
limitations. The appellee brought an indemnification claim against his former employer for fees<br />
incurred in a shareholder-initiated arbitration. The former employer went bankrupt before the<br />
litigation concluded. The appellee then sued the former employer’s parent company, seeking the<br />
same indemnification.<br />
While acknowledging that the claim would likely be time barred by the applicable<br />
limitations period, the lower court held that due to the exceptional circumstances of the case, the<br />
statute of limitations did not apply to the claim. The lower court held that the claim was timely<br />
under the doctrine of laches. The Delaware Supreme Court affirmed, noting that: (1) appellant<br />
timely pursued his claim against both the former employer and its parent; (2) according to the<br />
parent, it controlled the former employer’s defense in the indemnification action; (3) the<br />
bankruptcy was unexpected; and (4) appellant’s indemnification claim was meritorious. The<br />
Delaware Supreme Court also rejected the appellant’s challenge to the amount of fees awarded.<br />
The court reviewed the trial court’s award for abuse of discretion and found none, noting that the<br />
trial court carefully analyzed the amounts charged and the work performed.<br />
L.<br />
L.<br />
317
L.<br />
Banco Indus. De Venezuela C.A., Miami Agency v. De Saad, 68 So.3d 895 (Fla. 2011).<br />
The Supreme Court of Florida held that the respondent, the director of a Venezuelan bank<br />
doing business in Florida, was not entitled to statutory indemnification pursuant to Fla. Stat. §<br />
607.0850 because Florida’s indemnification statute does not apply to foreign corporations. The<br />
respondent sued her former employer, seeking indemnification pursuant to Fla. Stat. § 607.0850<br />
to recover attorneys’ fees and costs incurred in defending herself against criminal charges. The<br />
court held that while the choice-of-law clause in the respondent’s employment contract subjected<br />
her employer to Florida law, it did not change the fact that a foreign corporation is not subject to<br />
the indemnification statute.<br />
The court noted that even if the statute applied to foreign banks, the respondent would not<br />
be entitled to statutory indemnification because she did not satisfy the statutory requirements.<br />
She was prosecuted for her conduct, not on account of her corporate position. The court<br />
determined that even assuming the respondent was prosecuted “by reason of the fact” of being a<br />
corporate officer, she did not “act in good faith” in a manner she reasonably believed to be in the<br />
best interest of the corporation.<br />
Ridley v. Sullivan, 2011 WL 1900156 (Ky. Ct. App. May 20, 2011).<br />
The court held that the appellant had waived his claim for indemnification by his former<br />
employer of damages imposed against him as part of an arbitration proceeding because the issue<br />
was not raised during the arbitration. The appellant had entered into a separation agreement with<br />
the employer (an NASD member). The agreement contained an indemnification provision that<br />
the employer would indemnify against any claim made for conduct in the course of the<br />
appellant’s employment. The appellant’s ex-wife later brought an arbitration claim against him<br />
and the employer, alleging the appellant mismanaged her brokerage accounts among other<br />
things. During the arbitration, the employer asserted that the appellant’s conduct had not been<br />
within the scope of his employment. The arbitration panel awarded judgment in favor of the exwife,<br />
against both the appellant and the employer separately.<br />
The appellant then brought suit to enforce the indemnification provision against the<br />
employer. The trial court denied his motion to compel indemnification. On appeal, he asserted<br />
that his indemnification claim had not yet accrued at the time of the arbitration and that the<br />
agreement was not subject to any arbitration clause. The Court of Appeals rejected these<br />
arguments, finding that the appellant was not permitted to re-litigate the same facts that had been<br />
presented to the arbitration panel.<br />
L.<br />
318
L.<br />
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 927 N.Y.S.2d 517 (N.Y. Sup. 2011).<br />
The court denied the defendants’ motion to dismiss the plaintiff’s indemnification and<br />
reimbursement claims in a case involving issues with mortgage-backed securities. The<br />
defendants’ sole argument for dismissal was that the claims were dependent on two breach of<br />
contract claims, both of which defendants argued should also be dismissed. As the court did not<br />
dismiss the breach of contract claims, the court also declined to dismiss the indemnification and<br />
reimbursement claims. The court further noted that the plaintiff had a contractual right to<br />
indemnification and reimbursement for some of the alleged conduct. On reconsideration, 2011<br />
WL 4865133 (N.Y. Sup. Oct. 7, 2011), the court reinstated plaintiff’s fraudulent inducement<br />
claims and demands for punitive and consequential damages without revisiting the<br />
indemnification and reimbursement claims.<br />
M. Statute of Limitations<br />
1. Federal Securities Claims<br />
M.1<br />
First Bank P.R., Inc. v. La Vida Merger Sub, Inc., 638 F.3d 37 (1st Cir. 2011).<br />
The First Circuit affirmed the dismissal of a securities fraud action. The district court<br />
held that plaintiff’s claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule<br />
10b–5 were time barred under the two-year statute of limitations in 28 U.S.C. § 1658(b)(1). The<br />
First Circuit held that the Supreme Court’s recent decision in Merck & Co. v. Reynolds, 130 S.<br />
Ct. 1784 (2010), did not require reversal because the plaintiff had actual notice of the allegedly<br />
fraudulent merger at issue more than two years prior to filing suit.<br />
City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011).<br />
M.1<br />
The Second Circuit reversed the dismissal of a proposed securities fraud class action<br />
arising out of the defendant corporation’s accounting for a transaction as income rather than a<br />
loan. The district court had concluded that the plaintiffs’ claims under the Securities Exchange<br />
Act of 1934 were barred by the applicable two-year statute of limitations because the proposed<br />
class was on inquiry notice of the alleged fraud more than two years before the suit was filed.<br />
Applying the Supreme Court’s decision in Merck & Co. v. Reynolds, 130 S. Ct. 1784<br />
(2010), the Second Circuit held that a plaintiff is deemed to have discovered one of the facts<br />
constituting a securities fraud violation, thereby triggering the statute of limitations, when the<br />
plaintiff can plead that fact with sufficient detail to withstand a motion to dismiss. The court also<br />
held that even though it had previously affirmed the district court’s ruling regarding inquiry<br />
notice, the law of the case doctrine did not preclude re-litigation of this issue because Merck<br />
changed the law. The court further held that since a securities fraud claim cannot accrue until the<br />
plaintiff purchases or sells the relevant security, the two-year limitations period did not begin to<br />
319
un prior to the beginning of the class period. The court remanded with instructions that the<br />
district court assess the timeliness of plaintiffs’ claims under the Merck standard and that it also<br />
consider whether the statute of repose barred the claims.<br />
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).<br />
The Second Circuit held that the SEC’s claim for civil penalties under the anti-fraud<br />
provisions of the Investment Advisors Act, 15 U.S.C. § 80b.6(1) and (2) was not time barred<br />
under the applicable five-year limitations period of 28 U.S.C. § 2462. The court noted that since<br />
the SEC’s claims sounded in fraud, a discovery rule was read into the statute of limitations. The<br />
court concluded that the claim was not time barred because it first accrued when the SEC<br />
discovered the alleged fraud.<br />
McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011).<br />
The Seventh Circuit affirmed the dismissal of plaintiff’s claims under Section 10(b) of<br />
the Securities Exchange Act of 1934 and the Rule 10b–5. The court held that the five-year<br />
period set forth in 28 U.S.C. § 1658(b) was a statute of repose rather than a statute of limitation.<br />
Because the alleged misrepresentation occurred more than five years before plaintiff filed suit,<br />
the suit was untimely.<br />
Goldenson v. Steffens, 802 F. Supp. 2d 240 (D. Me. 2011).<br />
The court denied the defendants’ motion to dismiss plaintiffs’ claims under the Securities<br />
Exchange Act of 1934 and Rule 10-b5. The court held that because the alleged<br />
misrepresentations in this case came from a common group of defendants in pursuit of a<br />
common scheme, none of the misrepresentations were time barred if any of them occurred within<br />
the five-year period of repose.<br />
SEC v. Tambone, 802 F. Supp. 2d. 299 (D. Mass. 2011).<br />
The court held in this civil enforcement action that the five-year statute of limitations for<br />
SEC civil enforcement actions under 28 U.S.C. § 2462 was tolled until September 2003 because<br />
defendants’ alleged securities fraud remained concealed until then. The court determined that<br />
although the SEC may have had a “general awareness” that investors engaged in market timing<br />
activities with impunity and that some companies were adopting prospectus language restricting<br />
the practice, there was no evidence that the SEC had information before September 2003 that<br />
would have alerted it to the defendants’ alleged fraud. The court held that equitable tolling was<br />
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M.1<br />
M.1<br />
M.1<br />
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warranted under these circumstances because of the self-concealing nature of the defendants’<br />
conduct.<br />
Special Situations Fund III, L.P. v. Am. Dental Partners, Inc., 775 F. Supp. 2d 227 (D. Mass.<br />
2011).<br />
The court granted defendants’ motion to dismiss in part, holding that the plaintiffs’<br />
claims under Section 18(a) of the Securities Exchange Act of 1934 were barred by the one-year<br />
statute of limitations. The court rejected plaintiffs’ argument that their claims were tolled under<br />
American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held<br />
that the filing of a class-action lawsuit tolls the statute of limitations for putative class members.<br />
The court determined that because the class action on which the plaintiffs relied for tolling<br />
involved a claim under Section 10(b) of the Exchange Act and not a claim under Section 18(a),<br />
American Pipe tolling did not apply. The court held that the legal standards for proving Section<br />
18 and Section 10(b) claims are “sufficiently distinct” that filing a class action alleging a<br />
violation of Section 10(b) did not toll the statute of limitations for plaintiffs’ Section 18 claim.<br />
Mass. Bricklayers & Mason Funds v. Deutsche Alt-A Secs., 273 F.R.D. 363 (E.D.N.Y. 2011).<br />
The court denied a bank’s motion to intervene as a plaintiff in a class action because its<br />
claim was time barred. The bank purchased securities, which were offered in 2006, in December<br />
2007. It sought to intervene in the class action on January 11, 2011, more than three years after<br />
the offering. The applicable three-year statute of repose for claims under the Securities Act of<br />
1933 barred the claim, unless tolling applied.<br />
The court held that the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S.<br />
538 (1974) (where under certain circumstances, the commencement of a class action tolls the<br />
running of the applicable statute of limitations for all class members, even where class status is<br />
later denied) did not apply because the bank was not a member of the originally named class,<br />
which included only those who purchased securities between May 2006 and May 2007. The<br />
bank did not purchase its securities until December 2007, therefore the tolling rule was<br />
inapplicable.<br />
Plumbers’ & Pipefitters’ Local No. 562 Supplemental Plan v. J.P. Morgan Acceptance Corp. I,<br />
2011 WL 6182121 (E.D.N.Y. Dec. 13, 2011).<br />
The court denied, in part, the defendants’ motion to dismiss because plaintiffs’ claims<br />
under Sections 11 and 12(a)(2) of the Securities Act of 1933 were timely filed and because<br />
additional claims under Section 12(a)(2) of the Securities Act that were added later related back<br />
to the filing of the original complaint. Defendants argued that plaintiffs had constructive notice,<br />
M.1<br />
M.1<br />
M.1<br />
321
ased on a number of public documents, more than one year before filing their claim and that<br />
their claims were therefore time barred under 15 U.S.C. § 77m. The court found that the news<br />
stories on which defendants relied would not give a reasonable plaintiff notice that the offering<br />
documents at issue contained material misstatements and omissions. Because the evidence did<br />
not establish that plaintiffs should have discovered the violation more than a year before filing<br />
the complaint, the action was timely.<br />
The court also rejected the defendants’ argument that the additional Section 12(a)(2)<br />
claims asserted by plaintiffs after the filing of the complaint did not relate back to the original<br />
complaint. The court held that the claims related back to the original filing for statute of<br />
limitations purposes because the claims relied on the same core factual allegations contained in<br />
the initial complaint.<br />
In re IndyMac Mortg.-Backed Secs. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011).<br />
In this putative class action, the court held that although tolling may be invoked to avoid<br />
the one-year statute of limitations applicable to certain claims under the Securities Act of 1933,<br />
the three-year statute of repose could not be tolled. After consolidating two cases brought by the<br />
state and municipal retirement systems against the defendant, the court appointed a lead plaintiff<br />
who, without objection, filed a consolidated complaint that named itself as the only plaintiff.<br />
The court later held that this plaintiff lacked standing to sue with respect to certain mortgage<br />
pass-through certificates, and the other retirement systems moved to intervene in order to cure<br />
the standing deficiency.<br />
The court determined that the statute of repose had expired on most of the claims that the<br />
proposed intervenors sought to assert. All the claims were timely when the initial suits were<br />
filed, but the proposed intervenors abandoned their own claims by allowing the lead plaintiff to<br />
proceed as the only plaintiff. Since the statute of repose by its terms allows no exceptions, the<br />
court denied leave to intervene to assert claims based on offerings that took place more than<br />
three years before the relevant motion to intervene.<br />
For claims not barred by the statute of repose, the court determined that the applicable<br />
statute of limitations should be tolled. The court held that the tolling doctrine of American Pipe<br />
& Constr. Co. v. Utah, 414 U.S. 538 (1974) (where under certain circumstances, the<br />
commencement of a class action tolls the running of the applicable statute of limitations for all<br />
class members) applied even where the putative class plaintiff had no standing to assert the<br />
claims at issue.<br />
In re Lehman Bros. Secs. & ERISA Litig., 800 F. Supp. 2d 477 (S.D.N.Y. 2011).<br />
The court denied in part motions by two putative intervenors who sought to intervene as<br />
plaintiffs in a class action to assert claims under Sections 11 and 15 of the Securities Act of<br />
M.1<br />
M.1<br />
322
1933. In opposition to the motions, the defendants argued that the putative intervenors’ claims<br />
fell outside the applicable three-year statute of repose. The putative intervenors responded by<br />
relying on American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme<br />
Court held that the filing of a class-action lawsuit tolls the statute of limitations for putative class<br />
members. The court denied the putative intervenors’ motions, holding that American Pipe<br />
tolling does not apply to statutes of repose.<br />
In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 2011 WL 4089580 (S.D.N.Y.<br />
Sept. 15, 2011).<br />
The court dismissed, without prejudice, plaintiffs’ claims under the Securities Act of<br />
1933 due to the plaintiffs’ failure to specify how and when they discovered the alleged<br />
misconduct giving rise to the claims. The court concluded that plaintiffs’ allegation regarding<br />
discovery in “late 2008” was vague and inconsistent with positions they took in other<br />
proceedings. The court rejected the defendants’ argument that the Securities Act claims of one<br />
plaintiff pension fund were barred by the one-year statute of limitations under 15 U.S.C. § 77m,<br />
concluding that downgrades of security certificates and public news articles and reports were<br />
insufficient to put the pension fund on inquiry notice of the claims.<br />
The court also held that the Securities Act claims asserted by newly-added plaintiffs were<br />
timely under the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974)<br />
(where under certain circumstances, the commencement of a class action tolls the running of the<br />
applicable statute of limitations for all class members, even where class status is later denied)<br />
and were not barred by 15 U.S.C. § 77m’s three-year statute of repose. The court followed the<br />
majority rule and concluded that the tolling principal articulated in American Pipe is legal in<br />
nature, as it is derived from Federal Rule of Civil Procedure 23, and thus applies to statutes of<br />
repose. In addition, the court held that American Pipe tolling was applicable even where the<br />
original plaintiff who brought the class action lacked standing, reasoning that such a rule furthers<br />
the policies of economy and efficiency that underpin the American Pipe doctrine and is<br />
consistent with the purposes of the statute of repose.<br />
Int’l Fund Mgmt. S.A. v. Citigroup, Inc., 2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30,<br />
2011).<br />
The court denied the defendant’s motion to dismiss plaintiffs’ claims as time-barred<br />
under the Securities Act of 1933. Prior to bringing their individual actions, plaintiffs were<br />
members of the putative classes in two pending class actions alleging the same claims. The<br />
defendants moved to dismiss, arguing that plaintiffs’ claims were barred by the one-year statute<br />
of limitations and three-year statute of repose. The court denied the motion, holding that, under<br />
American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), the statutes of limitations and repose<br />
applicable to plaintiffs’ claims were both tolled during the pendency of the class actions and<br />
thus, plaintiffs’ claims were timely.<br />
M.1<br />
M.1<br />
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M.1<br />
In re Smith Barney Transfer Agent Litig., 765 F. Supp. 2d 391 (S.D.N.Y. 2011).<br />
The district court granted in part and denied in part the defendants’ motion to dismiss<br />
plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934. The defendants<br />
asserted that a reasonably diligent plaintiff would have discovered the alleged scheme related to<br />
charging excessive fees for transfer agent services more than two years before the complaint was<br />
filed because it was reported in news articles and disclosed in public filings. The court, however,<br />
found that a reasonably diligent investor would not necessarily have discovered facts showing<br />
that the defendants acted intentionally or with reckless disregard. The plaintiffs’ claims were<br />
therefore not time barred.<br />
In re Wachovia Equity Sec. Litig., 753 F. Supp.2d 326 (S.D.N.Y. 2011).<br />
The court denied the defendants’ motion to dismiss plaintiffs claims under Sections 11<br />
and 12(a)(2) of the Securities Act of 1933. The court held that the tolling doctrine of American<br />
Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held that the<br />
filing of a class-action lawsuit tolls the statute of limitations for putative class members, applied<br />
even when the class-action complaint on which the tolling is based had been dismissed because<br />
the putative class representatives lacked standing. The court held that the failure to apply<br />
American Pipe tolling to this case would undermine the policies of efficiency and economy of<br />
litigation that underlie Federal Rule of Civil Procedure 23.<br />
Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F. Supp. 2d 618 (S.D.N.Y. 2011).<br />
The court granted defendants’ motion for summary judgment on the basis that plaintiffs’<br />
claims were barred by the statute of repose. Plaintiffs originally filed a class action in California<br />
state court in 2007 and filed this federal action on January 15, 2010, alleging violations of<br />
Sections 11 and 12(a)(2) of the Securities Act of 1933 for registration statements filed and<br />
securities purchased in 2006. Because plaintiffs’ claim was filed more than three years after<br />
defendants filed the registration statements and plaintiffs purchased the securities, the claims<br />
were barred by Section 13 of the Securities Act’s three-year statute of repose. The court also<br />
held that the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974),<br />
under which commencement of a class action suspends the applicable statute of limitations as to<br />
all asserted members of the class who would have been parties had the suit been allowed to<br />
continue, did not apply to Section 13’s statute of repose.<br />
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M.1<br />
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M.1<br />
SEC v. Wyly, 788 F. Supp. 2d 92 (S.D.N.Y. 2011).<br />
The court denied the defendants’ motion to dismiss, holding that the SEC’s claims were<br />
not time barred. The SEC sued the defendants under Section 21A of the Securities Exchange<br />
Act of 1934. The defendants argued that the SEC’s claims were time barred because the fiveyear<br />
limitations period for claims under Section 21A is a statute of repose, not a statute of<br />
limitations. The court rejected this argument, holding that it was a statute of limitations because<br />
it “is clearly a limitation on one of several ‘remedies’ the SEC may seek for insider trading,” not<br />
a limitation on the SEC’s right to sue.<br />
In re Franklin Bank Corp. Secs. Litig., 782 F. Supp. 2d 364 (S.D. Tex. 2011).<br />
The court denied, in part, a defendant’s motion to dismiss plaintiffs’ claims under the<br />
Securities Act of 1933 on statute of limitations grounds. The plaintiffs alleged that the defendant<br />
made untrue statement or material omissions in a May 2006 registration statement for the<br />
offering of bank stock. The defendant argued that plaintiffs had constructive notice of the claims<br />
more than a year before filing the action.<br />
The court found that plaintiffs did not have constructive notice of the claim until August<br />
2008, when the bank whose stock was at issue in the dispute first reported the need to file<br />
restatements covering the 2006 time period. Because plaintiffs brought their claim within one<br />
year of this notice, the action was timely.<br />
La. Mun. Police Emps.’ Ret. Sys. v. KPMG <strong>LLP</strong>, 2011 WL 4629299 (N.D. Ohio Sept. 30, 2011).<br />
The court held that the two-year limitations period under 28 U.S.C. § 1658 (b)(1) did not<br />
bar the plaintiff’s claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934<br />
and Rule 10b–5. Applying Merck & Co. v. Reynolds, __ US __, 130 S. Ct. 1784 (2010), the<br />
court held that neither the filing of a prior lawsuit nor the public record triggered the statute of<br />
limitations because they did not reveal “facts constituting the violation” (in this case, facts<br />
indicating scienter) under Merck. The court also held, however, that any allegations that a<br />
defendant participated in the alleged fraud that preceded June 30, 2005 (five years prior to the<br />
filing of the complaint) were barred by the five-year statute of repose under 28 U.S.C. § 1658<br />
(b)(2).<br />
Antelis v. Freeman, 799 F. Supp. 2d 854 (N.D. Ill. 2011).<br />
The court denied the defendant’s motion to dismiss the plaintiff’s claim on statute of<br />
limitation grounds. The plaintiff alleged that his former business partner violated the Securities<br />
M.1<br />
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Exchange Act of 1934 and Rule 10-b5. The defendant argued that the Exchange Act and 10b-5<br />
claim was barred by the two-year period contained in 28 U.S.C. § 1658(b)(1) because plaintiff<br />
should have discovered the facts constituting the violation at the time the allegedly fraudulent<br />
loan was made. The court noted that under Merck & Co. v. Reynolds, __ U.S. __, 130 S. Ct.<br />
1784 (2010), the statutory period did not begin until a reasonable investor would have actually<br />
uncovered the facts constituting the fraud. Applying Merck, the court held that plaintiff’s claim<br />
was not time-barred because nothing in the complaint indicated that the plaintiff should have<br />
suspected fraud more than two years before the date of the lawsuit or that he would have had<br />
access to the relevant information if he had tried to seek it out.<br />
Stone v. Chicago Inv. Grp., LLC, 2011 WL 6841817 (N.D. Ill. Dec. 29, 2011).<br />
The court held that the plaintiffs’ Rule 10b-5 claim was timely. Applying the standard<br />
set forth in Merck & Co. v. Reynolds, __ U.S. __, 130 S. Ct. 1784 (2010), the court held that<br />
there was nothing in the facts, as pleaded, to show that plaintiffs should have discovered the<br />
alleged fraud more than two years prior to the date of filing suit.<br />
Yary v. Voigt, 2011 WL 6781003 (D. Minn. Dec. 27, 2011).<br />
The court dismissed in part as untimely the plaintiffs’ claims under section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b–5. The court noted that the statute of repose<br />
under 28 U.S.C. § 1658(b)(2) sets forth an unqualified bar on actions commenced more than five<br />
years past the alleged violation. The court held that to the extent plaintiffs’ claims were based on<br />
alleged misrepresentations or omissions made in connection with the purchase of securities<br />
outside the five-year period, the claims were untimely.<br />
Stiching Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125 (C.D. Cal. 2011).<br />
The court dismissed as time-barred a pension fund’s claims for violations of the<br />
Securities Act of 1933 and the Securities Exchange Act of 1934 arising out of the fund’s<br />
purchase of residential mortgage backed securities. The court held that plaintiff’s Securities Act<br />
claims were barred by the three-year statute of repose under 15 U.S.C. § 77m, but granted leave<br />
to amend to allege facts showing that the claims were based on purchases that were the subject of<br />
pending putative class action and therefore subject to tolling under American Pipe & Constr. Co.<br />
v. Utah, 414 U.S. 538 (1974).<br />
The court further held that the plaintiff’s Exchange Act claims, which had been alleged<br />
for the first time in an amended complaint, did not relate back to the original complaint because<br />
the plaintiff had waived this argument and because the original complaint did not put defendants<br />
on notice of an impending fraud claim. The court dismissed plaintiff’s Exchange Act claims that<br />
were based on certificates purchased five years prior to the filing of the first amended complaint<br />
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as barred by the statute of repose under 28 U.S.C. § 1685(b)(2). The court dismissed the<br />
remaining Exchange Act claims under 28 U.S.C. § 1685(b)’s two-year statute of limitations,<br />
finding that numerous lawsuits and public press reports should have put the plaintiff on notice of<br />
the alleged omissions and misrepresentations.<br />
Anschutz Corp. v. Merrill Lynch & Co., 785 F. Supp. 2d 799 (N.D. Cal. 2011).<br />
The court denied the defendant’s motion to dismiss as time barred the plaintiff’s marketmanipulation<br />
claims under the Securities Exchange Act of 1934. The defendant argued that<br />
when the SEC issued a cease-and-desist order in 2006, it put the plaintiff on inquiry notice of<br />
potential problems in the market for auction rate securities and of the defendant’s possible<br />
involvement in those problems, even though the defendant was not a party to the SEC’s order.<br />
The court rejected this argument, holding that “at this stage of the litigation plaintiff has<br />
adequately alleged that it did not have notice of [defendant’s] conduct sufficient to trigger the<br />
statutes of limitations.”<br />
M.1<br />
2. State Securities Claims<br />
M.2<br />
Metz v. Unizan Bank, 649 F.3d 492 (6th Cir. 2011).<br />
The Sixth Circuit affirmed the dismissal of plaintiffs’ state law fraud claims as time<br />
barred. The court held that since plaintiffs’ fraud claims arose out of the sale of securities,<br />
Ohio’s blue sky statute of limitations period, rather than the statute of limitations for common<br />
law fraud, applied to plaintiffs’ claims.<br />
Stone v. Chicago Inv. Grp., 2011 WL 6841817 (N.D. Ill. Dec. 29, 2011).<br />
The court held that the plaintiffs’ claim under the Illinois Securities Law was timely<br />
under the applicable three-year statute of limitations. Plaintiffs filed suit on January 4, 2011.<br />
The court noted that plaintiffs were on notice that their investments were not performing as<br />
expected by late 2007, but it was not clear that they should have been on the alert for fraud,<br />
particularly in light of their broker’s alleged reassurances and the fact that when the original<br />
notes at issue could not be paid, the broker offered new notes payable in December 2008. The<br />
court held that, as alleged in the complaint, the circumstances were not sufficiently probative of<br />
fraud by January 4, 2008, three years prior to the date of filing of the complaint. Thus, plaintiffs’<br />
state law securities fraud claims were timely.<br />
M.2<br />
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Stiching Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125 (C.D. Cal. 2011).<br />
The court applied California’s three-year statute of limitations to dismiss the plaintiff’s<br />
California state-law fraud and aiding and abetting claims arising out of the plaintiff’s purchase of<br />
residential mortgage backed securities. The court concluded that public press coverage and the<br />
filing of similar lawsuits more than three years prior to the filing of the first amended complaint<br />
were sufficient to put the plaintiff on inquiry notice of the alleged wrongdoing.<br />
M.2<br />
Anschutz Corp. v. Merrill Lynch & Co., 785 F. Supp. 2d 799 (N.D. Cal. 2011).<br />
The court denied the defendant’s motion to dismiss as time-barred the plaintiff’s marketmanipulation<br />
claims under two-year statute of limitations applicable to the California Corporate<br />
Securities Law of 1968. The defendant argued that when the SEC issued a cease-and-desist<br />
order in 2006, it put the plaintiff on inquiry notice of potential problems in the market for auction<br />
rate securities and of the defendant’s possible involvement in those problems, even though the<br />
defendant was not a party to the SEC’s order. The court rejected this argument, holding that “at<br />
this stage of the litigation plaintiff has adequately alleged that it did not have notice of<br />
[defendant’s] conduct sufficient to trigger the statutes of limitations.”<br />
M.2<br />
Carbon Capital Mgmt., LLC v. Am. Express Co., 932 N.Y.S.2d 488 (N.Y. App. Div. 2011).<br />
The court affirmed the trial court’s finding that the plaintiff’s claim for breach of<br />
fiduciary duty was partially barred by the statute of limitations. The court noted that the<br />
limitations period applicable to a breach of fiduciary duty claim depends on the substantive<br />
remedy sought. The plaintiff’s breach of fiduciary duty claims that were based on an actual<br />
fraud were timely under the six-year limitations period for fraud-based claims. However, the<br />
plaintiff’s other breach of fiduciary duty claims were untimely under the applicable three-year<br />
limitations period. The court also held that the plaintiff’s fraud claim was timely under the<br />
applicable six-year limitations period.<br />
M.2<br />
Ingham v. Thompson, 931 N.Y.S.2d 306 (N.Y. App. Div. 2011).<br />
The court reversed the trial court’s denial of one of the defendant’s motions to dismiss,<br />
finding that plaintiff’s aiding and abetting breach of fiduciary duty and unjust enrichment claims<br />
were time barred. The court found that because the fraud claim was not merely incidental to the<br />
breach of fiduciary duty claim, the limitations period for the aiding and abetting was six years.<br />
As the complaint did not allege any conduct by the moving defendant after 1995, the claim was<br />
barred by the limitations period. The court noted that the limitations period was not tolled as (1)<br />
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equitable estoppel did not apply as there was no allegation that the defendant made any<br />
affirmative representations or had a fiduciary duty to plaintiff; (2) the discovery accrual rule does<br />
not apply to constructive frauds; and (3) repudiation applies only to claims seeking an accounting<br />
or other equitable relief.<br />
Orr v. Calvert, 2011 WL 6130799 (N.C. Dec. 9, 2011).<br />
The Supreme Court of North Carolina held that a ten-year limitations period applied to an<br />
investor action against an unlicensed securities advisor for breach of fiduciary duty. The<br />
Supreme Court’s opinion incorporated the reasoning set forth in the dissenting opinion in the<br />
Court of Appeals (713 S.E.2d 29 (2011)). The dissenting judge at the Court of Appeals asserted<br />
that the plaintiffs’ claim rose to the level of constructive fraud and was therefore subject to a tenyear<br />
rather than a three-year statute of limitations. The dissenting judge found that the defendant<br />
received a benefit in the form of commissions, that the benefit was illegal because the defendant<br />
was unlicensed, and that the agent–principal relationship between plaintiffs and defendant was<br />
sufficient to show a confidential relationship of trust.<br />
M.2<br />
3. RICO<br />
M.3<br />
Milo v. Galante, 2011 WL 1214769 (D. Conn. Mar. 28, 2011).<br />
The court held that the four-year statute of limitations had run on the plaintiff’s RICO<br />
claims against the defendant. The court noted that such claims begin to run when a plaintiff has<br />
actual or inquiry notice of the injury. The plaintiff did not plead with particularity that the<br />
limitations period should have been tolled because of the defendant’s wrongful concealment nor<br />
did she indicate what due diligence she had conducted to show that tolling should be applied.<br />
Further, the court held that the separate accrual rule – where an expired RICO claim can be<br />
revived by new and independent violations that fall outside the limitations period – did not apply<br />
because the plaintiff did not allege separate and distinct fraudulent acts by the defendant.<br />
4. SRO Rules<br />
Asensio v. SEC, 2011 WL 6032933 (11th Cir. Dec. 5, 2011).<br />
The Eleventh Circuit affirmed the SEC’s dismissal of the petitioner’s appeal of two<br />
NASD and FINRA decisions because the petitioner neither filed his appeal within thirty days of<br />
receiving notice of the decision (as required under 15 U.S.C. § 782(d)(2)) nor made a showing of<br />
extraordinary circumstances for the delay. The petitioner acknowledged that he waited three<br />
years to file an application for review of the NASD decision and sixteen months to file an<br />
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application for review of the FINRA decision but argued that extraordinary circumstances caused<br />
the delay. The Eleventh Circuit held that the petitioner did not make a showing of extraordinary<br />
circumstances because the facts underlying his claims of extraordinary circumstances were<br />
discoverable either during the challenged proceedings or shortly thereafter.<br />
Raymond James Fin. Servs., Inc. v. Phillips, 2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16,<br />
2011).<br />
The court held that Florida’s statutes of limitations did not apply to an NASD arbitration<br />
where the arbitration agreement did not expressly provide for their application. The court noted<br />
that the firm did not expressly include the Florida statutes of limitations in its contract with its<br />
account holders and that the Florida limitations statute does not expressly state that it applies to<br />
arbitrations. Because the court considered this issue to be of great public importance, it certified<br />
the question to the Florida Supreme Court which has granted review (2012 WL 285100).<br />
M.4<br />
N. Arbitration<br />
1. Scope<br />
N.1<br />
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).<br />
The United States Supreme Court considered the viability of California’s Discover Bank<br />
rule, which provided that class action waivers in arbitration agreements were unconscionable and<br />
thus unenforceable. The contract at issue provided that the customers and the provider arbitrate<br />
all disputes, but precluded class arbitration. The Supreme Court held that the Federal Arbitration<br />
Act (“FAA”) preempted the Discover Bank rule on the basis that the FAA was enacted to ensure<br />
enforcement of arbitration agreements. The Supreme Court noted that class arbitration sacrifices<br />
many of arbitration’s advantages, including informality, and greatly increases risks to<br />
defendants. More generally, arbitration is not an effective dispute resolution vehicle for highly<br />
complex, high stakes class action suits. As a result, California’s rule requiring the availability of<br />
class arbitration conflicted with the principal purpose of the FAA and was therefore pre-empted.<br />
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011).<br />
The Firm appealed the dismissal of its action to enjoin the FINRA arbitration claims filed<br />
by defendant. The original claim arose as a result of three separate offerings in which defendant<br />
issued $329 million of bonds, structured as auction rate securities. For each of these offerings,<br />
the Firm served as the lead underwriter and main-broker dealer, and contracts were executed<br />
between the parties detailing their rights and obligations under both relationships. The Firm<br />
contended that these relationships did not give rise to a “customer” relationship sufficient to<br />
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support the FINRA arbitration as proper, specifically arguing that FINRA rules do not include<br />
arbitration for sophisticated parties, that FINRA has a narrow “investor protection” mandate, and<br />
that a customer relationship requires a fiduciary relationship and cannot be found in an armslength<br />
transaction. The Second Circuit held that the FINRA rules did not support these<br />
contentions and rejected each of them, concluding that defendant was a customer of the Firm’s.<br />
The Second Circuit affirmed the district court’s order denying the Firm’s motion for a<br />
preliminary injunction restraining defendant from proceeding with the FINRA arbitration.<br />
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164 (2d Cir.<br />
2011).<br />
This appeal stemmed from a judgment entered by the district court dismissing a<br />
complaint that sought an injunction against a FINRA arbitration and simultaneously granted<br />
Defendant’s motion to compel arbitration on the ground that defendant, in a credit default swap<br />
agreement, was a customer of the entity with which it negotiated part of the agreement but which<br />
was a nonparty to the agreement. The crux of the district court action centered upon an<br />
arbitration proceeding brought by defendant, a hedge fund, against a broker-dealer that initiated<br />
negotiations for a credit default swap between plaintiff and defendant. The district court held<br />
that the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”) provided<br />
for arbitration of disputes between a FINRA member and its customers, and that the brokerdealer<br />
was a member and defendant was a customer, and granted the order compelling<br />
arbitration. Plaintiff and the broker-dealer continued to contest that the arbitration would be<br />
duplicative of a separate action defendant brought against the broker-dealer that was still pending<br />
in the district court, and that the FINRA arbitration could not proceed because defendant did not<br />
have an arbitration agreement with the broker-dealer and that defendant was not a customer of<br />
the broker-dealer within the meaning of the FINRA Code. The appellate court reversed this<br />
decision, holding that defendant was not a “customer” of the broker-dealer. The court reasoned<br />
that Defendant did not have a brokerage agreement with the broker-dealer and the parties’<br />
agreements expressly disclaimed any sort of advisory, brokerage, or other fiduciary relationship.<br />
Indeed, the parties had acknowledged in their agreement that this was an “arm’s length”<br />
relationship. As a result, the Second Circuit concluded that there was no reason for it to further<br />
analyze the boundaries of the FINRA meaning of “customer,” as defendant did not fall within<br />
that definition. The Second Circuit thus reversed the district court’s decision and enjoined<br />
Defendant from continuing with the FINRA arbitration.<br />
Anderson v. Beland, 2011 U.S. App. LEXIS 22209 (2d Cir. Nov. 3, 2011).<br />
Plaintiffs filed claims in a FINRA arbitration for breach of fiduciary duty, breach of<br />
contract, fraud, and negligent misrepresentation stemming from a decline in the value of assets<br />
managed by defendant. Defendant moved the district court (which retained exclusive<br />
jurisdiction over a related 2007 class-action settlement) to enforce that settlement agreement<br />
against plaintiffs, resulting in a withdrawal of their claims before FINRA as they were members<br />
N.1<br />
N.1<br />
331
of the class action suit. The district court granted defendant’s motion, ruling that plaintiffs had<br />
expressly released all of their arbitration claims as a result of failing to timely opt-out of the class<br />
action settlement. In determining the scope of the arbitration agreement on appeal, the Second<br />
Circuit agreed with the district court’s decision that defendant is liberated from its requirement to<br />
arbitrate released claims as defined in the class action settlement agreement. However, the<br />
Second Circuit noted that defendant still agreed to arbitrate both non-released claims and claims<br />
expressly excluded from the release, pursuant to the original arbitration agreement. Such claims<br />
were included in the FINRA action. Therefore, the Second Circuit vacated this portion of the<br />
district court’s ruling, holding that the district court may not enjoin plaintiff from arbitrating<br />
these claims before FINRA.<br />
Filho v. Safra Nat’l Bank, 797 F. Supp. 2d 289 (S.D.N.Y. 2011).<br />
Plaintiff alleged that representatives of defendant invested his money inappropriately in<br />
risky securities without his approval. defendant responded with a motion to compel arbitration<br />
pursuant to the arbitration agreement between the parties. Plaintiff contended that defendant<br />
modified the terms and conditions of the account agreement after Plaintiff agreed thereto, and<br />
that he never received nor read the original contract terms and conditions or the terms and<br />
conditions as later modified. The court held that there was a valid “change of terms” clause in<br />
the original agreement and that, if properly implemented and agreed upon, the change was not a<br />
contract modification as contemplated by New York’s General Obligation Law. Therefore, no<br />
additional consideration was required to support the modification to the agreement. The court<br />
further concluded that plaintiff’s allegation that he did not receive or read the contract was<br />
contradicted by the acknowledgement above plaintiff’s signature on the original account<br />
agreement that he received, understood, and agreed to the contract. The court further held that<br />
the issues plaintiff raised were within the scope of the arbitration agreement, and thus granted<br />
defendant’s motion to compel arbitration.<br />
Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp. 2d 445 (S.D.N.Y. 2011).<br />
Plaintiff brought an action against Defendants based on alleged violations of the Fair<br />
Labor Standards Act (“FLSA”). The parties did not dispute that Plaintiff signed an employment<br />
agreement providing that all disputes shall be settled and determined by arbitration. Plaintiff<br />
sought designation of this case as a collective action pursuant to FLSA Section 216. Defendants<br />
then moved to dismiss the complaint or, in the alternative, compel arbitration. The trial court<br />
considered the issue of whether these claims were eligible for arbitration based on FINRA Rule<br />
13024, which precludes arbitration of class action claims. The court held that collective actions<br />
are separate and distinct from class actions because they are “opt-in” actions, whereas class<br />
actions require participants to “opt-out.” The court granted defendants’ motion to compel<br />
arbitration on the basis that the FLSA “collective action” is not encompassed within the term<br />
“class action” and therefore was eligible for arbitration under the FINRA rules.<br />
N.1<br />
N.1<br />
332
N.1<br />
Citibank, N.A. v. Franco, 2011 U.S. Dist. LEXIS 150741 (S.D.N.Y. Dec. 29, 2011).<br />
Defendants initiated a FINRA arbitration, alleging fraud by Plaintiff with respect to<br />
Defendants’ non-discretionary accounts. Plaintiff filed a petition with the district court to stay<br />
the arbitration, arguing that there was no agreement requiring the parties to arbitrate the<br />
underlying claims since the dispute was outside the scope of the agreement because the<br />
transactions at issue were banking transactions under an International Swap <strong>Dealer</strong>s Association<br />
agreement, not brokerage trades under the arbitration agreement. Defendants contended that<br />
their claim included both brokerage and banking accounts and was therefore arbitrable.<br />
Reaffirming the general rule that doubts concerning the scope of arbitrable issues should be<br />
decided in favor of arbitration, the district court held that this particular arbitration agreement’s<br />
broad scope encompassed the dispute. The arbitration agreement explicitly covered “all claims<br />
and controversies” arising in “any and all accounts.” The district court thus compelled<br />
arbitration pursuant to the arbitration agreement.<br />
Hook v. UBS Fin. Servs., Inc., 2011 WL 1741997 (D. Conn. May 4, 2011).<br />
Plaintiff brought this action to enjoin defendant from enforcing a promissory note<br />
executed when plaintiff commenced his employment at the Firm. Defendant moved to compel<br />
arbitration and for dismissal or a stay of the litigation pending arbitration. Plaintiff objected,<br />
contending that a number of the claims he raised were outside the scope of the arbitration<br />
provision in the Promissory Note, which he contended only applied to his employment at the<br />
Firm and not thereafter as he was no longer an employee. The court rejected this argument.<br />
Plaintiff also pointed to the carve-out provision for injunctive relief in the arbitration clause. The<br />
Court, however, held that it did not need to consider whether the carve-out provision for<br />
injunctive relief exempted that claim from arbitration because plaintiff failed to establish that he<br />
was entitled to injunctive relief. The court concluded that the broad arbitration clause<br />
necessitated that plaintiff’s claims be arbitrated, and granted defendant’s motion to dismiss and<br />
compel arbitration.<br />
Spaz Bev. Co. Defined Benefit Pension Plan v. Douglas, 2011 U.S. Dist. LEXIS 86019 (E.D. Pa.<br />
Aug. 4, 2011).<br />
This was an action for breach of fiduciary duty stemming from losses in plaintiffs’<br />
benefit pension plan allegedly caused by defendants’ alleged mismanagement of the assets.<br />
defendants moved to stay the action and compel arbitration, citing two separate arbitration<br />
provisions in their agreements with respect to plaintiffs. Plaintiffs alleged that their claims for<br />
breach of fiduciary duty did not fall within the scope of either arbitration provision. The court<br />
disagreed, holding that courts within the Third Circuit have consistently found that claims for<br />
N.1<br />
N.1<br />
333
each of fiduciary duty fall within the scope of similar provisions. Citing the proposition that<br />
an order compelling arbitration “should not be denied unless it may be said with positive<br />
assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted<br />
dispute[,]” the court found that plaintiffs’ claims fell within the scope of the arbitration<br />
provisions and compelled the matter to arbitration.<br />
Waterford Inv. Servs. v. Bosco, 2011 U.S. Dist. LEXIS 96046 (E.D. Va. July 29, 2011).<br />
Plaintiff sought a declaratory judgment that it had no duty to arbitrate any claim with<br />
defendants, as well as an injunction enjoining the FINRA arbitration already filed by defendants.<br />
The arbitration claims stemmed from defendants’ investment relationship with an investment<br />
advisor who was employed by Community Bankers Securities (“CBS”). Both CBS and plaintiff<br />
were majority-owned by a third entity, AIC, Inc. Plaintiff alleged that it was not subject to<br />
FINRA arbitration because it did not have adequate association with CBS or the investment<br />
advisor at issue. The court disagreed with that contention and held that the investment advisor<br />
was an “associated person” under FINRA Rule 12100 because plaintiff had indirect control over<br />
him. Since FINRA Rule 12200 requires a member to arbitrate with the customer of an<br />
associated person, plaintiff had a duty to submit to arbitration with defendants as customers of<br />
the investment advisor.<br />
Hussain v. Garson, 783 F. Supp. 2d 846 (W.D. La. 2011).<br />
Plaintiff brought this action against defendant, his former broker, arising out of an alleged<br />
“pump and dump” investment fraud scheme. The account applications signed by plaintiff<br />
included a customer agreement containing a pre-dispute arbitration clause. The court held that<br />
even though plaintiff’s complaint centered upon being fraudulently induced into stock purchases<br />
– and thus fraudulently induced into the investment contract – the arbitration clause was<br />
enforceable unless plaintiff was fraudulently induced into signing the arbitration clause itself,<br />
which plaintiff did not allege. Thus, the court held that the arbitration clause was valid and that<br />
the claims brought by plaintiff were reasonably within the broad scope of the arbitration<br />
agreement as they related to defendant’s use of his credential as an investment advisor in the<br />
alleged scheme. Defendant’s motion to stay litigation pending arbitration was granted.<br />
Gordon v. Royal Palm Real Estate Inv. Fund I, <strong>LLP</strong>, 2011 U.S. Dist. LEXIS 22911 (E.D. Mich.<br />
Mar. 8, 2011).<br />
Plaintiff alleged that defendants committed a variety of violations with respect to<br />
investments in securities recommended and/or managed by defendants. At the time of this<br />
lawsuit, plaintiff had already initiated a FINRA arbitration against defendants. Defendants<br />
argued that the claims in both actions were virtually identical and moved to dismiss this action<br />
N.1<br />
N.1<br />
N.1<br />
334
ecause it overlapped with and was precluded by the FINRA arbitration, or, in the alternative, to<br />
stay the litigation pending the arbitration. The court agreed, holding that the claims in the instant<br />
action were within the scope of the arbitration agreement contained in the Uniform Submission<br />
Agreement, which plaintiff signed when initiating the FINRA arbitration. The court based its<br />
reasoning in large part on FINRA Rule 12209, which states that “[d]uring an arbitration, no party<br />
may bring any suit, legal action, or proceeding against any other party that concerns or that<br />
would resolve any of the matters raised in the arbitration.” The court ruled that the claims in<br />
both the FINRA arbitration and this action “concern and relate” to one another, and that the<br />
factual allegations in both actions are “essentially identical.” The court granted defendants’<br />
motion to dismiss.<br />
Shammami v. Allos, 2011 WL 4805931 (E.D. Mich. Oct. 11, 2011).<br />
Defendants provided plaintiff with investment advice and managed his assets. Plaintiff<br />
alleged wrongful trading of securities in his investment accounts. The court held that it was<br />
clear, however, that plaintiff agreed to arbitrate such disputes with defendants as the arbitration<br />
agreement plaintiff signed referred broadly to “controversies,” and that the case at bar fell within<br />
that scope. The court therefore ordered a stay of the proceedings as to one defendant, and<br />
dismissed as to others.<br />
Morgan Keegan & Co. v. Jindra, 2011 U.S. Dist LEXIS 135464 (W.D. Wash. Nov. 22, 2011).<br />
Defendants attempted to arbitrate claims against plaintiff before FINRA. Plaintiff<br />
brought this action for a temporary restraining order and preliminary injunction preventing the<br />
arbitration on the basis that it had no agreement with defendants, and defendants were not its<br />
customers. Defendants utilized a broker who was not associated with plaintiff, but the broker<br />
alleged that he relied heavily on communications distributed by plaintiff. The court held that it<br />
was clear that there was no arbitration agreement between defendants and plaintiff, and therefore<br />
defendants’ ability to arbitrate rested on whether or not they were a “customer” under applicable<br />
FINRA rules. The court held that neither defendants nor their broker had such a relationship<br />
with plaintiff as to infer a customer status, and therefore plaintiff was not subject to arbitration.<br />
The court concluded that a preliminary injunction enjoining defendants from arbitration was<br />
warranted.<br />
Branch v. Sicker, 2011 U.S. Dist. LEXIS 19392 (N.D. Ga. Feb. 28, 2011).<br />
Plaintiffs purchased securities in business entities that were created by defendants. One<br />
of these entities later filed for bankruptcy, which plaintiffs alleged was a result of defendants’<br />
risky business deals that ran contrary to the safe investments defendants had represented.<br />
Plaintiffs brought this suit as a result and defendants moved to dismiss for improper jurisdiction<br />
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and venue, citing the arbitration clause in the New Account Forms that plaintiffs signed.<br />
Plaintiffs challenged the extent to which their claims fell within the scope of the arbitration<br />
clause, contending that defendants could only produce copies of New Account Forms dated as<br />
early as 2004 and 2006, and the investment relationship began with plaintiffs in 1999 and 2000,<br />
respectively. The court, however, read the “arising out of or relating to” language in the<br />
arbitration agreement to relate the 2004 and 2006 purchases back to the 1999 and 2000<br />
purchases, and held that they were within the scope of the arbitration agreement as a result. The<br />
court further reiterated that “any doubts concerning the scope of arbitrable issues should be<br />
resolved in favor of arbitration.” Consequently, the court granted defendants’ motion and<br />
directed the parties to arbitrate their claims.<br />
Feller v. Wells Fargo Advisors, LLC, 2011 WL 3331265 (M.D. Fla. Aug. 3, 2011).<br />
Defendant initiated an arbitration proceeding with FINRA to recover the balance<br />
remaining on a promissory note from plaintiff. Plaintiff moved to stay the arbitration, but the<br />
arbitrators denied the motion. Plaintiff then filed this lawsuit in state court, which defendant<br />
removed to federal court and requested that the federal court compel arbitration and dismiss the<br />
action. Plaintiff contended that her claims were not within the scope of the arbitration clause.<br />
The court disagreed, holding that there were multiple potential agreements to arbitrate that had<br />
been executed between plaintiff and defendant and that plaintiff’s claims fell within the scope of<br />
more than one of these agreements.<br />
M & B Assocs., Inc. v. Wells Fargo Bank, N.A., 2011 Tex. App. LEXIS 2873 (Tex. App.<br />
Amarillo Apr. 15, 2011).<br />
In a suit involving a promissory note executed by plaintiffs, summary judgment was<br />
granted in favor of defendant by the trial court. An appeal ensued, in which the only issue raised<br />
was that the promissory note and guaranty contained arbitration clauses that should have<br />
prevented summary judgment. The court held that this argument failed because, “to compel<br />
arbitration, a party must apply to the court for it,” and the record contained neither a motion to<br />
stay nor a motion to compel arbitration. The court further stated that a party who has a right to<br />
arbitration was not required to invoke it, and the mere presence of an arbitration clause in an<br />
agreement subject to litigation did not require the court to send the dispute to arbitration. This<br />
was especially true when a particular clause required a party to demand arbitration, as was the<br />
case in this instance. Finally, the court concluded that an affidavit by plaintiff’s attorney stating<br />
that arbitration had been requested failed to disclose a particular dispute to be arbitrated and,<br />
without such a specific disclosure, the court could not conclude whether or not such a dispute<br />
was within the scope of the arbitration agreement. As such, summary judgment was affirmed.<br />
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2. Eligibility/Limitations<br />
N.2<br />
Yuan v. Getco, LLC, 2011 U.S. Dist. LEXIS 89991 (N.D. Ill. August 12, 2011).<br />
A former employee brought the action against defendant under the Illinois Wage<br />
Payment and Collection Act for failure to pay several million dollars of bonuses and<br />
commissions owed from plaintiff’s position as a securities trader. In granting defendants’<br />
motion to compel arbitration, the court rejected plaintiff’s argument that because FINRA Rule<br />
13206 precludes claims over six years old, those portions of his wage-payment claim that are<br />
over six years should be considered by the court. The court determined that the issue of whether<br />
a claim is timely is specifically reserved for the arbitrator.<br />
Mid-Ohio Sec. Corp. v. Estate of Burns, 790 F. Supp. 2d 1263 (D. Nev. 2011).<br />
Lawrence Burns opened a traditional IRA account with the Firm that designated his wife<br />
as the primary beneficiary and instructed that the funds be invested with Cumberland Enterprise<br />
Holding, LLC. Three years later Burns discovered that Cumberland was a fraud and the<br />
investment was worthless. Burns passed away on July 7, 2007. In September 2009, Burns’ wife<br />
filed a Statement of Claim with FINRA alleging negligence and breach of contract. The Firm<br />
filed an Answer and motion to dismiss asserting that the claims were ineligible because the<br />
claims were brought more than six years after the date the securities were purchased. The panel<br />
denied with motion to dismiss and subsequently awarded Burns’ wife $280.683.50 in<br />
compensatory damages. The Firm moved the court to vacate the award because the arbitrators’<br />
decision was in manifest disregard for the law, specifically FINRA Rule 12206. The court found<br />
that the arbitrators did not manifestly disregard the law because the United States Supreme<br />
Court’s holding in Howsam v. Dean Witter, 537 U.S. 79, 85 (2002), solidified that the FINRA<br />
eligibility time limit was not a question of arbitrability for the court, but rather a procedural<br />
matter for the arbitrators akin to a statute of limitations. Thus, the arbitrators were free to<br />
interpret the rule and apply the discovery rule or other tolling provisions. Therefore, the panel’s<br />
use of a tolling principle delaying the trigger event of FINRA Rule 12206 until Burns’ discovery<br />
in 2005 could not be considered a manifest disregard for the law and the Firm’s motion to vacate<br />
was denied.<br />
Reynolds v. Parklane Inv., Inc., 2011 Mich. App. LEXIS 1610 (Sept. 20, 2011).<br />
Plaintiffs hired defendants to manage six accounts with an online broker, but allegedly<br />
charged higher fees than agreed upon without written authorization. Defendants asserted that<br />
they were entitled to a set off due to amounts due from another related account and filed a thirdparty<br />
complaint on the owner of the deficient account, E. Wagner, LLC (the “LLC”). The parties<br />
ultimately agreed to arbitration and the arbitration award included damages for claims made by<br />
the LLC. Defendants challenged the award on the ground that the LLC was not a named plaintiff<br />
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and therefore did not file any claims. Further, because the LLC did not file a claim, the statute of<br />
limitations was never tolled for the claim as the arbitrator had perceived. The appellate court<br />
denied defendants any relief on the ground that the arbitrator incorrectly awarded damages.<br />
First, the court found that the award to the LLC was valid because the award was made to the<br />
LLC as a real party in interest to the claim advanced by plaintiff. Second, the arbitrator’s<br />
handling of the statute of limitations issue was appropriate because the arbitrator limited the<br />
damages to the six years prior to the filing of the complaint. The court found that this decision<br />
was consistent with the relation-back doctrine. Accordingly, the appellate court affirmed the<br />
decision of the circuit court in confirming the arbitration award.<br />
Citigroup Smith Barney v. Henderson, 241 Ore. App. 65 (Or. Ct. App. 2011).<br />
Henderson opened an IRA account with plaintiff. In doing so, he entered into an<br />
agreement that required arbitration of all claims and controversies between the parties. The<br />
agreement also included a choice of law provision selecting New York law to govern and<br />
construe its terms. Upon his death, two conflicting forms were discovered; one form designated<br />
his second wife, Madge Henderson, as beneficiary while the other designated his children from a<br />
prior marriage. Madge and the children were unable to resolve the dispute by themselves, and<br />
Plaintiff filed an interpleader action to determine the rightful owner of the IRA. After Madge and<br />
the children filed answers and counterclaims, Plaintiff filed a motion to compel arbitration. In<br />
response, Madge and the children argued that plaintiff had waived its right to arbitrate by filing<br />
the interpleader action. The trial court denied plaintiff’s motion to compel on the basis of<br />
waiver, and plaintiff appealed. On appeal, the court considered whether the issue of waiver was<br />
a procedural question for the arbitrator or a question of arbitrability for judicial determination.<br />
The court first determined that although New York law provided that the court decides issues of<br />
waiver, the choice of law provision did not expressly require New York law to govern the<br />
enforcement of the agreement. As such, the court applied the default presumption that the<br />
parties intended an arbitrator to decide procedural issues such as statute of limitations and<br />
waiver. Although the court limited its holding to the waiver issue, its reliance on statute of<br />
limitations doctrine suggested that choice of law provisions would be treated similarly in those<br />
instances.<br />
Raymond James Fin. Servs. Inc. v. Phillips, 2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16,<br />
2011).<br />
In November 2005, the account holders filed a Statement of Claim with the NASD<br />
based on allegations of negligence, misconduct, breaches of fiduciary duty, and state and federal<br />
securities violations. In response, the Firm filed a motion to dismiss arguing that the claims were<br />
barred by the applicable statute of limitations. Because the arbitration agreement provided that<br />
timeliness issues would be decided by the court, the account holders filed an action in the circuit<br />
court seeking a declaratory judgment. The circuit court found that the statute of limitations was<br />
not applicable to arbitration claims as a matter of law. On appeal, the appellate court found that<br />
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the legislature did not intend the “civil action or proceeding” language in the statute to include<br />
arbitrations based on its exclusion from the definition and the fact that the Arbitration Code was<br />
enacted prior to the statute at issue. Furthermore, the vast majority of state case law interpreted<br />
“proceeding” in the traditional sense, which did not generally include “arbitration.” Thus, the<br />
court affirmed the trial court’s decision on different grounds and held that the Florida statute of<br />
limitations does not apply to arbitrations when the parties have not expressly included a<br />
provision in the arbitration agreement stating it applies. The appellate court also certified the<br />
question to the Florida Supreme Court.<br />
3. Jurisdiction/Estoppel<br />
N.3<br />
UBS Fin. Servs. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011).<br />
The Firm appealed the denial of its motion for a preliminary injunction enjoining the<br />
defendants from proceeding with an arbitration before FINRA, and alternatively requiring that<br />
the arbitration proceed in New York County. The underlying dispute involved defendants’<br />
claims relating to the Firm’s alleged fraud in connection with defendants’ issuances of auction<br />
rate securities. The trial court denied the requested injunction, held that a forum selection clause<br />
in one of the parties’ agreements was unenforceable because it conflicted with FINRA rules, and<br />
ordered that the arbitration proceed in West Virginia. On appeal, the Second Circuit held that<br />
defendants were entitled to arbitration because they became the Firm’s “customers” under<br />
FINRA rules when they undertook to purchase auction rate services from the Firm. Further, the<br />
appellate court concluded that the enforceability of the forum selection clause was a procedural<br />
issue for FINRA arbitrators to address and that the district court lacked jurisdiction over that<br />
issue. In reaching these conclusions, the appellate court declined provide a comprehensive<br />
definition of “customer” under Rule 12200, and found that it includes at least a non-broker or<br />
non-dealer who purchases, or undertakes to purchase, a good or service from a FINRA member.<br />
Sacks v. Dietrich, 663 F.3d 1065 (9th Cir. 2011).<br />
Plaintiff appealed the district court’s dismissal of his claims against two arbitrators who<br />
disqualified him from representing a client in a FINRA arbitration. The Ninth Circuit affirmed<br />
the district court’s decision, finding that the lower court correctly held that Plaintiff’s claims<br />
were barred by arbitral immunity. The defendant arbitrators disqualified Plaintiff from the<br />
representation pursuant to FINRA Rule 13208, which provided that “[p]arties may be<br />
represented in an arbitration by a person who is not an attorney, unless…the person is currently<br />
suspended or barred from the securities industry in any capacity.” As it was undisputed that<br />
plaintiff was not an attorney, and also that he was barred from the securities industry in 1991, the<br />
panel disqualified plaintiff from the representation. In reaching this conclusion, the panel based<br />
its authority on Rule 13413, which provided that a “panel has the authority to interpret and<br />
determine the applicability of all provisions under the Code.” In challenging this determination,<br />
plaintiff contended that the arbitrators exceeded the scope of their authority under the Uniform<br />
Submission Agreement, FINRA rules, and California law because FINRA Rule 13208 does not<br />
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give arbitrators the authority to issue such a prohibition. The district court found that, although<br />
arbitral immunity extends only to those acts taken by arbitrators that are within the scope of their<br />
duties and within their jurisdiction, the arbitrators in this case were acting within their<br />
jurisdiction. The Ninth Circuit agreed, adding that “the fact that courts or other agencies ‘may’<br />
resolve such an issue does not preclude the arbitral panel from doing so.”<br />
Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011).<br />
The district court addressed whether Section 922 of the Dodd-Frank Act, which amends<br />
the whistleblower protection set forth in the Sarbanes-Oxley Corporate and Criminal Fraud<br />
Accountability Act of 2002, should be applied retroactively. Specifically, the court addressed<br />
the question of whether the ban on pre-dispute arbitration agreements imposed by the Dodd-<br />
Frank Act applies retroactively. In conducting its analysis, the court first found that nothing in<br />
Section 922 displays an express congressional intent regarding retroactivity. Next, the court<br />
again found that the statute was unclear regarding retroactivity, and as a result of this<br />
uncertainty, moved to the second step in the analysis of addressing the consequence of<br />
retroactivity. Accordingly, the court held that, in the absence of clear legislative intent to limit<br />
the temporal reach of Section 922 of the Act, and because of the procedural character of that<br />
provision, the court and not a FINRA arbitration panel had subject matter jurisdiction over the<br />
whistleblower claim.<br />
The Ayco Company, L.P v. Becker, 2011 U.S. Dist. LEXIS 92380 (N.D.N.Y. Aug. 18, 2011).<br />
Plaintiff filed this breach of employment contract action against its former employee<br />
alleging that the employee breached the Trade Secrets and Confidentiality Agreement (the<br />
“Agreement”) he signed upon beginning his employment. Plaintiff contended that Defendant<br />
violated that agreement when he: (1) used its confidential client and business information<br />
without the company’s permission; (2) removed from Plaintiff’s premises records of names and<br />
addresses of the firm’s clients; and (3) solicited or performed services for Plaintiff’s clients<br />
during the two year period following his departure from Plaintiff. Additionally, under the<br />
Agreement, Defendant agreed that the Northern District of New York would have jurisdiction<br />
over any disputes arising between the parties. Defendant offered various arguments in support of<br />
his motion to stay the federal court action and compel arbitration of the dispute. First, Defendant<br />
contended that FINRA Rule 13200(a) should apply, notwithstanding the fact that Plaintiff’s<br />
affiliate, and not Plaintiff, signed Defendant’s Form U-4 Agreement. According to Defendant,<br />
Plaintiff was the true party of interest with regard to the arbitration clause found in the Form U-4,<br />
and therefore should be estopped from avoiding arbitration. The court explained that, absent an<br />
express agreement to arbitrate, the Second Circuit has recognized only five theories upon which<br />
it is willing to enforce an arbitration agreement against a non-signatory: 1) incorporation by<br />
reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. Regarding<br />
estoppel, Defendant argued that Plaintiff should be bound by the arbitration agreement under a<br />
“direct benefits” theory. The court, however, disagreed, finding that it was unclear whether<br />
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Plaintiff in fact derived a direct benefit from Defendant’s signing of the Form U-4 Agreement.<br />
The court noted that Defendant did not establish that Plaintiff participated in negotiating the<br />
Form U-4 Agreement, is mentioned in that agreement, received fees as a result of the agreement,<br />
or sought to enforce that agreement against him. Therefore, and because each of Defendant’s<br />
remaining arguments failed, the court determined that the parties were not required to arbitrate<br />
the claims.<br />
Sanders v. Forex Capital Mkts., LLC, 2011 U.S. Dist. LEXIS 137961 (S.D.N.Y. Nov. 29, 2011).<br />
Plaintiff brought a putative class action alleging that the Firm engaged in unlawful and<br />
deceptive practices with regard to its online foreign-exchange trading service in violation of state<br />
and federal law. The Firm moved for an order compelling plaintiff to arbitrate the claims<br />
pursuant to a Client Agreement he entered into when he began using the Firm’s service. During<br />
the course of completing the online application, plaintiff checked a box which provided that any<br />
dispute arising out of or relating to the account shall be resolved by arbitration. Further, the<br />
agreement provided that traders who did not elect to be bound by arbitration were not precluded<br />
from opening an account with the Firm. In reaching the conclusion that the parties were<br />
compelled to arbitrate the claims, the court found that the trader’s affirmative assent to the<br />
arbitration clause, as evidenced by his checking of the box, made the dispute arbitrable so long as<br />
the clause was not unenforceable as a matter of law. Because the court found that the electronic<br />
assent to arbitrate was not unconscionable, either procedurally or substantively, the parties were<br />
compelled to arbitrate the dispute.<br />
McCafferty v. A.G. Edwards & Sons, Inc., 2011 U.S. Dist. LEXIS 89437 (D.N.J. Aug. 11, 2011).<br />
Following an adverse award against him, plaintiff, a former branch manager, filed a<br />
complaint in state court seeking to vacate that award on the grounds that the panel lacked<br />
jurisdiction because there was a “non-public” arbitrator on the panel. According to plaintiff, his<br />
claims required an all public panel because his allegations included a statutory employment<br />
discrimination claim. Under FINRA Rule 13802(c)(2), claims involving a statutory employment<br />
discrimination claim require a panel constituted entirely of public arbitrators unless the parties<br />
agree in writing otherwise. Defendant, the manager’s former employer, contended that<br />
plaintiff’s statement of claim did not include such a discrimination claim, or in the alternative,<br />
that plaintiff did in fact agree in writing to permit the panel to proceed with the non-public<br />
member. The court found that although plaintiff was correct in asserting that his New Jersey<br />
Conscientious Employee Protection Act (“CEPA”) was a civil rights claim, it does not<br />
automatically follow that CEPA is a discrimination statute. The court reasoned that CEPA<br />
protects employee conduct, rather than an employee’s “immutable characteristics” like<br />
employment discrimination statutes. As a result, the court held that Rule 13802(c)(2) did not<br />
apply to plaintiff’s claims, and it was proper to confirm the arbitration award entered against<br />
him.<br />
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N.3<br />
PFS Invs., Inc. v. Imhoff, 2011 U.S. Dist. LEXIS 31417 (E.D. Mich. Mar. 25, 2011).<br />
At issue was whether a registered representative was required to arbitrate his state court<br />
claims against his former employer, its affiliates, and various company personnel. The dispute<br />
arose following the representative’s decision to leave his longtime employer and begin selling<br />
securities with a close competitor. After this fact came to light, the parent company’s counsel<br />
contacted the competitor’s largest insurance provider and allegedly defamed the representative<br />
by creating doubt as to whether the insurance provider should allow him to sell its products.<br />
After buy-out negotiations relating to the representative’s book of business were frustrated, the<br />
representative filed a thirty-two count complaint in Michigan state court, alleging that his former<br />
employer was liable for conversion, tortious interference, unjust enrichment, and various other<br />
claims. In his complaint, the representative maintained that Defendants committed acts<br />
inconsistent with the right to arbitrate and so prejudiced his rights that they lost their right to<br />
compel arbitration. Additionally, the representative argued that FINRA rules permit a court to<br />
hear claims for injunctive relief. In determining that the representative was required to arbitrate<br />
his claims, in light of his agreement to do so in his Form U-4, the court explained that, under<br />
some circumstances, a non-party to an arbitration agreement may compel a party that signed to<br />
agreement. Likewise, the court found that the theory of equitable estoppel was appropriate in<br />
this case because it would be inequitable to allow the representative to avoid arbitrating his<br />
claims simply by naming non-FINRA member affiliated companies as defendants.<br />
Yuan v. Getco, LLC, 2011 U.S. Dist. LEXIS 89991 (N.D. Ill. Aug. 12, 2011).<br />
N.3.<br />
A securities trader filed a claim in state court alleging claims under the Illinois Wage<br />
Payment and Collection Act. In his complaint, the trader alleged that Defendants violated the<br />
Act by failing to pay him several million dollars worth of bonuses and commissions owing from<br />
his work for Defendants. Based on federal subject matter jurisdiction, Defendants removed the<br />
action to federal court and sought an order directing the parties to arbitrate the claims. In support<br />
of their position, Defendants argued that Plaintiff’s Form U-4 incorporates the mandatory<br />
arbitration provisions of the security exchanges with which Plaintiff was registered, including<br />
NYSE Arca, NASDAQ and NYSE. Given that NYSE Arca was the primary regulator of both<br />
parties, the court focused its attention to that SRO’s arbitration provisions. First, the court found<br />
that both parties were in fact “associated persons” under NYSE Arca rules as Plaintiff was an<br />
employee of an Equity Trading Permit (“ETP”) Holder and the parent companies and their<br />
members and directors satisfied NYSE Arca Rule 1.1(f) as “any person directly or indirectly<br />
controlling, controlled by or under common control with an ETP Holder.” Next, the court<br />
rejected Plaintiff’s argument that by filing a Form U-5 he was not subject to arbitration, stating<br />
that such a filing would have no impact on the employee’s prior agreement to arbitrate his<br />
claims. Citing one of its earlier opinions, the court added that, absent clear evidence that the<br />
parties intended to override this presumption of arbitration, an employee’s agreement to arbitrate<br />
survives his termination. Finally, the court rejected Plaintiff’s remaining argument that FINRA’s<br />
six year eligibility rule prohibited the panel from addressing wage-payment claims that occurred<br />
before that period. The court made clear that FINRA Rule 13206 specifically reserves for the<br />
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arbitrator the right to determine whether a claim is timely, and, as such, Plaintiff’s claims were<br />
required to be arbitrated.<br />
Mid-Ohio Sec. Corp. v. Estate of Burns, 790 F. Supp. 2d 1263 (D. Nev. 2011).<br />
Following her husband’s death in 2005, a widow filed a statement of claim against Mid-<br />
Ohio Securities alleging that her husband’s IRA incurred losses resulting from Defendant’s<br />
failure to perform basic due diligence. The unique issue presented by the action was that the<br />
statement of claim identified the claimant as “The Estate of Lawrence D. Burns, By its Executor,<br />
Epifania B. Burns,” when, in reality, the widow had not filed anything in probate court, there<br />
was not a will, and no estate was created. Further, the widow was not appointed by any court to<br />
be the executor or legal representative of her husband’s estate. However, the widow was the sole<br />
beneficiary of the IRA, and the panel was aware of that fact. Ultimately, the panel found in the<br />
widow’s favor, awarding her approximately $280,000, and defendant thereafter asked the court<br />
to vacate that award based on a lack of standing. Defendant argued that because the claimant, as<br />
depicted by the caption in the statement of claim, did not actually exist, the panel manifestly<br />
disregarded the law when it refused to dismiss the action. The court rejected this and other<br />
arguments offered by defendant and held that the “panel declined to elevate form over substance<br />
to find a lack of standing based on a mistake in the caption.” Similarly, the court held that<br />
defendant failed to meet its burden of establishing manifest disregard of the law because<br />
defendant did not provide the panel with the law cited in its brief. As such, the court could not<br />
conclude that the panel recognized the applicable law and then elected to ignore it. The court<br />
confirmed the award.<br />
Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 WL 855354 (D. Nev. Mar. 9,<br />
2011).<br />
Plaintiff, a registered financial advisor, filed suit in the state of Nevada alleging breach of<br />
contract, breach of the covenant of good faith and fair dealing, and declaratory relief, among<br />
other things, following his termination from employment at the Firm. According to the advisor,<br />
he was terminated without cause in violation of the parties’ employment agreement dated August<br />
4, 2009. After removing the action to the district court, the Firm sought to compel arbitration<br />
pursuant to the arbitration agreement found in the advisor’s Form U-4. In opposition to this<br />
motion to compel, the advisor contended that his employment agreement, which was executed on<br />
the same day as his Form U-4, did not contain an arbitration clause and also did contain a merger<br />
clause. Despite recognizing that both contentions were true, the court found that the advisor’s<br />
Form U-4 was sufficient to compel the advisor to arbitrate the dispute. Additionally, attached to<br />
the advisor’s Form U-4 was a disclosure statement informing the advisor of the parties’<br />
agreement to arbitrate, which stated: “This means you are giving up the right to sue a member,<br />
customer or another associated person in court.” Further, the court noted that the unique<br />
regulatory requirements in the investment industry permit the court to infer that the Form U-4<br />
ordinarily provides for dispute resolution rather than an employment agreement doing so.<br />
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N.3<br />
Gilmore v. Brandt, 2011 U.S. Dist. LEXIS 125812 (D. Colo. Oct. 31, 2011).<br />
Following the complete decimation of his investment in what turned out to be a Ponzi<br />
scheme, an investor submitted claims that a FINRA arbitration panel found in his favor. Upon<br />
the investor’s motion to enforce the award, Defendant securities representative moved to vacate<br />
the award maintaining that the FINRA arbitrators lacked jurisdiction over the dispute as<br />
defendant never agreed to submit any dispute with the investor to arbitration. While noting that<br />
the representative should have sought an order to stay the arbitration, the court nonetheless found<br />
that the representative did preserve his objection to the panel’s jurisdiction. Particularly, the<br />
representative appended a statement to his FINRA Arbitration Submission Agreement reserving<br />
all rights to challenge the jurisdiction of FINRA at a later date, and also raised the jurisdictional<br />
objection in both his answer and pre-hearing brief. The court concluded that, despite these<br />
objections, the representative was subject to the panel’s jurisdiction pursuant to his Uniform<br />
Application for Securities Industry Regulation or Transfer (“Form U-4”) that the representative<br />
executed when first seeking licensure to sell securities. Accordingly, the court found that the<br />
representative would be required to arbitrate the dispute if required to do so under FINRA rules.<br />
After concluding that the investor was a customer within the meaning of Rule 12200, and also<br />
that the recommendation fell within the class of disputes wherein the issues are reasonably<br />
related to FINRA regulated activity, the court held that the panel’s implicit recognition of its<br />
jurisdiction was proper and denied the representative’s motion to vacate the award.<br />
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2011 U.S. Dist. LEXIS 113172 (S.D. Fla. Sep.<br />
30, 2011).<br />
Plaintiff, a FINRA member, brought claims against affiliated companies and their<br />
officers and directors seeking damages following an alleged pattern of egregious<br />
misrepresentations and fraud. The claims were submitted to FINRA arbitration. The panel<br />
entered an award in favor of the respondents and denied plaintiff’s claims in their entirety.<br />
However, approximately two weeks before that award was rendered, plaintiff filed a complaint<br />
in court. Thereafter, the respondents asserted affirmative defenses to every count in the court<br />
complaint, contending that the claims were barred in whole or in part by the doctrines of<br />
collateral estoppel and res judicata. Having concluded that the issues adjudicated were identical,<br />
fully, and fairly litigated, and, further, were necessary to the binding judgment of the panel, the<br />
court found that the doctrine of collateral estoppel barred the claims.<br />
Hantz Group, Inc. v. Van Duyn, 2011 Mich. App. LEXIS 1212 (Mich. Ct. App. June 30, 2011).<br />
Plaintiffs, financial services affiliates, appealed a trial court’s grant of defendants’ motion<br />
to set aside defaults entered against them, and also the court’s order dismissing plaintiffs’ claims<br />
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and ordering of all parties into arbitration. Plaintiffs’ claims arose out of alleged violations of<br />
non-solicitation and confidentiality agreements that defendants signed while in plaintiffs’<br />
employ. Defendants contended that the default judgment would result in manifest injustice given<br />
the amount of damages sought, the minimal delay in filing their answer, and also that the parties<br />
were involved in ongoing settlement discussions. Following a hearing on such arguments, the<br />
court agreed to set aside the default, dismissed plaintiffs’ claims, and ordered the case into<br />
arbitration. The appellate court addressed whether various parties, who the parties agreed were<br />
not “members” or “associated persons,” were required to adjudicate the claims in FINRA<br />
arbitration. Citing the Sixth Circuit, the court noted that five theories exist to bind<br />
nonsignatories to arbitration agreements, those being incorporation by reference, assumption,<br />
agency, viel-piercing/alter ego, and estoppel. The appellate court held that the trial court erred in<br />
ordering the parties to arbitrate the claims because certain plaintiffs did not agree in writing or<br />
otherwise to arbitrate the dispute, the agreements did not incorporate the FINRA membership<br />
contract arbitration clauses, the claims were not inextricably intertwined with plaintiffs’ claims<br />
under the agreements, there was no evidence that plaintiffs sought the benefit of the FINRA<br />
membership agreements in any way related to the dispute, and the third-party beneficiary theory<br />
did not apply.<br />
Morgan Keegan & Co., Inc. v. Smythe, 2011 Tenn. App. LEXIS 613 (Tenn. Ct. App. Jan. 19,<br />
2011).<br />
Following an adverse award by a FINRA panel, the Firm filed a petition to vacate the<br />
award alleging partiality and bias on the part of two members of the panel. The Firm argued that<br />
the two panel members were no longer “independent and neutral” as those members participated<br />
in prior arbitrations in which unfavorable awards were rendered against it. The trial court entered<br />
an order vacating the award and remanded the matter to FINRA for rehearing before another<br />
panel of arbitrators. On appeal, the parties addressed whether the trial court’s order was<br />
appealable under the Tennessee Uniform Arbitration Act (“TUAA”) or the FAA. The appellate<br />
court concluded that, although the FAA applies to the substantive issues in the case, the TUAA<br />
governs the appealability of the trial court’s order. The appellate court reasoned that Section 29-<br />
5-319(a)(3) of the TUAA did not authorize the appeal of the trial court’s order because there was<br />
no motion to confirm and the trial court did not address confirmation of the arbitration award in<br />
its order. Moreover, the appellate court added that Section 29-5-319(a)(5) was the applicable<br />
provision, and that it was procedural in nature and not preempted by federal law. After declining<br />
to exercise its discretion under Rule 2 to suspend the Rules of Appellate Procedure or otherwise<br />
seek to avoid the effect of the plain language of Section 29-5-319(a), the appellate court<br />
dismissed the appeal for lack of subject matter jurisdiction.<br />
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4. Motions to Vacate or to Enjoin<br />
a. Punitive Damages<br />
N.4.a<br />
Hosier v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 146670 (D. Colo. Dec. 21, 2011).<br />
Defendant moved to vacate an arbitration award on the grounds that the panel manifestly<br />
disregarded the law and exceeded its powers by failing to follow FINRA procedures and<br />
Colorado law for awarding punitive damages and attorneys’ fees. The district court held that the<br />
panel did not manifestly disregard the law where defendant did not show that the panel knew<br />
about and ignored the cited case law. The district court found that it could not review the panel’s<br />
decision based on whether there was sufficient evidence to prove wanton conduct. On punitive<br />
damages, the Arbitrator’s Manual does not obligate the panel to provide a basis for punitive<br />
damages, but rather recommends that the panel do so. Defendant did not provide a case, nor did<br />
the district court find a case, which held that the failure to follow a recommended, but not<br />
mandatory, FINRA procedural rule justified vacating an arbitration award. Lastly, defendant<br />
argued that the panel exceeded its authority by granting attorneys’ fees under the Colorado<br />
Securities Act (“CSA”) when plaintiff did not allege claims against defendant under the CSA.<br />
The district court held that defendant’s contention that it had no advance warning or opportunity<br />
to respond to the CSA claims was disingenuous since the elements of common law and statutory<br />
fraud claims are almost identical and defendant referenced the CSA at the hearing. Additionally,<br />
the district court held that by failing to object to the request for attorneys’ fees at the hearing,<br />
defendant waived its right to later contest the attorneys’ fees.<br />
b. Attorneys’ Fees<br />
N.4.b<br />
Wells Fargo Bank, N.A. v. WMR e-Pin, LLC, 653 F.3d 702 (8th Cir. 2011).<br />
Plaintiff brought claims for breach of contract and for misappropriation of trade secrets<br />
against a corporation with which it entered into agreements to provide plaintiff consulting<br />
services and software products. The Consulting Agreement governing the software at issue<br />
reserved certain intellectual property rights for plaintiff. The panel found in plaintiff’s favor for<br />
breach of the Agreement and for misappropriation of the software trade secrets, and also<br />
awarded attorneys’ fees and costs and permanently enjoined the corporation from using or<br />
disclosing the software trade secrets. Defendant moved to vacate the arbitration award on the<br />
grounds that: (1) the district court, which confirmed the award, lacked subject matter<br />
jurisdiction; and (2) the panel lacked authority to grant injunctive relief, determine the inventor<br />
of the software, and award attorneys’ fees. The Eighth Circuit noted a circuit split on<br />
determining jurisdiction for national banks and concluded that a national bank is a citizen only of<br />
the state in which its main office is located. Therefore, on the facts of this case, diversity<br />
jurisdiction was established. The Eighth Circuit held that defendant waived its right to argue that<br />
the panel lacked authority where defendant itself argued for injunctive relief, that it was the<br />
rightful owner of the software, and sought an award of attorneys’ fees. The Circuit Court also<br />
held that, under Federal Rule of Civil Procedure 60(b)(5), an injunction is only subject to<br />
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impeachment upon proof of changed circumstances that shift the equitable balance in the<br />
challenging party’s favor. Defendant failed to prove any changed circumstances. The Eighth<br />
Circuit therefore affirmed the district court’s denial of defendant’s motion to vacate the<br />
arbitration award.<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Whitney, 419 Fed. App’x. 826, (10th Cir. 2011).<br />
N.4.b<br />
Whitney alleged she was improperly denied assets held in beneficiary-controlled<br />
accounts at the Firm Lynch based on her alleged status as beneficiary. The panel dismissed her<br />
claims and granted the Firm’s request for attorneys’ fees. The district court denied Whitney’s<br />
motion to vacate the arbitration award and Whitney appealed to the Tenth Circuit on the grounds<br />
that the panel exceeded its power by (1) disregarding the terms of the contractual relationship<br />
between the account holder and the Firm; (2) failing to recognize that the account holder lacked<br />
legal authority to name a beneficiary; and (3) awarding attorneys’ fees and costs in favor of the<br />
Firm without evidence to support the award. Whitney argued that, under Oklahoma case law, the<br />
Firm was required to submit detailed records to back up their requested attorneys’ fees and the<br />
Firm’s failure to do so precluded the panel from awarding attorneys’ fees. The Tenth Circuit<br />
affirmed the district court’s decision. The circuit court found that the first two grounds lacked<br />
merit and there was sufficient evidence for the determinations made. Importantly, the circuit<br />
court also found that the arbitration award for the Firm’s attorneys’ fees was valid under<br />
Oklahoma case law because the documentation guidelines for attorneys’ fees were guidelines<br />
and not absolute. Therefore, the Tenth Circuit affirmed the district court’s denial of Whitney’s<br />
motion to vacate the arbitration award.<br />
Sheedy v. Lehman Bros. Holdings Inc., 2011 U.S. Dist. LEXIS 131003 (D. Mass. 2011).<br />
N.4.b<br />
A former employee sought to vacate an arbitration award requiring her to return the balance on a<br />
“forgivable loan” given to her by the Firm in conjunction with her employment and to pay<br />
interest and attorneys’ fees. On appeal, employee argued the award violated the Weekly Wage<br />
Act and violated Massachusetts public policy against unlawful restraint of trade and competition.<br />
The district court denied the motion to vacate the arbitration award and found that incentive or<br />
bonus compensation is outside the Weekly Wage Act unless it qualified as commissions. The<br />
district court also held that a forgivable loan had no relationship to a noncompetition agreement<br />
where the employee was free to leave at any time and work for a competitor as long as she was<br />
willing to forgo the loan. On attorneys’ fees, the district court found that attorneys’ fees were<br />
properly awarded pursuant to a contractual fee provision entered into between the parties.<br />
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c. Other<br />
N.4.c<br />
STMicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 648 F.3d 68 (2d Cir. 2011).<br />
The Firm moved to vacate arbitration award on the ground that one of the arbitrators<br />
failed to disclose his prior experience as Claimant’s expert. The Firm based its argument on<br />
Federal Arbitration Act (“FAA”), 9 U.S.C. section 10(a)(3), which states, in pertinent part, that<br />
an award can be vacated for “other misbehavior by which the rights of any party have been<br />
prejudiced.” The district court denied the Firm’s motion to vacate and, on appeal, the Second<br />
Circuit affirmed the district court’s holding but vacated the arbitration award in part based on the<br />
district court’s improper implementation of fees. In affirming the district court’s findings, the<br />
Second Circuit noted the arbitrator’s disclosures that he worked as an expert for both customers<br />
and brokerage firms, although he did not estimate the number of times he represented each side.<br />
The Second Circuit held that FINRA rules do not require exhaustive arbitrator disclosures and<br />
that, although an arbitrator may estimate the number of times he’s appeared as an expert, he is<br />
not mandated to do so. Further, there was no indication that the arbitrator had any prior<br />
knowledge or misconception about the facts of the case. The Second Circuit also noted that the<br />
Firm did not cite to, nor was the court aware of, any cases which addressed insufficient<br />
disclosure as the basis to satisfying the “other misbehavior” prong of the FAA. The Firm also<br />
argued that the arbitrators manifestly disregarded the law. However, the Second Circuit found<br />
that, since the panel did not specify under which claim the award rested, the Firm had to<br />
demonstrate manifest disregard of the law under all the claims because an arbitration award that<br />
is conceivable under any alleged claim should not be vacated. Lastly, the Second Circuit agreed<br />
with the Firm that the award should have been reduced based on the amount of money<br />
Stmicroelectronics received from its sale of the securities at issue with a corresponding reduction<br />
in interest due.<br />
Rai v. Barclays Capital, Inc., 2011 U.S. App. LEXIS 22365 (2d Cir., Nov. 2, 2011).<br />
N.4.c<br />
Pro se plaintiff, Rai, appealed the Southern District Court of New York’s denial of his<br />
motion to vacate the arbitration award. Rai argued the arbitration award should be vacated<br />
because of the arbitrator’s misconduct in excluding one of Rai’s witnesses. The misconduct<br />
alleged was a failure to adjourn the hearing when Rai’s witness could not appear on the<br />
scheduled day and that the panel would not accept an affidavit by Rai’s witness in lieu of his<br />
appearance at the hearing. The Second Circuit affirmed the denial of the motion to vacate where<br />
the plaintiff failed to request an adjournment and found that (1) refusal to postpone a hearing to<br />
permit witness testimony and (2) refusal to receive a witness’ affidavit in place of live testimony<br />
do not rise to the level of unfairness required to vacate an arbitration award under the Federal<br />
Arbitration Act, 9 U.S.C. section 10(a)(1).<br />
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N.4.c<br />
Aviles v. Charles Schwab & Co., Inc., 435 Fed. Appx. 824 (11th Cir. 2011).<br />
The Firm sought and won an arbitration award against a former employee, Aviles, on<br />
claims of improper solicitation of the Firm’s clients. Aviles moved to vacate the arbitration<br />
award on the grounds that the arbitrators refused to hear material evidence when a witness<br />
became unavailable; refused to postpone the hearing; rendered an award contrary to public<br />
policy and were biased. The district court denied Aviles’ motion to vacate. On the issue of<br />
material evidence, the Eleventh Circuit found that the chairperson was accommodating with<br />
unavailable witnesses and reminded Aviles he could use telephonic testimony or file a motion for<br />
the chairperson to issue subpoenas to acquire the evidence. On the allegation of arbitrator bias,<br />
in order to establish “evident partiality,” the challenging party had to provide evidence of an<br />
actual conflict of interest or identify a business or other connection that might suggest bias which<br />
the arbitrator failed to disclose. The Eleventh Circuit held that an affidavit by another arbitrator<br />
concerning statements made by the chairperson did not demonstrate evident partiality, but did<br />
provide evidence of the chairperson’s misunderstanding of the law at the time of the hearing.<br />
However, an incorrect understanding of a legal issue doesn’t demonstrate bias or hostility toward<br />
a party and, therefore, the district court properly denied the motion to vacate the arbitration<br />
award.<br />
N.4.c<br />
Murray v. Citigroup Global Mkts., Inc., 2011 U.S. Dist. LEXIS 131197 (N.D. Ohio, Nov. 14,<br />
2011).<br />
A former employee of the Firm received a loan pursuant to a promissory note and, upon<br />
leaving the Firm did not pay off the outstanding loan. The employee’s motion to vacate the<br />
arbitration award was based on the grounds that the award was irrational; didn’t conform to the<br />
party’s contract; violated public policy; and manifestly disregarded the law. The district court<br />
stated that purported irrationality was an insufficient basis for vacating an award. The motion to<br />
vacate was also denied because the former employee simply contested the panel’s determinations<br />
of the facts and the court lacked the authority to re-litigate the facts of the case.<br />
N.4.c<br />
Finkelstein v. UBS Global Asset Management (US) Inc., 2011 U.S. Dist. LEXIS 89800<br />
(S.D.N.Y. August 9, 2011).<br />
A former employee of the Firm filed a claim in arbitration arguing his entitlement to a<br />
“special payment” of $6.25 million pursuant to the Firm’s ERISA-governed Separation Program.<br />
The panel denied the employee’s claim without an explanation. The district court noted that it<br />
was procedurally deficient of the employee to seek to vacate the arbitration award by filing a<br />
petition, but never making a motion to vacate. On the substantive law, the employee argued that<br />
the panel manifestly disregarded ERISA law; the award was procured through fraudulent<br />
concealment of material evidence; and the arbitrators refused to hear material evidence. The<br />
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district court held that the panel had a colorable justification to determine that the oral<br />
modifications requirement under ERISA did not apply; that there was ample evidence to<br />
conclude that the employee was not entitled to the special payment; and noted that the<br />
arbitrator’s factual findings are not subject to any review if the ground for the decision can be<br />
inferred from the facts of the case. The employee’s fraudulent concealment argument is based<br />
on its contention that the Firm intentionally withheld a particular month of data on profit and<br />
losses of a similarly situated employee. The district court found that the Firm could not be held<br />
liable for fraudulently concealing information where it was under no obligation to disclose that<br />
information and did voluntarily disclose appropriate data. The panel also denied the employee’s<br />
request for the production of evidence concerning the value of any parallel investments held by<br />
the Firm’s investment bank. The district court confirmed that the employee lacked a good faith<br />
basis for the information and did not prove that it would have altered the outcome of the<br />
arbitration. The employee’s motion to vacate the arbitration award was therefore denied.<br />
Salzman v. KCD Financial, Inc., 2011 U.S. Dist. LEXIS 147170 (S.D.N.Y. Dec. 21, 2011).<br />
N.4.c<br />
Salzman, a former employee and majority shareholder of the Firm (a FINRA member), entered<br />
into Stock Purchase Agreement to sell his Firm stock to another FINRA member. The Firm filed<br />
claims of breach of fiduciary duty and breach of contract against Salzman and others. The panel<br />
found Salzman jointly and severally liable for compensatory damages plus 5% interest, but did<br />
not specify under which claim his liability was based. Salzman sought to vacate the arbitration<br />
award on the grounds that (1) the award was procured by fraud or undue means because the<br />
Consulting Agreement was withheld from the panel and (2) another defendant gave false<br />
testimony at the hearing. The court noted that, although the Second Circuit has not articulated a<br />
test for vacating an arbitration award on the ground of fraud, district courts have found that a<br />
party challenging the arbitration award must show (1) engagement in fraudulent activity; (2) that<br />
challenger, using due diligence, could not have discovered the alleged fraud prior to the award;<br />
and (3) the alleged fraud was materially related to an issue in the arbitration. Salzman failed to<br />
provide evidence for prongs 1 and 2 and also failed to provide evidence that the other defendant,<br />
who was also found liable to KCD, provided fraudulent testimony. The district court denied<br />
Salzman’s motion to vacate the arbitration award.<br />
O. Practice and Procedure<br />
1. Rule 9(b) of the Fed. R. Civ. P.<br />
City of Pontiac Gen. Emp. Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011).<br />
In a proposed class-action brought by a pair of retirement funds that purchased stock in<br />
MBIA, Inc., the district court dismissed the suit as barred by the statute of limitations. The<br />
Second Circuit vacated the district court’s dismissal and remand for reconsideration of the statute<br />
of limitations analysis in light of the Supreme Court’s decision in Merck & Co. v. Reynolds, 130<br />
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S.Ct. 1784 (2010). Prior to Merck, Second Circuit precedent provided that a plaintiff was on<br />
“inquiry notice” when public information would lead a reasonable investor to investigate the<br />
possibility of fraud; the statute of limitations period starts to run the day the plaintiff should have<br />
begun investigating. Merck held that the limitations period begins to run only after “a reasonably<br />
diligent plaintiff would have discovered the facts constituting the violation, including scienter—<br />
irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.”<br />
Because the district court decision relied on the now-overruled “inquiry notice” rule, the<br />
appellate court reversed.<br />
New Orleans Emps. Ret. Sys. v. Celestica, Inc., 2011 WL 6823204 (2d Cir. Dec. 29, 2011).<br />
After the district court dismissed the plaintiffs’ securities fraud claims under the<br />
Securities Exchange Act of 1934 for failure to plead the requisite scienter, the plaintiffs<br />
appealed. The Second Circuit reversed and remanded, finding that the plaintiffs adequately<br />
alleged that the defendants made knowing or reckless misrepresentations concerning the<br />
company’s financial performance. To support their scienter allegations, the plaintiffs’ complaint<br />
used statements from confidential witnesses indicating that they informed the defendants about<br />
the company’s financial problems. Although the complaint did not identify these witnesses by<br />
name, the court found the pleadings sufficient to comply with the heightened pleading standards<br />
of Rule 9(b) and the Private Securities <strong>Litigation</strong> Reform Act of 1995, which the court found did<br />
not require the pleading of detailed evidentiary matter.<br />
Barnard v. Verizon Commc’n, Inc., 2011 WL 5517326 (3d Cir. Nov. 14, 2011).<br />
Former shareholders in bankrupt corporation spun-off from Verizon Communications<br />
sued Verizon and the administrative agent responsible for a debt exchange that took place in<br />
connection with the spin-off, alleging securities fraud, common law fraud, and other state and<br />
federal claims. The district court dismissed the case, plaintiffs appealed, and the Third Circuit<br />
affirmed. The court of appeals held that the plaintiffs’ federal securities fraud allegations fell far<br />
short of the particularized pleading required by the Private Securities <strong>Litigation</strong> Reform Act of<br />
1995, and their common law fraud allegations likewise failed to meet the particularity<br />
requirements of Rule 9(b).<br />
Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462 (4th Cir. 2011).<br />
Plaintiffs appealed the district court’s denial of their motion to amend the dismissal with<br />
prejudice of their complaint. The Fourth Circuit held that the district court did not abuse its<br />
discretion in concluding that allowing the plaintiffs to file the proposed third amended complaint<br />
would have been futile, for even the proposed complaint inadequately pleaded loss causation.<br />
The appellate court held that although the market disclosures at issue provided information<br />
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suggesting that the company’s initial statements regarding a planned leveraged buyout were<br />
overly optimistic, they did not disclose that Penn had perpetrated a fraud on the market by<br />
omitting in its eight prior press releases related to state regulatory approvals any mention that the<br />
leveraged buyout would not close as written, and thus did not sufficiently “relate back” to the<br />
alleged fraud.<br />
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).<br />
A class of investors who purchased securities in defendant Dana Corporation alleged that<br />
the CEO’s and CFO’s continually optimistic statements misrepresented the company’s dire<br />
financial straits, constituting securities fraud under Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5. The district court dismissed the plaintiffs’ complaint for<br />
failing to adequately plead scienter under Rule 9(b). Plaintiffs appealed, arguing that the<br />
defendant’s receipt of internal reports demonstrating financial distress, their cover-up of<br />
malfunctioning accounting systems, the magnitude of false statements and temporal proximity of<br />
false statements and corrective statements, their motivation to earn bonuses, the retirement of<br />
one of the fraud participants just after the accounting errors were revealed, their signing false<br />
Sarbanes-Oxley certifications, and the fact that the SEC investigated the company’s accounting<br />
practices demonstrated scienter. The Sixth Circuit agreed. Following the Supreme Court’s lead<br />
in Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011), which provided a post-Tellabs<br />
example of how to consider scienter pleadings “holistically” in section 10(b) cases, the Sixth<br />
Circuit held that the inference that the defendants recklessly disregarded the falsity of their<br />
extremely optimistic statements was at least as compelling as their excuse of failed accounting<br />
systems. The Sixth Circuit also held that the district court erred when it required Plaintiffs to<br />
plead as part of their section 20(a) claim that the defendants did not act in good faith; it joined<br />
the First, Fourth, Fifth, Seventh, and Eleventh Circuits in concluding that good faith is an<br />
affirmative defense.<br />
AnchorBank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011).<br />
A bank and the trustee for the bank’s investment fund filed suit against a bank employee<br />
alleging that he engaged in a collusive trading scheme in violation of sections 9(a) and 10(b) of<br />
the Securities Exchange Act of 1934. The complaint explained the scheme as a conspiracy<br />
between the defendant and other fund participants to cyclically cause drastic swings in the fund<br />
price, which allowed the conspirators to increase the value of their fund holdings by more than<br />
200%, even though the value of the fund units plummeted 95%. The employee successfully<br />
moved to dismiss the case on the grounds that the complaint inadequately pled reliance, scienter,<br />
and loss causation; but the Seventh Circuit reversed. The complaint stated that trustee himself<br />
relied on the distorted stock prices and the facts pleaded demonstrated that scienter was as<br />
plausible an explanation as any other, as required by Tellabs. As for loss causation, neither the<br />
fact that the trustee’s discretionary behavior might also have altered stock price nor the general<br />
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market sector downturn rendered the complaint’s stated facts insufficient under Rule 9(b)’s<br />
particularity requirement.<br />
Hill v. State Street Corp., 2011 WL 3420439 (D. Mass. Aug. 3, 2011).<br />
In consolidated class actions alleging violations of both the federal securities laws and the<br />
Employee Retirement Income Security Act (“ERISA”) brought against State Street Corporation<br />
and several other defendants, the defendants moved to dismiss claiming that, among other<br />
reasons, the plaintiffs failed to state claims with sufficient particularity. After finding that the<br />
federal securities law claims complied with the heightened pleading standards of both the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995 and Rule 9(b), the court turned to whether Rule 9(b)<br />
also applied to the ERISA claims. Recognizing uncertainty in the law on the issue, the court<br />
rejected the defendants’ arguments and held that Rule 9(b) did not apply. The court explained<br />
that while the complaint alleged that State Street’s foreign exchange practices were fraudulent,<br />
the fraud allegations were simply further proof that State Street stock was an imprudent<br />
investment. Thus, the court held, the plaintiffs might ultimately be unable to prove the alleged<br />
fraud, but nonetheless succeed on their claim that the defendants breached their fiduciary duty<br />
under ERISA by imprudently offering State Street stock as a plan investment.<br />
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC, 792 F. Supp. 2d 328 (D. Conn. 2011).<br />
The plaintiff brought securities fraud claims against a fund and related entities in which it<br />
invested, along with the executive who allegedly controlled the defendant-entities. The<br />
executive moved to dismiss the Section 20(a) claim against him alleging control person liability,<br />
but the court denied the motion, finding that the complaint sufficiently alleged that the executive<br />
possessed control over the alleged primary violators and that he was a culpable participant in the<br />
alleged primary violations. Addressing the defendant’s argument that the pleading standards of<br />
Rule 9(b) and the Private Securities <strong>Litigation</strong> Reform Act of 1995 applied to all the elements of<br />
the Section 20(a) claim, the court disagreed. The court found that the heightened pleading<br />
standards applied to the culpable participation element of the claim, but that the control element<br />
was subject only to the lower standard of Rule 8. Because the complaint contained sufficient<br />
allegations to satisfy the pleading standard applicable to each element, the court denied the<br />
motion to dismiss.<br />
Prime Mover Capital Partners, L.P. v. Elixir Gaming Techs., Inc., 793 F. Supp. 2d 651<br />
(S.D.N.Y. 2011).<br />
Hedge funds brought a securities fraud action against an issuer of securities, its individual<br />
directors and officers, a Hong Kong corporation that later gained control of the issuer, and the<br />
Hong Kong corporation’s chairman, a citizen of Canada residing in Hong Kong. After the court<br />
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dismissed the latter two defendants for lack of personal jurisdiction, the remaining defendants<br />
moved to dismiss under Rule 12(b)(6). The court granted the motion in part and denied it in part.<br />
With respect to the securities law claims, the court found that one of the plaintiffs failed to plead<br />
transaction causation adequately, while the other largely failed to plead loss causation adequately<br />
and, to the extent its causation allegations were adequate, the alleged misrepresentations were<br />
nevertheless protected as forward-looking statements. Turning to the plaintiffs’ claims that the<br />
defendants breached certain warranties in the transaction documents, the court held that Rule<br />
9(b) applied to these breach of contract claims because the warranty claims were closely related<br />
to the securities fraud claims, and thus the question of breach turned on whether the fraudulent<br />
conduct adequately had been pleaded. According to the court, Rule 9(b)’s relaxed standard for<br />
averments of intent should not be mistaken as a license to base claims of fraud on speculation<br />
and conclusory allegations, and still required the plaintiff to allege facts giving rise to a strong<br />
inference of fraudulent intent. Because the complaint failed to contain allegations giving rise to<br />
a strong inference that the issuer or any of its agents had a concrete personal motive to<br />
manipulate the price of the company’s stock and warrants, the breach of warranty claims failed.<br />
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011).<br />
In an action brought by the SEC accusing a father and his sons of insider trading where<br />
the father allegedly disclosed material non-public information regarding his employer to his<br />
sons, the defendants moved to dismiss, claiming that the SEC’s allegations failed to comply with<br />
the pleading requirements of Rule 9(b) because they did not allege whether the father directly or<br />
indirectly provided the sons with the information. The court rejected this argument, holding that<br />
the allegations were sufficient to put the defendants on notice of the claims, and to require the<br />
SEC to allege the specific details of the tips, including the manner in which they were disclosed,<br />
would place too heavy a burden on the SEC at the pleading stage. The court also rejected the<br />
defendants’ contention that the fact that the SEC had conducted discovery and deposed several<br />
defendants obligated it to plead with greater particularity, finding no basis for raising the<br />
pleading standard based upon the procedural posture of the case.<br />
PT Bank Negara Indonesia (Persero) Tbk v. Barclays Bank PLC, 2011 WL 4717360 (S.D.N.Y.<br />
Sept. 28, 2011).<br />
Plaintiff sued the defendants alleging that they defrauded the plaintiff into buying a<br />
credit-linked note that lost more than half of its value due to the bankruptcy of one of the<br />
corporate entities to which it was linked. The plaintiff asserted claims for violations of the<br />
Securities Exchange Act of 1934, along with numerous other state law claims. The defendants<br />
moved to dismiss on the grounds that the federal securities claim failed to plead an active<br />
misrepresentation or willful omission of material information about the credit-linked note with<br />
the particularity required by Rule 9(b). The court agreed, finding a general statement by the<br />
defendants that the note would be linked to “Verizon,” a large company known to have good<br />
credit, and the fact that the note carried a low rate of interest, were insufficient to show that the<br />
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defendants had misrepresented the note as investment grade, given that the sale documents made<br />
clear that Verizon was not necessarily the only reference entity on the note and that the note was<br />
unrated.<br />
Anwar v. Fairfield Greenwich, Ltd., 2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011).<br />
Investors brought suit against a securities broker and its corporate affiliates alleging<br />
securities fraud under Florida law based upon the broker’s recommendation to invest in a feeder<br />
fund that in turn invested in a Ponzi scheme. The defendants moved to dismiss for failure to<br />
plead the elements of fraud with particularity as required by Rule 9(b). The court found the<br />
plaintiffs’ claims based upon the riskiness of the feeder fund and the lack of due diligence were<br />
defectively pleaded due to the failure to allege where the misstatements were made and, with one<br />
exception, when they were made. The plaintiffs’ fraud claims were also deemed defective<br />
because they failed to specifically plead facts indicating what the defendants obtained through<br />
the fraud, or that the defendants had a motive to commit fraud. In addition, the court dismissed<br />
the negligent misrepresentation claims due to the failure to comply with Rule 9(b)’s<br />
requirements, as those claims were essentially identical to the defective fraud claims.<br />
Sawabeh Info. Servs. Co. v. Brody, 2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011).<br />
The plaintiff and its wholly-owned subsidiary brought suit against the subsidiary’s former<br />
officers and shareholders arising out of the defendants’ sale of all of the outstanding shares of the<br />
subsidiary to the plaintiff. The plaintiff asserted federal securities fraud and assorted state law<br />
claims against the defendants, accusing them of failing to disclose certain significant potential<br />
liabilities stemming from the transaction, including an agreement that transferred all of the<br />
subsidiary’s intellectual property to one of the former officers and an employment agreement<br />
that entitled the same officer to a large severance package. The defendants moved to dismiss,<br />
and the district court granted the motion in part and denied it in part. With respect to the<br />
securities fraud claims, the court held the allegations sufficiently specific and plausible to survive<br />
the motion to dismiss under the heightened pleading requirements of the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 and Rule 9(b). In particular, the court found that the complaint<br />
adequately alleged that the failure to disclose the agreements with the former officer constituted<br />
material misrepresentations or omissions, that it was at least reckless not to do so, that the<br />
defendants relied on these misrepresentations, and that this caused their losses, as the plaintiffs<br />
specifically stated that neither they nor any reasonable purchaser would have entered into the<br />
transaction had they known the true facts. In addition, the court found that Rule 9(b) does not<br />
require the plaintiffs to plead damages with specificity.<br />
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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).<br />
Over a two-year period, plaintiff purchased almost two dozen structured notes from<br />
defendants. As the declining value of the notes triggered margin calls, defendants liquidated<br />
portions of the plaintiff’s note investments, causing him to lose millions of dollars. He brought<br />
suit against them under § 10(b) of the Securities Exchange Act of 1934 alleging that he had been<br />
misled by defendants into significantly underestimating the risk of purchasing the notes,<br />
including the risk of forced liquidation. Defendants moved to dismiss the suit, claiming that the<br />
plaintiff failed to allege that the misstatements were material, scienter, reasonable reliance, and<br />
loss causation. Defendants also claimed that U.S. courts lacked jurisdiction because the notes<br />
were purchased outside of the U.S. and were not listed on a domestic exchange, and that<br />
plaintiff’s suit was time-barred. The district court rejected nearly all of defendants’ arguments<br />
and allowed the complaint to stand. It held that (1) the “bespeaks caution” doctrine did not apply<br />
because the warnings provided did not cover all of the risks that plaintiff complains defendants<br />
did not disclose; (2) the defendants’ failure to provide the plaintiff with prospectuses or other<br />
detailed written information about the complex debt instruments was an extreme departure from<br />
ordinary standards of care, supporting the inference of scienter; (3) the defendants’ active efforts<br />
to circumvent federal regulations designed to protect investors also supported the inference of<br />
scienter; (4) the plaintiff’s negligence in failing to ask for additional information did not entirely<br />
undermine the reliance element of his claim, finding that failing to read documents in one’s<br />
possession, which can affect the reliance prong, and failing to ask for information are sufficiently<br />
distinct; (5) the fact that the financial harm suffered by the plaintiff occurred during a period of<br />
financial market decline did not prevent him from pleading loss causation; (6) the case was not<br />
time-barred because the plaintiff was not a sophisticated investor, and thus he fulfilled his<br />
responsibility of reasonable diligence to investigate potential fraud notwithstanding the various<br />
warning signs that a sophisticated investor would have noticed; and (7) although the notes<br />
themselves were not listed on a domestic exchange, they were all linked to securities listed on a<br />
domestic exchange, and this was enough to give the court jurisdiction under § 10(b).<br />
In re Anadigics, Inc., Sec. Litig., 2011 WL 4594845 (D.N.J. Sept. 30, 2011).<br />
The plaintiffs brought securities fraud claims against the defendants claiming that they<br />
misled investors about Anadigics’s capacity to meet demand for its products. The defendants<br />
sought dismissal for failure to satisfy the pleading demands of Rule 9(b) and the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995, and the district court granted the motion. The court<br />
found that most of the allegedly misleading statements were forward-looking and accompanied<br />
by meaningful cautionary language and while the plaintiffs had identified two potentially false or<br />
misleading statements with the requisite particularity, they nevertheless failed to plead facts<br />
supporting an inference that the defendants were under a duty to disclose alleged over-ordering<br />
and dual-sourcing being done by the company’s customers. In addition, the plaintiffs failed to<br />
adequately allege scienter because the confidential witness allegations used in an attempt to<br />
support an inference of knowledge lacked particularity. The complaint’s confidential witness<br />
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allegations did not reference particular dates on which material information was discovered and<br />
allegedly conveyed to management that would permit a strong inference of scienter.<br />
Monk v. Johnson and Johnson, 2011 WL 6339824 (D.N.J. Dec. 19, 2011).<br />
Plaintiffs brought securities fraud claims against corporation, its wholly-owned<br />
subsidiary, and current and former officers and directors, alleging that they misrepresented<br />
material information about systemic quality control failures at certain drug manufacturing plants.<br />
Certain individual defendants moved to dismiss for failure to meet the applicable pleading<br />
standards imposed by Rule 9(b) and the Private Securities <strong>Litigation</strong> Reform Act of 1995. The<br />
court found the scienter allegations sufficient with respect to some defendants but lacking as to<br />
others, and thus granted the motion in part and denied it in part. Commenting on the demands of<br />
Rule 9(b), the court found that the plaintiffs’ citations to press releases did not satisfy the<br />
pleading standards because they did not identify the dates of the press releases or the precise<br />
statements attributable to particular defendants. In addition, the court found allegations that a<br />
defendant should have known about quality control problems simply by virtue of her position<br />
defective because a corporate officer’s knowledge of day-to-day operations could not be<br />
presumed.<br />
Chau v. Aviva Life and Annuity Co., 2011 WL 1990446 (N.D. Tex. May 20, 2011).<br />
The plaintiffs, a group of physicians and dentists and their professional corporations, sued<br />
the defendant based on its advertising, marketing and sale of tax shelters, accusing the defendant<br />
of common law fraud, negligent misrepresentation, violating Washington state securities laws,<br />
and other state common law and statutory claims. The defendant moved to dismiss, and the<br />
court granted dismissal of all claims except the breach of contract cause of action. The court<br />
found that while the common law fraud claim adequately alleged the “who, what, when, where,<br />
and how” of the alleged fraud, it failed to allege why the purported misrepresentations were false<br />
when made. Specifically, the court found that allegations that the defendant was aware that the<br />
IRS had questioned the propriety of similar plans failed to show that the defendant knew that its<br />
statements regarding the benefits and legality of the tax shelters were false when made and since<br />
the plaintiffs’ Washington state securities law claims were premised on the same allegations of<br />
fraudulent misstatements, they also failed to state a claim with the particularity required by Rule<br />
9(b). With respect to the plaintiffs’ contract claims, however, the court found it generally<br />
inappropriate to apply Rule 9(b) to contract actions under Fifth Circuit law and, in any event, the<br />
claimed breach was not based on the allegedly fraudulent misrepresentations, but the failure to<br />
provide the promised benefits. Accordingly, the contract claims survived the motion to dismiss.<br />
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SEC v. Carroll, 2011 WL 5880875 (W.D. Ky. Nov. 23, 2011).<br />
The SEC accused several defendants of insider trading, and they responded by filing<br />
individual motions to dismiss. One of the defendants argued that the SEC failed to supply a<br />
specific description of the alleged inside information, but the court rejected this argument,<br />
finding that Rule 9(b)’s particularity requirements were relaxed where facts are peculiarly within<br />
the knowledge of defendants. Another defendant argued that the SEC’s scienter allegations were<br />
insufficient, but the court held that Rule 9(b) permitted general allegations as to state of mind,<br />
finding that the SEC should not be held to the higher standard imposed on private litigants by the<br />
Private Securities <strong>Litigation</strong> Reform Act of 1995.<br />
SEC v. Steffes, 2011 WL 3418305 (N.D. Ill. Aug. 3, 2011).<br />
The SEC brought an enforcement action against employees, alleging that they engaged in<br />
insider trading by disseminating non-public information to family members regarding the<br />
company’s pending acquisition. The defendants moved to dismiss, and the court denied the<br />
motion, holding that the SEC sufficiently alleged misappropriation of material non-public<br />
information, breach of fiduciary duty, and scienter, all with the particularity required by Rule<br />
9(b). Though the defendants admittedly were not involved in the merger negotiations, the SEC<br />
claimed that they pieced the situation together for themselves based on information that was<br />
available to them as employees, and the complaint identified with the requisite particularity what<br />
information the employees used to reach the conclusion that the company was being sold. The<br />
employees also pointed to the complaint’s failure to identify the dates and times of the phone<br />
calls they allegedly made to family members to discuss the misappropriated information, or the<br />
specific contents of the conversations, but the court found that the SEC’s allegation that the<br />
suspicious trading immediately followed such phone calls sufficed to support a reasonable<br />
inference that the calls involved misappropriation. The court also concluded that several prior<br />
decisions involving the SEC and referencing the “strong inference” standard with respect to<br />
scienter did not mean that the Private Securities <strong>Litigation</strong> Reform Act of 1995 standard applied<br />
to the SEC, and instead held that Rule 9(b) allows scienter to be alleged generally.<br />
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 2011 WL 1253250 (D.<br />
Ariz. Mar. 31, 2011).<br />
Plaintiffs brought a securities fraud action against defendant Apollo Group, Inc., and a<br />
group of its officers and directors, accusing the defendants of improperly backdating stock option<br />
grants. The district court had previously dismissed with leave to amend, and after the plaintiffs<br />
filed their Second Amended Complaint, the defendants again moved to dismiss, arguing that the<br />
complaint failed to plead backdating with the particularity required by Rule 9(b). The court<br />
agreed, finding that no reasonable inference of backdating could be drawn as to those grants that<br />
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were disclosed by the timely filing of Form 4s with the SEC. With respect to grants for which<br />
Form 4s were not necessarily timely filed, the court credited the defendants’ arguments that the<br />
plaintiffs used inconsistent standards to measure the gains that accrued after options were<br />
granted, thus undercutting the force of their backdating allegations. The defendants also<br />
convinced the court that the plaintiffs had improperly cherry-picked a small subset of option<br />
grants to allege circumstantial backdating, ignoring the larger number of grants that bore no<br />
indicia that they were backdated. With respect to the plaintiffs’ claims that Apollo overstated its<br />
net income and understated its compensation expenses as a result of granting stock options below<br />
their fair market value, the court similarly held that these allegations failed to meet the applicable<br />
pleading standards.<br />
Nguyen v. Radient Pharms. Corp., 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011).<br />
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Plaintiffs filed a complaint alleging federal securities law violations against a small<br />
pharmaceutical company and related individuals. The defendants moved to dismiss, arguing that<br />
the complaint failed to comply with the applicable pleading requirements and, in particular,<br />
failed to identify the allegedly material misrepresentations with the particularity required by Rule<br />
9(b) and the Private Securities <strong>Litigation</strong> Reform Act of 1995. The court disagreed and denied<br />
the motion, holding that the plaintiffs adequately specified which statements were misleading<br />
and stated the reasons why those statements were misleading. Specifically, the plaintiffs<br />
properly accused the defendants of misstating that that the company was conducting a drug study<br />
with the Mayo Clinic and referring to that study as the “Mayo study” when, in fact, the company<br />
had only entered into a collaboration agreement with a separate laboratory division of the Mayo<br />
Clinic known as Mayo Validation Support Services.<br />
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Anschutz Corp. v. Merrill Lynch & Co., Inc., 785 F. Supp. 2d 799 (N.D. Cal. 2011)<br />
The plaintiff, an investor in auction rate securities (“ARS”) brought suit against sellers of<br />
ARS and securities ratings agencies, accusing the sellers of market manipulation in violation of<br />
the Securities Exchange Act of 1934 and California state securities laws, and accusing the ratings<br />
agencies of negligent misrepresentation. The defendants moved to dismiss, and with one limited<br />
exception, the court denied the motion. With respect to the market manipulation claims against<br />
the sellers, the court found that the allegations were pleaded with sufficient particularity to<br />
satisfy Rule 9(b), rejecting the defendants’ argument that their disclosure of the fact that they<br />
“may” place support bids in auctions precluded claims of manipulation. The defendants’<br />
disclosure was not sufficient to cover the allegation made by plaintiffs that in the auctions at<br />
issue, the defendants had participated in every auction and bid for 100% of the issue at every<br />
auction. With respect to the negligent misrepresentation claims against the ratings agencies, the<br />
court noted that district courts within the Ninth Circuit held Rule 9(b) applicable to such claims<br />
and therefore, although the Ninth Circuit had not decided the question, the court assumed that the<br />
heightened pleading standard applied. The court found the plaintiff’s allegations against the<br />
rating agencies sufficient to meet the heightened standard, particularly in light of the rating<br />
agencies’ involvement in structuring the securities at issue, their knowledge that the securities<br />
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needed to achieve an investment-grade rating to be marketed as intended, and that a defined<br />
group of buyers would be the only entities allowed to purchase the securities.<br />
SEC v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011).<br />
In an enforcement action brought by the SEC against two Charles Schwab executives<br />
responsible for the firm’s YieldPlus Fund, the executives moved to dismiss and strike portions of<br />
the complaint. The court denied the motion in large measure, rejecting the defendants’<br />
arguments that the complaint failed to allege their substantial participation in misrepresentations<br />
attributable to others. The court found that these alleged misstatements all concerned the Fund<br />
managed by Daifotis, who reported directly to Merk, who was the President of Charles Schwab<br />
Investment Management and also a trustee for the entity that issued the YieldPlus Fund. The<br />
complaint adequately set forth allegations that Merk oversaw Daifotis and the Fund, and also<br />
substantially participated in the creation of various alleged misstatements made by others. Thus,<br />
the court found, the SEC had pleaded misrepresentations with the particularity demanded by<br />
Rule 9(b).<br />
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2. Rule 11 of the Fed. R. Civ. P.<br />
Fishoff v. Coty, Inc., 634 F.3d 647 (2d Cir. 2011).<br />
Former CFO brought suit against his former employer that included claims under the<br />
Securities Exchange Act of 1934 based upon options he received. The district court rejected the<br />
securities fraud claims as a matter of law for failure to plead the requisite scienter, but concluded<br />
that the plaintiff had complied with Rule 11 in asserting the claims. The employer appealed, and<br />
the Second Circuit affirmed, finding that the district court did not abuse its discretion. Although<br />
unlikely to succeed, the plaintiff’s securities fraud claims were not foreclosed by binding<br />
precedent and the plaintiff’s position was not unsupported by case law even though the cases he<br />
cited were not binding on the court adjudicating his claims. Accordingly, the claims were nonfrivolous<br />
and Rule 11 sanctions were not warranted.<br />
Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).<br />
Plaintiffs appealed the district court’s imposition of Rule 11 sanctions based upon<br />
conclusions that plaintiffs’ attempted filing of a Third Amended Complaint was not warranted by<br />
existing law and was presented only for the improper purpose of harassing the defendant, and<br />
that the plaintiffs failed to conduct a reasonable inquiry into the facts before filing suit. The<br />
district court’s sanctions award required the plaintiffs to reimburse the defendants for all<br />
attorney’s fees and costs incurred in the defense. The Sixth Circuit reversed, finding that the<br />
district court’s sanctions award went beyond the conduct identified by the defendant--the<br />
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improper attempt to file the Third Amended Complaint---as the basis for its motion for sanctions.<br />
The court found that the sanctions award violated Rule 11’s clear requirement that the motion<br />
describe the specific conduct that allegedly violates Rule 11(b), and thus the plaintiffs lacked the<br />
requisite notice that the initial filing of the lawsuit could form the basis for sanctions.<br />
SEC v. Smith, 798 F. Supp. 2d 412 (N.D.N.Y. 2011).<br />
Sanctions were warranted against wife of the target of an SEC investigation and the<br />
attorney for a trust in which she and her husband had an interest based upon their subjective bad<br />
faith. When the SEC moved for a preliminary injunction freezing assets of the trust based upon<br />
its contention that the target held an interest in the trust assets, the wife deliberately concealed<br />
the existence of an annuity agreement pursuant to which she and her husband were to receive<br />
$500,000 annually from the trust, warranting sanctions. Likewise, the attorney for the trust acted<br />
with subjective bad faith by submitting a declaration denying that she informed the SEC of the<br />
existence of the annuity agreement because she had no knowledge of it at the time, where she<br />
had received an email referring to the annuity agreement one day before her conversation with<br />
the SEC.<br />
Stevens v. Sembcorp Utilities PTE Ltd., 2011 WL 3296063 (S.D.N.Y. Aug. 1, 2011).<br />
In a suit brought by a shareholder against a defendant claiming that the defendant omitted<br />
material information from its tender offer to purchase the shares of the firm in which the plaintiff<br />
was a shareholder, the defendant moved to recover its attorney’s fees under Rule 11. The district<br />
court rejected the defendant’s argument that the plaintiff’s amended complaint was moot before<br />
it was filed, holding that while the release of certain documents mooted the primary concerns of<br />
the original complaint, those disclosures did not address the claims asserted in the amended<br />
complaint. The court found that the plaintiff’s claims were not so patently meritless as to render<br />
the amended complaint sanctionable, and thus refused to award attorney’s fees to the defendant.<br />
Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL 4389689 (C.D. Cal. May 5, 2011).<br />
District court granted defendant’s motion to strike allegations from plaintiffs’ complaint<br />
referring to untested allegations from pleadings in other cases as if they were facts. Unlike other<br />
cases in which this practice was deemed appropriate, the plaintiffs’ counsel did not investigate<br />
the grounds for the allegations in the other complaints and did not contact the attorneys in the<br />
other cases to discuss the basis for the claims. The court concluded that lifting allegations from<br />
other complaints without performing any dud diligence did not constitute a reasonable<br />
investigation as required by Rule 11(b), and thus granted the motion to strike.<br />
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3. Rule 23 of the Fed. R. Civ. P.<br />
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Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179 (2011).<br />
The Supreme Court held that a plaintiff in a private securities fraud class action need not<br />
prove loss causation in order to obtain class certification under Rule 23, reversing the Fifth<br />
Circuit’s decision affirming the denial of class certification on that basis. In doing so, the Court<br />
reaffirmed its decision in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which outlined the<br />
“fraud-on-the-market” theory, pursuant to which investors are understood to rely generally upon<br />
the pricing information generated by an efficient stock market when they buy and sell securities.<br />
The decision overturned opinions by the Fifth Circuit and the Second Circuit limiting investors’<br />
ability to use the theory by holding that the investors needed to demonstrate loss causation prior<br />
to obtaining class certification.<br />
In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011).<br />
The Third Circuit affirmed class certification in a securities fraud action against a<br />
company’s auditor. On appeal, the auditor challenged the district court’s predominance findings,<br />
arguing that the court improperly applied the fraud-on-the-market presumption of reliance, that<br />
the plaintiff must establish loss causation prior to invoking the presumption and, in any event,<br />
the auditor had rebutted the presumption by showing that individual issues of loss causation<br />
predominated over common ones. The Third Circuit rejected the auditor’s arguments, holding<br />
that invocation of the fraud-on-the-market presumption was proper to satisfy the predominance<br />
requirement, that the plaintiff need not establish loss causation at the class certification stage, and<br />
that the defendant’s evidence failed to rebut the presumption of reliance.<br />
Conn. Ret. Plans and Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. 2011).<br />
After the district court certified a securities fraud class action against a company and its<br />
individual officers and directors, the Ninth Circuit granted the defendant’s request for permission<br />
to bring an interlocutory appeal. On appeal, the Ninth Circuit affirmed the class certification<br />
decision, finding that the plaintiff did not need to prove materiality in order to invoke the fraudon-the-market<br />
presumption of reliance at the class certification stage because proof of materiality<br />
was not necessary to ensure that the question of reliance was common among all prospective<br />
class members’ securities fraud claims; rather, the plaintiff’s needed only to allege materiality<br />
with sufficient plausibility. The court of appeals also held that the district court properly refused<br />
to consider the defendant’s truth-on-the-market defense at the class certification stage since the<br />
defense was a method of refuting materiality, which the plaintiff was not required to prove.<br />
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In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 275 F.R.D. 382 (D. Mass. 2011)<br />
Plaintiffs, mutual fund shareholders, brought putative class actions against companies<br />
that marketed, managed, and advised the fund, alleging that they violated federal securities law<br />
by registering, marketing, and selling the fund as a safe, liquid, and stable investment when in<br />
fact it was comprised of illiquid, risky, and volatile securities. Plaintiffs sought class certification<br />
and defendants opposed by arguing that plaintiffs lacked standing because no lead plaintiff<br />
purchased shares in the fund until 15 months after the beginning of the proposed class period, the<br />
interests of the lead plaintiffs conflicted with those of absent class members, and four of the five<br />
lead plaintiffs acquired their shares as a result of a merger between funds, rendering their claims<br />
atypical. The district court rejected these arguments and certified the class. The court held that<br />
the plaintiffs had standing despite not purchasing shares at the beginning of the class period<br />
because the offering materials in effect at the beginning of the class period were allegedly part of<br />
a common, fraudulent scheme. The court also held that the potential for conflict between<br />
plaintiffs that purchased and those that sold securities is present in every securities case and does<br />
not impede class certification. Finally, the court found that the plaintiffs’ acquisition of stock via<br />
merger and their differing purchase dates were not sufficient to defeat the typicality requirement.<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011).<br />
Investors sued issuers, underwriters, and rating agencies for securities fraud, alleging that<br />
the offering documents for mortgage-backed securities they purchased were materially<br />
misleading. On the plaintiffs’ motion for class certification, the district court found that although<br />
the plaintiffs met all of the elements of the Rule 23(a) analysis, they failed to show that common<br />
issues predominated or that a class action provided the superior method of adjudication, and thus<br />
denied class certification for failure to meet the requirements of Rule 23(b)(3). In particular, the<br />
court credited the defendants’ assertion that certain purchasers had varying levels of knowledge<br />
that the loan originators had lowered their standards, which would necessitate individual<br />
inquiries sufficient to defeat the predominance of common issues. The court also found that the<br />
proposed class consisted of large, institutional and sophisticated investors with the financial<br />
resources and incentive to pursue their own claims, such that treatment as a class action was not<br />
superior.<br />
In re Moody’s Corp. Sec. Litig., 274 F.R.D. 480 (S.D.N.Y. 2011).<br />
Plaintiffs in a putative securities fraud class action against a credit rating agency alleged<br />
that the defendant’s wholly owned subsidiary made material misrepresentations and omissions<br />
concerning conflicts of interest in its business model and about how the agency considered<br />
originator standards in its rating methodologies moved for class certification. The district court<br />
denied class certification because the defendants successfully rebutted the fraud-on-the-market<br />
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presumption by severing the link between misrepresentation and price, and plaintiffs were unable<br />
to prove that common questions predominated. In addition, the court found that a pension trust<br />
fund and individual plaintiff were unable to adequately represent the class because they were inand-out<br />
traders who could not serve as class representative (though one plaintiff was an adequate<br />
representative, satisfying the Rule 23(a) adequacy requirement).<br />
In re Dynex Capital, Inc. Sec. Litig., 2011 WL 781215 (S.D.N.Y. Mar. 7, 2011).<br />
In a suit brought by purchasers of mortgage backed securities collateralized by mobile<br />
home loans originated by the defendants, the plaintiff sought class certification. The court<br />
certified the class, rejecting arguments from the defendants that the plaintiff was not an adequate<br />
class representative because it lacked knowledge of the facts and the case was driven by counsel,<br />
and that typicality was lacking because the lead plaintiff’s claim was subject to an atypical<br />
defense. The court also spurned the defendants’ attempt to show that the fraud-on-the-market<br />
presumption could not be invoked because the relevant bond market was not efficient, as the<br />
plaintiff had shown that reliable tools existed for assessing price reactions to downgrade events.<br />
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N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2011 WL 3874821 (S.D.N.Y. Aug. 16,<br />
2011).<br />
Plaintiffs brought a putative class action under the Securities Act of 1933, claiming that<br />
offering documents issued by the defendants in connection with plaintiffs’ private placement<br />
purchase of mortgage-backed securities issued by trusts as pass-through certificates contained<br />
materially misleading misstatements and omissions. In granting class certification, the district<br />
court rejected the defendants’ arguments that differences between class members with respect to<br />
damages and timing of purchases precluded finding typicality, concluding that the supposed<br />
differences were merely speculative. The court also concluded that any potential individualized<br />
issues regarding the plaintiffs’ knowledge of the alleged misrepresentations and omissions did<br />
not predominate over the common issues presented by the case.<br />
Public Emps. Ret. Sys. of Miss. v. Merrill Lynch & Co., 2011 WL 3652477 (S.D.N.Y. Aug. 22,<br />
2011).<br />
Plaintiff-investors moved for class certification in action against investment firm,<br />
alleging securities fraud in connection with firm’s sale of mortgage pass-through certificates.<br />
The district court granted class certification, rejecting the defendants’ arguments that issues<br />
regarding the existence and materiality of the alleged misstatements, loss causation, the<br />
expiration of the limitations period, and the plaintiffs’ knowledge of the alleged misstatements<br />
were not susceptible to class-wide proof. In doing so, the district court held that the action<br />
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would primarily focus on establishing that certain statements and omissions common to all the<br />
securities offerings constituted material misrepresentations, which is a classic basis for a class<br />
action.<br />
Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., 2011 WL 6962826 (D. Minn. Dec. 12,<br />
2011).<br />
In a putative securities fraud class action, defendant opposed class certification<br />
exclusively on the grounds that the plaintiffs’ counsel were inadequate because they had made<br />
misrepresentations in the amended complaint regarding the testimony of certain confidential<br />
witnesses. The district court rejected the defendant’s argument and certified the class,<br />
concluding that the defendant failed to establish that the amended complaint contained relevant<br />
and substantial misrepresentations. The court deemed the declarations submitted by the<br />
defendant disputing the implications plaintiffs drew from the confidential witness statements<br />
insufficient to warrant finding plaintiffs’ counsel inadequate.<br />
Hodges v. Akeena Solar, Inc., 274 F.R.D. 259 (N.D. Cal. 2011).<br />
Plaintiff-investors filed securities fraud class action and moved for class certification.<br />
The district court granted the motion, holding that all the elements of the Rule 23 analysis were<br />
satisfied. With respect to the predominance prong of Rule 23(b)(3), the court rejected the<br />
defendants’ contention that the fraud-on-the-market presumption could not be used to support<br />
class certification. Though the defendants argued that they could show, using the plaintiffs’ own<br />
expert testimony, that the alleged misrepresentation did not distort the stock price, the court<br />
found that the plaintiffs’ expert did not offer any opinion on the subject of loss causation, and<br />
therefore defendants had not met their burden of eliminating the possibility that a rational jury<br />
could find that the alleged misrepresentations and omissions misled the market.<br />
In re Wash. Mut. Mortg. Backed Sec. Litig., 2011 WL 5027725 (W.D. Wash. Oct. 21, 2011).<br />
In a putative class action under the Securities Act of 1933 brought by investors against<br />
entities that created and sold mortgage-backed securities (“MBS”) alleging that residential<br />
mortgage loans backing the MBS were fundamentally impaired and that investors were mislead<br />
as to the quality of the underwriting of the loans, the plaintiffs moved for class certification. The<br />
district court certified the class, concluding that the proposed plaintiff class of 701 investors was<br />
sufficiently numerous that joinder was impractical, that the named plaintiffs’ claims were typical<br />
of those of the class, that the named plaintiffs were adequate representatives, that common legal<br />
issues existed and predominated over individual questions, and that class action was superior<br />
method of adjudicating the controversy, thus satisfying the requirements of Rule 23(a) and Rule<br />
23(b)(3).<br />
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Lane v. Page, 272 F.R.D. 558 (D.N.M. 2011).<br />
The shareholders of an acquired company brought a putative class action challenging the<br />
merger under federal securities law by alleging that a proxy statement issued in connection with<br />
the merger contained material misrepresentations and omissions. The defendants conceded all<br />
elements of Rule 23 except the named plaintiff’s adequacy as a class representative. The<br />
defendants maintained that the named plaintiff was a convicted felon, financially irresponsible,<br />
and lacked credibility and candor, and therefore could not adequately protect the interests of<br />
absent class members. The court found, however, that while the defendants had voiced some<br />
legitimate concerns about the plaintiff’s ability to act as a fiduciary, most of the cited<br />
transgressions were old, and his conduct in prosecuting the case demonstrated his ability to<br />
vigorously and faithfully protect the interests of the class. Accordingly, the court granted class<br />
certification.<br />
Bacon v. Stiefel Labs., Inc., 275 F.R.D. 681 (S.D. Fla. 2011).<br />
Participants in ERISA plan and holders of shares in a closely-held corporation brought a<br />
putative class action alleging a fraudulent scheme on the part of the corporation’s board members<br />
to conceal the value of the participants’ shares and to benefit improperly from the participants’<br />
premature sale of those shares. The district court denied the plaintiffs’ motion for class<br />
certification, holding that the plaintiffs failed to meet either the predominance or superiority<br />
requirements of Rule 23. The court concluded that individualized proof of reliance was<br />
necessary, and therefore common issues did not predominate. The court also found superiority<br />
lacking, as several would-be class members had an interest in controlling the separate, personal<br />
litigation they brought raising the same claims.<br />
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4. Venue, Pendent Jurisdiction Removal and Other Issues<br />
McIntyre Mach., Ltd. v. Nicastro, 131 S.Ct. 2780 (2011).<br />
In a suit brought by a New Jersey worker injured while using a metal-shearing machine<br />
against the British manufacturer of the machine, which had been sold to the plaintiff’s employer<br />
through a United States distributor, the New Jersey Supreme Court had held that personal<br />
jurisdiction existed over the manufacturer because it knew or reasonably should have known that<br />
its products were distributed nationwide and might reach any of the fifty states, where they could<br />
cause injury. In splintered opinions, six Justices voted to reverse. Framing the issue as whether<br />
the court had jurisdiction over an entity that was not present in the forum and had not consented<br />
to jurisdiction, Justice Kennedy’s plurality opinion (joined by Chief Justice Roberts and Justices<br />
Scalia and Thomas) asked whether the defendant’s activities “manifest an intention to submit to<br />
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the power of a sovereign.” It was not enough that the defendant might have predicted that its<br />
goods would reach the forum. The inquiry required a forum-by-forum analysis, and under the<br />
facts of the case, while the manufacturer targeted the United States market as a whole, New<br />
Jersey’s courts nevertheless lacked jurisdiction because the manufacturer had not purposefully<br />
availed itself of the New Jersey market. Justices Breyer and Alito concurred in the result, but<br />
suggested that the case could be resolved based on prior precedents, none of which held that a<br />
single isolated sale, even if accompanied by the kind of sales effort that occurred in this case,<br />
sufficed to establish personal jurisdiction.<br />
Indah v. SEC, 661 F.3d 914 (6th Cir. 2011).<br />
In an action brought by putative owners of Indonesian mines against a mining company,<br />
the SEC and others, the mining company moved to dismiss for lack of personal jurisdiction, and<br />
the district court granted the motion. On appeal, the plaintiffs argued that the nationwide service<br />
of process provision in the Securities Exchange Act of 1934 permitted exercise of personal<br />
jurisdiction based upon the mining company’s minimum contacts with the United States as a<br />
whole, rather than any particular state. The court found that the district court correctly held that<br />
the plaintiffs’ complaint failed to state a claim for violation of the Exchange Act, and therefore<br />
its nationwide service of process provision could not be used to establish personal jurisdiction.<br />
The Sixth Circuit also rejected the plaintiffs’ contention that the combined facts that (1) the<br />
mining company formerly had a registered subsidiary in the forum state, (2) did substantial<br />
business with a third-party company headquartered in the forum, and (3) sold stock to the general<br />
public including residents of the forum state, were sufficient to establish personal jurisdiction.<br />
The court of appeals therefore affirmed dismissal of the claims against the mining company for<br />
lack of personal jurisdiction.<br />
Toussie v. Smithtown Bancorp, Inc., 2011 WL 1155597 (E.D.N.Y. Feb. 7, 2011).<br />
Plaintiff brought suit against a bank holding company and its president in New York state<br />
court, alleging that they defrauded him by knowingly making materially false statements to<br />
induce him to purchase shares in the bank. The defendants removed the case to federal court,<br />
claiming that the suit necessarily raised substantial federal issues. The federal court remanded<br />
the case, holding that the plaintiff could prove his claims by relying solely on state law, the<br />
complaint did not contain a logically separate claim relating to violations of federal laws or<br />
regulations, and that references to FDIC examinations related only to defenses, and therefore<br />
federal question jurisdiction did not exist.<br />
Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 478 (S.D.N.Y. 2011).<br />
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A hedge fund filed suit against international corporations, their executives and<br />
subsidiaries, alleging violations of federal and state securities laws and various other state law<br />
causes of action. All of the defendants moved to dismiss. With respect to defendant Credit<br />
Suisse and its Swiss broker, the court found that advice given by the broker to the plaintiffs, on<br />
behalf of Credit Suisse, had the unmistakably foreseeable effect within the United States that the<br />
Plaintiffs would rely on the broker’s representations. The court found this sufficient to establish<br />
personal jurisdiction over Credit Suisse and its broker. With respect to the German broker<br />
purportedly involved in manipulating the market in certain securities in which the plaintiff<br />
invested, the court found it lacked jurisdiction because there was no indication that the broker<br />
had traveled to the United States in furtherance of the scheme, exerted any control over agents in<br />
the United States involved in the scheme, or had any contacts with the plaintiff. Nor did the<br />
court have personal jurisdiction over a British corporation and its South African principal<br />
shareholder, because, though purportedly involved in the scheme, the plaintiff’s conclusory<br />
allegations of market manipulation failed to establish that these defendants had sufficient<br />
contacts with the United States. Finally, the court found that it did have jurisdiction over a<br />
German limited liability company and its managing director, based on the fact that the managing<br />
director directed the plaintiff to purchase shares in the allegedly manipulated stock.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 761 F. Supp. 2d 103 (S.D.N.Y.<br />
2011).<br />
Hedge funds brought a securities fraud action against an issuer of securities, a Hong<br />
Kong corporation that later gained control of the issuer, and the Hong Kong corporation’s<br />
chairman, a citizen of Canada residing in Hong Kong. The latter two defendants moved to<br />
dismiss for lack of personal jurisdiction. The plaintiffs asserted that specific personal<br />
jurisdiction existed under the Securities Exchange Act of 1934. The court found that the<br />
plaintiffs’ Exchange Act claim was based on allegations that they relied to their detriment on<br />
false and misleading statements by the issuer. Because they claimed no injury as a consequence<br />
of anything allegedly done by the Hong Kong corporation or its chairman, let alone any injury<br />
arising out of or related to their contacts with the United States, the court lacked personal<br />
jurisdiction over the foreign defendants.<br />
SEC v. Compania Internacional Financiera S.A., 2011 WL 3251813 (S.D.N.Y. July 29, 2011).<br />
The SEC brought an enforcement action against a United Kingdom-based investment<br />
manager, in connection with its purchase in the U.K. of “contracts for difference” regarding the<br />
shares of a United States company that were traded on the New York Stock Exchange. The SEC<br />
accused the investment manager of trading in the contracts based on insider information, which<br />
constituted trading in securities of a U.S. corporation that was inextricably linked to the purchase<br />
or sale of that corporation’s common stock on the NYSE. The investment manager contended<br />
that personal jurisdiction was improper because the trades were conducted entirely in London,<br />
and any effects on the United States were indirect. But the court rejected this argument, citing<br />
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the admission by the investment manager’s employee that he understood these transactions<br />
would be matched by trades in U.S. securities in the normal course of business.<br />
TAGC Mgmt. LLC v. Lehman, 2011 WL 3796350 (S.D.N.Y. Aug. 24, 2011).<br />
A group of companies that attempted to start a business in China sued the Chinese law<br />
firm that assisted them, as well as an associate at the law firm who performed a small amount of<br />
work on the project, claiming violations of various state and federal laws, including Section<br />
10(b) of the Securities Exchange Act of 1934. The defendant-law firm associate moved to<br />
dismiss for lack of personal jurisdiction and the court granted the motion. The associate, a<br />
Georgia resident licensed to practice in Georgia, lacked any connections to the state of New<br />
York: he never transacted business there, had no clients in New York, never conducted business<br />
through the firm’s New York office or visited that office, and had never set foot in the state.<br />
Accordingly, the court concluded that the New York long-arm statute did not permit exercise of<br />
personal jurisdiction over him.<br />
In re Herald, Primeo & Thema Sec. Litig., 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).<br />
Three foreign plaintiffs each purporting to represent a class of foreign investors in foreign<br />
investment funds brought suit against the foreign funds and their directors, administrators,<br />
custodians, investment managers, auditors, advisors, lawyers and financial intermediaries based<br />
on the funds’ investments with Bernard L. Madoff Investment Securities LLC. After dismissing<br />
certain of the plaintiffs’ claims as precluded by the Securities <strong>Litigation</strong> Uniform Standards Act<br />
and preempted under New York’s Martin Act, the court turned to the defendants’ motion to<br />
dismiss the remaining claims on the basis of forum non conveniens in favor of Ireland and<br />
Luxembourg. Those nations, where closely related suits were already pending, permitted<br />
litigation of the subject matter of the plaintiffs’ suit and served as adequate alternative fora.<br />
Because the plaintiffs essentially admitted forum shopping, bringing suit in the U.S. to take<br />
advantage of the class action device, avoid costly fee shifting, and to pursue RICO claims, the<br />
court found their choice of forum deserving of little deference. Additionally, both the public and<br />
private interest factors favored litigation in Ireland and Luxembourg, given the evidence and<br />
witnesses located there and the fact that suits were already pending. Accordingly, the court<br />
dismissed the remaining claims based upon the doctrine of forum non conveniens.<br />
In re Optimal U.S. Litig., 2011 WL 6424988 (S.D.N.Y. Dec. 21, 2011).<br />
Foreign plaintiffs, who were investors in a fund that invested 100% of its assets with<br />
Bernard L. Madoff Investment Securities LLC, brought suit alleging that the defendants failed to<br />
conduct adequate diligence regarding Madoff, ignored red flags, and made misstatements and<br />
omissions regarding fund shares. The defendants moved to dismiss under the doctrine of forum<br />
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non conveniens. The court denied the motion, finding that because the plaintiffs resided all over<br />
the world, New York was as convenient a location as any, and the plaintiffs’ choice of forum<br />
deserved deference. Witnesses and evidence were located in New York, suggesting that the<br />
plaintiffs’ forum choice was motivated by convenience rather than forum shopping. Unlike other<br />
similar cases where courts had granted dismissal based on forum non conveniens, the plaintiffs in<br />
this case had not admitted that their decision to sue in the United States was motivated by factors<br />
strongly indicative of forum shopping.<br />
In re Heckmann Corp. Sec. Litig., 2011 WL 2413999 (D. Del. June 16, 2011).<br />
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The plaintiff filed claims under the Securities Exchange Act of 1934 arising out of a<br />
shareholder-approved merger involving two Delaware corporations. The individual defendants<br />
moved to dismiss for lack of personal jurisdiction on grounds that they were not Delaware<br />
residents and their only tie to the state owed to their status as officers and directors of a Delaware<br />
corporation. The court found, however, that pursuant to the nationwide service of process<br />
provision in 15 U.S.C. § 78aa, it was not constrained to the normal personal jurisdiction<br />
requirement that the defendants have minimum contacts with certain districts or states. Rather,<br />
the only question was whether the defendants had minimum contacts with the United States, and<br />
that issue was not contested by the defendants. The court therefore held that the defendants were<br />
subject to personal jurisdiction.<br />
Commonwealth of Pa. Pub. Sch. Emp. Ret. Sys. v. Citigroup, Inc., 2011 WL 1937737 (E.D. Pa.<br />
May 20, 2011).<br />
The plaintiffs, who were investors in Citigroup securities, brought suit in state court<br />
under state law and the Securities Act of 1933 to recover damages allegedly resulting from<br />
Citigroup’s undisclosed exposure to mortgage-backed securities. The defendants removed,<br />
asserting that neither plaintiff was an arm of the state for jurisdictional purposes. The plaintiffs<br />
moved to remand, and the court granted the motion. The court determined that defendants failed<br />
to demonstrate that the Pennsylvania Public School Employees’ Retirement System (“PSERS”),<br />
a defined benefit pension fund that manages assets for public school employees, was not an arm<br />
of the state where: the state guaranteed PSERS’ reserve fund and its payment of interest charges,<br />
annuities and other benefits; PSERS lacked independent corporate existence and state officials<br />
played a significant role in its operations; and it did not act autonomously, as the state exercised<br />
some control over its investment discretion.<br />
Szulik v. TAG Virgin Islands, Inc., 783 F. Supp. 2d 792 (E.D.N.C. 2011).<br />
The plaintiffs sued the defendants, who served as the plaintiffs’ investment advisors, and<br />
the advisors’ attorney, and sought expedited jurisdictional discovery. The court found that the<br />
investment advisor-defendants lacked sufficiently meaningful contact with North Carolina to<br />
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permit exercise of personal jurisdiction. The company was not a resident of the state, had no<br />
office there, did not regularly conduct business there, and had no accounts or assets in the state.<br />
Likewise, the individual defendants had never been North Carolina residents and had no assets in<br />
the state. Their contacts with the forum were limited to correspondence, a few business<br />
meetings, and trips to the state unrelated to the subject matter of the suit. The court found that<br />
the plaintiffs had failed to make out a prima facie case of general personal jurisdiction, and their<br />
proposed discovery would not alter the analysis of the issue.<br />
Nexbank, SSB v. BAC Home Loan Servicing, LP, 2011 WL 5182118 (N.D. Tex. Oct. 28, 2011).<br />
Plaintiff filed suit against the defendants in Texas state court asserting claims under state<br />
common and statutory law and federal securities law arising out of the plaintiff’s purchase of<br />
three mortgage-backed securities from the defendants. The defendants removed the case to<br />
federal court based on both federal question and diversity jurisdiction. The plaintiff moved to<br />
remand and the court granted the motion, concluding that the claim under the Securities Act of<br />
1933 was not removable under 15 U.S.C. § 77v(a), and the claims under the Securities<br />
Exchange Act of 1934 were not separate and independent, and therefore the court lacked subject<br />
matter jurisdiction. Back in state court, the defendants moved for partial summary judgment as<br />
to the Securities Act claim, which the state court granted. Thereafter, the defendants removed<br />
the case to federal court a second time, and the plaintiff again moved to remand. The court<br />
granted the motion, holding that the second removal violated the “voluntary-involuntary rule,”<br />
which provides that a case that is not removable on the initial pleadings may only become<br />
removable pursuant to a voluntary act of the plaintiff. Because the summary judgment on the<br />
Securities Act claim granted by the state court, which erased the initial impediment to removal,<br />
resulted from the defendants’ actions, not the plaintiff’s, the case remained non-removable and<br />
remand was warranted.<br />
KBR, Inc. v. Chevedden, 776 F. Supp. 2d 415 (S.D. Tex. 2011).<br />
In a declaratory judgment action brought by a corporation seeking a declaration that it<br />
could exclude a retail investor’s proposal in proxy materials for its annual shareholders meeting,<br />
the defendant-investor moved to transfer venue from Houston to California. The court found<br />
that the litigation arose out of letters the defendant sent to Houston asking for his proposal to be<br />
included in the proxy materials, and therefore venue was proper in Houston. In denying the<br />
motion to transfer, the court concluded that the defendant failed to show that a California venue<br />
was clearly more convenient, as the case raised a legal issue that would be resolved on the papers<br />
without the need for court appearances, rendering the parties’ relative financial burdens largely<br />
irrelevant.<br />
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In re BP S’holder Derivative Litig., 2011 WL 4345209 (S.D. Tex. Sept. 15, 2011).<br />
Plaintiffs brought a derivative action on behalf of nominal defendant BP to recover<br />
damages from current and former officers and directors of BP and its U.S. subsidiary for alleged<br />
breaches of fiduciary duty relating to the Deepwater Horizon explosion and subsequent oil spill<br />
in the Gulf of Mexico. The court granted the defendants’ motion to dismiss on forum non<br />
conveniens grounds, concluding that the English high court was the far more appropriate forum<br />
for the litigation. Due to the character of the litigation, as a derivative action challenging board<br />
action, much of the relevant evidence was likely to be located at BP’s headquarters in London,<br />
and therefore England was a more convenient forum in terms of access to proof. In addition,<br />
non-party witnesses and a majority of party witnesses were likely to be found in England and<br />
subject to compulsory process in English courts. The court also found that the public interest<br />
factors weighed in favor of an English forum, given England’s greater interest in resolving a<br />
dispute relating to the internal governance of an English company, and the need to apply a<br />
recently-enacted English law on which there was little existing guidance.<br />
SEC v. Carroll, 2011 WL 6141227 (W.D. Ky. Dec. 9, 2011).<br />
In an action brought by the SEC against several defendants based on allegations of<br />
insider trading, the court addressed whether venue was proper in Kentucky as to certain<br />
defendants who lived in North Carolina and had almost no contact with Kentucky. The court<br />
found that the unusually broad venue provisions of the Securities Exchange Act of 1934, which<br />
provide for venue where “any act or transaction constituting the violation,” permitted venue in<br />
Kentucky. The court found that the venue-conferring action need not itself be illegal, but where<br />
it is not, it must at least be material to the alleged violation. The court held that the disclosure of<br />
material, nonpublic information by one of the defendants to one of the North Carolina-based<br />
defendants over telephone calls to and from Kentucky was sufficient to establish venue over the<br />
North Carolina-based defendant. The court found that venue was also proper against the brother<br />
of the North Carolina-based defendant (also a North Carolina resident), to whom his brother<br />
relayed the insider information, based upon a co-conspirator theory and because both brothers<br />
traded on the same inside information from the same Kentucky source, venue was proper.<br />
Fed. Home Loan Bank of Chicago v. Bank of Am. Sec. LLC, 448 B.R. 517 (C.D. Cal. 2011).<br />
A federally chartered bank that purchased residential mortgage-backed securities brought<br />
an action in state court against the sellers for misrepresentations allegedly made in connection<br />
with the securities offerings. The defendants removed, alleging federal jurisdiction based upon<br />
the chapter 11 bankruptcy filing of a lender against which the sellers had contractual<br />
indemnification rights. The plaintiff moved to remand, and the court granted the motion. The<br />
court found that “related to” jurisdiction did exist, but it was appropriate to remand the case<br />
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anyway because the connection to bankruptcy was attenuated and state law issues predominated.<br />
The court also rejected the defendants’ contention that the plaintiff’s federal charter supplied an<br />
independent basis for federal jurisdiction.<br />
Kexuan Yao v. Crisnic Fund, S.A., 2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).<br />
The plaintiff, a citizen of China, sued the defendants, a Costa Rican corporation and its<br />
principal, a United States citizen and permanent resident of Costa Rica, asserting claims for<br />
violations of federal securities laws and multiple state laws. The defendants moved to dismiss<br />
for lack of personal jurisdiction, and the court denied the motion. With respect to the corporate<br />
defendant, the court noted that its transaction with the plaintiff, which gave rise to the complaint,<br />
was governed by a contract specifying the law of the State of Georgia as controlling, and<br />
involved the shares of a corporation registered in Nevada. Under the nationwide service of<br />
process provision in 15 U.S.C. § 78aa, the question was whether the United States, rather than<br />
any particular state, was a proper forum. Based on these facts, the court found that the corporate<br />
defendant had sufficient ties to the United States to satisfy due process. In addition, the court<br />
found that the individual defendant, as a United States citizen with a Georgia driver’s license, a<br />
mortgage on a home in Georgia, and business ties to a Georgia corporation, had sufficient<br />
contacts with the United States to permit exercise of personal jurisdiction.<br />
Anschutz Corp. v. Merrill Lynch and Co. Inc., 785 F. Supp. 2d 799 (N.D. Cal. 2011).<br />
An investor in auction rate securities brought suit against the seller of the securities and<br />
certain securities rating agencies, alleging market manipulation in violation of state and federal<br />
securities laws. One of the rating agencies, Fitch Ratings, Ltd. (“FRL”), moved to dismiss for<br />
lack of personal jurisdiction. FRL maintained that it did not rate the securities at issue, and that<br />
it was a London-based entity organized under the laws of England and Wales, and primarily<br />
rated securities in Europe, the Middle East, Africa, and Asia. Though the plaintiff produced<br />
rating letters regarding the securities that defined “Fitch” to include FRL, the court found this<br />
“slim reed” insufficient to find that FRL played a role in the ratings, particularly in the face of<br />
FRL’s affidavit to the contrary. Accordingly, the court granted the motion and dismissed FRL as<br />
a defendant.<br />
Charles Schwab Corp. v. BNP Paribas Sec., 2011 WL 724696 (N.D. Cal. Feb. 23, 2011).<br />
The plaintiff brought suit against the defendant in state court asserting various state law<br />
claims as well as claims under the Securities Act stemming from the plaintiff’s purchase of<br />
certificates in securitization trusts backed by residential mortgage loans. Defendants removed<br />
the case, asserting that it was “related to” bankruptcy proceedings involving American Home<br />
Mortgage Holdings (“AHM”), which originated loans included in one of the trusts and, pursuant<br />
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to a contractual indemnity agreement, owed the defendants indemnity for claims relating to<br />
alleged misstatements about those loans. The court refused to resolve the question of whether<br />
“related to” jurisdiction existed, instead assuming that it did and holding that remand was<br />
warranted in any event based upon equitable considerations. The court found that comity<br />
concerns weighed in favor of remand, that the connection between the case and the bankruptcy<br />
proceedings was very remote, and that the defendants had failed to explain how its claims against<br />
AHM would be treated under the bankruptcy plan or how this action could impact the<br />
administration of the plan.<br />
Charles Schwab Corp. v. Bank of Am. Sec. LLC, 2011 WL 864978 (N.D. Cal. Mar. 11, 2011).<br />
The plaintiff brought suit against the defendants in state court asserting various state law<br />
claims as well as claims under the Securities Act of 1933 stemming from the plaintiff’s purchase<br />
of certificates in securitization trusts backed by residential mortgage loans. Defendants removed<br />
the case, asserting that it was “related to” several bankruptcy proceedings involving loan<br />
originators, including American Home Mortgage and IndyMac Bancorp. While conceding that<br />
diversity jurisdiction did not exist on the face of the pleadings, the defendants claimed that the<br />
plaintiff had received its claims as a result of a collusive assignment from Schwab Bank, a<br />
diverse entity which actually invested in the trusts at issue in the case, but assigned its claims to<br />
the plaintiff, a non-diverse entity. The court found that although the assignment bore some<br />
hallmarks of collusion, it constituted a complete assignment because no party besides the<br />
plaintiff had standing to bring the claims, and therefore the court would not ignore the plaintiff’s<br />
citizenship to determine diversity. The court concluded that it did possess federal subject matter<br />
jurisdiction based on the relationship to the pending bankruptcy cases of the loan originators, but<br />
that the equities nevertheless favored remand to state court.<br />
Quail Cruises Ship Mgmt, Ltd. v. Agencia de Viagens CVC Tur Limitada, 2011 WL 5057203<br />
(S.D. Fla. Oct. 24, 2011).<br />
The plaintiff, a Bahamanian corporation that acquired a cruise ship by purchasing the<br />
shares of a corporation whose primary asset was the ship, brought suit against, among others, the<br />
corporate seller and its principal, for fraud under the Securities Exchange Act of 1934, along<br />
with various maritime and state law torts. The corporate seller’s principal, a citizen of Brazil,<br />
moved to dismiss for lack of personal jurisdiction. The district court denied the motion, holding<br />
that the plaintiff successfully established a prima facie case that the principal had committed a<br />
tortious act within the meaning of the Florida long-arm statute through his agents in Florida as<br />
part of the civil conspiracy alleged by the plaintiff. The court also found that exercise of personal<br />
jurisdiction comported with due process because the principal’s communications with his Florida<br />
agents occurred in furtherance of the conspiracy and the conspirators had availed themselves of<br />
the privilege of conducting business in Florida by consummating the sale of the ship in Florida.<br />
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5. Discovery<br />
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Mori v. Saito, 802 F. Supp. 2d 520 (S.D.N.Y. 2011).<br />
The plaintiffs moved to lift the Private Securities <strong>Litigation</strong> Reform Act of 1995<br />
discovery stay in order to serve three subpoenas upon third parties. The court denied the motion,<br />
finding that the plaintiffs failed to satisfy any of the conditions for lifting the stay. The<br />
subpoenas failed to identify the records sought, and thus were not sufficiently particularized.<br />
Although the plaintiffs had shown that the named defendants may have been involved in<br />
destroying records, they made no showing that the third-party banks targeted by the subpoenas<br />
were doing the same, and thus lifting the stay was not necessary to preserve evidence. Finally,<br />
the court rejected the plaintiffs’ attempts at justifying the requests with their alleged need to<br />
identify other investors, what happened to their money, and to obtain evidence supporting<br />
prejudgment attachment, finding these contentions insufficient to show the necessary undue<br />
prejudice.<br />
Litwin v. OceanFreight, Inc., 2011 WL 5223022 (S.D.N.Y. Nov. 2, 2011).<br />
In connection with a request for a temporary restraining order and preliminary injunction<br />
aimed at enjoining a special shareholder meeting scheduled by the defendant to consider a<br />
merger proposal, the plaintiff moved for expedited discovery of a broad array of materials<br />
relating to the proposed transaction. The court denied the request, holding that the plaintiff had<br />
failed to show the necessary probability of success or injury. The discovery requests were<br />
deemed unreasonable due to their sheer volume and breadth, and the defendant had represented<br />
that it was taking appropriate steps to preserve all relevant materials, and therefore the materials<br />
would be available to the plaintiff in the future if needed.<br />
Plumbers and Pipefitters Local Union No. 630 Pension Annuity Trust Fund v. Arbitron, Inc.,<br />
2011 WL 5519840 (S.D.N.Y. Nov. 14, 2011).<br />
Resolving a discovery dispute, the district court granted the defendant’s motion to<br />
compel the lead plaintiff to disclose the names of the eleven former employees designated in the<br />
complaint as “confidential informants.” The court rejected the plaintiff’s argument that it had<br />
complied with its discovery obligations by producing a list of 83 current or former employees<br />
likely to have discoverable information, which included the names all 11 informants but did not<br />
identify them as such. The court also held that these names were not protected by the work<br />
product doctrine. Given the plaintiff’s expressed concern with retribution by the employer,<br />
however, the court permitted the plaintiff time to submit an affidavit setting forth particularized<br />
facts that might support this concern sufficiently to justify non-disclosure or entry of a protective<br />
order.<br />
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NECA-IBEW Pension Trust Fund v. Bank of Am. Corp., 2011 WL 6844456 (S.D.N.Y. Dec. 29,<br />
2011).<br />
The plaintiff sought to partially lift the discovery stay imposed by the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995. The court found that there was no serious claim that discovery<br />
was needed to preserve evidence, as the documents in issue had already been produced to the<br />
SEC. The court also concluded that the plaintiff’s vague argument that it needed discovery to<br />
plan litigation strategy and investigate the merits of early settlement discussions was insufficient<br />
to meet the undue prejudice standard necessary to lift the stay. Finally, the court found that, even<br />
if it was true (as the plaintiff contended) that the discovery sought was limited, had already been<br />
produced in another action, and posed no substantial burden to the defendant, these<br />
circumstances were insufficient to overcome the command of the PSLRA.<br />
Botton v. Ness Techs., Inc., 2011 WL 3438705 (D.N.J. Aug. 4, 2011).<br />
Plaintiff alleging violations of the Securities Exchange Act of 1934 in connection with a<br />
proposed merger contemplated by the defendants sought expedited discovery to support its<br />
anticipated filing of a motion to preliminarily enjoin the merger. The court denied the motion,<br />
finding unpersuasive the plaintiff’s claims that without discovery the shareholders would be<br />
forced to vote on the merger without adequate information. The court also found the plaintiff’s<br />
discovery requests overbroad, and noted that other legal remedies existed for the plaintiff to<br />
pursue if the merger was approved by the shareholders.<br />
In re Massey Energy Co. Sec. Litig., 2011 WL 4528509 (S.D. W. Va. Sept. 28, 2011).<br />
In securities litigation brought in the wake of an explosion that killed 29 coal miners, the<br />
plaintiffs moved to partially lift the Private Securities <strong>Litigation</strong> Reform Act of 1995-imposed<br />
discovery stay. After the United States moved to intervene and stay discovery to prevent<br />
interference with its investigation and prosecution, the plaintiffs and the United States reached<br />
agreement on a proposed order granting the plaintiffs’ discovery motion. Analyzing the<br />
proposed order in light of the defendants’ opposition, the court concluded that the plaintiffs’<br />
requests were sufficiently particularized, that the acquisition of the defendant by another<br />
company demonstrated extraordinary circumstances that might lead to the inadvertent<br />
destruction of documents, and that refusing the requests risked undue prejudice to the plaintiffs.<br />
Accordingly, the court granted the plaintiffs’ motion and entered the proposed order.<br />
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O.5<br />
Davis v. Duncan Energy Partners L.P., 801 F. Supp. 2d 589 (S.D. Tex. 2011).<br />
Limited partners in the defendant company sued the partnership, its general partner,<br />
members of the firm’s board, and its potential acquirer, alleging violations of the Securities<br />
Exchange Act of 1934. The plaintiffs filed a motion seeking expedited discovery, which the<br />
court denied. The court found the plaintiffs’ discovery requests, which included requests for<br />
extensive electronic discovery, burdensome and insufficiently particularized. The court also<br />
rejected the plaintiffs’ argument that they would be prejudiced in their efforts to obtain injunctive<br />
relief without discovery, finding that accepting this argument and granting discovery prior to<br />
determining whether they met the heightened pleading standards of the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 would eviscerate those standards.<br />
Hufnagle v. RINO Int’l Corp., 2011 WL 2650755 (C.D. Cal. July 6, 2011).<br />
Lead plaintiff moved to partially lift the discovery stay to obtain addresses to serve<br />
individual defendants based in the People’s Republic of China. The plaintiff sought to serve the<br />
corporate defendant with special interrogatories asking for the Chinese Government Identity<br />
Number and residential address of the individual defendants, who were former officers and<br />
directors of the corporate defendant. The court granted the motion (with the exception of one<br />
individual defendant who had already waived service and appeared in the action). The court<br />
found that the discovery was necessary to avoid unduly prejudicing the plaintiff by substantially<br />
delaying the lawsuit and potentially allowing a defendant to escape liability notwithstanding the<br />
plaintiff’s ability to state a claim against the defendant even without discovery.<br />
In re China Educ. Alliance, Inc. Sec. Litig., 2011 WL 3715969 (C.D. Cal. Aug. 22, 2011).<br />
The plaintiffs brought claims alleging violations of the Securities Exchange Act of 1934<br />
by a Chinese corporation and several of its officer and directors, all of whom lived outside the<br />
United States. Unable to locate several of the defendants, the plaintiffs moved to authorize<br />
service on defendants located abroad pursuant to Federal Rule of Civil Procedure 4(f)(3) or, in<br />
the alternative, to partially lift the discovery stay to obtain addresses where they could serve the<br />
unserved defendants with the summons and complaint. The court refused to grant relief under<br />
Rule 4(f)(3) permitting service on the individual defendants, who apparently no longer worked<br />
for the company, via the corporation’s agent, finding that this presented potential due process<br />
problems. But the court granted the request to partially lift the discovery stay, finding that the<br />
plaintiffs would suffer undue prejudice and their requests were highly limited. The court was<br />
persuaded by the fact that the plaintiffs had tried to use a number of non-discovery tools to<br />
obtain the information, and that the corporate defendant could easily provide this information to<br />
the plaintiffs.<br />
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O.5<br />
Moomjy v. HQ Sustainable Maritime Indus., Inc., 2011 WL 4048792 (W.D. Wash. Sept. 12,<br />
2011).<br />
Corporate and individual defendants moved for a stay of discovery in a pending state<br />
court derivative action, claiming that permitting such discovery would violate the Private<br />
Securities <strong>Litigation</strong> Reform Act of 1995. The court granted the motions, holding that all three<br />
pertinent factors--(1) the risk of federal plaintiffs obtaining the state plaintiff’s discovery; (2) the<br />
extent of factual and legal overlap between the state and federal actions; and (3) the burden of<br />
state court discovery on the defendants---weighed in favor of imposing a stay.<br />
P. Failure to Supervise<br />
1. SEC Enforcement Actions<br />
P.1<br />
In re Investment Placement Group, Admin. Proc. File No. 3-14677, SEC Release No. 34-66055,<br />
2011 SEC LEXIS 4547 (Dec. 23, 2011).<br />
Respondent Gonzolez-Rubio, the Chief Operating Officer (“COO”) of IPG, the<br />
respondent broker-dealer, was responsible for supervising the trading room, including overseeing<br />
the activities of a trader who engaged in a fraudulent interpositioning scheme involving a<br />
Mexican investment advisor and a separate Mexican brokerage firm. The trader was found to<br />
have violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and<br />
Rule 10b-5 thereunder, to the detriment of for Mexican pension funds that were institutional<br />
clients of the Mexican brokerage firm. As a result of the trader’s fraud, the pension funds<br />
overpaid for certain credit-linked notes by approximately $65 million. The firm and the trader<br />
each earned more than $6 million as part of the scheme.<br />
The SEC alleged that the scheme went undetected by the firm because the firm failed to<br />
establish adequate policies and procedures and a system for implementation that would<br />
reasonably be expected to prevent and detect interpositioning. The firms written procedures<br />
merely listed interpositioning as a prohibited activity, but had no procedures for reviewing<br />
transactions to monitory them for suspicious activity. The COO delegated supervisory<br />
responsibility for the trading to the trader, which effectively resulted in the trader supervising<br />
himself. In addition, the COO failed to respond to red flags regarding the scheme, including<br />
what the SEC order referred to as a “dramatic” rise in revenue resulting from the interpositioned<br />
transactions. The COO also failed to follow-up on his discovery that the Mexican brokerage<br />
firm who played a part in the scheme had been receiving 78% of the markups in the firm’s<br />
proprietary trading account generated from trades executed on behalf of the Mexican brokerage<br />
firm’s clients.<br />
The firm and the COO consented to findings that they failed reasonably to supervise the<br />
trader with a view to detecting and preventing his violations. As a result, the firm consented to a<br />
378
censure, a civil money penalty of $260,000, disgorgement of over $3.8 million, including<br />
prejudgment interest, and agreed to comply with an undertaking to review its policies,<br />
procedures and systems regarding the detection and prevention of interpositioning violations, to<br />
submit a report to the SEC regarding the review and conclusions and changes made as a result of<br />
the review, and to certify that it has established procedures, and a system for applying the<br />
procedures, which are reasonably expected to prevent and detect, insofar as practicable, the<br />
violations described in the SEC’s order. The firm also agreed to provide cooperation in<br />
connection with the SEC’s ongoing investigation and/or litigation relating to the underlying<br />
conduct. The COO consented to a three-month suspension from association with a broker,<br />
dealer, investment advisor, municipal securities dealer, municipal adviser, transfer agent, or<br />
nationally recognized statistical rating organization.<br />
Matter of Clifton, Admin. Proc. File No. 3-14266, SEC Init. Dec. Release No. 443, 2011 SEC<br />
LEXIS 4185 (Nov. 29, 2011).<br />
The SEC alleged that Clifton, the president and principal of MPG Financial, a registered<br />
broker-dealer, made material misrepresentations and omissions relating to an oil-and-gas well<br />
project while he possessed material and materially adverse information pertinent to potential<br />
investors. The SEC also alleged that Clifton failed to implement day-to-day supervision over<br />
MPG Financial sales representatives and sales practices, that he failed to draft and approve<br />
written supervisory procedures, and otherwise failed to supervise the sales activity.<br />
After a hearing, ALJ Mahony found that MPG Financial’s written supervisory procedures<br />
(“WSPs”) clearly designated Clifton as the designated supervisor of the salesmen and gave him<br />
responsibility for reviewing and approving written and electronic correspondence drafted by<br />
them. Clifton contended, however, that despite the WSPs, he delegated the task of reviewing<br />
electronic correspondence to the firm’s chief compliance officer (“CCO”). The CCO however,<br />
testified that the responsibility for correspondence review was primarily Clifton’s and in any<br />
event he was a part-time employee charged with numerous other compliance responsibilities.<br />
Moreover, the CCO pointed out that his supervisory duties were limited to “associated persons<br />
not involved in sales,” and had agreed with Clifton that he would only conduct keyword search<br />
reviews of electronic communications, not a review of individual e-mails. The ALJ also found<br />
Clifton did not implement any formal tracking system or procedure for documenting the<br />
correspondence review process, noting that both Clifton and the CCO testified that there were<br />
“no formal policies or procedures in place to ensure that electronic communications were being<br />
regularly reviewed.” The ALJ found that Clifton failed to conduct regular and systematic<br />
reviews of e-mail correspondence sent to investors or prospective investors, and concluded that<br />
Clifton violated Section 15(b) of the Exchange Act by failing reasonably supervise the sales<br />
representatives. The ALJ rejected Clifton’s attempt to establish an affirmative defense based on<br />
compliance with the firm’s written supervisory procedures because he concluded that he did not<br />
fulfill the duties charged to him thereunder.<br />
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In assessing the appropriate sanctions, the ALJ found that Clifton’s conduct was<br />
egregious, having placed himself in a supervisory position, and acted with scienter in both<br />
making affirmative misrepresentations and omissions himself, and failing to adequately<br />
supervise the sales representatives to ensure that the information they provided to customers was<br />
accurate, complete, and truthful. He failed to acknowledge his wrongdoing. The ALJ noted that<br />
because Clifton remained the owner and president of a registered broker-dealer, he had<br />
opportunities to violate securities laws in the future.<br />
As a result, the ALJ imposed a cease-and-desist order, collateral bar, and a third-tier civil<br />
penalty of $130,000, as requested by the Division of Enforcement. As to the collateral bar, the<br />
ALJ’s decision contained a discussion of the appropriateness of a full collateral bar from all<br />
capacities provided under the Dodd-Frank Act. The ALJ considered the retroactive effect of<br />
Dodd-Frank as a remedy for conduct that pre-dated its enactment., questioning whether Clifton<br />
had a reasonable expectation that his misconduct would not affect his ability to associate with<br />
industry segments other than brokers or dealers. He concluded that because recent amendments<br />
to Section 15(b) of the Exchange Act also includes two new associational bars – municipal<br />
advisors and NRSROs – which did not exist at the time of Clifton’s conduct, they were<br />
impermissibly retroactive because they attached new legal consequences. As such, the ALJ<br />
imposed only associational bars with respect to brokers, dealers, investment advisers, municipal<br />
securities dealers, and transfer agents.<br />
Matter of Gallardo, Admin. Proc. File No. 3-14139, SEC Release No. 34-65658, 2011 SEC<br />
LEXIS 3848 (Oct. 31, 2011).<br />
The SEC charged Zurita, the President of a broker-dealer and supervisory responsible for<br />
the firm’s New York branch office, with failing reasonably to supervise a registered<br />
representative who was engaged in a fraudulent profit-sharing arrangement with customers. The<br />
SEC alleged that Zurita failed to follow-up on red flags by which he became aware that a<br />
customer was communicating with the representative about the arrangement, which violated the<br />
firm’s procedures, and also about stock market investments with exorbitant returns, yet he failed<br />
to take sufficient steps to investigate the representative’s conduct. While made some initial<br />
inquiries, he did not conduct sufficient follow-up to determine if disciplinary steps or other<br />
actions were necessary. In other instances, after becoming aware of customer complaints, Zurita<br />
did not visit the New York office to investigate. In addition, the SEC took the position that<br />
Zurita, as President of the firm, was responsible for establishing, maintaining, and implementing<br />
policies, procedures, and systems reasonably designed to detect violative activity by the firm’s<br />
registered representatives. Thus, while the firm had procedures that discussed prohibited<br />
transactions, the firm and Zurita failed to develop reasonable systems to implement the<br />
procedures with respect to such transactions.<br />
The SEC’s order noted that the firm and Zurita permitted an unlicensed foreign associate<br />
to perform the functions of a registered representative at the firm’s New York branch office, and<br />
that Zurita was physically located in Florida, even though he was responsible for the New York<br />
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anch office, which did not have any other qualified supervisory personnel. Indeed, when<br />
Zurita hired the representative in question, he did so with the intention that the representative<br />
would become qualified as a principal and take over supervision of the New York office. The<br />
representative never qualified, and as such, Zurita retained sole authority for supervision of the<br />
office. The SEC also noted that Zurita failed to implement any form of inspection program for<br />
the New York office, even though branch inspections were required under the firm’s written<br />
supervisory procedures.<br />
Zurita and the firm consented to the entry of an order that concluded that they failed<br />
reasonably to supervise the representative within the meaning of Section 15(b)(4)(E) of the<br />
Exchange Act. Moreover, the SEC concluded that the firm violated Section 15(b)(7) of the<br />
Exchange Act and Rule 15b7-1 thereunder, which require registration of individuals effecting<br />
securities transactions, and that Zurita willfully aided and abetted and caused the firm’s<br />
violation.<br />
In resolution of these charges, the firm agreed to an undertaking that it would hire an<br />
individual with appropriate supervisory licenses and qualifications to assume supervisory<br />
authority at the firm. The firm also consented to censure, a cease and desist order, and payment<br />
of a civil money penalty of $50,000.<br />
Zurita consented to the entry of a cease and desist order, an order barring him from<br />
association in a supervisory capacity with any broker, dealer, investment adviser, municipal<br />
securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating<br />
organization, with the right to apply for reentry after three years, and payment of a civil money<br />
penalty of $35,000.<br />
In re Gilford Securities Inc., Admin. Proc. File No. 3-14574, SEC Release No. 34-65450, 2011<br />
SEC LEXIS 3419 (Sept. 30, 2011).<br />
Respondent Gilford Securities, a broker-dealer firm, Worthington, the firm’s CEO and<br />
trading desk supervisor, and Kaplan, the sales manager of the New York office of the firm, were<br />
charged with failing reasonably to supervise Berger, a former registered representative engaged<br />
in unregistered distributions of securities in connection with international pump-and-dump<br />
schemes.<br />
For a period of more than a year, Berger allegedly resold over 30 million shares of securities<br />
through at least 20 customer accounts at Gilford without meeting registration requirements or<br />
exemptions. These unregistered sales went undetected by Gilford, because the firm had failed to<br />
develop reasonable systems to implement its policies and procedures regarding supervision of<br />
registered representatives with regard to unregistered securities. The SEC alleged that<br />
Worthington, as CEO, had ultimate authority and responsibility for the firm’s supervisory<br />
policies and procedures, including their implementation. The SEC further alleged that Kaplan,<br />
as Berger’s direct branch office supervisory, had ultimate responsibility for supervising Berger.<br />
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The firm was also charged with other violations stemming from the sale of unregistered<br />
securities, including failing to file Suspicious Activity Reports under the Bank Secrecy Act,<br />
allowing unlicensed employees to execute orders, and violating Regulation S-P, among others.<br />
Some of these violations were aided and abetted by Worthington and Kaplan.<br />
To resolve all of these charges, the firm agreed to an undertaking to retain, at its own<br />
expense, an independent consultant to review the firm’s written supervisory procedures, and the<br />
firm’s implementation of same, and make recommendations for necessary improvements. In<br />
addition, the firm consented to the entry of a cease and desist order, a censure, payment of<br />
disgorgement of $275,000, prejudgment interest of $77,113, and a civil penalty of $260,000.<br />
Worthington consented to a cease and desist order, a suspension from association in a<br />
supervisory capacity with any broker or dealer for a period of twelve months, and payment of a<br />
civil penalty of $45,000. Kaplan consented to a cease and desist order, a suspension from<br />
association in a supervisory capacity with any broker or dealer for a period of twelve months,<br />
and payment of disgorgement of $225,000, prejudgment interest of $63,092 and a civil penalty<br />
of $ 30,000.<br />
In re Lopez-Tarre, Admin. Proc. File No. 3-14562, SEC Release No. 34-65391, 2011 SEC<br />
LEXIS 3311 (Sept. 23, 2011).<br />
Respondent was the Chief Compliance Officer of a broker-dealer, but was also<br />
specifically made responsible for supervising the handling of customer accounts and for<br />
reviewing correspondence, including email correspondence, of Clamens, the sole owner of the<br />
firm, and Lopez, an employee who assisted Clamens. During an eight month period, Clamens<br />
allegedly engaged in a large volume of unauthorized trading in the brokerage accounts of two<br />
customers of the firm, resulting in large losses. Lopez allegedly created and sent the customers<br />
false account statements in an attempt to conceal the fraud, which included creating fabricated<br />
rates of return on securities that the firm was not authorized to sell and showing holdings in<br />
certificates of deposit and money market funds, instead of the unauthorized investments. The<br />
SEC charged that respondent failed to follow procedures for reviewing Clamens’ customer<br />
accounts and did not review email correspondence, as required by the firm’s supervisory<br />
procedures. Moreover, he failed to respond to several “red flags” that should have alerted him to<br />
Lopez’s participation in the fraud. For example, when the falsified rate of return prompted one<br />
customer to begin depositing funds for overnight investment, expecting the funds to be wired<br />
back to it the next morning, Lopez had to wire funds from another customer account to cover the<br />
shortfall on numerous occasions. Respondent was responsible, under the firm’s procedures, for<br />
reviewing wire transfers between customer accounts but failed to do so.<br />
Respondent consented to a bar from association with any broker, dealer, investment<br />
adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized<br />
statistical rating organization in a supervisory capacity, with a right to reapply for association<br />
after one year. Based on respondent’s demonstrated inability to pay, the SEC declined to impose<br />
a penalty against respondent.<br />
P.1<br />
382
In re Application of Kaminski, Admin. Proc. File No. 3-14054, SEC Release No. 34-65347, 2011<br />
SEC LEXIS 3225 (Sept. 16, 2011).<br />
Respondent Kaminski, formerly a general securities principal and senior executive officer<br />
of Mutual Service Corporation (“MSC”), an NASD member firm, sought review of a NASD<br />
disciplinary action, specifically a December 2008 hearing panel decision finding that he failed<br />
reasonably to supervise MSC’s review of its variable annuity transactions for a three-month<br />
period in 2004, resulting in a six month suspension in all principal capacities and a fine of<br />
$50,000. The decision was reviewed by the National Adjudicatory Counsel (“NAC”) on its own<br />
motion. The NAC affirmed the fine, but increased the principal suspension to an 18-month<br />
suspension in all capacities, with a requirement to requalifiy before resuming his duties.<br />
In a very detailed Order, the SEC reviewed the evidence of Kaminski’s misconduct and<br />
the context in which it occurred, and responded to Kaminski’s arguments attacking the NAC’s<br />
decision. The SEC agreed with the NAC’s conclusion that the conduct was egregious, based<br />
largely on the fact that Kaminski was found to have suspended the firm’s use of a “red flag<br />
blotter,” which was created as part of the resolution of a prior NASD disciplinary action<br />
regarding supervision of variable annuity transactions. Kaminiski insisted that he did not make<br />
the decision to suspend use of the blotter, but the SEC agreed with the NASD’s conclusion that<br />
Kaminiski’s position was not credible, as it was rebutted by direct testimony and circumstantial<br />
evidence that the trier of fact was in a better position to assess, and thus, would not be<br />
overturned. The SEC also rejected Kaminski’s argument that his sanction was<br />
disproportionately severe because other supervisors at MSC were treated less severely by the<br />
NASD for their participation in variable annuity supervision at the firm. The SEC, however,<br />
declined to give credence to Kaminski’s argument, relying on its long-standing position that the<br />
appropriateness of sanctions is based on facts and circumstances and cannot be measured by<br />
comparing one case to another.<br />
The Commission affirmed the NAC’s decision in all respects.<br />
In re Gautney, Admin. Proc. File No. 3-14069, SEC Release No. 34-65151, 2011 SEC LEXIS<br />
2944 (Aug. 17, 2011) (as to Respondent Blum); In re Gautney, Admin. Proc. File No. 3-14069,<br />
SEC Release No. 34-65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011(as to Respondent Bellia).<br />
Two related settled administrative proceedings arise form allegations of churning by<br />
registered representatives affiliated with Aura Financial Services, Inc. (“Aura”). Respondent<br />
Blum was the manager of Aura’s Miami branch office. Blum was responsible for supervising a<br />
representative charged with churning accounts of two of his customers. Blum received quarterly<br />
reports showing turnover rations of between 6 and 54 and cost to equity ratios of 14% to 54%.<br />
Moreover, the accounts were aggressively traded, inconsistent with the customers’ investment<br />
objectives and risk tolerance.<br />
P.1<br />
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383
Aura’s Written Supervisory Procedures (“WSP”) required “immediate attention” to<br />
customer accounts having turnover ratios greater than six, and “further review” of accounts<br />
having such ratios greater than two and less than or equal to six.<br />
Blum failed reasonably to supervise the representative based on a variety of findings,<br />
including that the customer’s turnover rates and cost to equity ratios increased over time and<br />
were reported in reports provided to Blum. Further, while Blum sent out active account letters<br />
after receiving the quarterly compliance reports, evidence indicated that sometimes the letters<br />
were returned signed but not completed. Moreover, Blum treated the letters as “negative<br />
response letters,” such that if no response was received, he assumed that the customer approved<br />
of the trading. He relied on the representative to follow-up with customers who did not return<br />
the letter. In the face of these red-flags, and additional red-flags in the form of customer<br />
complaints concerning the representative, the SEC found that Blum failed reasonably to<br />
supervise the representative within the meaning of Section 15(b)(4)(E) of the Exchange Act.<br />
As a result, Blum consented to a bar from association in a supervisory capacity with any<br />
broker, dealer, investment adviser, municipal securities dealer, or transfer agent, with the right to<br />
reapply for association after two (2) years. In addition, Blum agreed to pay disgorgement of $<br />
4,753, plus prejudgment interest, and a civil penalty of $10,000.<br />
Respondent Bellia was the owner of Aura’s branch office in Islandia, New York and<br />
served as its branch manager. During his association with Aura, Bellia was under heightened<br />
supervision due to a prior FINRA disciplinary action involving failing to supervise registered<br />
representatives at another broker-dealer. Bellia was responsible for supervision of two<br />
representatives, one of which was under heightened supervision. Bellia received quarterly<br />
reports showing that certain customers of one of the representatives had annualized turnover<br />
rations of between 20 and 94, and cost to equity rations of 87% to 2058%. Two customers of the<br />
other representative had annualized turnover rates of 40 and 59 and cost to equity ratios of 144%<br />
and 418%, respectively, according to reports that were reported to Bellia. In addition, to these<br />
significant indications of churning, all these customers had their accounts aggressively traded by<br />
the representatives, contrary to their risk tolerance and investment objectives.<br />
The SEC found that despite Aura’s requirements for dealing with the extreme ratios<br />
present in these accounts, Bellia and Aura were only able to produce a small number of Active<br />
Account Letters. In addition, Bellia failed to track whether the letters were returned, and when<br />
they were not, merely directed the representative to contact the customers. The SEC found that<br />
the failure to contact the first representative’s customers was “particularly egregious” because he<br />
was under heightened supervision, and had been subject to numerous current customer<br />
complaints.<br />
Bellia consented to findings that he failed reasonably to supervise the representatives<br />
within the meaning of Section 15(b)(4)(E) of the Exchange Act. As a sanction, Bellia consented<br />
to a bar from association in any capacity with any broker, dealer, investment adviser, municipal<br />
securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating<br />
organization, as well as a penny stock bar, and agreed to pay disgorgement of $ 5,959 and<br />
384
prejudgment interest. The payment was waived, however, and a civil money penalty forgone,<br />
however, due to Bellia’s demonstrated inability to pay.<br />
Matter of Divine Capital Markets LLC, Admin. Proc. File No. 3-14274, SEC Release No. 34-<br />
64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011).<br />
Respondent, Divine Capital Markets, LLC, a broker-dealer, and respondent Hughes, the<br />
firm’s CEO and principal responsible for supervision of equities, institutional and retail sales,<br />
were charged with selling unregistered securities and failing reasonably to supervise a<br />
representatives involved in selling such securities, respectively, in connection with a particular<br />
securities offering. Specifically, the representative and Hughes knew that customers had<br />
acquired the shares directly from the issuer, but neither the representative nor Hughes conducted<br />
adequate due diligence to determine if the shares were registered. The SEC noted that Hughes<br />
was responsible for reviewing the firm’s trade tickets to look for, among other things, “sizable<br />
positions in a single security,” and for a period of time served as the firm’s Chief Compliance<br />
Officer.<br />
The SEC alleged that Hughes ignored red flags, in that she received notice that the<br />
customer had received shares in certificate form and was planning on selling them. Thereafter,<br />
the size of the trading also constituted a red flag, with the customer selling 45 million of the first<br />
65 million-share certificate on the first day, with another certificate planned for deposit the next<br />
day. When she inquired about the transactions with the representative, and asked for the stock<br />
purchase agreement by which the shares were acquired directly from the issuer, she received a<br />
copy of the agreement, but took no steps to determine whether the shares were registered.<br />
The SEC also charged Hughes with failure to supervise based on the inadequacy of the<br />
firm’s supervisory policies and procedures, which she was responsible for developing and<br />
maintaining. The policies did not provide adequate guidance to supervisors and did not address<br />
the issue of unregistered distributions through statutory underwriters, or more specifically,<br />
situations in which certificates without restrictive legends were acquired by a customer from an<br />
issuer with a view to distribution, as was present in the instant case.<br />
For its underlying violations of Sections 5(a) and 5(c), and apparently not as a sanction<br />
for failure to supervise (while the SEC’s order recites the firm’s supervisory failures, its violation<br />
section neglects to list failure to supervise among the charged violations against the firm), the<br />
firm consented to a censure, a cease and desist order from committing or causing violations of<br />
Sections 5(a) or 5(c), a penny stock bar, and payment of disgorgement of $33,762 and<br />
prejudgment interest of $ 6,921 and a civil money penalty of $60,000.<br />
In resolution of her failure to supervise charges, Hughes consented to a four-month<br />
suspension from association in a supervisory capacity with any broker, dealer, investment<br />
adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized<br />
statistical rating organization, and payment of a civil money penalty of $25,000.<br />
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Matter of Bloomfield, Admin. Proc. File No. 3-13871, SEC Initial Dec. Release No. 416-A, 2011<br />
SEC LEXIS 1457 (April 26, 2011).<br />
Among the issues in this administrative proceeding, tried before ALJ Murray, was<br />
whether respondent Gorgia failed reasonably to supervise certain registered representatives in<br />
connection with the sale of unregistered securities. The ALJ summed up he lengthy and<br />
exhaustive opinion by stating: “this large scale fraud with massive financial losses to members of<br />
the investing public happened because a broker-dealer did not exercise safeguards when<br />
accepting securities from customers where there were abundant red flags.”<br />
Gorgia argued that he was not in the direct supervisory chain, that he did not have the<br />
ability to control the actions of the representatives, and that he made attempts to address<br />
compliance issues and left the firm when his demands and suggestions were not implemented.<br />
The ALJ, however, did not find Gorgia’s arguments applicable, or his testimony credible. She<br />
found that Gorgia was, in fact, a supervisor, having been assigned areas of supervision in the<br />
firm’s written supervisory procedures, served as its Chief Compliance Officers, that he was in<br />
charge of the firm’s supervisory system, and had the ability to fire at least one of the<br />
representatives. The ALJ pointed to numerous red-flags, and indications of clear awareness on<br />
the part of Gorgia, of problematic activities surrounding the firm’s and the representative’s<br />
penny stock business, including information requests from the firm’s clearing broker. The ALJ<br />
concluded that Gorgia failed reasonably to supervise the representatives within the meaning of<br />
Sections 15(b)(4) and 15(b)(6) of the Exchange Act, with a view toward preventing and<br />
detecting violations of Section 5 of the Securities Act.<br />
As a result, Gorgia was barred from association with any broker or dealer and from<br />
participating in any offering of penny stock, required to cease and desist from committing or<br />
causing any violations or any future violations of Section 17(a) of the Exchange Act or Rule 17a-<br />
8 thereunder, and required to pay a civil money penalty of $100,000.<br />
In re Huntleigh Securities Corp., Admin. Proc. File No. 3-14354, SEC Release No. 34-64336,<br />
2011 SEC LEXIS 1439 (April 25, 2011).<br />
The SEC alleged that the firm failed reasonably to supervise a representative who<br />
engaged in “marking the close” trades on behalf of an investment adviser customer. The adviser<br />
sent orders in thinly-traded securities to the firm, directing that the orders be executed in the final<br />
minutes of the last trading day of the month. The SEC alleged that the purpose of doing so was<br />
to artificially inflate the closing prices of the securities. A firm’s supervisory failures centered<br />
on its failure to establish procedures or a system for implementing existing procedures<br />
reasonably designed to prevent and detect the trader’s violations of the securities laws, which<br />
were separately charged as violations of Section 10(b) of the Exchange Act and Rule 10b-5<br />
thereunder.<br />
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Specifically, the firm’s procedures did not require that certain daily trading exception<br />
reports be transmitted to compliance personnel. In addition, which the firm’s written procedures<br />
required that traded tickets be reviewed daily by the firm’s Compliance Director, the review was<br />
suspended when the firm changed clearing brokers, and once the new clearing firm was on<br />
board, the firm did not revise its procedures to provide for review of trade tickets.<br />
In resolution of the charges, the firm agreed to a censure and an undertaking that it would<br />
review and revise, as necessary, currently adopted and implemented procedures concerning<br />
manipulative trading. At a minimum, the firm agreed to adopt and implement procedures<br />
requiring daily review of trade execution blotters and daily exception reports by compliance<br />
personnel. As a result of the firm’s demonstrated inability to pay, the SEC declined to require<br />
the firm to pay a civil money penalty.<br />
P.1<br />
In re Torrey Pines Securities, Inc., Admin. Proc. File No. 3-14230, SEC Release No. 34-64317,<br />
2011 SEC LEXIS 1394 (April 20, 2011); Matter of Smith, Admin. Proc. File No. 3-14229, SEC<br />
Release No. 34-63834, 2011 SEC LEXIS 390 (Feb. 3, 2011).<br />
The SEC charged the firm and Smith, a part-owner of the firm who served as its<br />
President and CEO, and who had overall supervisory responsibility for the firm, with failing<br />
reasonably to supervise a registered representative, Dennis Lee Keating II (“Keating”), in<br />
connection with an unregistered private securities offering from August 2006 to November 2008.<br />
The SEC charged Keating with violating Section 15 (a) of the Exchange Act, the broker-dealer<br />
registration provision of the federal securities laws, by conducting the unregistered private<br />
securities offering outside the scope of his employment with Torrey Pines.<br />
The firm failed reasonably to supervise Keating in that it did not establish reasonable<br />
policies and procedures to assign responsibility for supervising Keating, who was in charge of<br />
the firm’s Corona Office and a part-owner of the firm, such that Keating was permitted to<br />
supervise himself. The firm also failed to develop systems to implement the firm’s procedures<br />
regarding registered representatives’ outside business activities. The SEC noted that other than<br />
annual audits, which it described as “cursory,” there was no review of Keating’s daily<br />
correspondence or telephone calls. Further, although the firm had a policy prohibiting the sale of<br />
securities away from the firm, and a policy requiring reporting of outside business activities,<br />
there was no system for either supervisors or the compliance department to monitor activity to<br />
ensure the prohibitions and reporting requirements were met. Smith shared responsibility for<br />
lack of adequate procedures, as he had the power and responsibility to ensure that such<br />
procedures were placed in effect.<br />
The SEC noted the existence of suspicious events concerning Keating’s outside business<br />
activities, which came to the attention of the firm and Smith, most notably multiple<br />
communications from an individual who had invested in Keating’s private offering. Yet, the<br />
firm did not have procedures in place requiring follow-up on such events by supervisors or<br />
compliance officers, and Smith shared responsibility for the failure to enact such procedures.<br />
387
The firm and Smith consented to the entry of the SEC’s order, which concluded that the<br />
firm and Smith failed reasonably to supervise Keating within the meaning of Section 15(b)(4)(E)<br />
of the Exchange Act, and within the meaning of Section 203 (e) of the Advisers Act, when it<br />
failed to supervise Keating with a view to detecting and preventing violations of Section 15 (a)<br />
of the Exchange Act. As a result, the firm consented to an undertaking to retain an independent<br />
consultant to review its policies, procedures and systems relating to supervision and outside<br />
business activities, and make recommendations for improvements. The firm also agreed to<br />
provide, at its own expense, a copy of the SEC’s order to all current customers and all<br />
prospective customers for a period of two years. As a result of a demonstrated inability to pay,<br />
the SEC declined to impose a civil money penalty against the firm.<br />
Smith consented to a nine-month suspension from association with any broker or dealer<br />
or investment adviser in a supervisory capacity for a period of nine (9) months, as well as a civil<br />
money penalty of $25,000.<br />
Matter of Ellis, Admin. Proc. File No. 3-14328, SEC Release No. 34-64220, 2011 SEC LEXIS<br />
1199 (April 7, 2011).<br />
Although not charged as a failure to supervise violation under Section 15(b) of the<br />
Exchange Act, this settled administrative proceeding, arising out of violations by GunnAllen<br />
Financial, Inc. (“GunnAllen”), have supervisory overtones. The SEC alleged that GunnAllen<br />
violated Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)) (the “Safeguard Rule”), which,<br />
according to the SEC order, “requires broker-dealers to, among other things, adopt written<br />
policies and procedures reasonably designed to protect customer information against<br />
unauthorized access and use.” The SEC found that although GunnAllen maintained written<br />
supervisory procedures for safeguarding customer information, they were inadequate and failed<br />
to instruct the firm’s supervisors and registered representatives how to comply with the<br />
Safeguard Rule. Respondent Ellis, who served as GunnAllen’s Chief Compliance Officer, had<br />
responsibility for maintaining and reviewing the adequacy of GunnAllen’s procedures for<br />
protecting customer information. The SEC charged Ellis with failing to direct the firm to revise<br />
or supplement is procedures for safeguarding customer information, after he became aware that<br />
three laptop computers were stolen and a registered representative’s computer password<br />
credentials were compromises, such that customer information collected by GunnAllen was<br />
placed at risk of unauthorized access and use. Ellis consented to the entry of the SEC order,<br />
which concluded that he aided and abetted and caused GunnAllen’s violations of the Safeguard<br />
Rule.<br />
As a result, Ellis consented to a cease and desist order from committing or causing any<br />
violations and any future violations of Rule 30(a) of Regulation S-P under the Exchange Act, a<br />
censure, and a civil money penalty of $15,000.<br />
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In re Pagliarini, Admin. Proc.File No. 3-14273, SEC Release No. 34-63964, 2011 SEC LEXIS<br />
682 (Feb. 24, 2011).<br />
Respondent, the Chief Compliance Officer and AML Compliance Officer of a brokerdealer,<br />
was charged with failing reasonably to supervise one of the firm’s traders, over whom she<br />
had direct supervisory authority. The trader was charged with helping to manipulate the prices<br />
of several microcap issuers’ stocks, in violation of Section 10(b) of the Exchange Act and Rule<br />
10b-5 thereunder. The trader was also charged with aiding and abetting the firm’s violations of<br />
Section 15(c)(1) of the Exchange Act, by executing trades, including wash trades, in an apparent<br />
effort to manipulate the prices of microcap companies stocks and to generate over $ 600,000 in<br />
sales credits (commission equivalents) to the firm.<br />
Respondent’s supervisory failures centered on her failure to follow the firm’s procedures,<br />
which required her to follow up on suspicious transactions, such as the wash trades, that lacked<br />
business sense or exhibited a lack of concern regarding risks, commissions, or other transaction<br />
costs. Her awareness of such transactions, particularly the wash trades, which moved stock<br />
between accounts held by the same owner, constituted “red-flags” that she should have followedup<br />
on, but did not. Respondent was also charged with aiding and abetting and causing books and<br />
records violations by the firm, including the firm’s failure to file suspicious activity reports under<br />
the Bank Secrecy Act, with respect to the traders various transactions and transfers of which she<br />
became aware.<br />
As a result, respondent consented to an ordered requiring that she cease and desist from<br />
committing or causing any violations and any future violations of Section 17(a) of the Exchange<br />
Act and Rule 17a-8 thereunder, be suspended from acting in a supervisory capacity with any<br />
broker or dealer for a period of twelve months, and pay a civil money penalty of $20,000.<br />
P.1<br />
In re TD Ameritrade, Inc., Admin. Proc. File No. 3-14225, SEC Release No. 34-63829, 2011<br />
SEC LEXIS 389 (Feb. 3, 2011).<br />
The SEC charged the firm with failure to supervise its representatives in connection with<br />
their offer and sale of shares in a particular mutual fund. Although the firm created and<br />
distributed to the representatives training materials accurately describing the mutual fund, the<br />
representatives nevertheless at times mischaracterized the mutual fund “as a money market fund,<br />
as safe as cash, or as an investment with guaranteed liquidity,” and otherwise failed to accurately<br />
depict the nature or risks of the mutual fund.<br />
The firm had in place policies and procedures, which required the representatives’ direct<br />
managers to review solicited trades in the mutual fund and to review other documentation to<br />
ensure suitability. The procedures, however, did not require the managers to ensure that the<br />
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epresentatives provided complete and accurate disclosures to customers regarding the mutual<br />
fund.<br />
Later, the firm changed is supervisory structure, and in all but one branch, designated a<br />
“centralized, independent branch supervision and controls group” to take the place of individual<br />
direct OSJ managers for the branches. The group functioned through four Divisional Operations<br />
Managers (“DOMs”), with responsibility for the branch offices within each of four regions. The<br />
firm also revised its written supervisory procedures to place primary responsibility on the DOMs<br />
for reviewing sales of the mutual fund, with such review focusing on suitability, without<br />
inquiring as to whether the representatives had provided the proper disclosures to customers.<br />
Additional improvements to the supervisory system that added exception reports still neglected<br />
the need to ensure that the proper disclosures were made. As such, throughout the time period,<br />
the evolving supervisory system was not reasonably designed to prevent and detect any<br />
misrepresentations or omissions by firm’s representatives. The SEC’s order was also critical of<br />
the supervision of other sales channels within the firm, for similar reasons, all centering on the<br />
fact that the systems did not prevent or detect misrepresentation or omissions made by<br />
representatives concerning the mutual fund.<br />
The SEC concluded that the firm failed reasonably to supervise its representatives within<br />
the meaning of Section 15(b)(4)(E) of the Exchange Act due to the representatives’ violations of<br />
Section 17(a)(2) of the Securities Act, and the firm’s failure to implement adequate policies and<br />
procedures and a system for applying established procedures reasonably designed to prevent or<br />
detect such violations.<br />
The SEC noted that the firm had undertaken to distribute, under an elaborate distribution<br />
plan, the sum of $0.012 per share of the Fund, which is expected to total approximately $10<br />
million. To resolve the charges, the firm consented to a censure. The SEC stated that it was not<br />
imposing a penalty against the firm at this time, noting that in determining to accept the Offer of<br />
Settlement by the firm, it had considered remedial acts voluntarily undertaken by the firm to<br />
make improvements to its supervisory system, as well as the fact that the firm had undertaken the<br />
distribution plan.<br />
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., Admin. Proc. File No. 3-14204, SEC Release<br />
No. 34-63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).<br />
The firm settled charges that its proprietary traders misused institutional customer order<br />
information which was shared with them by the firm’s market makers, and separately, that its<br />
traders improperly charged mark-ups and mark-downs on certain riskless principal trades of<br />
institutional and high net worth customers for which the firm had agreed to charge only a<br />
commission equivalent. As a result of this conduct, the SEC found that the firm had violated<br />
both Section 15(c)(1)(A) of the Exchange Act by effecting transactions in securities by means of<br />
manipulative, deceptive or other fraudulent devices or contrivances, and Section 15(g) of the<br />
Exchange Act by failing to establish, maintain, and enforce written policies and procedures<br />
reasonably designed to prevent the misuse of material, nonpublic information. In addition, the<br />
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390
firm settled charges that it violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(6)<br />
thereunder by failing to make records of price guarantees that were part of the terms and<br />
conditions of institutional customer orders.<br />
In addition, the SEC charged the firm with violating Section 15(b)(4)(E) of the Exchange<br />
Act, in that the firm failed reasonably to supervise its traders with a view towards preventing<br />
them from violating the federal securities laws. Specifically, the firm failed to establish policies<br />
and procedures reasonably designed to prevent the proprietary traders from obtaining<br />
institutional customer order information from the market making desk. The close proximity<br />
between proprietary traders and market makers on the firm’s equity trading floor, allowed the<br />
proprietary traders to see customer order information on the market makers’ computer screens<br />
and hear market makers discuss customer orders. In addition, the SEC noted that the firm<br />
encouraged the market makers to generate and share “trading ideas” with the proprietary traders<br />
and compensated market makers for profitable ideas. The firm consented to the SEC’s finding<br />
that, as a result of such conduct, it failed reasonably to supervise traders associated with the<br />
proprietary trading desk and its NASDAQ market making operations, with a view toward<br />
detecting and preventing violations of the Exchange Act.<br />
As a result, the firm consented to cease and desist order from committing or causing any<br />
violations and any future violations of Sections 15(c)(1)(A), 15(g) and 17(a) of the Exchange Act<br />
and Rule 17a-3(a)(6) thereunder, a censure, and a civil money penalty of $10 million.<br />
Matter of BNY Mellon Securities LLC, Admin. Proc. File No. 3-14191, SEC Release No. 34-<br />
63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).<br />
The SEC alleged that respondent failed reasonably to supervise the order desk manager<br />
on its institutional order desk and traders under his supervision. The institutional order desk<br />
executed orders to purchase and sell securities on behalf of one of the firm’s affiliates, which<br />
administered various employee stock plans. The SEC found that the order desk manager failed<br />
to provide best execution for orders on behalf of such plan customers, by executing trades at<br />
prices that were sale or outside of the National Best Bid and Offer (“NBBO”). More<br />
specifically, the orders were executed as part of cross trades with “a favored handful” of<br />
accounts held by hedge funds and individuals. The SEC noted that the order desk manager not<br />
only executed such trades himself, but directed traders under his supervision to do so as well.<br />
In connection with the supervisory charges, the SEC noted that while the firm had written<br />
supervisory procedures regarding best execution of customer orders, the procedures were<br />
unreasonable because they failed to describe how the best execution committee should follow-up<br />
on red flags raised in best execution reports (which among other things, tracked the frequency of<br />
executions outside the NBBO), and lacked procedures to determine whether the order desk<br />
manager was completing effectively his daily review of executions on regional exchanges, as<br />
prescribed by the written supervisory procedures. In fact, the manager was not conducting the<br />
required review; if such failure had been discovered by the firm, the manger and his<br />
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subordinates’ practice of benefiting hedge fund and individual customers at the expense of the<br />
employee plan customers would likely have been detected by the firm.<br />
The SEC singled out cooperation and remedial efforts by the firm. When firm discovered<br />
that the SEC had charged one of the hedge fund customers in an unrelated matter, within three<br />
days the firm suspended cross-trading with that hedge fund and commenced an internal<br />
investigation. In addition, the firm promptly terminated the order desk manager for cause and<br />
reported the matter to the SEC.<br />
As a result, the firm consented to a censure, payment of disgorgement in excess of<br />
$23,000,000, including prejudgment interest, and a civil money penalty of $1,000,000. The firm<br />
agreed to retain and bear the cost of an Independent Distribution Consultant to administer the<br />
disgorgement fund under applicable “Fair Funds” provisions. Notably, the SEC expressed stated<br />
that based on the firm’s cooperation, the Commission was declining to impose a civil money<br />
penalty in excess of $1,000,000.<br />
2. FINRA Enforcement Actions<br />
P.2<br />
Department of Enforcement v. Murphy, Complaint No. 2005003610701, 2011 FINRA Discip.<br />
LEXIS 42 (NAC, Oct. 20, 2011).<br />
A FINRA hearing panel found a registered representative liable for disciplinary<br />
violations stemming from discretionary trading he engaged in without written authorization from<br />
his clients or firm. The trading included excessive and unsuitable options trading, churning,<br />
unauthorized trading, and also occurred in conjunction with inaccurate, unbalanced and<br />
misleading communications with customers. The panel also found that the representative’s<br />
direct supervisor failed to supervise him in connection with such conduct. The panel barred the<br />
representative and ordered $591,933.67 in disgorgement. The panel fined the supervisor $25,000<br />
and ordered a six-month suspension from association as a general securities principal and as an<br />
options principal, including a requirement that he re-qualify in those principal capacities.<br />
The supervisor was responsible for approving options agreements, approving customers<br />
to engage in various levels of options trading, and approval all options trades. He reviewed all<br />
options trades daily for suitability, size and frequency. He reviewed “profit and loss” reports and<br />
sales literature sent to customers. The supervisor was found to be aware of numerous “red flags”<br />
concerning a representative’s trading of certain customers accounts, but the action he took in<br />
response, if any, was insufficient. For example, he was aware that the trading in question, which<br />
had been occurring over an extended period of time, had caused concern both to the firm’s<br />
compliance officer, and regulators, but did not mount an adequate supervisory response, taking<br />
definitive action only after state securities officials and FINRA became involved.<br />
On appeal by the respondents, the National Adjudicatory Council affirmed the hearing<br />
panel’s findings, but the sanctions imposed on the supervisor were found to be wholly<br />
insufficient to remedy his failure to supervise, and was therefore increased to a bar in all<br />
392
capacities. The NAC cited the fact that there were “numerous aggravating factors,” and that the<br />
number of “obvious red flag warnings” that the supervisory ignored indicated that his “failures<br />
must have stemmed from some degree of intent.” The NAC concluded that the supervisor posed<br />
“a serious risk to the investing public, in whatever capacity he would function, that his failure to<br />
supervise was egregious, and that sanctions at the high end of the relevant range are warranted.”<br />
Department of Enforcement v. Midas Securities, LLC, Complaint No. 2005000075703, 2011<br />
FINRA LEXIS 71, (NAC, March 3, 2011).<br />
A hearing panel found respondents Midas Securities, LLC, World Trade Financial<br />
Corporation and Frank Edward Brickell responsible for violations stemming from the sale of<br />
unregistered securities in violation of Section 5 of the Securities Act and NASD Rule 2110,<br />
fining Midas $30,000, World Trade $15,000, and Brickell $15,000, with a 30 business-day<br />
suspension in all capacities. The hearing panel also imposed sanctions for related supervisory<br />
violations against Midas for $25,000 and World Trade for $15,000. The panel sanctioned<br />
individual supervisors, fining Michel $15,000, with a 45-day principal suspension, and Lee<br />
$20,000, with a two year suspension in all capacities, and Adams $10,000, with a 30-day<br />
principal suspension.<br />
The NAC reviewed the hearing panel’s findings that the firms lacked written policies and<br />
procedures that were tailored to its business, a large proportion of which dealt with handling<br />
transactions in unregistered securities. The firms’ procedures were found to be lacking in that<br />
they did not require representatives to make any inquiry when they received large volumes of<br />
thinly traded, unregistered shares for liquidation, and did not offer guidance as to what due<br />
diligence was required when dealing with the unregistered stock that was deposited for sale by<br />
the firms’ customers. In addition, there was significant evidence that the individual supervisors<br />
were aware of, but did not follow-up on, situations that constituted red-flags as to possible<br />
Section 5 violations.<br />
The National Adjudicatory Council, on appeal by respondents, affirmed the findings of<br />
the hearing panel, but modified the sanctions. The NAC found that the supervisory conduct was<br />
egregious. The fine for World Trade was increase to $30,000; the fine for Midas increased to<br />
$50,000; the fine for Michel was increased to $30,000; the fine for Lee was increased to<br />
$50,000; and the fine for Adams was increased to $20,000. The suspensions for Michel, Lee and<br />
Adams, however, were not modified. The hearing panel, as an additional sanction, prohibited<br />
Midas and World Trade from receiver or selling unregistered securities until they complied with<br />
an undertaking to engage an independent consultant to review their supervisory policies and<br />
procedures relating to Section 5 and recommend necessary improvements.<br />
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393
Department of Enforcement v. Thomas Weisel Partners, LLC, Disciplinary Proceeding No.<br />
2008014621701, 2011 NASD Discip. LEXIS 59 (OHO, Nov. 8, 2011).<br />
FINRA’s Department of Enforcement alleged that the firm and a registered representative<br />
who worked on the firm’s Fixed Income Desk violated Section 10(b) of the Exchange Act and<br />
Rule 10b-5 thereunder, as well as NASD Conduct Rules 2120 and 2110, by “stuffing” auction<br />
rate securities from the account of the firm’s corporate parent into the accounts of three of its<br />
customers, prior to the freezing of the market for auction rate securities in 2008. The complaint<br />
also included allegations that respondents provided false and misleading information to<br />
customers in connection with attempting to secure their retroactive consent, and that respondents<br />
provided false information to FINRA during the investigation in violation of Rule 8210.<br />
Relevant to this summary, FINRA also alleged that the firm violated Conduct Rules 3010 and<br />
2110 by failing to establish and maintain supervisory systems and procedures surrounding<br />
principal transactions executed by the firm.<br />
After a hearing, the hearing panel concluded that respondents did not commit the<br />
“stuffing,” false information, to customers, or Rule 8210 violations. The panel did conclude,<br />
however, that firm’s Fixed Income Desk procedures governing principal transactions were<br />
inadequate. The firm did not believe that the Fixed Income Desk handled any principal<br />
accounts, and therefore the procedures lacked those applicable provisions, including the<br />
requirement for prior notice to and consent from customers. Such supervisory failures were<br />
found to violate NASD Rules 3010 and 2110, and as a result, the firm was fined $200,000, plus<br />
hearing costs.<br />
Department of Enforcement v. Max International <strong>Broker</strong>-<strong>Dealer</strong> Corp., Disciplinary Proceeding<br />
No. 20070072538-03, 2011 FINRA Discip. LEXIS 58 (OHO, Sept. 1, 2011).<br />
FINRA charged respondent with charging fraudulent, excessive, undisclosed markups on<br />
penny stock sales to more than 100 customers, in violation of Section 10(b) of the Exchange Act<br />
and Rule 10b-5 thereunder, and NASD Conduct Rules 2110, 2120, and 2440. In addition to<br />
trade reporting and books and records violations stemming from such conduct, the firm was also<br />
charged with certain supervisory violations. Specifically, the Department alleged that<br />
respondent failed to enforce its written supervisory procedures, in violation of NASD Conduct<br />
Rules 2110 and 3010, failed to maintain and enforce supervisory control procedures, in violation<br />
of NASD Conduct Rules 2110 and 3012, and failed to timely update its Form BD and file a<br />
required annual certification, in violation of NASD Conduct Rules 2110 and 3013.<br />
The hearing panel concluded that the firm failed to maintain and enforce its written<br />
supervisory control procedures regarding markups and proprietary customer trades. While the<br />
procedures contained references to supervision of proprietary trading, prohibitions against<br />
principal trades with customer, and cautions against mark-ups in excess of five percent, the<br />
procedures were not applied or enforced. The panel also concluded that the firm failed to<br />
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maintain and enforce a system of supervisory control procedures for testing and verification of<br />
the supervisory procedures. Finally, the panel found that the firm failed to timely update its<br />
Form BD to identify its new chief compliance officer, and failed to file timely an annual<br />
certification.<br />
For all these violations, the hearing panel imposed a censure, a fine of $335,000,<br />
restitution of $482,111.27, plus accrued interest to customers, and hearing costs. The hearing<br />
panel made clear in its decision, however, that the fines pertaining to the supervisory violations<br />
were $25,000 for failing to maintain and enforce its supervisory system for mark-ups and<br />
proprietary trades, $5,000 for its lack of testing and verification that its procedures were<br />
adequate, and $5,000 for failing to timely update its Form BD and failing to file a timely annual<br />
certification.<br />
Department of Enforcement v. Otalvaro, Disciplinary Proceeding No. 2008011725901, 2011<br />
FINRA Discip. LEXIS 39 (OHO, June 24, 2011).<br />
Respondent was charged with failing to disclose on his Form U-4 information regarding<br />
securities arbitrations filed against him. He was named as a respondent in seven arbitrations<br />
filed by customers of his firm. All of the claims related to investments with the firm. All of the<br />
arbitrations included claims against him for supervisory failures, and at least one charged him<br />
with active participation in the alleged fraud. Five of the arbitrations were settled for sums in<br />
excess of $15,000, triggering reporting obligations.<br />
The panel found that “failure to supervise” allegations in arbitration complaints needed to<br />
be reported. It cited the “Explanation of Terms” for the Form U4, which defines “involved” as<br />
“doing an act or aiding, abetting, counseling, commanding, inducing, conspiring with or failing<br />
reasonably to supervise another in doing an act.” The panel also noted that the failure to disclose<br />
the arbitration was material, because the arbitrations filed against respondent and his firm “might<br />
have alerted regulators to possible supervisory problems and sales practice problems.”<br />
After a hearing, the panel suspended respondent from associating with any FINRA<br />
member firm in any capacity for one year, barred him from acting as a principal for any FINRA<br />
member firm, and fined him $15,000.<br />
Department of Enforcement v. Gallagher, Disciplinary Proceeding No. 2008011701203, 2011<br />
FINRA Discip. LEXIS 40 (OHO June 13, 2011).<br />
Respondent Vision Securities was charged with violating FINRA rules pertaining to<br />
allowing the President of the firm to act as an unregistered principal, failing to apply heightened<br />
supervision over the President, failing to adopt a supervisory control system and failing to file<br />
annual certifications, fail to file AML testing, and continuing educations violations, among other<br />
things.<br />
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The hearing panel found that for nearly a year, the President was required to adhere to<br />
heightened supervisory requirements imposed by FINRA and various state securities regulators.<br />
Because the President controlled the firm, however, we was able to “sidestep” the requirements<br />
of heightened supervision. The firm, for its part, failed to ensure that the heightened supervision<br />
requirements were being followed, and by failing to have a system to monitor same, the hearing<br />
panel found the firm to be in violation of Rule 3010(a).<br />
Moreover, the firm admitted that it did not comply with Rules 3012 and 3013, in part<br />
because, as the President testified, he did not know what the rules were. Even so, as President,<br />
he was responsible for the establishment, maintenance and enforcement of a system of<br />
supervisory control policies and procedures, and was required to make the designations and<br />
certifications required by Rules 3012 and 3013. He and the firm were both found to have<br />
violated both Rules and Rule 2110.<br />
For his personal violations pertaining to failing to answer questions during his OTR<br />
examinations and circumvented his own heightened supervision requirements, the President was<br />
barred. Because of the bars, the hearing panel did not sanction him for the supervisory<br />
violations. The firm, however, was censured and fined a total of $60,000 for all violations.<br />
Department of Enforcement v. ACAP Financial, Inc., Disciplinary Proceeding No.<br />
2007008239001, 2011 FINRA Discip. LEXIS 32 (OHO, May 3, 2011).<br />
Respondent ACAP Financial was charged with selling unregistered securities in violation<br />
of Section 5 of the Securities Act. Respondent ACAP and respondent Hume, ACAP’s<br />
compliance officer and head trader, were charged with violating Conduct Rules 3010 and 2110<br />
by failing to reasonably supervise a registered representative in connection with the sale of<br />
unregistered securities and by failing to establish, maintain, and enforce written supervisory<br />
procedures reasonably designed to achieve compliance with the applicable securities laws and<br />
regulations.<br />
ACAP had stipulated to the supervisory violations alleged in the Department’s complaint.<br />
The firm failed to ensure that the representative performed sufficient inquiry to determine<br />
whether the customers’ unregistered shares could be sold in compliance with Section 5. The<br />
firm also failed to make any reasonable inquiry into whether the customers were underwriters or<br />
whether the transactions were a part of a distribution, instead relying on the lack of a restrictive<br />
legend on the stock certificates and the clearance through transfer without restriction. Moreover,<br />
the firm did not have any written or formal procedures regarding restricted stock transactions or<br />
the receipt of certificates. As the firm’s Compliance Officer, the hearing panel found Hume to<br />
be responsible for creating and maintaining its written supervisory procedures. They found that<br />
he failed to take appropriate action to cause the firm to adopt and implement appropriate<br />
procedures for handling the sale of stock deposited in certificate form without restricted legends.<br />
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The hearing panel found respondents responsible for the supervisory violation and<br />
imposed the following sanctions. ACAP was fined $50,000, required to revise its procedures to<br />
ensure that they are reasonably designed to comply with the requirements of Section 5, including<br />
but not limited to the deficiencies noted by the panel, required to retain an independent<br />
consultant to review and approve the firm’s revised procedures, and suspended from receiving or<br />
selling unregistered penny stocks, until it has implemented its revised procedures after approval<br />
by the independent consultant. Respondent Hume was fined $10,000, suspended from<br />
associating with any FINRA member firm in all principal capacities for one year, and required to<br />
re-qualify before re-associating in a principal capacity.<br />
Department of Enforcement v. AIS Financial, Inc., Disciplinary Proceeding No. 2008012169101,<br />
2011 FINRA Discip. LEXIS 24, (OHO, March 3, 2011).<br />
Respondent was charged with violating Conduct Rules 3011(a) and 2110 by failing to<br />
implement and enforce an anti-money laundering program reasonably designed to achieve and<br />
monitor compliance with applicable laws, rules, and regulations, which resulted in a failure to<br />
identify, investigate, and report suspicious activity. A hearing panel found that respondent<br />
committed the violation and that its conduct was egregious.<br />
The hearing panel noted that the FINRA Sanction Guidelines did not specifically address<br />
violations of Conduct Rule 3011. It noted, however, that the rules requiring firms to implement<br />
AML programs are, in substance, supervisory requirements. As such, the panel considered the<br />
guidelines for supervisory violations in determining the appropriate remedial sanction in this<br />
case. For this violation, the Department Enforcement recommended a $150,000 fine and a oneyear<br />
suspension from all penny stock activity. The hearing panel, however, found that the<br />
conduct warranted a more significant sanction, finding that “[a]nything short of an expulsion of<br />
[the firm] would be insufficient to remedy its misconduct and deter it from engaging in future<br />
misconduct.”<br />
Department of Enforcement v. Hedge Fund Capital Partners LLC, Disciplinary Proceeding No.<br />
2006004122402, 2011 FINRA Discip. LEXIS 20 (OHO, Jan. 26, 2011).<br />
Respondent firm and its Chief Executive Officer were charged with numerous underlying<br />
violations of FINRA and SEC Rules stemming from a “hedge fund hotel” scheme, whereby the<br />
firm rented office space to hedge fund clients at its Fifth Avenue offices, in exchange for soft<br />
dollars, paid through trading commissions. The firm was also charged with failing to supervise<br />
its email and instant message retention, annual compliance meetings and registration of<br />
associated persons.<br />
The hearing panel concluded that respondents’ failure to supervise caused many of the<br />
violations, which could have been prevented with “diligent and reasonable supervision.” While<br />
the firm had written supervisory procedures that addressed areas such as e-mail and instant<br />
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message retention, registration of representatives, and soft dollar arrangements, the procedures<br />
were not enforced. The panel noted that the respondents “made no effort” to implement an<br />
electronic mail or message retention system, despite its procedures and warnings from the CCO.<br />
The firm also had a written requirement that it hold an annual compliance meeting, but the firm<br />
merely sent a PowerPoint presentation for employees to read, in lieu of a live meeting. Finally,<br />
regulatory requirements and the firm’s own procedures required its representatives to be properly<br />
registered, but the firm allowed unlicensed marketers to do business.<br />
For the supervisory violations, together with the numerous other violations, the hearing<br />
panel expelled the firm from FINRA membership and barred the CEO from associating with any<br />
FINRA member firm in any capacity, and ordered them to pay hearing costs.<br />
3. NYSE Enforcement Actions<br />
P.3<br />
In re KCCI, Ltd., NYSE Hearing Panel Decision 11-NYSE-8; 2011 NYSE Disc. Action LEXIS 8<br />
(Nov. 1, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 in that the firm<br />
failed to reasonably supervise and implement adequate controls designed to achieve compliance<br />
with NYSE Rules and policies pertaining to conducting “upstairs” operations from its booth<br />
premises on the NYSE Floor. In addition, the firm was found to have violated NYSE Rule<br />
70.40, governing its so-called “Blue Line” operations, by conducting “upstairs” operations in its<br />
booth premises on the floor of the exchange without obtaining requisite approval from NYSE<br />
Regulation, adopting and implementing written procedures and guidelines governing the conduct<br />
and supervision of such business, and/or obtaining approval of its written procedures and<br />
guidelines from NYSE Regulation, as required. The NYSE noted that the firm’s overall written<br />
supervisory procedures did not have separate, “stand-alone” procedures for the Blue Line<br />
business as required by Rule 70.40 and Information Memo 07-77. The firm resolved these<br />
violations by consenting to a censure and a $10,000 fine.<br />
Matter of Blue Point Securities, Inc., NYSE Hearing Panel Decision 11-NYSE-7; 2011 NYSE<br />
Disc. Action LEXIS 7 (Sept. 27, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to<br />
reasonably supervise and implement adequate controls, including a reasonable system of followup<br />
and review, designed to achieve compliance with NYSE Rule 123C regarding the entry and<br />
cancellation of market-on-close (“MOC”) and limit-on-close (“LOC”) orders. In addition, the<br />
firm consented to findings that it violated Section 12(k)(4) of the Exchange Act, in connection<br />
with violation of an SEC Emergency Order prohibiting short sales in certain financial institutions<br />
during the financial crisis, in that the firm executed 212 short sale orders in such stocks. The<br />
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firm also consented to findings that it violated NYSE Rule 123C itself, based on both entry of<br />
orders in situations where a market imbalance was not found to exist, and cancellation of orders<br />
after the cut-off time for cancellations. In resolution of all violations, the firm consented to a<br />
censure, a $22,500 fine, and an undertaking to enhance its procedures and controls governing the<br />
entry, cancellation, and supervision of MOC and LOC orders.<br />
Matter of Credit Suisse Securities (USA) LLC, NYSE Hearing Panel Decision 11-NYSE-5; 2011<br />
NYSE Disc. Action LEXIS 5 (Sept. 14, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to<br />
reasonably supervise and implement adequate controls for compliance with NYSE rules<br />
regarding entry and cancellation of Market-on-Close (“MOC”) and Limit-on-Close (“LOC”)<br />
orders. Specifically, while the NYSE acknowledged that the firm had policies and procedures<br />
reasonably designed to ensure compliance with NYSE rules relating to entry, modification or<br />
cancellation of MOC and LOC orders, including reasonable policies and procedures for<br />
conducting a follow-up and review, the firm failed to prevent the entry or cancelation of MOC<br />
and LOC orders after certain mandated cut-off times due to technical issues within the firm’s<br />
order entry systems. Respondent was also found to have violated NYSE Rule 123C in<br />
connection with the entry and cancelation of such orders in 94 transactions. As a resolution of<br />
both the failure to supervise and the order handling charges, the firm consented to a censure and<br />
a $50,000 fine.<br />
In re Lombardi & Co., Inc., NYSE Hearing Panel Decision 2011-4; 2011 NYSE Disc. Action<br />
LEXIS 4 (May 25, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 in two respects.<br />
In certain areas, it failed to follow its supervisory procedures, and in other areas it failed to<br />
maintain adequate written supervisory procedures in other areas. Specifically, the firm’s failure<br />
to follow its procedures was connected to violations in the areas of registration and licensing,<br />
notification of NYSE of terminations of employment and return of identification badges,<br />
evidencing supervisory review of employees trading, and maintaining adequate books and<br />
records of employees’ forms U-4. In addition, NYSE found that the firm lacked adequate<br />
procedures dealing with review and resolution of “d/k’ed” trades, reporting and/or identification<br />
of manual trades or crosses, monitoring and preventing publishing quotations that lock or cross<br />
markets, preventing acceptance of sub-penny orders, and maintenance of a separate error account<br />
for errors of executions on other market centers. As a result, the firm consented to a censure and<br />
a $12,500 fine.<br />
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In re SG Americas Securities, LLC, NYSE Hearing Panel Decision 2011-3; 2011 NYSE Disc.<br />
Action LEXIS 3 (May 13, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to<br />
reasonably supervise and implement adequate controls, including a reasonable system of followup<br />
and review, designed to achieve compliance with NYSE Rule 123C regarding compliance<br />
with the requirements governing the cancellation of market-on-close and limit-on-close orders.<br />
Specifically, NYSE found that the firm failed to have any systems or procedures in place to<br />
detect possible violations of Rule 123C until March 2009, when it created an exception report for<br />
that purpose, and failed to implement procedures designed to hold individual supervisors<br />
responsible for reviewing the exception report. The firm also consented to findings that it<br />
violated Rule 123C itself. As a result, for its supervisory violations, together with its Rule 123C<br />
violations, the firm consented to a censure and a $ 350,000 fine.<br />
In re UBS Securities LLC, NYSE Hearing Panel Decision 2011-2; 2011 NYSE Disc. Action<br />
LEXIS 2 (Feb. 2, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated, among other rules, NYSE Rule<br />
342 by failing to reasonably supervise and implement adequate controls, including a separate<br />
system of follow-up and review, in connection with pre-opening odd lot orders routed to the<br />
NYSE, and the submission of complete and accurate blue sheet data. NYSE found that the firm<br />
had entered pre-opening, thousands of principal odd lot market orders for execution on the<br />
NYSE in the same stock on the same side of the market, that aggregated 100 shares or more<br />
without consolidating them into round lot orders as much as possible. Further NYSE found that<br />
the firm had submitted incomplete or inaccurate blue sheet responses on approximately 437<br />
occasions. In addition, the firm consented to findings that it violated, among other rules, NYSE<br />
Arca Equities Rule 6.18 by failing to establish, maintain and/or enforce appropriate written<br />
policies and procedures for supervision and control, including a separate system of follow-up and<br />
review, with respect to odd lot transactions on the NYSE Arca Marketplace. In connection with<br />
the Arca violations, the firm was found to have unbundled round lots for the purpose of entering<br />
approximately 8,800 odd lot limit order.<br />
As a result, Respondent consented to a censure and a fine of $225,000 for all its NYSE<br />
violations, and $175,000 for all its NYSE Arca violations, inclusive of fines relating to<br />
underlying handling of odd lot transactions.<br />
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In re Keybanc Capital Markets, Inc., NYSE Hearing Panel Decision 2011-1; 2011 NYSE Disc.<br />
Action LEXIS 1 (Jan. 31, 2011).<br />
In a settled disciplinary proceeding, consented to by respondent without admitting or<br />
denying the allegations, respondent was found to have violated NYSE Rule 342 by failing to<br />
reasonably supervise and implement adequate controls, including a reasonable system of followup<br />
and review, in connection with its Control Room procedures, Watch and Restricted Lists, and<br />
related trading activities. Specifically, while respondent had written policies and procedures<br />
pertaining to its Control Room, Watch and Restricted Lists, and related trading activities which<br />
required reporting of material nonpublic information to the Control Room for inclusion on the<br />
Watch and Restricted Lists, the NYSE found that the firm failed to establish adequate controls,<br />
including a reasonable system of follow-up and review, to ensure that its employees were<br />
adhering to such policies and procedures, including adequate training. Moreover, NYSE found<br />
that the firm failed to report a significant number of companies, issuers and event updates to its<br />
Watch and Restricted Lists, as required by its procedures, and consequently failed to monitor for<br />
trades that were potentially associated with material nonpublic information.<br />
In addition, respondent was found to have violated NYSE Rules 351(e)(ii) and 476(a) by<br />
failing to disclose to the NYSE in its quarterly attestation that it had completed an internal<br />
investigation of possible insider trading, Finally, respondent was found to have violated NYSE<br />
Rule 342.21(a) for an inadequate system of obtaining, reviewing, and monitoring trade<br />
confirmations and account statements for employee trades. As a result, respondent consented to<br />
a censure and a $ 350,000 fine.<br />
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Q. SEC <strong>Litigation</strong> Affecting <strong>Broker</strong>-<strong>Dealer</strong>s<br />
1. Direct SEC Proceedings<br />
a. Sales Practice Violations<br />
Q.1.a<br />
SEC v. Vianna, Litig. Release No. 21905, 2011 SEC LEXIS 1039 (S.D.N.Y. Mar. 28, 2011).<br />
A federal district court entered a final judgment by consent against Vianna, a former<br />
registered representative of a registered broker-dealer (the “Firm”). The Commission’s<br />
complaint alleged that Vianna participated in a scheme to divert dozens of profitable stock trades<br />
and millions of dollars in trading profits from one customer to another customer. Vianna<br />
simultaneously entered orders to trade the same amounts of the same stock in the accounts of a<br />
customer of the Firm and a company known as Creswell. Each time, he placed a buy order in<br />
one of the accounts and a sell order in the other account. When the market moved to make the<br />
customer’s trade profitable, Vianna diverted the profitable trade to Creswell by misusing the<br />
Firm’s order management system to switch the identity of buyer and seller. The court<br />
permanently enjoined Vianna from violating and from aiding and abetting violations of the<br />
antifraud provisions of the federal securities laws . The final judgment ordered Vianna to pay<br />
401
disgorgement of $306,412, prejudgment interest of $47,442, and a $130,000 civil penalty. In a<br />
prior administrative proceeding, the Commission barred Vianna from association.<br />
In re Konaxis, Release No. 64298, 2011 SEC LEXIS 1334 (Apr. 13, 2011).<br />
Q.1.a<br />
The Commission accepted an offer of settlement from Konaxis, a former registered<br />
representative with a registered broker-dealer. Konaxis was also an advisory account manager<br />
for an affiliate of the broker-dealer and a registered investment adviser representative. In an<br />
earlier action brought by the Commission in federal court, the court entered a consent judgment<br />
against Konaxis, permanently enjoining him from future violations of the anti-fraud provisions<br />
of the federal securities laws, and barring him from participating in an offering of penny stock.<br />
The Commission’s complaint alleged that Konaxis defrauded one of his largest individual<br />
customers by churning at least three of the customer’s brokerage accounts, disregarding the<br />
customer’s interests and earning approximately $550,000 in commissions. The Commission<br />
barred Konaxis from association.<br />
Q.1.a<br />
In re MMR Inv. Bankers, LLC, Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re<br />
MMR Investment Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In<br />
re MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8, 2011);<br />
In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS 1966 (June 8,<br />
2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011 SEC LEXIS 1967 (June<br />
8, 2011).<br />
The Commission accepted offers of settlement from MMR Investment Bankers LLC, a<br />
registered broker-dealer (the “Firm”), Martin, its president and majority owner, Rankin, its vicepresident<br />
and assistant compliance officer, and Hubert and Fimreite, registered representatives at<br />
the Firm. According to the Commission, Martin and Rankin assisted in the preparation of<br />
disclosure documents for certain private placement debenture offerings, and Hubert and Fimreite<br />
recommended and sold the debentures to customers. Respondents were reckless in not knowing<br />
of material omissions in the disclosure documents, including that Martin and Rankin had created<br />
a new company, in which Martin, Rankin, Fimreite, and Hubert’s wife owned shares, to manage<br />
the proceeds of the debenture sales, that this company received management fees that were<br />
charged to the offering companies, and that Martin Rankin, Hubert and Fimreite had received<br />
shares in some of the offering companies. Additionally, Respondents were reckless in not<br />
knowing that the Firm was selling the debentures to customers for whom they were unsuitable.<br />
The Commission ordered the Firm and individual respondents to cease and desist from<br />
committing or causing any violations and future violations of Section 17(a) of the Securities Act<br />
of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5 and<br />
17a-3(a)(17)(i)(B)(1) thereunder. The Commission also censured the Firm and revoked its<br />
registration. Based on a sworn statement of financial condition, the Commission declined to<br />
impose a penalty against the Firm. The Commission barred the individual respondents from<br />
association and from participating in any offering of a penny stock, ordered Martin to pay a<br />
402
$30,000 civil fine, disgorgement of $25,200 and prejudgment interest of $2,292; Rankin to pay a<br />
$15,000 civil fine; Hubert to pay a $20,000 civil fine disgorgement of $39,615 and prejudgment<br />
interest of $3,603; and Fimreite to pay disgorgement of $2,644 and prejudgment interest of $240.<br />
The Commission declined to impose a penalty against Fimreite based on his sworn statement of<br />
financial condition.<br />
In re Brouwer, Release No. 65208, 2011 SEC LEXIS 3004 (Aug. 26, 2011).<br />
Q.1.a<br />
The Commission accepted an offer of settlement from Brouwer, a former registered<br />
representative associated with a registered broker-dealer. The Commission alleged that Brouwer<br />
made material misrepresentations and omissions concerning the risks associated with certain<br />
structured notes. In particular, he represented that the securities were safe and failed to disclose<br />
the risk that the notes might convert into the underlying securities at a value less than the<br />
invested principal. The Commission further alleged that Brouwer’s recommendations of the<br />
notes were unsuitable for at least two customers. The Commission barred Brouwer from<br />
association and from participating in any offering of a penny stock, ordered him to cease and<br />
desist from violating the antifraud provisions of the federal securities laws, and ordered him to<br />
pay $33,000 in disgorgement, $6,137 in prejudgment interest, and a $33,000 civil penalty.<br />
b. Unfair/Fraudulent Markups or Commissions<br />
Q.1.b<br />
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280<br />
(Jan. 25, 2011).<br />
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &<br />
Smith Incorporated (the “Firm”). The Commission alleged that the Firm’s market making desk<br />
improperly disclosed customer order information to the Firm’s proprietary traders, who then<br />
misused the information to place similar orders. According to the Commission, the Firm<br />
improperly charged institutional and high net worth customers an undisclosed mark-up or markdown,<br />
in addition to a commission equivalent, on certain riskless principal trades for which it<br />
had agreed only to charge a commission equivalent. Additionally, on numerous occasions, the<br />
Firm failed to make records of price guarantees that were part of the terms and conditions of<br />
institutional customer orders. As a result of this conduct, the Commission found that the Firm<br />
violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in<br />
securities by means of manipulative, deceptive or other fraudulent devices or contrivances,<br />
Section 15(g) of the Exchange Act by failing to establish written policies and procedures<br />
designed to prevent the misuse of material, nonpublic information, Section 17(a) of the<br />
Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain terms and<br />
conditions of customer orders, and failed reasonably to supervise its traders. The Commission<br />
ordered the Firm to cease and desist from committing or causing any violations and any future<br />
violations, censured the Firm and ordered it to pay a $10 million civil penalty.<br />
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Q.1.b<br />
In re Wells Fargo Sec. LLC, Release No. 64182, 2011 SEC LEXIS 1202 (Apr. 5, 2011).<br />
The Commission accepted an offer of settlement from Wells Fargo Securities LLC (the “Firm”),<br />
a registered broker-dealer. The Commission alleged that during late 2006 and early 2007, the<br />
Firm’s predecessor structured and marketed two collateralized debt obligations tied to mortgagebacked<br />
securities in violation of the antifraud provisions of the Securities Act of 1933. The<br />
Commission alleged that the Firm’s predecessor charged an undisclosed excessive markup in<br />
connection with certain sales of one of the securities, and that it knew or should have known that<br />
the prices it charged were excessive. It further alleged that the Firm’s predecessor represented to<br />
investors in the other security that it acquired assets from affiliates in an arm’s-length transaction<br />
and at fair market prices when certain assets were transferred from an affiliate at approximately<br />
$4.6 million above market value. The Commission ordered the Firm to cease and desist from<br />
violating Sections 17(a)(2) and (3) of the Securities Act and to pay $6.75 million in<br />
disgorgement and a $4.45 million civil penalty.<br />
In re Rodriguez, Release No. 66056, 2011 SEC LEXIS 4546 (Dec. 23, 2011).<br />
Q.1.b<br />
The Commission accepted an offer of settlement from Rodriguez, a former registered<br />
representative and trader of a registered broker-dealer and investment adviser. The Commission<br />
alleged that Rodriguez violated the antifraud provisions of the federal securities laws by<br />
needlessly interposing a Mexican brokerage firm into securities transactions between his firm<br />
and a Mexican investment adviser’s institutional clients. As a result, four Mexican pension<br />
funds paid approximately $65 million more for certain notes than they would have otherwise<br />
paid, and Rodriguez received more than $6 million in additional markups. The Commission<br />
ordered Rodriguez to cease and desist from violating the antifraud provisions of the federal<br />
securities laws and to pay disgorgement of $6,041,810 and prejudgment interest of $613,667.<br />
The Commission also barred Rodriguez from association and from participating in any offering<br />
of penny stock, and prohibited him from serving as an employee, officer, director, board<br />
member, investment adviser, depositor or principal underwriter for a registered investment<br />
company.<br />
c. Other Fraudulent Practices<br />
(i)<br />
Misappropriation<br />
Q.1.c.(i)<br />
In re Awan, Release No. 65961, 2011 SEC LEXIS 4410 (Dec. 15, 2011); SEC v. OCC Holdings,<br />
Ltd., Litig. Release No. 22200, 2011 SEC LEXIS 4442 (S.D.N.Y. Dec. 16, 2011).<br />
A federal district court entered judgments by consent against Awan and Koppel, the<br />
remaining defendants in a case arising out of allegedly fraudulent offerings of securities. The<br />
Commission previously obtained summary judgment or default judgment, as the case may be,<br />
against certain other defendants, and voluntarily dismissed its claims against another defendant.<br />
404
The Commission’s complaint alleged that Awan, Koppel, and the other defendants fraudulently<br />
raised more than $2 million from investors in three offerings by means of fraudulent<br />
misrepresentations, including promises of imminent initial public offerings and/or substantial<br />
increases in stock price; misappropriated investor funds for personal expenses, and failed to<br />
disclose their disciplinary histories. The court permanently enjoined Awan and Koppel from<br />
violating the antifraud provisions of the federal securities laws, ordered Awan to pay $655 in<br />
disgorgement plus prejudgment interest and a $10,000 civil penalty, ordered Koppel to pay $851<br />
in disgorgement plus prejudgment interest and a $10,000 civil penalty, and barred Koppel from<br />
participating in the offering of any penny stock. In related administrative proceedings brought<br />
by the Commission, Awan consented to the entry of an order barring him from association and<br />
from participating in the offering of any penny stock, and Koppel consented to the entry of an<br />
order barring him from association.<br />
In re Buchholz, Release No. 63800, 2011 SEC LEXIS 344 (Jan. 31, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Buchholz, a registered<br />
representative of a registered broker-dealer. In an earlier criminal proceeding, Buchholz pleaded<br />
guilty to one count of wire fraud. The criminal indictment alleged that Buchholz engaged in a<br />
scheme to defraud his clients of more than $1.3 million through such tactics as forging client<br />
signatures, depositing client funds into personal accounts, misrepresenting that his clients had<br />
authorized redemptions, and misrepresenting to clients that funds would be placed into their<br />
accounts when he actually placed those funds into his personal accounts. The Commission<br />
barred Buchholz from association and from participating in any offering of penny stock.<br />
In re Zangari, Release No. 63923, 2011 SEC LEXIS 650 (Feb. 17, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Zangari, a stock loan trader who<br />
was employed by several major Wall Street brokerage firms over an eleven year period. In an<br />
earlier action brought by the Commission, a federal district court entered a partial judgment by<br />
consent against Zangari, permanently enjoining him from violating the antifraud provisions of<br />
the federal securities laws. The Commission’s complaint alleged that Zangari knowingly<br />
engaged in a scheme to defraud broker-dealers in connection with the lending and borrowing of<br />
securities. The Commission barred Zangari from association.<br />
In re Sarnicola, Release No. 63924, 2011 SEC LEXIS 651 (Feb. 17, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Sarnicola, a securities lending<br />
representative of a registered broker-dealer. In an earlier criminal proceeding, Sarnicola pleaded<br />
guilty to one count of conspiracy to commit wire fraud. The criminal indictment alleged that<br />
Sarnicola conspired to defraud the registered broker-dealer of money and property, and to obtain<br />
money and property from the broker-dealer by means of materially false and fraudulent<br />
pretenses. The Commission barred Sarnicola from association.<br />
405
Q.1.c(i)<br />
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).<br />
The Commission accepted an offer of settlement from Nicholson, the president and<br />
owner of a registered broker-dealer and owner of a separate entity that acted as the general<br />
partner for various issuers of limited partnership interests. In a related civil action brought by the<br />
Commission in federal court, a judgment was entered by consent against Nicholson, permanently<br />
enjoining him from violating the antifraud and registration provisions of the federal securities<br />
laws. The Commission’s complaint alleged that, in connection with the sale of limited<br />
partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose<br />
material information regarding the use of investor proceeds, sold unregistered securities and<br />
operated an unregistered broker-dealer. The Commission barred Nicholson from association.<br />
In re Kobayashi, Release No. 64508, 2011 SEC LEXIS 1735 (May 17, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Kobayashi, a former registered<br />
financial adviser at a national broker-dealer. In an earlier proceeding brought by the<br />
Commission, a federal district court entered a final judgment by consent against Kobayashi,<br />
permanently enjoining him from future violations of the broker-dealer registration and antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that, in<br />
connection with the sale of securities, Kobayashi misappropriated funds from client accounts at<br />
the broker-dealer where he was employed, and acted as unregistered broker-dealer by selling<br />
interests in a pooled investment fund that he established and managed. The Commission barred<br />
Kobayashi from association and from participating in the offering of any penny stock.<br />
In re Shereshevsky, Release No. 64704, 2011 SEC LEXIS 2098 (June 20, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Shereshevsky, who was associated<br />
with a registered broker-dealer. In a related criminal proceeding in federal district court,<br />
Shereshevsky pleaded guilty to one count of securities fraud, one count of conspiracy to commit<br />
securities fraud, mail fraud and wire fraud, and one count of mail fraud. The criminal indictment<br />
alleged that Shereshevsky raised money in a private placement offering and diverted some of the<br />
proceeds to purposes other than those specified in the private placement memoranda, without<br />
disclosure to investors. The indictment also alleged that Shereshevsky made materially false<br />
statements in documents distributed to investors concerning the investments. The Commission<br />
barred Shereshevsky from association and from participating in any offering of penny stock.<br />
In re Icely, Release No. 62215, 2011 SEC LEXIS 3012 (Aug. 29, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Icely, a former registered<br />
representative of a registered broker-dealer. In an earlier proceeding brought by the<br />
406
Commission, a federal district court entered a final judgment by consent against Icely,<br />
permanently enjoining him from future violations of the antifraud provisions of the federal<br />
securities laws. The Commission alleged that Icely engaged in a scheme to defraud customers<br />
by selling their securities and diverting the proceeds to bank accounts in the name of Icely’s<br />
company. Icely forged wire requests and IRA distribution forms, and prepared false account<br />
statements. The Commission barred Icely from association and from participating in an offering<br />
of penny stock.<br />
In re Schaefer, Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011).<br />
Q.1.c(i)<br />
The Commission issued an Order Instituting Proceedings (OIP) and entered a final<br />
judgment by default against Schaefer, formerly the president, a principal, and a registered<br />
representative of a registered broker-dealer. In an earlier proceeding brought by the Commission<br />
in federal court, the court entered a default judgment permanently enjoining Schaefer from<br />
violating the securities registration and antifraud provisions of the federal securities laws, and<br />
from aiding and abetting violations of various other provisions. The Commission’s complaint<br />
alleged that Schaefer sold unregistered securities of his firm’s parent company to investors and<br />
diverted approximately 79% of the offering proceeds to enrich himself and others. The<br />
Commission also alleged that Schaefer knowingly and substantially assisted in violations by not<br />
disclosing in regulatory filings that another individual controlled the firm, by permitting<br />
unregistered individuals to effect securities transactions, and by not making or keeping required<br />
employment documentation for certain associated persons of the firm. Schaefer was barred from<br />
association.<br />
In re Jennings, Release No. 65349, 2011 SEC LEXIS 3233 (Sept. 16, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Jennings, an associated person of a<br />
registered broker-dealer. In an earlier proceeding brought by the Commission, a federal district<br />
court entered a final judgment by consent against Jennings, permanently enjoining him from<br />
future violations of the securities registration and antifraud provisions of the federal securities<br />
laws. The Commission alleged that Jennings misused investor funds to operate a Ponzi-like<br />
scheme. The Commission barred Jennings from association and from participating in an offering<br />
of penny stock, with the right to reapply after five years.<br />
In re Mutascio, Release No. 65351, 2011 SEC LEXIS 3254 (Sep. 19, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Mutascio, a registered<br />
representative associated with a registered broker-dealer. Mutascio had earlier pleaded guilty to<br />
one count of wire fraud in federal district court, admitting in his guilty plea that he devised a<br />
scheme to defraud one of his clients and to obtain money and property by means of fraudulent<br />
misrepresentations, and made an unauthorized wire transfer of $44,000 from his client’s<br />
brokerage account to a bank account owned and controlled by one of his family members and<br />
407
then to his own bank account. The Commission barred Mutascio from association, and from<br />
participating in any offering of a penny stock.<br />
In re Gallardo, Release No. 65422, 2011 SEC LEXIS 3370 (Sept. 28, 2011).<br />
Q.1.c(i)<br />
An administrative law judge entered a default order against Gallardo, a former registered<br />
representative. The Commission’s complaint alleged that Gallardo had solicited foreign<br />
investors to provide him with approximately $1.2 million that he represented would be invested<br />
by “professional traders” for a guaranteed rate of return. Instead, Gallardo invested a portion of<br />
the money himself, returned approximately $275,000 as “distributions,” and misappropriated<br />
approximately $685,000 for his personal use. The ALJ barred Gallardo from association and<br />
from participating in the offering of any penny stock, ordered him to cease and desist from<br />
violating the anti-fraud provisions of the federal securities laws, and ordered him to pay<br />
$876,193 in disgorgement, $178,682.58 in prejudgment interest, and a $260,000 civil penalty.<br />
In re Paganes, Release No. 65957, 2011 SEC LEXIS 4401 (Dec. 15, 2011).<br />
Q.1.c(i)<br />
An administrative law judge entered a default order against Paganes, a former managing<br />
member of a former registered investment adviser and a former associated person of a former<br />
registered broker-dealer, both of which served as trustee for a hedge fund. In a related action<br />
brought by the Commission, a federal district court ordered Paganes to pay disgorgement of<br />
$650,000, prejudgment interest of $90,339, and a $650,000 civil penalty. The Commission<br />
alleged that Paganes approved hedge fund transactions and disbursed investor funds for uses not<br />
permitted by relevant organizational documents, and that he had a direct, undisclosed financial<br />
interest in at least one of the transactions he approved. The ALJ permanently enjoined Paganes<br />
from engaging in conduct in connection with the purchase or sale of any security, and barred him<br />
from association.<br />
In re Caccioppoli, Release No. 66060, 2011 SEC LEXIS 4569 (Dec. 28, 2011).<br />
Q.1.c(i)<br />
The Commission accepted an offer of settlement from Caccioppoli, a former securities<br />
lending representative associated with a registered broker-dealer (the “Firm”). In an earlier<br />
proceeding brought by the Commission, a federal district court entered a judgment by consent<br />
against Caccioppoli, permanently enjoining him from violating the antifraud provisions of the<br />
federal securities laws. The Commission’s complaint alleged that Caccioppoli knowingly<br />
engaged in a scheme to defraud the Firm in connection with the lending and borrowing of<br />
securities. The Commission barred Caccioppoli from association.<br />
408
(ii)<br />
Misrepresentation<br />
Q.1.c.(ii)<br />
In re Blech, Release No. 63801, 2011 SEC LEXIS 345 (Jan. 31, 2011).<br />
The Commission accepted an offer of settlement from Blech, a registered representative<br />
and Chief Executive Officer of a registered broker-dealer. In an earlier criminal proceeding in<br />
federal court, Blech pleaded guilty to three counts of securities fraud and wire fraud. The court<br />
sentenced him to 72 months in prison followed by three years of supervised release and ordered<br />
him to make restitution of $18,128,599. The criminal complaint alleged that Blech defrauded<br />
investors and obtained money and property by means of fraudulent statements. The Commission<br />
barred him from association.<br />
In re Demizio, Release No. 63922, 2011 SEC LEXIS 649 (Feb. 17, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from DeMizio, a securities lending<br />
representative of a registered broker-dealer. In an earlier criminal proceeding, a jury convicted<br />
DeMizio of conspiracy to commit securities fraud and wire fraud. The criminal indictment<br />
alleged that DeMizio conspired to execute a scheme and artifice to defraud and obtain money<br />
and property from the registered broker-dealer by means of false and fraudulent pretenses,<br />
representations and promises, and to deprive the broker-dealer of its right to honest services of its<br />
employees in connection with securities of issuers with a class of securities registered under<br />
Section 12 of the Securities Exchange Act of 1934. The Commission barred DeMizio from<br />
association.<br />
In re Beachy, Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Beachy, a former registered<br />
representative of a registered broker-dealer. In an earlier proceeding brought by the<br />
Commission, a federal district court entered a final judgment by consent against Beachy,<br />
permanently enjoining him from future violations of the broker-dealer registration and antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that Beachy sold<br />
investment contracts to investors in at least 29 states using a fictitious name, made false<br />
statements to investors, distributed false account statements, and sold unregistered securities.<br />
The Commission barred Beachy from association and from participating in an offering of penny<br />
stock.<br />
In re Biddlecome, Release No. 64500, 2011 SEC LEXIS 1725 (May 16, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Biddlecome, a former registered<br />
representative associated with a registered broker-dealer and the founder and president of a<br />
formerly registered investment adviser. In an earlier proceeding brought by the Commission, a<br />
409
federal district court entered a final judgment by consent against Biddlecome, permanently<br />
enjoining him from future violations of the securities registration, broker-dealer registration and<br />
antifraud provisions of the federal securities laws. The Commission’s complaint alleged that<br />
Biddlecome sold unregistered interests in a fund, made several misrepresentations in connection<br />
with the sale of interests in the fund, and was not associated with a registered broker-dealer for<br />
purposes of selling the interests. The Commission also alleged that the fund’s offering<br />
documents stated that the fund would invest in real property, but Biddlecome instead used<br />
investors’ funds to engage in speculative short-term trading through a brokerage account in his<br />
own name. The Commission barred Biddlecome from association and from participating in any<br />
offering of penny stock, with the right to reapply after three years.<br />
Q.1.c(ii)<br />
In re MMR Inv. Bankers, LLC, Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re<br />
MMR Investment Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In<br />
re MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8, 2011);<br />
In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS 1966 (June 8,<br />
2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011 SEC LEXIS 1967 (June<br />
8, 2011).<br />
The Commission accepted offers of settlement from MMR Investment Bankers LLC, a<br />
registered broker-dealer, Martin, its president and majority owner, Rankin, its vice-president and<br />
assistant compliance officer, and Hubert and Fimreite, registered representatives at the Firm.<br />
According to the Commission, Martin and Rankin assisted in the preparation of disclosure<br />
documents for certain private placement debenture offerings, and Hubert and Fimreite<br />
recommended and sold the debentures to customers. Respondents were reckless in not knowing<br />
of material omissions in the disclosure documents, including that Martin and Rankin had created<br />
a new company, in which Martin, Rankin, Fimreite, and Hubert’s wife owned shares, to manage<br />
the proceeds of the debenture sales, that this company received management fees that were<br />
charged to the offering companies, and that Martin Rankin, Hubert and Fimreite had received<br />
shares in some of the offering companies. Additionally, Respondents were reckless in not<br />
knowing that the Firm was selling the debentures to customers for whom they were unsuitable.<br />
The Commission ordered the Firm and individual respondents to cease and desist from<br />
committing or causing any violations and future violations of Section 17(a) of the Securities Act<br />
of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5 and<br />
17a-3(a)(17)(i)(B)(1) thereunder. The Commission also censured the Firm and revoked its<br />
registration. Based on a sworn statement of financial condition, the Commission declined to<br />
impose a penalty against the Firm. The Commission barred the individual respondents from<br />
association and from participating in any offering of a penny stock, ordered Martin to pay a<br />
$30,000 civil fine, disgorgement of $25,200 and prejudgment interest of $2,292; Rankin to pay a<br />
$15,000 civil fine; Hubert to pay a $20,000 civil fine disgorgement of $39,615 and prejudgment<br />
interest of $3,603; and Fimreite to pay disgorgement of $2,644 and prejudgment interest of $240.<br />
The Commission declined to impose a penalty against Fimreite based on his sworn statement of<br />
financial condition.<br />
410
Q.1.c(ii)<br />
In re Chiaese, Release No. 64932, 2011 SEC LEXIS 2496 (July 20, 2011).<br />
The Commission accepted an offer of settlement from Chiaese, a registered<br />
representative of a registered broker-dealer and a principal member and the controlling person of<br />
an unregistered investment adviser. In a prior criminal proceeding, Chiaese pleaded guilty to one<br />
count of fraud. The criminal indictment alleged that Chiaese defrauded investors of<br />
approximately $2.4 million in money and property. The Commission barred Chiaese from<br />
association and from participating in any offering of penny stock.<br />
In re Ryan, Release No. 65173, 2011 SEC LEXIS 2930 (Aug. 19, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Ryan, a former registered<br />
representative of a registered broker-dealer and owner and sole managing member of an<br />
unregistered company (the “Company”). In an earlier action in federal district court, Ryan<br />
pleaded guilty to one count of securities fraud in violation of Sections 10(b) and 32 of the<br />
Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Title 18 of the United States Code,<br />
Section 2. The criminal indictment alleged that Ryan offered and sold investors purported<br />
contracts with the Company pursuant to which the Company promised to pay a guaranteed fixed<br />
rate of interest. To create the appearance of legitimacy, Ryan falsely represented to investors<br />
that, among other things, the Company was a substantial Manhattan-based financial services<br />
firm. Ryan sent investors false account statements and diverted investor funds for personal use.<br />
The Commission barred him from association.<br />
In re Bjork, Release No. 65520, 2011 SEC LEXIS 3536 (Oct. 7, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Bjork, a former executive officer<br />
of a registered investment adviser and a former registered representative associated with<br />
registered broker-dealers. In an earlier proceeding brought by the Commission, a federal district<br />
court entered a final judgment by consent against Bjork, permanently enjoining him from<br />
violating or aiding and abetting violations of the antifraud provisions of the federal securities<br />
laws. The Commission’s complaint alleged that Bjork offered and sold interests in investments<br />
that he never made, commingled investor money, failed to provide financial statements to<br />
investors and transferred money to affiliates without disclosing the transactions to investors. The<br />
Commission barred Bjork from association.<br />
In re Garcia, Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Garcia, a securities lending<br />
representative of a registered broker-dealer. In a related criminal proceeding in federal district<br />
court, Garcia pleaded guilty to one count of conspiracy to commit securities fraud. He was<br />
411
sentenced to three years of probation and 150 hours of community service and ordered to pay<br />
$300,422 in restitution. The criminal indictment alleged that Garcia executed a scheme to<br />
defraud his firm by means of false and fraudulent pretenses and to deprive his firm of the right to<br />
honest services of its employees in connection with registered securities of issuers. The<br />
Commission barred Garcia from association.<br />
In re Suarez, Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Suarez, a securities lending<br />
representative of a registered broker-dealer. In a related criminal proceeding in federal district<br />
court, Suarez pleaded guilty to two counts of conspiracy to commit securities and wire fraud. He<br />
was sentenced to five years of probation and ordered to pay $391,187 in restitution. The<br />
criminal indictment alleged that Suarez executed a scheme to defraud his firm by means of false<br />
and fraudulent pretenses and to deprive his firm of the right to honest services of its employees<br />
in connection with registered securities of issuers. The Commission barred Suarez from<br />
association.<br />
Q.1.c(ii)<br />
In re Lindsey, Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin.<br />
Serv., Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin. Serv.,<br />
Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011).<br />
The Commission accepted offers of settlement from Capital Financial, a former<br />
registered broker-dealer (the “Firm”), Boppre, the president and a registered principal of the<br />
Firm, and Lindsey, a registered representative, senior vice president, and due diligence officer of<br />
the Firm. The Commission alleged that the Firm, through Boppre and Lindsey, who together ran<br />
the Firm’s due diligence process, failed to perform reasonable due diligence on numerous oil and<br />
gas private placement offerings prior to recommending them to customers. Specifically, the<br />
Commission alleged that the Firm never independently investigated the information in the<br />
offering materials that the issuer provided to it and never received audited or unaudited financial<br />
statements. The Commission’s complaint alleged that Boppre and Lindsey knew that the<br />
offering materials stated that selling broker-dealers would receive a due diligence fee, which<br />
misleadingly suggested that the Firm was conducting independent due diligence. It further<br />
alleged that Boppre and Lindsey acted at least with severe recklessness by approving the<br />
offerings without first obtaining appropriate due diligence and by not acting on red flags brought<br />
to their attention through third party due diligence reports. The Firm received over $5 million in<br />
sales commissions and over $600,000 in due diligence fees in connection with the offerings,<br />
many of which involved classic Ponzi schemes and offering frauds.<br />
The Commission ordered Respondents to cease and desist from violating the<br />
antifraud provisions of the federal securities laws. It further barred Boppre and Lindsey from<br />
association and from participating in any offering of a penny stock, with the right to reapply after<br />
two years, and ordered each of them to pay, in specified installments, a $25,000 civil penalty.<br />
412
The Commission censured the Firm. Additionally, the Firm undertook to retain an independent<br />
consultant to review its due diligence policies and procedures.<br />
In re Sabado, Release No. 64890, 2011 SEC LEXIS 2434 (July 14, 2011).<br />
Q.1.c(ii)<br />
The Commission accepted an offer of settlement from Sabado, a former registered<br />
representative and investment adviser of a dually registered broker-dealer and investment<br />
adviser. In an earlier action in federal district court, the Commission filed a partially settled civil<br />
injunctive action alleging Halek Energy, CBO Energy, Inc., and Jason Halek fraudulently sold<br />
investments in purported Texas oil and gas projects, raising approximately $22 million from 300<br />
investors nationwide. The Commission alleged that Sabado sold $491,880 of the oil and gas<br />
interests to six of her clients, and in doing so, materially misrepresented and omitted the<br />
interests’ risks and returns. Additionally, the Commission alleged that Sabado violated her<br />
firm’s compliance policies and procedures by “selling away” and failing to disclose the sales on<br />
her annual outside business activities forms. Sabado did no meaningful diligence on the interests<br />
and was paid commissions in the form of working interests in one of the oil and gas projects.<br />
The Commission ordered Sabado to cease and desist from committing or causing any violations<br />
of the securities registration and antifraud provisions of the federal securities laws and to pay<br />
disgorgement of $2,341, prejudgment interest of $275 and a $25,000 civil penalty. It further<br />
barred her from association and from participating in any offering of a penny stock, with the<br />
right to apply for reentry after five years.<br />
Q.1.c(ii)<br />
In re Sawyers, Release No. 64759, 2011 SEC LEXIS 2214 (June 28, 2011); In re Harrison,<br />
Release No. 64965, 2011 SEC LEXIS 2558 (July 26, 2011).<br />
The Commission accepted offers of settlement from Harrison and Sawyers, former<br />
registered representatives associated with a registered broker-dealer (the “Firm”). In an earlier<br />
proceeding brought by the Commission, a federal district court entered a judgment by consent<br />
against Harrison and Sawyers, permanently enjoining them from violating the antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that Harrison and<br />
Sawyers defrauded forty-two customers of the Firm of at least $8 million by soliciting them to<br />
invest through an advisory firm they owned and misrepresenting that the customers would<br />
receive a guaranteed thirty-five percent return with no risk to principal. Within one year, they<br />
had depleted the majority of the customers’ funds. The Commission barred Harrison and<br />
Sawyers from association and from participating in the offering of any penny stock.<br />
413
(iii)<br />
Falsification of Documents<br />
Q.1.c.(iii)<br />
In re Peperno, Release No. 65018, 2011 SEC LEXIS 2649 (Aug. 3, 2011).<br />
The Commission accepted an offer of settlement from Peperno, a former registered<br />
representative with a registered broker-dealer. In an earlier criminal proceeding, Peperno<br />
pleaded guilty to one count of mail fraud and was sentenced to forty-three months of prison<br />
followed by five years of supervised release. The criminal indictment alleged that Peperno<br />
invested funds from at least nine customers in high-commission real estate investment trusts by<br />
forging their signatures or otherwise falsifying information on their account application<br />
documents. These actions generated at least $54,089 in commissions for Peperno over a thirtytwo<br />
month period. The indictment also alleged that he misappropriated $380,000 from two<br />
customers by converting their funds to his own use. The Commission barred Peperno from<br />
association and from participating in any offering of a penny stock.<br />
(iv)<br />
Failure to Maintain Accurate Books and Records<br />
Q.1.c.(iv)<br />
In re Legend Sec. Inc., Release No. 64502, 2011 SEC LEXIS 1726 (May 16, 2011).<br />
The Commission accepted an offer of settlement from Legend Securities, Inc., a registered<br />
broker-dealer (the “Firm”), and Caruso, a registered representative and the Firm’s President and<br />
CCO. The Commission alleged that in response to multiple requests from the Commission for a<br />
particular employee’s personnel file, Caruso, after first failing to respond, caused the employee<br />
to sign and back date certain records to the date that the employee became a registered<br />
representative at Legend. The Commission alleged that Caruso then provided these documents<br />
to the Commission without disclosing the backdating. Respondents were censured and ordered<br />
to cease and desist from committing or causing any violations and any future violations of<br />
Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. Legend was ordered<br />
to pay a $50,000 civil penalty and Caruso was ordered to pay a $25,000 civil penalty.<br />
d. Mutual Fund Trading and Disclosure Violations<br />
Q.1.d<br />
In re Charles Schwab Inv. Mgmt., Release No. 63693, 2011 SEC LEXIS 120 (Jan. 11, 2011).<br />
The Commission accepted offers of settlement from Charles Schwab Investment<br />
Management (“CSIM”), a registered investment adviser, Charles Schwab & Co., Inc.<br />
(“CS&Co.”), a registered broker-dealer, and Schwab Investments, an open-end investment<br />
management company. In a related proceeding brought by the Commission, a federal district<br />
court entered judgment by consent against CSIM and CS&Co., ordering them to pay<br />
disgorgement, pre-judgment interest and civil penalties. The Commission’s complaint alleged<br />
that CSIM and CS&Co. misled investors by inadequately disclosing the characteristics of an<br />
ultra-short bond fund that was comprised of a series of Schwab Investments (the “Fund”). In<br />
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particular, CSIM and CS&Co. marketed the Fund as a “cash alternative” and compared it to a<br />
money market fund without explaining the differences between the Fund and money market<br />
funds. The complaint further alleged that CSIM and CS&Co. misled investors in sales materials<br />
that made it appear that the Fund’s investments were going to mature sooner on average than<br />
they actually would. Additionally, representatives of CSIM and CS&Co. made material<br />
omissions or misstatements in communications to investors in connection with the decline in the<br />
Fund’s net asset value by understating the extent of redemptions experienced by the Fund. The<br />
complaint further alleged that CSIM and CS&Co. had inadequate policies and procedures to<br />
prevent the misuse of material non-public information, resulting in redemptions by affiliates to<br />
the detriment of the Fund’s other investors, and that CSIM aided and abetted Schwab<br />
Investments’ failure to obtain shareholder approval when it deviated from the Fund’s stated<br />
concentration policy.<br />
CSIM and CS&Co. agreed to various undertakings, including the retention of an<br />
independent consultant to review the Firms’ policies and procedures for preventing the misuse of<br />
material, non-public information related to its proprietary mutual funds. The Commission<br />
censured CSIM and ordered it to cease and desist from future violations of Sections 17(a)(2) and<br />
(3) of the Securities Act of 1933, Sections 204A and 206(4) of the Investment Advisers Act of<br />
1940 and Rule 206(4)-8 thereunder and Sections 13(a) and 34(b) of the Investment Company Act<br />
of 1940. The Commission censured CS&Co. and ordered it to cease and desist from future<br />
violations of Sections 17(a)(2) and (3) of the Securities Act, Section 15(g) of the Securities<br />
Exchange Act of 1934 and Section 34(b) of the Investment Company Act. The Commission<br />
ordered Schwab Investments to cease and desist from future violations of Section 34(b) of the<br />
Investment Company Act.<br />
In re Ginder, Release No. 64098, 2011 SEC LEXIS 968 (Mar. 18, 2011).<br />
Q.1.d<br />
The Commission accepted an offer of settlement from Ginder, a registered representative<br />
of a dually registered broker-dealer and investment adviser. In an earlier proceeding brought by<br />
the Commission, a federal district court entered a final judgment by consent against Ginder,<br />
permanently enjoining him from future violations of the antifraud provisions of the federal<br />
securities laws and ordering him to pay a $30,000 civil penalty. The Commission’s complaint<br />
alleged that Ginder and other registered representatives defrauded mutual fund companies and<br />
their shareholders by engaging in market timing on behalf of two hedge fund customers, using<br />
multiple customer account numbers and financial adviser numbers to conceal their fraud. The<br />
Commission suspended Ginder from association and from participating in an offering of penny<br />
stock for nine months.<br />
Q.1.d<br />
In re Banc of Am. Capital Mgmt, LLC, Release No. 9254, 2011 SEC LEXIS 3020 (Aug. 30,<br />
2011).<br />
The Commission accepted an amended offer of settlement from Banc of America Capital<br />
Management, LLC (“BACAP”), BACAP Distributors, LLC, and Banc of America Securities,<br />
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LLC (“BAS”), by and through their respective successors. In 2005, Respondents had consented<br />
to the entry of an order by the Commission that ordered Respondents to cease and desist from<br />
violations of various federal securities laws, to pay disgorgement and civil money penalties and<br />
to comply with certain undertakings. In the amended offer of settlement, the Commission<br />
ordered that Respondents were relieved of their continuing obligation under the 2005 order to<br />
conduct third-party periodic reviews. The Commission further ordered Merrill Lynch, Pierce,<br />
Fenner & Smith Incorporated (“Merrill Lynch”), as successor to the retail sales of mutual funds<br />
business of BAS, to maintain a compliance and ethics oversight infrastructure in accordance with<br />
the one required of BAS under the 2005 order. Additionally, the Commission ordered Merrill<br />
Lynch to retain a disinterested third-party to determine if its compliance and ethics oversight<br />
infrastructure met the terms of the 2005 order. The Commission further ordered Merrill Lynch<br />
to retain a disinterested third-party to conduct a compliance review and make recommendations<br />
concerning its supervisory, compliance, and other policies to prevent and detect breaches of<br />
fiduciary duty, breaches of the Code of Ethics, and breaches of the federal securities law. The<br />
Commission also ordered BACAP or BACAP Distributors to conduct a similar review in the<br />
event that they were to seek to advise, sponsor or distribute mutual funds, other than moneymarket<br />
funds.<br />
e. Trading Practice Violations<br />
(i)<br />
Insider Trading<br />
Q.1.e.(i)<br />
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280<br />
(Jan. 25, 2011).<br />
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &<br />
Smith Incorporated (the “Firm”). The Commission alleged that the Firm’s market making desk<br />
improperly disclosed customer order information to the Firm’s proprietary traders, who then<br />
misused the information to place similar orders. According to the Commission, the Firm<br />
improperly charged institutional and high net worth customers an undisclosed mark-up or markdown,<br />
in addition to a commission equivalent, on certain riskless principal trades for which it<br />
had agreed only to charge a commission equivalent. Additionally, on numerous occasions, the<br />
Firm failed to make records of price guarantees that were part of the terms and conditions of<br />
institutional customer orders. As a result of this conduct, the Commission found that the Firm<br />
violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in<br />
securities by means of manipulative, deceptive or other fraudulent devices or contrivances,<br />
Section 15(g) of the Exchange Act by failing to establish written policies and procedures<br />
designed to prevent the misuse of material, nonpublic information, Section 17(a) of the<br />
Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain terms and<br />
conditions of customer orders, and failed reasonably to supervise its traders. The Commission<br />
ordered the Firm to cease and desist from committing or causing any violations and any future<br />
violations, censured the Firm and ordered it to pay a $10 million civil penalty.<br />
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Q.1.e.(i)<br />
SEC v. Devlin, Litig. Release No. 21854, 2011 SEC LEXIS 539 (S.D.N.Y. Feb. 14, 2011); In re<br />
Bowers, Release No. 63901, 2011 SEC LEXIS 632 (Feb. 14, 2011); In re Faulhaber, Release<br />
No. 63902, 2011 SEC LEXIS 633 (Feb. 14, 2011); In re Glover, Release No. 63903, 2011 SEC<br />
LEXIS 634 (Feb. 14, 2011).<br />
The Commission accepted offers of settlement from Glover, who was affiliated with a<br />
registered broker-dealer, Bowers, a registered representative of a dually registered broker-dealer<br />
and investment adviser, Faulhaber, a registered representative of a registered broker-dealer, and<br />
Holzer, a certified public accountant. In an earlier action brought by the Commission, a federal<br />
district court entered final judgments by consent against these defendants. The Commission’s<br />
complaint alleged that Devlin, a registered representative, traded on and tipped to others,<br />
including Glover, Holzer, and Bowers, inside information about thirteen impending corporate<br />
transactions. Holzer traded on the tips in at least three deals, and agreed with Devlin that he<br />
would arrange for the purchase of shares for Devlin’s benefit, so that Devlin’s insider trading<br />
could avoid detection. Bowers traded on the tips in five deals, and tipped his client, Faulhaber,<br />
who then traded in three deals and paid kickbacks to Bowers. The final judgments permanently<br />
enjoined the four defendants from future violations of Sections 10(b) and 14(e) of the Securities<br />
Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The judgment against Glover<br />
ordered him to pay disgorgement of $209,356, prejudgment interest of $55,390, and a $306,761<br />
civil penalty. The judgment against Bowers ordered him to pay a $12,000 civil penalty. The<br />
judgment against Faulhaber ordered him to pay disgorgement of $235,300, prejudgment interest<br />
of $50,663, and a $235,300 civil penalty. The judgment against Holzer ordered him to pay<br />
disgorgement of $52,922, prejudgment interest of $25,055.04, and a $172,269 civil penalty.<br />
In a related criminal proceedings in federal district court, Bowers pleaded guilty to one<br />
count of conspiracy to commit securities fraud and one count of securities fraud, and was<br />
sentenced to three years of probation and ordered to pay $12,000 in disgorgement, a $15,000<br />
fine, and $200 special assessment; and Faulhaber pleaded guilty to securities fraud, conspiracy to<br />
commit securities fraud, and felonies involving moral turpitude, and was sentenced to five years<br />
of probation and ordered to pay a $15,000 fine and over $119,300 in disgorgement. The<br />
Commission barred Glover, Bowers, and Faulhaber from association, and suspended Holzer<br />
from appearing or practicing before the Commission.<br />
In re Malin, Release No. 64302, 2011 SEC LEXIS 1349 (Apr. 14, 2011)<br />
Q.1.e(i)<br />
The Commission accepted an offer of settlement from Malin, a consultant to and later the<br />
CEO and Chairman of the Board of the parent company of a registered broker-dealer. In an<br />
action brought by the Commission a federal court entered consent judgment against Malin,<br />
permanently enjoining him from future violations of the anti-fraud provisions of the federal<br />
securities laws, and from aiding and abetting violations of Section 15(c) of the Securities<br />
Exchange Act of 1934. The Commission alleged that Malin participated in a scheme to<br />
improperly obtain material confidential information from the broker-dealer’s squawk boxes to<br />
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permit day traders at the broker-dealer to trade ahead of institutional orders. The Commission<br />
barred Malin from association, with the right to reapply after one year.<br />
In re Shankar, Release No. 64714, 2011 SEC LEXIS 2185 (June 21, 2011).<br />
Q.1.e(i)<br />
The Commission accepted an offer of settlement from Shankar, a registered<br />
representative and proprietary trader of a registered broker-dealer. In two earlier actions brought<br />
by the Commission, a federal district court entered a final judgments by consent against Shankar,<br />
permanently enjoining him from future violations of the antifraud provisions of the federal<br />
securities laws. The Commission’s complaints alleged that Shankar was tipped material,<br />
nonpublic information concerning five companies and that he traded on the information and also<br />
tipped certain of the information to others. In a related criminal proceeding in federal district<br />
court, Shankar pleaded guilty to one count of conspiracy to commit securities fraud and one<br />
count of securities fraud. The Commission barred Shankar from association and from<br />
participating in any offering of penny stock.<br />
Q.1.e(i)<br />
SEC v. Galleon Mgmt. LP, Litig. Release No. 22021, 2011 SEC LEXIS 2258 (S.D.N.Y. June 30,<br />
2011).<br />
A federal district court entered judgment against Plate, a registered representative and<br />
proprietary trader of a registered broker-dealer (the “Firm”). In a related criminal case, Plate<br />
previously pleaded guilty to charges of securities fraud and conspiracy to commit securities<br />
fraud. The Commission’s complaint alleged that Plate, upon being tipped inside information,<br />
traded ahead of an impending acquisition announcement in a Firm account he managed. The<br />
court permanently enjoined Plate from further violations of the antifraud provisions of the<br />
federal securities laws and ordered him to pay $43,876 in disgorgement plus $9,416 in<br />
prejudgment interest. The judgment provided that the court would determine civil penalty issues<br />
at a later date.<br />
Q.1.e(i)<br />
In re Janney Montgomery Scott LLC, Release No. 64855, 2011 SEC LEXIS 3166 (July 11,<br />
2011).<br />
The Commission accepted an offer of settlement from Janney Montgomery Scott LLC, a<br />
dually-registered broker-dealer and investment adviser (the “Firm”). The Commission alleged<br />
that the Firm failed to adhere to its policy requiring a member of the Compliance Department or<br />
Legal Department to attend meetings between investment bankers and research analysts, and<br />
failed to properly maintain and enforce its email communication firewall procedures.<br />
Additionally, the Commission alleged that beginning in 2005, the Firm began using research<br />
analysts to help investment bankers explore new business opportunities, yet did not revise its<br />
policies and procedures to prevent the possible misuse of material, nonpublic information. The<br />
Commission also alleged that the Firm failed to adequately monitor trading in the securities of<br />
firms on its Watch List, allowed a compliance employee to conduct supervisory reviews of pre-<br />
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clearance trades without being a registered principal, enabled investment bankers to trade<br />
without pre-clearance, failed to obtain and/or timely obtain completed questionnaires and<br />
disclosure forms necessary to review employees’ outside account transactions, and failed to<br />
request and review employees’ outside account statements to identify possible improper trading.<br />
The Commission ordered the Firm to pay a $850,000 civil penalty and to cease and desist<br />
from committing or causing any violations and any future violations of Section 15(g) of the<br />
Exchange Act. The Firm also undertook to retain an independent consultant to review the Firm’s<br />
policies and procedures relating to Section 15(g).<br />
In re Tudor, Release No. 65009, 2011 SEC LEXIS 2616 (Aug. 2, 2011).<br />
Q.1.e(i)<br />
The Commission accepted an offer of settlement from Tudor, a registered representative<br />
and proprietary trader associated with a registered broker-dealer. In an earlier action brought by<br />
the Commission, the federal district court entered judgment by consent against Tudor,<br />
permanently enjoining him from future violations of the antifraud provisions of the federal<br />
securities laws. The Commission alleged that Tudor was tipped material, nonpublic information<br />
and traded on the basis of that information. The Commission barred Tudor from association.<br />
In re Hansen, Release No. 65513, 2011 SEC LEXIS 3532 (Oct. 7, 2011).<br />
Q.1.e(i)<br />
The Commission accepted an offer of settlement from Hansen, a former associated<br />
person of a registered broker-dealer. In an earlier criminal proceeding, a federal district court<br />
convicted Hansen pursuant to his guilty plea for conspiracy to commit securities fraud and<br />
securities fraud. In an earlier civil proceeding brought by the Commission, a federal district<br />
court entered a final judgment by consent against Hansen, permanently enjoining him from<br />
future violations of the antifraud provisions of the federal securities laws. The Commission’s<br />
complaint alleged that Hansen traded on tips of material, non-public information that he knew or<br />
was reckless in not knowing had been dispensed improperly. The Commission barred Hansen<br />
from association and from participating in any offering of a penny stock.<br />
In re Skowron, Release No. 65783, 2011 SEC LEXIS 4065 (Nov. 17, 2011).<br />
Q.1.e(i)<br />
The Commission accepted an offer of settlement from Skowron, a managing director<br />
associated with a registered broker-dealer, a co-portfolio manager for six hedge funds, and an<br />
officer of the investment adviser to the hedge funds. In an earlier proceeding brought by the<br />
Commission, a federal district court entered a judgment by consent against Skowron,<br />
permanently enjoining him from violating the antifraud provisions of the federal securities laws.<br />
The Commission’s complaint alleged that Skowron ordered the sale of approximately six million<br />
shares of stock of a company based on material non-public information he had been tipped,<br />
thereby avoiding losses of approximately $30 million. In a related criminal proceeding,<br />
Skowron pleaded guilty to one count of conspiracy to commit securities fraud and obstruct<br />
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justice. The criminal indictment alleged that, in addition to trading on the basis of material nonpublic<br />
information, Skowron and his tipper agreed to provide false and misleading information to<br />
the Commission regarding the sales, and that Skowron made a cash payment to the tipper in<br />
furtherance of that agreement. The Commission barred Skowron from association and from<br />
participating in the offering of any penny stock.<br />
(ii)<br />
Market Manipulation<br />
Q.1.e.(ii)<br />
In re Adams, Release No. 63850, 2011 SEC LEXIS 454 (Feb. 7, 2011).<br />
An administrative law judge entered a default order against Adams, a former registered<br />
representative. In a parallel criminal proceeding, Adams was convicted of conspiracy to commit<br />
securities, mail, and wire fraud and conspiracy to commit money laundering, and was sentenced<br />
to time served and three years of supervised release, and ordered to pay $5,000,000 in restitution.<br />
The Commission alleged that Adams used a variety of fraudulent tactics to artificially inflate the<br />
demand for, and market price of, the securities of a publicly traded company, and sold them to<br />
customers at inflated prices. These tactics included effecting unauthorized purchases of the stock<br />
in the accounts of existing customers and making material misrepresentations and omissions<br />
concerning the stock’s future price. The ALJ found that Adams violated and aided and abetted<br />
his associated Firm’s violations of the antifraud provisions of the federal securities laws. The<br />
ALJ ordered Adams to cease and desist from future violations and barred him from association<br />
with a broker-dealer and from participating in an offering of penny stock.<br />
In re Ahn, Release No. 63963, 2011 SEC LEXIS 681 (Feb. 24, 2011).<br />
Q.1.e(ii)<br />
The Commission accepted an offer of settlement from Ahn, a former registered<br />
representative and primary trader of a former registered broker-dealer (the “Firm”). The<br />
Commission alleged that Ahn and others engaged in market manipulation of the prices of a<br />
number of thinly-traded microcap stocks, including some that the Firm helped bring public, in<br />
return for placement fees and warrants and shares of stock. A variety of techniques were used to<br />
manipulate the stocks’ prices, including matched orders, marking the close, wash trades and<br />
purchases at artificially increasing prices. As a result of the manipulation, the Firm’s co-owners<br />
and others reaped over $65.5 million in illicit profits. The Commission ordered Ahn to pay a<br />
$40,000 civil penalty and to cease and desist from committing or causing any violations and any<br />
future violations of the antifraud provisions of the federal securities laws, and barred him from<br />
association with the right to reapply after five years. The Commission did not impose a greater<br />
civil penalty based on Ahn’s agreement to cooperate in a Commission investigation and/or<br />
related enforcement action.<br />
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Q.1.e(ii)<br />
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)<br />
The Commission accepted an offer of settlement from Huntleigh Securities Corp., a<br />
registered broker-dealer, and Jeffrey Christanell. The Commission alleged that Christanell, a<br />
registered representative, executed a series of “marking the close” trades at the request of a third<br />
party SEC-registered investment adviser. The Commission further alleged that Huntleigh failed<br />
to supervise Christanell by failing to establish procedures, or implement existing policies and<br />
procedures, designed to prevent and detect such unlawful trading. The Commission ordered<br />
Christanell to cease and desist from future violations of Section 10(b) of the Securities Exchange<br />
Act of 1934 and Rule 10b-5 thereunder, barred him from association with the right to reapply<br />
after one year and ordered him to pay a $15,000 civil penalty. The Commission censured<br />
Huntleigh and ordered it to comply with undertaking to implement improved compliance<br />
procedures. Based on Huntleigh’s representation regarding its inability to pay, the Commission<br />
did not impose a civil penalty.<br />
Q.1.e(ii)<br />
SEC v. Fareri, Litig. Release No. 21874, 2011 SEC LEXIS 819 (S.D. Fla. Mar. 7, 2011); In re<br />
Fareri, Release No. 64413, 2011 SEC LEXIS 1591 (May 5, 2011).<br />
An administrative law judge entered a default order against Fareri, a former registered<br />
principal of Fareri Financial Services (the “Firm”), a registered broker-dealer. In an earlier<br />
proceeding brought by the Commission, a federal district court entered a final judgment by<br />
default against Fareri, the Firm, and Anthony Fareri & Associates, Inc., a relief defendant. The<br />
court’s order permanently enjoined Fareri and the Firm from future violations of the antifraud<br />
provisions of the federal securities laws. Additionally, the court ordered Fareri to pay<br />
disgorgement of $1,840,703, prejudgment interest of $667,032, and a $100,000 civil penalty, and<br />
barred him from participating in an offering of penny stock. Under the order, the Firm was<br />
jointly and severally liable for $160,704 of the disgorgement, and Anthony Fareri & Associates<br />
was jointly and severally liable for $820,000 of the disgorgement plus prejudgment interest of<br />
$297,150. The Commission’s complaint alleged that Fareri defrauded his customers of more<br />
than $4.7 million by purchasing and acquiring worthless shares of two shell companies for their<br />
accounts and creating an artificial market for the two stocks by using pre-arranged matched<br />
orders to create the illusion of market demand. Additionally, Fareri received secret kickbacks<br />
totaling more than $1 million. The ALJ barred Fareri from association.<br />
In re Feinblum, Release No. 64575, 2011 SEC LEXIS 1893 (May 31, 2011).<br />
Q.1.e(ii)<br />
The Commission accepted an offer of settlement from Feinblum, a registered<br />
representative with a registered broker-dealer (the “Firm”). The Commission alleged that<br />
Feinblum and his direct report executed numerous swap trades in certain securities that created<br />
net risk positions substantially in excess of internal risk trading limits. To conceal these<br />
excessions, Feinblum entered and then cancelled fake swap orders which had the effect of<br />
temporarily and artificially reducing the net risk positions in the securities as recorded in the<br />
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Firm’s risk management systems. Upon learning of the misconduct, Feinblum’s associated<br />
broker-dealer unwound the unauthorized trading positions, thereby sustaining a loss of<br />
approximately $24.47 million. The Commission ordered him to cease and desist from any future<br />
violations, barred him from association for two years, and ordered him to pay a $150,000 civil<br />
penalty.<br />
In re Hertz, Release No. 64831, 2011 SEC LEXIS 2347 (July 7, 2011).<br />
Q.1.e(ii)<br />
The Commission accepted an offer of settlement from Hertz, an associated person of a<br />
registered broker-dealer and registered municipal securities dealer. In a prior criminal<br />
proceeding, Hertz pleaded guilty to two counts of conspiracy and one count of wire fraud. The<br />
criminal indictment alleged that Hertz engaged in a bid rigging scheme to defraud municipal<br />
issuers by causing them to award investment agreements and other municipal finance contracts at<br />
artificially determined or suppressed rates. The Commission barred Hertz from association and<br />
from participating in any offering of penny stock.<br />
In re Kim, Release No. 64862, 2011 SEC LEXIS 2389 (July 12, 2011).<br />
Q.1.e(ii)<br />
The Commission accepted an offer of settlement from Kim, a former trader associated<br />
with a registered broker-dealer (the “Firm”). The Commission alleged that Kim executed<br />
numerous trades in certain securities on behalf of the Firm that created net risk positions in<br />
excess of internal limits imposed by the Firm. To conceal the true risk exposure, Kim and<br />
another trader entered swap orders that they had no intention of executing for the sole purpose of<br />
artificially reducing the net risk positions in the securities. Kim would certify the artificial net<br />
exposure in the Firm’s risk management system, and then promptly cancel the swap orders. As a<br />
result of this conduct, Kim violated Section 13(b)(5) of the Securities Exchange Act of 1934.<br />
The Commission ordered Kim to cease and desist from violating the Exchange Act, barred her<br />
from association with a right to reapply after three years, and ordered her to pay a $25,000 civil<br />
penalty.<br />
Q.1.e(ii)<br />
SEC v. Badian, Litig. Release No. 22070, 2011 SEC LEXIS 2931 (S.D.N.Y. Aug. 19, 2011); In<br />
re Drillman, Release No. 65172, 2011 SEC LEXIS 2929 (Aug. 19, 2011); In re Spinner, Release<br />
No. 65171, 2011 SEC LEXIS 2928, (Aug. 19, 2011).<br />
The Commission accepted offers of settlement from Drillman and Spinner, two former<br />
registered representatives that were associated with a registered broker-dealer (the “Firm”). In a<br />
related civil action brought by the Commission, a federal district court entered judgment by<br />
consent against Respondents, enjoining them from future violations of, and aiding and abetting<br />
violations of, the antifraud provisions of the federal securities laws. The judgment further<br />
ordered each of them to pay disgorgement of $4,000, prejudgment interest of $3,107.25, and a<br />
$25,000 civil penalty. The Commission’s complaint alleged that Respondents participated in a<br />
scheme to defraud by manipulating the price of certain common stock and that they knowingly<br />
422
assisted in the Firm’s creation of materially inaccurate trade tickets. The Commission suspended<br />
Respondents from association for six months.<br />
Q.1.e(ii)<br />
SEC v. Geiger, Litig. Release No. 21831, 2011 SEC LEXIS 349 (D. Colo. Jan. 31, 2011); In re<br />
Geiger, Release No. 63849, 2011 SEC LEXIS 752 (Feb. 7, 2011); In re Geiger, Release No.<br />
65265, 2011 SEC LEXIS 3096 (Sept. 6, 2011).<br />
The Commission accepted an offer of settlement from Geiger, a former registered<br />
representative of Sierra <strong>Broker</strong>age Services, Inc. (“Sierra”), a registered broker-dealer. In an<br />
earlier action brought by the Commission, a federal district court entered a final judgment by<br />
consent against Geiger, permanently enjoining him from future violations of the antifraud<br />
provisions of the federal securities laws and future aiding and abetting violations of Section<br />
15(c)(1) of the Securities Exchange Act of 1934, and ordering him to pay $261,110 in<br />
disgorgement, $221,466 in prejudgment interest and a $220,000 civil penalty. The Commission<br />
alleged that Geiger participated in a scheme to manipulate the share price of a security through<br />
artificial trading activity, and aided and abetted Sierra’s price leadership and domination of other<br />
market makers by leading the bid and raising the bid throughout the first day of trading even<br />
though it had no legitimate reason to do so. The Commission barred Geiger from association<br />
and from participating in an offering of penny stock.<br />
(iii)<br />
Securities Offering Violations<br />
Q.1.e.(iii)<br />
In re Fayette, Release No. 63698, 2011 SEC LEXIS 151 (Jan. 11, 2011).<br />
The Commission accepted an offer of settlement from Fayette, a former registered<br />
representative of a registered broker-dealer. In an earlier action brought by the Commission, a<br />
federal district court entered a final judgment by consent against Fayette, permanently enjoining<br />
him from future violations of Section 5 of the Securities Act of 1933. The Commission’s<br />
complaint alleged that Fayette failed to make a reasonable inquiry under the circumstances to<br />
ensure his customers were not acting as underwriters, and facilitated a penny stock pump and<br />
dump scheme by liquidating millions of shares into the public market when no registration<br />
statement was in effect. The Commission barred Fayette from association.<br />
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).<br />
Q.1.e(iii)<br />
The Commission accepted an offer of settlement from Nicholson, the president and<br />
owner of a registered broker-dealer and owner of a separate entity that acted as the general<br />
partner for various issuers of limited partnership interests. In a related civil action brought by the<br />
Commission in federal court, the court entered a judgment by consent against Nicholson,<br />
permanently enjoining him from violating the antifraud and registration provisions of the federal<br />
securities laws. The Commission’s complaint alleged that, in connection with the sale of limited<br />
423
partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose<br />
material information regarding the use of investor proceeds, sold unregistered securities, and<br />
operated an unregistered broker-dealer. The Commission barred Nicholson from association.<br />
In re Oldham, Release No. 64491, 2011 SEC LEXIS 1705 (May 13, 2011).<br />
Q.1.e(iii)<br />
The Commission accepted an offer of settlement from Oldham, a registered<br />
representative with a registered broker-dealer and an investment adviser representative with a<br />
registered investment adviser. In an earlier proceeding brought by the Commission, a federal<br />
district court entered a judgment by consent against Oldham, permanently enjoining him from<br />
violating the securities registration provisions of the federal securities laws. The Commission’s<br />
complaint alleged that Oldham offered and sold securities for which there was no registration<br />
statement in effect and for which no exemption from the registration requirements applied. The<br />
Commission barred Oldham from association, with the right to reapply after eighteen months.<br />
In re Harris, Release No. 64942, 2011 SEC LEXIS 2518 (July 21, 2011).<br />
Q.1.e(iii)<br />
The Commission accepted an offer of settlement from Harris, a registered representative<br />
of a registered broker-dealer. In an earlier action brought by the Commission, a federal district<br />
court entered a final judgment by consent against Harris, permanently enjoining him from future<br />
violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission alleged that<br />
Harris offered and sold unregistered securities from 2004 through 2006. The Commission barred<br />
Harris from association and from participating in any penny stock offering, both for a period of<br />
eighteen months.<br />
In re Divine Capital Mkts., LLC, Release No. 64999, 2011 SEC LEXIS 2610 (Aug. 1, 2011).<br />
Q.1.e(iii)<br />
The Commission accepted an offer of settlement from Buonomo, a registered<br />
representative with Divine Capital Markets, LLC (the “Firm”), a registered broker-dealer. The<br />
Commission alleged that Buonomo sold over 9.8 billion shares of a penny stock on behalf of a<br />
client in violation of the securities registration provisions of the federal securities laws. The<br />
sales generated at least $29,017 in commissions and other remuneration for Buonomo.<br />
Buonomo either knew or should have known that the client had acquired the shares directly from<br />
the issuer, and did not perform any due diligence to determine if there was a registration<br />
statement in effect or on file for the shares. The Commission ordered Buonomo to cease and<br />
desist from violating Sections 5(a) and (c) of the Securities Act, suspended him from<br />
participating in any offering of a penny stock for twelve months, suspended him from association<br />
for twelve months, and ordered him to disgorge $29,017 plus $5,948 in prejudgment interest.<br />
The Commission waived Buonomo’s obligation to pay all but $3,000 of these amounts and did<br />
not impose a civil penalty based on Buonomo’s sworn statement of financial condition.<br />
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Q.1.e(iii)<br />
In re Schaefer, Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011).<br />
The Commission issued an Order Instituting Proceedings (OIP) and entered a final<br />
judgment by default against Schaefer, formerly the president, a principal, and a registered<br />
representative with a registered broker-dealer. In an earlier proceeding brought by the<br />
Commission in federal court, the court entered a default judgment permanently enjoining<br />
Schaefer from violating the securities registration and antifraud provisions of the federal<br />
securities laws, and from aiding and abetting violations of various other provisions. The<br />
Commission’s complaint alleged that Schaefer sold unregistered securities of his firm’s parent<br />
company to investors and diverted approximately 79% of the offering proceeds to enrich himself<br />
and others. The Commission also alleged that Schaefer knowingly and substantially assisted in<br />
violating numerous regulatory provisions governing broker-dealers by not disclosing in<br />
regulatory filings that another individual controlled the firm, by permitting unregistered<br />
individuals to effect securities transactions, and by not making or keeping required employment<br />
documentation for certain associated persons of the firm. The Commission barred Schaefer<br />
barred from association.<br />
In re Gilford Sec., Inc., Release No. 9264, 2011 SEC LEXIS 3419 (Sept. 30, 2011).<br />
Q.1.e(iii)<br />
The Commission accepted offers of settlement from Gilford, a registered broker-dealer<br />
(the “Firm”), Worthington, Gilford’s CEO and trading desk supervisor, Granahan, Gilford’s<br />
CCO and AML officer, and Kaplan, a sales manager and supervisor of Berger, a former<br />
registered representative of the Firm. In an earlier action in federal district court, Berger pleaded<br />
guilty to conspiracy to commit securities fraud and wire fraud. The Commission’s complaint<br />
against Berger alleged that Berger, together with others, engaged in schemes to pump and dump<br />
the securities of at least eight U.S. microcap stocks, and facilitated unregistered sales of millions<br />
of shares of these stocks, generating proceeds in excess of $33 million. Berger resold shares of<br />
the unregistered securities through at least twenty customer accounts at the Firm. The<br />
Commission alleged that the Firm failed reasonably to supervise Berger, permitted customers to<br />
deliver in and sell millions of shares of stock without registered representatives and officers at<br />
the Firm conducting reasonable inquiry into the source of the stock, failed to fulfill its<br />
obligations under the Bank Secrecy Act with respect to filing Suspicious Activity Reports,<br />
allowed employees to execute customer orders without the requisite trading licenses, failed to<br />
make and keep current either a questionnaire or application for employment for these employees,<br />
and violated Regulation S-P by sharing nonpublic customer information with unauthorized third<br />
parties. The Commission alleged that Worthington and Kaplan aided and abetted some of the<br />
Firm’s violations, and that Granahan aided and abetted the Firm’s Suspicious Activity Report<br />
violation.<br />
The Commission ordered all Respondents to cease and desist from committing or causing<br />
any future violations of the federal securities laws. It further censured the Firm and ordered it to<br />
pay disgorgement of $275,000, prejudgment interest of $77,113, and a $260,000 civil penalty.<br />
The Firm also undertook to retain an independent consultant to review its policies and<br />
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procedures relating to AML and its systems for implementing its supervisory policies and<br />
procedures. The Commission suspended Worthington in a supervisory capacity for 12 months<br />
and ordered him to pay a $45,000 civil penalty. The Commission suspended Kaplan in a<br />
supervisory capacity for 12 months and ordered him to pay disgorgement of $225,000,<br />
prejudgment interest of $63,092, and a $30,000 civil penalty. Worthington and Kaplan each also<br />
undertook to submit an affidavit following the end of their suspensions concerning their full<br />
compliance with the sanctions imposed. The Commission censured Granahan and ordered him<br />
to pay a $20,000 civil penalty.<br />
Q.1e(iii)<br />
In re Lindsey, Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin.<br />
Serv., Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin. Serv.,<br />
Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011).<br />
The Commission accepted offers of settlement from Capital Financial, a former<br />
registered broker-dealer (the “Firm”), Boppre, the president and a registered principal of the<br />
Firm, and Lindsey, a registered representative, senior vice president, and due diligence officer of<br />
the Firm. The Commission alleged that the Firm, through Boppre and Lindsey, who together ran<br />
the Firm’s due diligence process, failed to perform reasonable due diligence on numerous oil and<br />
gas private placement offerings prior to recommending them to customers. Specifically, the<br />
Commission alleged that the Firm never independently investigated the information in the<br />
offering materials that the issuer provided to it and never received audited or unaudited financial<br />
statements. The Commission’s complaint alleged that Boppre and Lindsey knew that the<br />
offering materials stated that selling broker-dealers would receive a due diligence fee, which<br />
misleadingly suggested that the Firm was conducting independent due diligence. It further<br />
alleged that Boppre and Lindsey acted at least with severe recklessness by approving the<br />
offerings without first obtaining appropriate due diligence and by not acting on red flags brought<br />
to their attention through third party due diligence reports. The Firm received over $5 million in<br />
sales commissions and over $600,000 in due diligence fees in connection with the offerings,<br />
many of which involved classic Ponzi schemes and offering frauds.<br />
The Commission ordered Respondents to cease and desist from violating the<br />
antifraud provisions of the federal securities laws. It further barred Boppre and Lindsey from<br />
association and from participating in any offering of a penny stock, with the right to reapply after<br />
two years, and ordered each of them to pay, in specified installments, a $25,000 civil penalty.<br />
The Commission censured the Firm. Additionally, the Firm undertook to retain an independent<br />
consultant to review its due diligence policies and procedures.<br />
(iv)<br />
Trading Rules Violations<br />
Q.1.e.(iv)<br />
In re Shaw, Release No. 9174, 2011 SEC LEXIS 251 (Jan. 14, 2011).<br />
The Commission accepted an offer of settlement from Shaw, a registered representative<br />
and institutional order desk manager of a registered broker-dealer. The Commission alleged that,<br />
for more than eight years, Shaw engaged in a best execution fraud on behalf of certain individual<br />
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and hedge fund accounts, to the detriment of certain employee stock purchase plans and similar<br />
accounts. Specifically, Shaw and other traders under his direction manipulated time delays in<br />
systems for executing and reporting agency cross trades to obtain the lower prices to benefit the<br />
hedge funds and conversely, the higher prices for the plan customers. The order desk was paid<br />
commissions on both sides of each cross trade, with the hedge funds generally paying greater<br />
commissions than plan customers. The Commission ordered Shaw to cease and desist from<br />
violating the antifraud provisions of the federal securities laws, barred him from association, and<br />
ordered him to pay a $150,000 civil fine, disgorge $195,300 and pay $23,291 in prejudgment<br />
interest. The Commission further created a Fair Fund pursuant to Section 308(a) of the<br />
Sarbanes-Oxley Act of 2002 for purposes of administering the proceeds of the settlement, and<br />
Shaw agreed not to seek any offset of the civil fine imposed by the Commission based on any<br />
offset that might be ordered in any related investor action.<br />
Q.1.e(iv)<br />
In re Melhado, Flynn & Associates, Inc.,, Release No. 64467, 2011 SEC LEXIS 1662 (May 11,<br />
2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64468, 2011 SEC LEXIS 1663<br />
(May 11, 2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64469, 2011 SEC LEXIS<br />
1664 (May 11, 2011).<br />
The Commission accepted offers of settlement from Melhado, Flynn & Associates, Inc., a<br />
dually registered broker-dealer and investment adviser (the “Firm”), McCarthy, a Financial and<br />
Operations Principal, and later, the Director of Compliance Coordination at the Firm, and Motz,<br />
the President, CEO, Director and CCO at the Firm. In an earlier proceeding brought by the<br />
Commission in federal district court, Motz pleaded guilty to securities fraud and the court<br />
sentenced him to eight years in prison, with three years of supervised release and ordered him to<br />
pay $864,806 in restitution. The Commission alleged that, from 2001 through approximately<br />
September 2003, Motz effectuated a cherry-picking trading scheme whereby he would submit<br />
equity orders to the Firm’s trading desk in the morning, but wait until later in the day to decide<br />
whether to allocate the orders to the Firm’s proprietary account or to advisory clients. The trades<br />
that were allocated to the Firm’s proprietary account were profitable 98% of the time, and<br />
yielded a net gain of $1.4 million. The Commission further alleged that during an SEC<br />
examination, Motz, with the assistance of McCarthy, who was aware of the late-day trade<br />
allocation practices, altered certain order tickets to conceal the practices from regulators. The<br />
Commission also alleged the Firm filed a misleading Form ADV because the Firm did not<br />
disclose that proprietary trades could received prices more favorable than those allocated to<br />
advisory clients.<br />
The Commission ordered Respondents to cease and desist from committing or causing<br />
any violations and any future violations of the anti-fraud provisions of the federal securities laws.<br />
The Commission also revoked the Firm’s registrations and barred McCarthy and Motz from<br />
association. The Commission further ordered Motz to pay disgorgement and prejudgment<br />
interest totaling $864,806, but deemed those satisfied by the restitution ordered in the criminal<br />
case. Based upon evidence of the Firm’s inability to pay, and given the revocation of the Firm’s<br />
registrations, the Commission declined to impose a penalty against it. Based upon evidence of<br />
McCarthy’s inability to pay, the Firm declined to impose a penalty against her. Based upon the<br />
prison sentence imposed on Motz, the Commission declined to impose a penalty against him.<br />
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Q.1.e(iv)<br />
In re UBS Sec. LLC, Release No. 65733, 2011 SEC LEXIS 3985 (Nov. 10, 2011).<br />
The Commission accepted an offer of settlement from UBS Securities, LLC, a registered<br />
broker-dealer. The Commission alleged that Respondent’s lending desk traders recorded<br />
“locates” (i.e., an indication that shares to satisfy a short sale had been identified, or alternatively<br />
that reasonable grounds existed to believe the shares could be borrowed for delivery when due)<br />
on the Firm’s “locate log” sourced to employees of lenders even when no one at Respondent had<br />
contacted the lender to confirm the availability of shares, and duplicated and reused locate<br />
approval information from prior locates to document new locate approvals. Respondent knew of<br />
these practices and allowed them to continue. The Commission noted that several mitigating<br />
factors existed. For instance, some of the locates Respondent granted were furnished to clients<br />
who did not execute short sales using the locates, some of the lenders may have had the ability to<br />
lend sufficient securities by the delivery date notwithstanding the inaccurate locate log, and<br />
Respondent was generally able to meet its settlement obligations by borrowing stock from<br />
sources other than the lenders identified in the locate log. The Commission censured<br />
Respondent and ordered it to cease and desist from violating Section 17(a) of the Securities<br />
Exchange Act of 1934 and Rule 203(b) of Regulation SHO, and to pay a $8 million civil penalty.<br />
Respondent also undertook to hire an independent consultant to review its policies and<br />
procedures with respect to granting locate requests and monitoring compliance therewith.<br />
In re Bell, Release No. 65941, 2011 SEC LEXIS 4379 (Dec. 13, 2011).<br />
Q.1.e(iv)<br />
The Commission accepted an offer of settlement from Bell, a former registered brokerdealer,<br />
former part owner of a registered broker-dealer and former member of the Chicago Board<br />
Options Exchange. According to the Commission, Bell and his firm, both purported options<br />
market makers, violated the locate and close-out requirements of Regulation SHO of the<br />
Securities Exchange Act of 1934 by improperly relying on the market maker exception to avoid<br />
locating shares before effecting short sales. The Commission also alleged that Bell and his firm<br />
engaged in a series of sham reset transactions that employed short-term, paired stock and options<br />
positions, which enabled them to circumvent their close out obligations. Additionally, Bell and<br />
his firm assisted other options market makers who were executing their own sham reset<br />
transactions by acting as a counterparty to the sham transactions. As a result of these activities,<br />
Bell caused large persistent fail to deliver positions in SHO threshold securities. The<br />
Commission ordered Bell to cease and desist from committing or causing any current or future<br />
violations of the Exchange Act Rules 203(b)(1) and 203(b)(3), and to pay $1,500,000 in<br />
disgorgement, a $250,000 civil penalty, and $336,094 in prejudgment interest. The Commission<br />
also suspended Bell from association for nine months.<br />
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f. Failure to Supervise<br />
Q.1.f<br />
In re BNY Mellon Sec. LLC, Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).<br />
The Commission accepted an offer of settlement from BNY Mellon Securities LLC, a<br />
registered broker-dealer (the “Firm”). The Commission alleged that the Firm failed reasonably<br />
to supervise its institutional order desk and traders over a period of more than eight years in<br />
connection with the Firm’s best execution obligations, in violation of Section 15(b)(4)(E) of the<br />
Securities Exchange Act of 1934. Specifically, the Firm failed to establish reasonable<br />
procedures for its best execution committee concerning how to follow up on best execution<br />
exception reports. The Commission censured the Firm and ordered it to pay disgorgement of<br />
$19,297,016, prejudgment interest of $3,748,431, and a $1,000,000 civil fine. Additionally, the<br />
Firm agreed to retain an independent distribution consultant to administer the distribution of the<br />
settlement proceeds through a Fair Fund.<br />
Q.1.f<br />
In re Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 63760, 2011 SEC LEXIS 280<br />
(Jan. 25, 2011).<br />
The Commission accepted an offer of settlement from Merrill Lynch, Pierce, Fenner &<br />
Smith Incorporated, a registered broker-dealer (the “Firm”). The Commission’s complaint<br />
alleged that the Firm’s market making desk improperly disclosed customer order information to<br />
the Firm’s proprietary traders, who then misused the information to place similar orders. The<br />
Commission’s complaint further alleged that the Firm improperly charged institutional and high<br />
net worth customers an undisclosed mark-up or mark-down, in addition to a commission<br />
equivalent, on certain riskless principal trades for which it had agreed only to charge a<br />
commission equivalent. Additionally, on numerous occasions, the Firm failed to make records<br />
of price guarantees that were part of the terms and conditions of institutional customer orders.<br />
As a result of this conduct, the Commission found that the Firm willfully violated Section<br />
15(c)(1)(A) of the Securities Exchange Act of 1934 by effecting transactions in securities by<br />
means of manipulative, deceptive or other fraudulent devices or contrivances, willfully violated<br />
Section 15(g) of the Exchange Act by failing to establish written policies and procedures<br />
designed to prevent the misuse of material, nonpublic information, willfully violated Section<br />
17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make records of certain<br />
terms and conditions of customer orders, and failed reasonably to supervise its traders. The<br />
Commission ordered the Firm to cease and desist from committing or causing any violations and<br />
any future violations, censured the Firm and ordered it to pay a $10 million civil penalty.<br />
In re Smith, Release No. 63834, 2011 SEC LEXIS 390 (Feb. 3, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Smith, president, CEO and partowner<br />
of a registered broker-dealer (the “Firm”). In an earlier action brought by the<br />
Commission, a federal district court entered a final judgment against Keating, also a part-owner<br />
429
and a former registered representative of the Firm, permanently enjoining him from future<br />
violations of the securities and broker-dealer registration and antifraud provisions of the federal<br />
securities laws, and barring him from association. Keating had conducted an unregistered<br />
private securities offering outside the scope of his employment with the Firm. The<br />
Commission’s complaint alleged that Smith failed to establish reasonable policies and<br />
procedures to adequately supervise Keating. It further alleged that Smith failed to establish<br />
systems to implement and enforce policies for supervisors and the Firm’s compliance<br />
department, and failed to monitor registered representatives’ outside business activities and to<br />
follow up on activities that might signal selling away. The Commission suspended Smith from<br />
supervision for nine months and ordered him to pay a $25,000 civil penalty.<br />
In re TD Ameritrade, Inc., Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from TD Ameritrade, Inc., a registered<br />
broker-dealer. The Commission’s complaint alleged that the Firm violated Section 15(b)(4)(E)<br />
of the Securities Exchange Act of 1934 by failing to reasonably supervise its registered<br />
representatives to prevent violations of Section 17(a)(2) of the Securities Act of 1933 in<br />
connection with their offer and sale of a mutual fund (the “Fund”). According to the<br />
Commission’s complaint, from January 2007 to September 2008, the Firm failed to ensure that<br />
trainings mandated by its policies and procedures occurred or that the materials used in the<br />
trainings that did occur were the ones the Firm had prepared. The Firm subsequently<br />
implemented a computer-based system designed to generate reports to assist managers in<br />
conducting a suitability review of transactions in the Fund. However, the Commission’s<br />
complaint alleged that the system was not reasonably designed to prevent violations of Section<br />
17(a)(2) because it did not assist managers in determining whether registered representatives<br />
were making proper disclosures about the Fund to customers. As a result of these failures,<br />
registered representatives mischaracterized the Fund as a money market fund, overstated its<br />
safety and liquidity and failed to disclose its risks, in violation of Section 17(a)(2) of the<br />
Securities Act. In its offer of settlement, the Firm undertook to distribute $0.012 per share to<br />
each customer who purchased Fund shares at the Firm during the relevant period and who<br />
continued to hold such shares as of the date of the order. The distribution was expected to<br />
amount to approximately $10 million. The Commission also censured the Firm.<br />
In re Pagliarini, Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Pagliarini, CCO and anti-money<br />
laundering compliance officer of a former registered broker-dealer (the “Firm”). The<br />
Commission’s complaint alleged that Pagliarini failed reasonably to supervise Ahn, a registered<br />
representative and primary trader for the broker-dealer who engaged in market manipulation.<br />
Specifically, the Commission’s complaint alleged that Pagliarini failed to follow up on the red<br />
flags posed by Ahn’s trading activity, and failed to cause the broker-dealer to file suspicious<br />
activity reports concerning Ahn’s wash transactions, suspicious cash transfers to and from the<br />
brokerage account of a co-owner of the broker-dealer, and $4 million wire transfer that violated<br />
430
Firm policy disallowing wires from customer accounts to third parties. The Commission ordered<br />
Pagliarini to pay a $20,000 civil penalty and to cease and desist from committing or causing any<br />
violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-8<br />
thereunder, and suspended her from serving in a supervisory capacity for twelve months.<br />
In re Torrey Pines Sec., Inc, Release No. 64317, 2011 SEC LEXIS 1394 (Apr. 20, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Torrey Pines Securities, Inc., (the<br />
“Firm”) a registered broker-dealer. The Commission alleged that the Firm failed to supervise<br />
reasonably one of its brokers, a part-owner of the Firm, because the Firm did not establish<br />
reasonable policies and procedures to assign responsibility for supervising that broker. The<br />
Commission also alleged that the Firm failed to develop systems to implement its procedures<br />
regarding selling away and outside business activities. The Commission alleged that without<br />
these and other failures, including failing to follow-up on oral and written investor complaints,<br />
the Firm would have likely detected the broker’s outside sale of a $17 million private,<br />
unregistered offering of securities. The Commission censured the Firm but did not impose a<br />
penalty based on the Firm’s sworn statement of financial condition. As part of the settlement,<br />
the Firm agreed to retain an independent consultant to review its procedures regarding the<br />
supervision of registered representatives and the outside business activities of associated persons.<br />
In re Huntleigh Sec. Corp., Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Huntleigh Securities Corp., a<br />
registered broker-dealer, and Jeffrey Christanell, a registered representative. The Commission<br />
alleged that Christanell executed a series of “marking the close” trades at the request of a third<br />
party SEC-registered investment adviser. The Commission further alleged that Huntleigh failed<br />
to supervise Christanell by failing to establish procedures, or implement existing policies and<br />
procedures designed to prevent and detect such unlawful trading. The Commission ordered<br />
Christanell to cease and desist from future violations of Section 10(b) of the Securities Exchange<br />
Act of 1934 and Rule 10b-5 thereunder, barred him from association with the right to reapply<br />
after one year and ordered him to pay a $15,000 civil penalty. The Commission censored<br />
Huntleigh and ordered it to comply with undertaking to implement improved compliance<br />
procedures. Based on its representation regarding its inability to pay, the Commission did not<br />
impose a civil penalty.<br />
In re Divine Capital Mkts., LLC, Release No. 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Divine Capital Markets, LLC (the<br />
“Firm”), a registered broker-dealer, and Hughes, who held a controlling interest in the Firm and<br />
served as the Firm’s CEO and General Securities Principal. The Commission alleged that<br />
Hughes failed reasonably to supervise a registered representative who sold unregistered shares of<br />
a penny stock. In particular, Hughes failed to respond to red flags, such as the large volume of<br />
431
trades in the penny stock for a new client and information on the stock purchase agreement<br />
showing that the client acquired the shares directly from the issuer. The Commission also<br />
alleged that the Firm failed to have adequate supervisory policies in that its policies failed to<br />
address unregistered distributions through statutory underwriters and situations in which<br />
certificates without restrictive legends were acquired by a customer from an issuer with a view to<br />
distribution. The Commission censured the Firm, ordered it to cease and desist from violating<br />
the securities registration provisions of the federal securities laws, suspended it from<br />
participating in any offering of a penny stock for twelve months, and ordered it to pay<br />
disgorgement of $33,762, prejudgment interest of $6,921, and a $60,000 civil penalty. The<br />
Commission suspended Hughes from association in a supervisory capacity for four months and<br />
ordered her to pay a $25,000 civil penalty.<br />
Q.1.f<br />
In re Gautney, Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011); In re Gautney,<br />
Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011).<br />
The Commission accepted offers of settlement from Bellia, a registered branch manager<br />
and branch owner of a registered broker-dealer (the “Firm”), and Blum, a registered branch<br />
manager of a separate branch office of the Firm. The Commission alleged that Bellia failed to<br />
reasonably supervise two registered representatives who churned the accounts of seven<br />
customers, and that Blum failed to reasonably supervise one registered representative who<br />
churned the accounts of two customers. In particular, Respondents failed to follow the Firm’s<br />
written supervisory procedures requiring “immediate attention” be given to accounts with<br />
annualized turnover rates greater than six. The registered representatives Respondents<br />
supervised were also the subject of complaints that reinforced the need for Respondents to<br />
contact their customers about the large trading volume. During his time at the Firm, Bellia was<br />
under heightened supervision due to a FINRA disciplinary history for failing to supervise<br />
registered representatives at another broker-dealer. The Commission barred Bellia from<br />
association and from participating in any offering of a penny stock, and ordered him to pay<br />
disgorgement of $5,959 and prejudgment interest of $901. The Commission waived the<br />
obligation to pay these amounts and did not impose a civil penalty based upon Bellia’s sworn<br />
statement of financial condition. The Commission barred Blum from association, with the right<br />
to reapply after two years, and ordered him to pay disgorgement of $4,753, prejudgment interest<br />
of $355, and a $10,000 civil penalty.<br />
In re Lopez-Tarre, Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Lopez-Tarre, a former CCO of a<br />
registered broker-dealer (the “Firm”). In an earlier action brought by the Commission, a federal<br />
district court entered a final judgment by consent against Clamens, the Firm’s sole owner, and<br />
Lopez, one of the Firm’s employees, enjoining them from violating the antifraud provisions of<br />
the federal securities laws. The Commission alleged that Clamens had engaged in unauthorized<br />
trading in the brokerage accounts of two customers, causing losses exceeding $20 million, and<br />
that Lopez participated in the fraud through the creation and sending of fake account statements.<br />
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The Commission alleged that Lopez-Tarre failed reasonably to supervise Clamens and Lopez.<br />
Lopez-Tarre failed to follow established procedures for reviewing Clamens’ customer accounts,<br />
did not review email correspondence, and failed to respond to several red flags, including<br />
shortfalls in wire transfers. The Commission barred Lopez-Tarre from association, with a right<br />
to reapply after one year.<br />
In re Gilford Sec., Inc., Release No. 9264, 2011 SEC LEXIS 3419 (Sept. 30, 2011).<br />
Q.1.f<br />
The Commission accepted offers of settlement from Gilford, a registered broker-dealer<br />
(the “Firm”), Worthington, Gilford’s CEO and trading desk supervisor, Granahan, Gilford’s<br />
CCO and AML officer, and Kaplan, a sales manager and supervisor of Berger, a former<br />
registered representative of the Firm. In an earlier action in federal district court, Berger pleaded<br />
guilty to conspiracy to commit securities fraud and wire fraud. The Commission’s complaint<br />
against Berger alleged that Berger, together with others, engaged in schemes to pump and dump<br />
the securities of at least eight U.S. microcap stocks, and facilitated unregistered sales of millions<br />
of shares of these stocks, generating proceeds in excess of $33 million. Berger resold shares of<br />
the unregistered securities through at least twenty customer accounts at the Firm. The<br />
Commission alleged that the Firm failed reasonably to supervise Berger, permitted customers to<br />
deliver in and sell millions of shares of stock without registered representatives and officers at<br />
the Firm conducting reasonable inquiry into the source of the stock, failed to fulfill its<br />
obligations under the Bank Secrecy Act with respect to filing Suspicious Activity Reports,<br />
allowed employees to execute customer orders without the requisite trading licenses, failed to<br />
make and keep current either a questionnaire or application for employment for these employees,<br />
and violated Regulation S-P by sharing nonpublic customer information with unauthorized third<br />
parties. The Commission alleged that Worthington and Kaplan aided and abetted some of the<br />
Firm’s violations, and that Granahan aided and abetted the Firm’s Suspicious Activity Report<br />
violation.<br />
The Commission ordered all Respondents to cease and desist from committing or causing<br />
any future violations of the federal securities laws. It further censured the Firm and ordered it to<br />
pay disgorgement of $275,000, prejudgment interest of $77,113, and a $260,000 civil penalty.<br />
The Firm also undertook to retain an independent consultant to review its policies and<br />
procedures relating to AML and its systems for implementing its supervisory policies and<br />
procedures. The Commission suspended Worthington in a supervisory capacity for 12 months<br />
and ordered him to pay a $45,000 civil penalty. The Commission suspended Kaplan in a<br />
supervisory capacity for 12 months and ordered him to pay disgorgement of $225,000,<br />
prejudgment interest of $63,092, and a $30,000 civil penalty. Worthington and Kaplan each also<br />
undertook to submit an affidavit following the end of their suspensions concerning their full<br />
compliance with the sanctions imposed. The Commission censured Granahan and ordered him<br />
to pay a $20,000 civil penalty.<br />
433
Q.1.f<br />
In re Gallardo, Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011).<br />
The Commission accepted an offer of settlement from Orion Trading, LLC (the “Firm”),<br />
a registered broker-dealer, and Zurita, president of the Firm and supervisor of a branch office of<br />
the Firm. The Commission alleged that a registered representative under Zurita’s supervision<br />
had solicited foreign investors to provide him with approximately $1.2 million that he<br />
represented would be invested by an investment company for a guaranteed rate of return.<br />
Instead, the registered representative invested a portion of the money himself, returned<br />
approximately $275,000 as “distributions,” and misappropriated approximately $685,000 for his<br />
personal use. The Commission alleged that Zurita failed to follow-up on red flags regarding this<br />
activity, including certain suspect emails from the registered representative’s foreign investors<br />
that Zurita had reviewed. As a result, Zurita and the Firm failed reasonably to supervise the<br />
registered representative within the meaning of Section 15(b)(4)(E) of the Securities Exchange<br />
Act of 1934. The Commission further alleged that Zurita permitted an unlicensed associate to<br />
perform the functions of a registered representative. As a result, the Firm willfully violated, and<br />
Zurita willfully aided and abetted and caused the Firm’s violations of, Section 15(b)(7) of the<br />
Exchange Act and Rule 15b7-1 thereunder. The Commission ordered Respondents to cease and<br />
desist from violating the federal securities laws. It barred Zurita from association in a<br />
supervisory capacity, with a right to reapply in three years, and ordered him to pay a $35,000<br />
civil penalty. The Commission censured the Firm and ordered it to pay a $50,000 civil penalty.<br />
The Firm also undertook to hire an individual with appropriate supervisory licenses and<br />
qualifications to assume supervisory authority at the Firm.<br />
In re Inv. Placement Group, Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Investment Placement Group, a<br />
registered broker-dealer and a former registered investment adviser (the “Firm”), and Gonzalez-<br />
Rubio, former COO and current CEO of the Firm. The Commission alleged that Respondents<br />
failed to supervise reasonably Rodriguez, a former registered representative and trader who<br />
engaged in a fraudulent interpositioning scheme. In particular, the Firm failed to establish a<br />
reasonable system to implement its policies and procedures to prevent and detect<br />
interpositioning, and Gonzalez-Rubio effectively allowed Rodriguez to supervise himself by<br />
delegating trading supervisory oversight to Rodriguez. Additionally, Gonzalez-Rubio failed to<br />
respond to red flags regarding Rodriguez’s fraudulent scheme, including a dramatic rise in<br />
revenue resulting from the interpositioned transactions. As a result of Rodriguez’s misconduct,<br />
four Mexican pension funds paid approximately $65 million more for certain notes than they<br />
would have otherwise paid, and the Firm and Rodriguez received more than $6 million in<br />
additional markups.<br />
The Commission censured the Firm and ordered it to pay a $260,000 civil penalty,<br />
disgorgement of $3,572,016, and prejudgment interest of $240,012. The Commission suspended<br />
Gonzalez-Rubio from association in a supervisory capacity for three months. Gonzalez-Rubio<br />
also undertook to provide to the Commission an affidavit within fifteen days after the end of his<br />
434
suspension concerning his compliance with the sanctions imposed. The Firm undertook to<br />
review its policies and procedures regarding the detection and prevention of interpositioning<br />
violations and to submit a report to the Commission within ninety days concerning that review.<br />
The Firm further agreed to cooperate fully with the Commission in related investigations and<br />
proceedings.<br />
g. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed<br />
. No cases decided in 2011.<br />
h. Procedural Issues<br />
(i)<br />
Jurisdiction and Time Bars<br />
No cases decided in 2011.<br />
(ii)<br />
Standard of Review<br />
. No cases decided in 2011.<br />
(iii)<br />
Due Process<br />
. No cases decided in 2011.<br />
(iv)<br />
Prior Disciplinary Histories<br />
.. No cases decided in 2011.<br />
(v)<br />
Selective Prosecution<br />
. No cases decided in 2011.<br />
(vi)<br />
Sanctions<br />
Q.1.h(vi)<br />
SEC v. Koji Goto, Litig. Release No. 22123, 2011 SEC LEXIS 3565 (Oct. 12, 2011).<br />
The Commission moved to dismiss its claims against Goto, a former registered<br />
representative with a registered broker-dealer, in light of the outcome of other related<br />
proceedings. The Commission’s complaint alleged that Goto misappropriated more than $5<br />
million of investor funds. In a related criminal action in state court, Goto was charged with theft<br />
by misapplication of property, theft by deception, criminal solicitation, unlawful securities<br />
practice, and witness tampering. A jury found Goto guilty of 23 counts and the court sentenced<br />
him to 25 to 75 years in prison and ordered him to pay $3.2 million in restitution. Subsequent to<br />
the trial, the state court found Goto incompetent to stand trial on the remaining criminal charges.<br />
Following the criminal conviction, the Commission instituted a public administrative proceeding<br />
435
and permanently barred Goto from association. Following that proceeding, Goto filed for<br />
bankruptcy. The federal district court granted the Commission’s motion.<br />
i. <strong>Broker</strong>/<strong>Dealer</strong> Registration Violations<br />
In re Beachy, Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011).<br />
Q.1.i<br />
The Commission accepted an offer of settlement from Beachy, a former registered<br />
representative of a registered broker-dealer. In an earlier proceeding brought by the<br />
Commission, a federal district court entered a final judgment by consent against Beachy,<br />
permanently enjoining him from future violations of the broker-dealer registration and antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that Beachy sold<br />
investment contracts to investors in at least 29 states using a fictitious name, made false<br />
statements to investors, distributed false account statements, knowingly and intentionally hid his<br />
losses and sold unregistered securities. The Commission barred Beachy from association and<br />
prohibited Beachy from participating in an offering of penny stock.<br />
In re Nicholson, Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011).<br />
Q.1.i<br />
The Commission accepted an offer of settlement from Nicholson, the president and<br />
owner of a registered broker-dealer and owner of a separate entity that acted as the general<br />
partner for various issuers of limited partnership interests. In a related civil action brought by the<br />
Commission in federal court, the court entered a judgment by consent against Nicholson,<br />
permanently enjoining him from violating the antifraud and registration provisions of the federal<br />
securities laws. The Commission’s complaint alleged that, in connection with the sale of limited<br />
partnership interests, Nicholson misused and misappropriated investor funds, failed to disclose<br />
material information regarding the use of investor proceeds, sold unregistered securities and<br />
operated an unregistered broker-dealer. The Commission barred Nicholson from association.<br />
In re LeBouef, Release No. 65216, 2011 SEC LEXIS 3013 (Aug. 29, 2011).<br />
The Commission accepted an offer of settlement from LeBouef, a former registered<br />
representative with a registered broker-dealer. In a related criminal action in federal district<br />
court, LeBoeuf pleaded guilty to one count of mail fraud and was sentenced to a prison for thirty<br />
months followed by three years of supervised release, and ordered to pay $492,365 in restitution.<br />
In a related civil action brought by the Commission, a federal district court entered a final<br />
judgment by consent against LeBouef enjoining him from future violations of the antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that, in<br />
connection with six oil and gas offerings, LeBouef acted as an unregistered broker-dealer when<br />
he actively solicited investors and raised over $500,000 from nine investors after his license had<br />
lapsed, misused and misappropriated investor funds, and made various misrepresentations. The<br />
Q.1.i<br />
436
Commission barred LeBouef from association and from participating in any offering of a penny<br />
stock.<br />
j. Miscellaneous / MSSR Municipal Bond Offerings<br />
In re Ellis, Release No. 64220, 2011 SEC LEXIS 1199 (Apr. 7, 2011).<br />
Q.1.j<br />
The Commission accepted an offer of settlement from Ellis, CCO of a former registered<br />
broker-dealer (the “Firm”). The Commission’s complaint alleged that Ellis willfully aided and<br />
abetted and caused the Firm’s violations of Rule 30(a) of Regulation S-P (the “Safeguard Rule”)<br />
under the Securities Exchange Act of 1934 by failing to direct the Firm to revise or supplement<br />
its written supervisory procedures for safeguarding customer information after being notified of<br />
the theft of three laptop computers and a registered representative’s computer password. The<br />
Commission’s complaint further alleged the Firm’s supervisory procedures were inadequate and<br />
failed to instruct the Firm’s registered representatives and supervisors how to comply with the<br />
Safeguard Rule. The Commission censured Ellis and ordered him to pay a $15,000 civil penalty<br />
and to cease and desist from committing or causing any violations and any future violations of<br />
Rule 30(a) of Regulation S-P.<br />
Q.1.j<br />
In re Kraus, Release No. 64221, 2011 SEC LEXIS 1200 (Apr. 7, 2011), In re Levine, Release<br />
No. 64222, 2011 SEC LEXIS 1201 (Apr. 7, 2011).<br />
The Commission accepted offers of settlement from Kraus, President, CFO and Director<br />
of Supervision of a former registered broker-dealer (the “Firm”) and Levine, National Sales<br />
Manager of the Firm. The Commission’s complaint alleged that at the time the Firm was<br />
winding down its business, Kraus authorized the transfer of 16,000 accounts to Levine and any<br />
broker-dealer with whom he became affiliated. In connection with this transfer, Levine<br />
downloaded nonpublic customer information for the accounts onto a portable thumb drive. After<br />
joining the new broker-dealer, Levine mailed a letter that Kraus had reviewed and approved to<br />
the account holders advising them of the transfer and of their right to opt out of the transfer, but<br />
failing to provide procedures on how to exercise that right, contact information or the identity of<br />
the new broker-dealer. Thereafter, Levine supplied the receiving broker-dealer with the<br />
nonpublic customer information.<br />
The Commission’s complaint alleged that Kraus and Levine willfully aided and<br />
abetted and caused the Firm’s violations of Rules 7(a) and 10(a) of Regulation S-P under the<br />
Securities Exchange Act of 1934 by failing to provide the customers with proper notice, a<br />
reasonable opportunity to opt out of the transfer, a reasonable means to exercise their opt out<br />
right and sufficient time within which to opt out before disclosing their personal nonpublic<br />
information to Levine and the receiving broker. The Commission’s complaint also alleged that<br />
Kraus and Levine willfully aided and abetted and caused the broker-dealer’s violations of Rule<br />
30(a) of Regulation S-P by knowingly placing customer information at substantial risk of<br />
unauthorized access and misuse. The Commission censured Kraus and Levine and ordered them<br />
to cease and desist from committing or causing any violations and any future violations of Rules<br />
437
7(a), 10(a) and 30(a) of Regulation S-P. The Commission also ordered each of them to pay a<br />
$20,000 civil penalty.<br />
k. Regulation S-P<br />
In re Zaino, Release No. 64398, 2011 SEC LEXIS 1574 (May 4, 2011).<br />
Q.1.k<br />
The Commission accepted an offer of settlement from Zaino, an employee of a registered<br />
broker-dealer. In a related criminal action in federal court, Zaino pleaded guilty to one count of<br />
conspiracy to allocate and rig bids for investment agreements or other municipal finance<br />
contracts, one count of conspiracy to defraud the Internal Revenue Service by impeding the<br />
collection of revenue due from municipal issuers, and one count of wire fraud. The criminal<br />
indictment alleged that Zaino engaged in fraudulent misconduct in connection with the<br />
competitive bidding process for the selection of firms to provide instruments in which municipal<br />
issuers temporarily invested the proceeds of tax-exempt municipal bonds. Specifically, Zaino<br />
devised a scheme to defraud municipalities of money by facilitating the payment of kickbacks<br />
through the execution of swap transactions and by submitting intentionally losing bids. The<br />
Commission barred Zaino from association.<br />
Q.1.k<br />
SEC v. N. Am. Clearing, Inc., Litig. Release No. 21960, 2011 SEC LEXIS 1608 (M.D. Fla. May<br />
5, 2011).<br />
In an action initiated by the Commission, a federal district court entered a final judgment<br />
against defendant Goble, the founder, sole owner, and director of North American Clearing, Inc.<br />
(the “Firm”), a clearing broker-dealer for approximately 40 correspondent firms and more than<br />
10,000 customer accounts. Following a five-day bench trial, the court found that Goble acted<br />
with a high degree of scienter in directing the Firm to falsely record a $5 million money market<br />
purchase, which artificially lowered the Firm’s reserve requirement under the Customer<br />
Protection Rule and allowed the Firm to improperly withdraw more than $3 million from its<br />
Exclusive Benefit of Customers Account. The court further found that this “sham” transaction<br />
constituted fraud on the market. The court permanently enjoined Goble from future violations of<br />
Sections 10(b), 15(c)(3), and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5,<br />
15c3-3, and 17a-3 thereunder. Additionally, on its own initiative, the court enjoined Goble from<br />
attempting to secure any securities licenses or attempting to engage in the securities business.<br />
The court also ordered Goble to pay a reduced $7,500 civil penalty based, in part, on the Firm<br />
having been liquidated in a Securities Investor Protection Corporation bankruptcy proceeding.<br />
In re EDGX Exchange, Inc., Release No. 65556, 2011 SEC LEXIS 3592 (Oct. 13, 2011).<br />
Q.1.k<br />
The Commission accepted an offer of settlement from EDGX Exchange, Inc., a<br />
registered national securities exchange, EDGX, a registered national securities exchange, and<br />
438
Direct Edge ECN LLC, doing business as DE Route, a registered broker-dealer. The<br />
Commission alleged that, after certain orders were overfilled due to operational errors, the<br />
exchanges decided that DE Route would assume and liquidate the overfilled positions through its<br />
error account, and that Respondents also assumed positions in other securities to facilitate the<br />
resolution. The Commission alleged that the exchanges violated Section 19(b)(1) of the<br />
Securities Exchange Act of 1934 by not filing a proposed rule change concerning the use of the<br />
DE Route error account to assume overfilled or error positions, and Section 19(g)(1) of the<br />
Exchange Act by not complying with their own rules when they allowed DE Route to engage in<br />
activities not approved by the Commission. The operational errors caused approximately 27<br />
million shares of excess trading with a value of approximately $773 million across<br />
approximately one thousand symbols, and the exchanges realized a net loss of $2.1 million in<br />
connection with the positions that were assumed and liquidated. In an attempt to liquidate the<br />
positions quickly, DE Route engaged in short selling activity without marking its orders as short<br />
and without locating the shorted stock prior to effecting the short sales, in violation of Regulation<br />
SHO.<br />
In a separate incident, an EDGX database administrator effectively disabled the<br />
exchange’s ability to process incoming orders, modifications, and cancellations, leading to<br />
member claims totaling over $680,000 in losses. Respondents promptly notified the<br />
Commission staff of this incident, and submitted to the Commission staff a plan of remediation,<br />
which they promptly began to implement. The Commission alleged that EDGX, which<br />
displayed quotations representing that it was operating as an automated trading center, violated<br />
Regulation NMS by not immediately notifying all specified persons when it determined that it<br />
was not capable of displaying quotations that accurately reflected the current state of the market<br />
on EDGX. The Commission censured Respondents and ordered them to cease and desist from<br />
future violations and to comply with certain undertakings.<br />
2. SEC Review of SRO Proceedings<br />
a. Sales Practice Violations<br />
Q.2.a<br />
In re Cody, Release No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); In re Cody, Release No.<br />
65235, 2011 SEC LEXIS 3041 (Aug. 31, 2011).<br />
The Commission rejected a request for reconsideration by Cody, a former registered<br />
representative. The underlying FINRA hearing panel decision found that Cody violated NASD<br />
Rules 2310 and 2110 and suspended Cody from association for three months, fined him $27,500,<br />
and assessed $8,711 in costs against him. Cody first appealed to the National Adjudicatory<br />
Council, which increased the suspension to one year and otherwise sustained the decision. On<br />
further appeal, the Commission sustained the decision by the National Adjudicatory Council.<br />
The Commission found that Cody recommended unsuitable trades to customers, sent misleading<br />
account summaries and information to customers, and failed to timely disclose two customer<br />
settlement agreements on his Form U-4. The Commission found that this conduct violated<br />
NASD Rules 2310 and 2110, and rejected Cody’s arguments concerning alleged procedural<br />
439
infirmities warranting reversal. The Commission denied the motion for reconsideration on the<br />
grounds that Cody failed to show any manifest errors of law or fact or present newly discovered<br />
evidence.<br />
b. Unfair/Fraudulent Markups or Commissions<br />
In re Am. Funds Distrib., Inc., Release No. 64747, 2011 SEC LEXIS 2191 (June 24, 2011).<br />
Q.2.b<br />
The Commission overturned a NASD hearing panel’s censure and imposition of a<br />
$5 million fine on a NASD member firm that was the principal underwriter and distributor for a<br />
family of mutual funds. The NASD imposed the sanctions based on the firm’s participation in<br />
mutual fund directed brokerage practices from 2001-2003, in violation of NASD Rule 2830(k),<br />
the “Anti-Reciprocal Rule.” The National Adjudicatory Council had affirmed the hearing<br />
panel’s decision and the sanctions it imposed, finding that the member firm violated the Rule<br />
because its target commissions, while considered non-binding arrangements with retail firms,<br />
constituted a specific amount or percentage of brokerage for the sale of mutual fund shares, in<br />
violation of the Rule. The Commission concluded that the Rule in effect at the time of the<br />
directed brokerage arrangement was sufficiently ambiguous to preclude the member firm from<br />
having fair notice that its practices were prohibited. The Commission noted, however, that the<br />
2004 Amendments to the Rule “addressed the uncertainty . . . and, as a result of these changes,<br />
the directed brokerage practices at issue are now clearly prohibited.”<br />
c. Other Fraudulent Practices<br />
(i)<br />
Misrepresentation<br />
Q.2.c(i)<br />
In re Spartis, Release No. 64489, 2011 SEC LEXIS 1693 (May 13, 2011).<br />
The Commission sustained the NYSE’s imposition of sanctions against Spartis and Elias<br />
(together “Applicants”), former registered representatives associated with a NYSE member firm<br />
(the “Firm”). A NYSE hearing panel had found that Spartis and Elias had caused the Firm to<br />
violate NYSE Rule 472.30 by sending customers communications between 1998 and 2001 that<br />
failed to depict any downside risk of holding WorldCom, Inc. shares on margin. The hearing<br />
panel censured Spartis and Elias and suspended Spartis for five months and Elias for three<br />
months. Applicants appealed to the NYSE Board of Directors, which vacated the suspensions<br />
but otherwise affirmed the hearing panel’s ruling. In their appeal to the Commission, the<br />
Applicants argued in relevant part that they should not be found liable because they had not acted<br />
with scienter. The Commission rejected this argument on the basis that Rule 472.30 does not<br />
require a showing of scienter. The Commission sustained the NYSE’s censures.<br />
440
(ii)<br />
Falsification of Documents<br />
. No cases decided in 2011.<br />
(iii)<br />
Failure to Maintain Accurate Books and Records<br />
No cases decided in 2011.<br />
(iv)<br />
Selling Away<br />
No cases decided in 2011.<br />
d. Financial Responsibility Violations<br />
(i)<br />
Segregation of Customer Funds<br />
No cases decided in 2011.<br />
(ii)<br />
Regulation T Violations<br />
No cases decided in 2011.<br />
e. Trading Practice Violations/Market Manipulation<br />
No cases decided in 2011.<br />
f. Failure to Supervise<br />
Q.2.f<br />
In re Kaminski, Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).<br />
The Commission reviewed an appeal by Kaminski, a general securities principal and<br />
senior executive officer of an NASD member firm (the “Firm”). The appeal concerned a 2008<br />
NASD disciplinary decision finding that Kaminski violated NASD Conduct Rules 3010 and<br />
2110 by failing to supervise the Firm’s variable annuity trading. The NASD fined Kaminiski<br />
$50,000 and suspended him in all principal capacities for six months. The National Adjudicatory<br />
Council affirmed the fine, but increased Kaminski’s suspension to eighteen months in all<br />
capacities and required that he requalify before acting in any capacity requiring qualification.<br />
Kaminski had previously assisted the Firm in settling a NASD disciplinary proceeding in<br />
which the Firm undertook certain specified corrective actions relating to the Firm’s supervision<br />
of variable annuity transactions, including the creation of a Trade Review Team (“TRT”) and a<br />
441
Red Flag Blotter. The Commission found that Kaminski ignored TRT’s staffing shortages,<br />
failed diligently to inform senior management of compliance needs, had unlicensed individuals<br />
review the backlog of Red Flag Blotters, failed to effectively communicate to senior<br />
management the need to restrict business expansion to that which could be supervised<br />
adequately, and failed to limit the Firm’s activities when resources were not made available.<br />
Kaminski also failed to inform NASD staff of the suspension of the Red Flag Blotter review<br />
process during an NASD examination and subsequent investigation. The Commission found that<br />
Kaminski’s supervisory failure was egregious and sustained the NASD’s ruling.<br />
g. Registration Violations<br />
No cases decided in 2011.<br />
h. Failure to Cooperate with FINRA Investigation/Failure to Comply with<br />
FINRA Requests for Financial Information<br />
In re Osborn, Release No. 64145, 2011 SEC LEXIS 1055 (Mar. 29, 2011).<br />
Q.2.h<br />
The Commission considered an application for review by Osborn, a former registered<br />
representative of a FINRA member firm. FINRA had barred Osborn from association after<br />
Osborn failed to respond to FINRA’s information requests pertaining to his termination from a<br />
FINRA member firm. Osborn requested that the Commission set aside the bar since he was<br />
incarcerated due to an unrelated family court matter and had not received FINRA’s information<br />
requests or the subsequent suspension notices that resulted in his bar. In his application for<br />
review, Osborn included information responsive to FINRA’s information requests. As a result of<br />
Osborn’s willingness to respond to FINRA’s request for information and the circumstances that<br />
made him unavailable, Osborn and FINRA agreed to settle the matter for a sanction less than a<br />
bar. FINRA filed an assented-to motion to dismiss, arguing that Osborn’s application for review<br />
was mooted by the settlement. The Commission granted FINRA’s motion to dismiss.<br />
In re Gizankis, Release No. 64391, 2011 SEC LEXIS 1576 (May 4, 2011).<br />
Q.2.h<br />
The Commission considered an application for review by Gizankis, a former registered<br />
representative of a FINRA member firm. FINRA had barred Gizankis from association after<br />
Gizankis failed to respond to FINRA’s information requests pertaining to her termination from a<br />
FINRA member firm. Gizankis requested that the Commission set aside the bar since she had<br />
recently relocated to another state and had not received FINRA’s information requests or the<br />
subsequent suspension notices that resulted in her bar. In her application for review, Gizankis<br />
also included information responsive to FINRA’s information requests. As a result of Gizankis’s<br />
willingness to respond to FINRA’s request for information and the circumstances that made her<br />
442
unavailable, Gizankis and FINRA agreed to settle the matter for a sanction less than a bar.<br />
FINRA filed an assented-to motion to dismiss, arguing that Gizankis’s application for review<br />
was mooted by the settlement. The Commission granted FINRA’s motion to dismiss.<br />
In re Sweat, Release No. 65117, 2011 SEC LEXIS 2814 (Aug. 11, 2011).<br />
Q.2.h<br />
The Commission considered a motion for reconsideration by Intermountain Financial<br />
Securities, Inc. (“IFS”), a FINRA member firm, and Sweat, a registered general securities<br />
representative and IFSs’ President and CCO. The Applicants moved for reconsideration of an<br />
order by the Commission dismissing their petition for review of a FINRA hearing panel decision.<br />
The FINRA hearing panel had suspended Sweat from association and suspended IFS<br />
from FINRA membership until they complied with requests for information that FINRA had<br />
issued during a routine examination of IFS. Under the terms of the hearing panel’s order, if the<br />
Applicants did not comply with the requests for information within three months, Sweat’s<br />
suspension would automatically convert into a bar and IFS’s suspension would convert into an<br />
expulsion. Applicants filed an appeal with the Commission and requested a stay of their<br />
suspensions. The Commission denied Applicants’ stay request and issued a briefing order<br />
setting a deadline for Applicants to submit a brief and noting that failure to file a brief could<br />
result in dismissal pursuant to Rule of Practice 180(c). The Commission did not receive a brief<br />
from Applicants and dismissed their appeal.<br />
Applicants sought reconsideration claiming that their failure to file a brief was “due to<br />
illness.” The Commission denied the request, noting that reconsideration is an extraordinary<br />
remedy designed to correct manifest errors of law or fact, or to permit the presentation of newly<br />
discovered evidence, and that Applicants’ motion failed to provide such grounds for<br />
reconsideration.<br />
In re Chen, Release No. 65345, 2011 SEC LEXIS 3224 (Sept. 16, 2011).<br />
Q.2.h<br />
The Commission considered an application for review by Chen, a former registered<br />
representative of a FINRA member firm, of a FINRA decision. FINRA had barred Chen after<br />
Chen failed to respond to letters FINRA sent him inquiring about his discharge from a FINRA<br />
member firm, which the Firm had disclosed on Chen’s Form U-5. FINRA’s letters repeatedly<br />
warned Chen that he would be suspended and automatically barred if he failed to respond to<br />
FINRA’s inquiries. Chen apologized but did not dispute that he had notice of FINRA’s requests<br />
and that he failed to respond, and his request for a hearing was also untimely. The Commission<br />
granted FINRA’s motion to dismiss.<br />
443
Q.2.h<br />
In re Picozzi, Release No. 65569, 2011 SEC LEXIS 3609 (Oct. 14, 2011).<br />
The Commission considered an appeal by Picozzi, a former associated person of a<br />
member firm of PCX Equities, Inc. (“PCX”), the predecessor-in-interest to NYSE Euronext and<br />
NYSE Regulation Inc. In 2004, PCX filed a complaint against Picozzi charging him with<br />
violation of PCX Rule 10.2(d) for failing to furnish information and testimony requested by<br />
PCX. PCX mailed the complaint to Picozzi, but Picozzi failed to respond. PCX issued a Notice<br />
of Summary Determination that censured and barred Picozzi, and stated that if Picozzi and his<br />
member firm fully cooperated within three months after issuance of the Notice, the bar would be<br />
lifted and an appropriate sanction for obstructing the investigation would be imposed. On<br />
appeal, Picozzi argued that he did not receive any of the PCX documents until 2010. The<br />
Commission overturned PCX’s findings of violation and sanction, noting the lack of evidence<br />
surrounding PCX’s attempts to serve Picozzi and PCX’s successor’s statement that it did not<br />
oppose Picozzi’s petition. The Commission declined Picozzi’s request that it expunge his CRD<br />
record, noting its assumption that FINRA would update the record.<br />
i. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed<br />
Q.2.i<br />
In re FCS Sec., Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec.,<br />
Release No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011).<br />
The Commission rejected a request for reconsideration by FCS Securities, a registered<br />
broker-dealer (the “Firm”), and Kleinser, its sole proprietor. Applicants sought review of the<br />
Commission’s earlier decision sustaining a FINRA decision from 2008 finding violations of<br />
Section 17(e) of the Securities Exchange Act of 1934, Rule 17a-5 thereunder, and NASD Rule<br />
2110 by FCS Securities and Kleinser for failure to file audited financial statements. FINRA had<br />
fined the Firm and Kleinser $5,000, jointly and severally, and suspended the Firm from<br />
membership for four months, with the suspension to convert to an expulsion if the Firm did not<br />
file audited annual reports for 2006 and 2007 before the suspension ended. Applicants first<br />
appealed to the National Adjudicatory Council, which sustained FINRA’s decision. On appeal<br />
to the Commission, the Commission found that the Firm failed to file audited financial reports<br />
for fiscal years 2006 and 2007 and failed to show that the exemption contained in Rule 17a-<br />
5(e)(1)(i)(B) under the Securities Exchange Act of 1934 permitted them to file unaudited annual<br />
reports for those years. The Commission further rejected the Applicants’ argument that their<br />
situation was similar to that described in certain No Action Letters, distinguishing the facts<br />
described in those letters and stating that the Commission was not bound by the statements of<br />
Commission staff in such letters. In denying Applicants’ subsequent motion for reconsideration,<br />
the Commission found that the motion raised arguments that the Commission had already<br />
rejected and did not introduce any newly discovered evidence.<br />
444
j. Procedural Issues<br />
(i)<br />
Evidence<br />
No cases decided in 2011.<br />
(ii)<br />
Due Process<br />
No cases decided in 2011.<br />
(iii)<br />
Jurisdiction and Time Bars<br />
Q.2.j(iii)<br />
In re Sharemaster, Release No. 65570, 2011 SEC LEXIS 3610 (Oct. 14, 2011).<br />
The Commission considered an appeal by Sharemaster, a registered broker-dealer,<br />
of a FINRA disciplinary decision. A FINRA hearing panel had found that Sharemaster violated<br />
Section 17(e) of the Securities Exchange Act of 1934 and Rule 17a-5 thereunder by filing an<br />
annual report with financial statements that were audited by an accounting firm that was not<br />
registered with the Public Company Accounting Oversight Board. The hearing panel suspended<br />
Sharemaster’s membership pending the filing of the requisite annual report, with the suspension<br />
to convert to an expulsion at the end of six months if the report was not filed, and assessed<br />
$1,785 in costs. Sharemaster appealed to the Commission, and while the appeal was pending,<br />
Sharemaster filed a compliant annual report and the suspension was lifted. Both parties argued<br />
that the Commission should resolve this case because, although the suspension was lifted, a<br />
violation was found and costs were assessed. The Commission dismissed the appeal for lack of<br />
jurisdiction, finding that because the sanction was lifted, there was no final disciplinary sanction<br />
to review.<br />
(iv)<br />
Discovery<br />
No cases decided in 2011.<br />
(v)<br />
Sanctions<br />
Q.2.j.(v)<br />
In re Houston, Release No. 66014, 2011 SEC LEXIS 4491 (Dec. 20, 2011).<br />
The Commission reviewed an appeal by Houston, a former general securities<br />
representative with a former NASD member firm, from a NASD disciplinary action. The NASD<br />
had found that Houston violated NASD Rules 3030 and 2110 by engaging in outside business<br />
activities without providing his member firm with written notice, and violated NASD Rules 8210<br />
and 2110 by failing to appear for an on-the-record interview with NASD staff. The NASD fined<br />
Houston $100,000 and suspended him for one year in all capacities, and, for failing to appear for<br />
445
testimony, barred him from association. The National Adjudicatory Council affirmed the<br />
hearing panel’s findings of violation and the bar. However, it overturned the fine and suspension<br />
in light of the bar imposed on Houston.<br />
The Commission sustained the findings of violations, but vacated the sanction and<br />
remanded for redetermination of the sanction. The Commission explained that Houston did<br />
respond in some manner to the NASD’s information requests, and therefore the determination of<br />
the sanction should analyze factors other than the presumptive unfitness indicated by a failure to<br />
respond in any manner.<br />
(vi)<br />
Right to Counsel<br />
No cases decided in 2011.<br />
k. Statutory Disqualification<br />
Q.2.k<br />
In re Bahl, Release No. 65323, 2011 SEC LEXIS 3182 (Sept. 12, 2011).<br />
The Commission considered FINRA’s application for an order allowing Bahl to be<br />
associated with a registered broker-dealer. In 1974, the Commission had barred Bahl from<br />
association with a broker-dealer except as a supervised person in a non-supervisory capacity, and<br />
upon a satisfactory showing to the Commission’s Division of Enforcement that a firm would<br />
adequately supervise him. The order further subjected Bahl to a statutory disqualification under<br />
Section 3(a)(39)(B) of the Securities Exchange Act of 1934. In a parallel proceeding, a federal<br />
district court permanently enjoined Bahl from further violations of the federal securities laws<br />
relating to fraud in prospectus delivery. Thereafter, Bahl was associated with two brokerdealers.<br />
In each case, FINRA’s CRD failed to identify Bahl as being subject to a statutory<br />
disqualification, and as a result, FINRA did not file the required notifications with the<br />
Commission pursuant to Rule 19h-1 of the Exchange Act on behalf of Mr. Bahl for these two<br />
associations. FINRA’s application sought to allow Bahl to be associated with a registered<br />
broker-dealer as a general securities principal working out of his home subject to heightened<br />
remote supervision. The Commission approved FINRA’s application.<br />
l. Reporting Violations<br />
In re Gremo Invs., Inc., Release No. 64481, 2011 SEC LEXIS 1695 (May 12, 2011).<br />
The Commission considered an appeal by Gremo Investments, Inc., a registered brokerdealer,<br />
of a FINRA disciplinary decision. A FINRA hearing panel had suspended Gremo’s<br />
membership, imposed a $1,000 fine and assessed $1,605 in costs after finding that Gremo<br />
violated Section 17(e) of the Securities Exchange Act of 1934 and Rule 17a-5 thereunder, and<br />
Q.2.l<br />
446
FINRA Rule 2010 by submitting an annual report with financial statements audited by an<br />
accounting firm that was not registered with the Public Company Accounting Oversight Board<br />
(“PCAOB”). Previously, non-public broker-dealers such as Gremo were exempted from the<br />
requirement that their annual financial statements be audited by a PCAOB-registered accounting<br />
firm. However, in December 2008, FINRA published two Information Notices notifying nonpublic<br />
broker-dealers that their fiscal year 2009 and subsequent audits were required to be<br />
conducted by a PCAOB-registered accounting firm.<br />
On appeal, Gremo argued in relevant part that the requirement that it use a PCAOBregistered<br />
accounting firm was a violation of antitrust laws. The Commission rejected this<br />
argument on the basis that the antitrust laws are impliedly repealed to the extent necessary for the<br />
Exchange Act to function in the manner Congress intended. The Commission sustained<br />
FINRA’s findings and sanction, noting that they would serve to impress upon Gremo and others<br />
the importance of filing annual reports that are audited by PCAOB-registered firms.<br />
In re Friedman, Release No. 64486, 2011 SEC LEXIS 1699 (May 13, 2011).<br />
The Commission reviewed an appeal by Friedman, a general securities representative and<br />
general securities principal formerly registered with a FINRA member firm (the “Firm”), from a<br />
FINRA disciplinary action. A FINRA hearing panel had found that Friedman engaged in private<br />
securities transactions without prior written notice to the Firm, in violation of NASD Conduct<br />
Rules 3040 and 2110. The hearing panel suspended Friedman in all capacities for forty-five days<br />
and imposed a $77,500 fine. FINRA appealed to the National Adjudicatory Council, seeking a<br />
longer suspension. The National Adjudicatory Council affirmed the hearing panel’s decision in all<br />
respects except for the suspension, which it increased to nine months based on the seriousness of<br />
the violations. Friedman appealed, arguing in relevant part that another employee of the Firm,<br />
Schnaier, was responsible for disclosing the transactions to the Firm because all relevant<br />
conversations with the private company had occurred through him.<br />
The Commission rejected this argument on the basis that Rule 3040 requires each person<br />
who participates in a private securities transaction to provide prior written notice to his member<br />
firm. The Commission found that Friedman’s conduct constituted a “very serious violation,” as<br />
private securities transactions deprive investors of a firm’s oversight, due diligence, and<br />
supervision. The Commission noted that the nine-month suspension was shorter than the<br />
minimum suspension recommended in the Sanction Guidelines (which support a suspension of<br />
twelve months to a bar), and that FINRA aligned the fine with the “financial benefit” Friedman<br />
received as a result of the violations. The Commission sustained the National Adjudicatory<br />
Council’s findings and sanctions.<br />
Q.2.l<br />
Q.2.l<br />
In re FCS Sec., Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec.,<br />
Release No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011).<br />
The Commission rejected a request for reconsideration by FCS Securities, a registered<br />
broker-dealer (the “Firm”), and Kleinser, its sole proprietor. Applicants sought review of the<br />
447
Commission’s earlier decision sustaining a FINRA decision from 2008 finding violations of<br />
Section 17(e) of the Securities Exchange Act of 1934, Rule 17a-5 thereunder, and NASD Rule<br />
2110 by FCS Securities and Kleinser for failure to file audited financial reports. FINRA had fined<br />
the Firm and Kleinser $5,000, jointly and severally, and suspended the Firm from membership for<br />
four months, with the suspension to convert to an expulsion if the Firm did not file audited annual<br />
reports for 2006 and 2007 before the suspension ended. Applicants first appealed to the National<br />
Adjudicatory Council, which sustained FINRA’s decision. On appeal to the Commission, the<br />
Commission found that the Firm failed to file audited financial reports for fiscal years 2006 and<br />
2007 and failed to show that the exemption contained in Rule 17a-5(e)(1)(i)(B) under the<br />
Securities Exchange Act of 1934 permitted them to file unaudited annual reports for those years.<br />
The Commission further rejected the Applicants’ argument that their situation was similar to that<br />
described in certain No Action Letters, distinguishing the facts described in those letters and<br />
stating that the Commission was not bound by the statements of Commission staff in such letters.<br />
In denying Applicants’ subsequent motion for reconsideration, the Commission found that the<br />
motion raised arguments that the Commission had already rejected and did not introduce any<br />
newly discovered evidence.<br />
In re Neaton, Release No. 65863, 2011 SEC LEXIS 4232 (Dec. 1, 2011).<br />
The Commission denied a motion for reconsideration by Neaton, a former registered<br />
representative of various FINRA member firms, of a Commission decision. The underlying<br />
FINRA hearing panel decision barred Neaton from association and fined him $5,000. Neaton<br />
appealed to the National Adjudicatory Council, which sustained the bar against him but waived<br />
the fine. On further appeal, the Commission found that Neaton violated NASD Conduct Rule<br />
2110 and Membership Rule IM-1000-1 by willfully submitting a Form U-4 that did not disclose<br />
disciplinary actions and sanctions imposed on him by a state bar disciplinary board. The<br />
Commission, noting that it is the decision of the National Adjudicatory Council and not the<br />
underlying FINRA hearing panel decision that is subject to Commission review, sustained the<br />
bar, and further found that Neaton was subject to a statutory disqualification because his failures<br />
to disclose were willful. In his motion for reconsideration, Neaton argued, in relevant part, that<br />
the Commission erred in finding that his actions caused harm. The Commission rejected this<br />
argument, concluding there was harm by Neaton’s failure to amend his Form U-4 as employers,<br />
regulators, and potential customers were deprived of the information. The Commission upheld<br />
the bar..<br />
m. Net Capital Violations<br />
No cases decided in 2011.<br />
n. Trading Practice Violations/Market Manipulation<br />
No cases decided in 2011.<br />
Q.2.l<br />
448
R. <strong>Broker</strong>-<strong>Dealer</strong> Employment <strong>Litigation</strong> and Arbitration<br />
R.<br />
FleetBoston Fin. Corp. v. Alt, 638 F.3d 70 (1st Cir. 2011).<br />
An investment banking firm and its former employees arbitrated claims brought by the<br />
employees arising from the firm’s alleged failure to pay deferred compensation. The arbitrators<br />
issued an award in favor of the employees. A subset of the employees’ claims were stayed in<br />
federal court during the arbitration. After the district court confirmed the arbitral award, it was<br />
asked to enter summary judgment against the employees on the stayed claims. The essential<br />
question was whether the confirmed arbitral award precluded the employees from pursuing the<br />
stayed claims. The district court decided that the essence of the stayed claims was litigated<br />
during the arbitration and entered judgment against the employees. The employees appealed,<br />
arguing that investment firm’s parent was named in the lawsuit but was not a party to the<br />
arbitration and, as a result, the arbitral panel did not decide the employees’ claims against the<br />
parent company.<br />
The U.S. Court of Appeals for the First Circuit affirmed the district court’s decision. The<br />
First Circuit looked at the scope of the arbitral award to determine whether the claims before the<br />
arbitration panel and the arbitral award itself encompassed the federal stayed claims. The court<br />
concluded that the scope of the stayed claims were the same as the arbitrated claims because the<br />
same underlying conduct was the basis for both claims. The court relied on the fact that (1) the<br />
arbitrators stated they were resolving all claims between the parties; (2) the employees argued<br />
that the claims could be fully resolved without adding the investment firm’s parent to the matter,<br />
because the parent was liable under an alter ego theory and would be subject to the award<br />
without being formally added as a party; (3) the arbitrators’ case summary unambiguously<br />
included the types of claims stayed in federal court; and (4) the arbitrators refused to amend the<br />
award to exclude the investment firm’s parent company. Moreover, because the final arbitral<br />
award did not specify the basis for the amounts awarded, the court could not conclude that the<br />
award excluded damages for the stayed claims. The court noted that the employees could have<br />
pursued many different avenues for clarifying any ambiguity in the award, but instead sought a<br />
“second bite at the apple” by having the district court confirm the award and then relying on the<br />
ambiguity to pursue their stayed federal court claims. The court refused to play this game and<br />
ultimately denied the employees’ appeal under the doctrine of res judicata, explaining that the<br />
judgment confirming the arbitral award had the same force and effect as any other judgment and<br />
that the employees had a full opportunity to litigate the stayed claims before the arbitrators. The<br />
First Circuit affirmed summary judgment on the stayed federal court claims in favor of the<br />
investment firm.<br />
Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011)<br />
The Securities and Exchange Commission brought suit against an investment company<br />
and related entities for allegedly perpetrating a massive Ponzi scheme. The district court<br />
R.<br />
449
appointed a receiver to marshal the assets of the estate. The receiver subsequently obtained a<br />
preliminary injunction against numerous former financial advisors and employees of the<br />
investment company, freezing the accounts of those individuals pending the outcome of trial. In<br />
an interlocutory appeal, the employee defendants contended that the district court should have<br />
granted their motion to compel arbitration, and that the district court had no power to grant the<br />
preliminary injunction when the motion to compel arbitration was pending. In a 2010 opinion,<br />
the U.S. Court of Appeals for the Fifth Circuit disagreed, holding that the district court acted<br />
within its power when it considered and decided the motion for preliminary injunction before<br />
deciding the outstanding motion to compel arbitration. In addition, the Fifth Circuit held that the<br />
district court did not abuse its discretion in issuing the preliminary injunction. The receiver had<br />
a substantial likelihood of success on the merits on its claim pursuant to the Texas Uniform<br />
Fraudulent Transfer Act (TUFTA), since there was sufficient evidence to support the district<br />
court’s finding that the investment company entities constituted a Ponzi scheme and had paid the<br />
defendant advisors and employees from the alleged Ponzi scheme. The receiver would likely<br />
suffer irreparable harm in the absence of a preliminary injunction against the employee<br />
defendants, because the accounts of those individuals would be frozen pending the outcome of<br />
trial. If the defendants were to dissipate or transfer those assets out of the jurisdiction, the<br />
district court would not be able to grant an effective remedy for the fraudulent transfers or<br />
obligations. Furthermore, the receiver’s claims were not subject to arbitration in any event,<br />
because the receiver was suing on behalf of estate creditors, who are not party to any alleged<br />
arbitration agreements. Thus, the Fifth Circuit affirmed and remanded the matter back to the<br />
district court for further proceedings.<br />
In 2011, the Fifth Circuit withdrew its 2010 opinion and replaced it. The Fifth Circuit<br />
simply adopted and reiterated its 2010 opinion as to all issues except for the motion to compel<br />
arbitration. For that issue, the Fifth Circuit concluded that it did not have jurisdiction to decide<br />
the motion because the district court had not decided the motion in the first instance. Because<br />
the district court had not issued a final and appealable order, the Fifth Circuit lacked jurisdiction<br />
to decide the motion to compel. The Fifth Circuit continued to add that, even if the district court<br />
had ruled on a motion to compel arbitration, such a ruling is not a final judgment ending the<br />
litigation on the merits and is thus not appealable. The Fifth Circuit remanded the matter back to<br />
the district court for a ruling on the motion to compel arbitration.<br />
Wanken v. Wanken, 2011 WL 4495597 (5th Cir. Sept. 29, 2011).<br />
After a sales associate was terminated from an advisory firm owned by his father, he filed<br />
for arbitration with FINRA. The sales associate alleged that he was wrongfully terminated, but<br />
the arbitral panel dismissed all of his claims. Still disgruntled, the associate sued the firm and his<br />
father to vacate or modify the arbitration award. The firm and father cross-moved to confirm the<br />
award. A magistrate judge recommended confirming the arbitration award and the district court<br />
agreed. The associate appealed. The U.S. Court of Appeals for the Fifth Circuit affirmed the<br />
district court’s decision to confirm the award. The Fifth Circuit found the associate’s allegations<br />
of arbitral fraud and bias to be merely conclusory and lacked support in the record. The<br />
associate’s arguments that the arbitrators failed to support his efforts to obtain complete<br />
R.<br />
450
discovery responses was also meritless because his father and the firm produced over 6,000<br />
pages of documents in response to over 250 discovery requests. The court also held that the<br />
arbitral panel did not exceed its authority under the FAA by failing to inform the associate that<br />
he was entitled to a continuance or by issuing a “gag” order that prevented him from<br />
communicating with the media. The court decided that nothing in the record supported vacatur<br />
and affirmed the district court’s decision to confirm the arbitration award.<br />
Aviles v. Charles Schwab & Co., Inc., 435 Fed. Appx. 824 (11th Cir. 2011).<br />
A securities broker resigned from his employment with a broker-dealer. The brokerdealer<br />
brought an arbitration action against the broker, alleging that he was improperly soliciting<br />
the broker-dealer’s clients. The arbitral panel entered an award in favor of the broker-dealer.<br />
The broker filed an action in state court to vacate the award. The broker-dealer removed the case<br />
to federal court and filed a motion to confirm the award. The district court confirmed the award<br />
and the broker appealed. The broker argued that the arbitrators refused to hear material<br />
evidence, refused to postpone the hearing despite sufficient cause shown, rendered an award that<br />
was in manifest disregard of the law, and suffered from bias. In dismissing the broker’s<br />
arguments, the appellate court emphasized the significant discretion that arbitrators have in<br />
conducting an arbitration. The appellate court also ruled that the broker failed to present any<br />
evidence of bias. The broker presented one affidavit allegedly proving bias, but the affidavit did<br />
not indicate that the arbitrator was predisposed to find in favor of the broker-dealer based, for<br />
example, on prior dealings or relationships that required disclosure. Because the broker failed to<br />
present sufficient evidence to support his arguments of vacatur, the appellate court affirmed the<br />
district court’s decision to confirm the award.<br />
Hook v. UBS Fin. Servs., Inc., 2011 WL 1741997 (D. Conn. May 4, 2011)<br />
A financial advisor filed suit to enjoin his former employer from enforcing a promissory<br />
note. The employer moved to compel arbitration based on an arbitration agreement in the<br />
promissory note. The financial advisor argued that the promissory note as a whole was not valid,<br />
and, as such, he should not be bound by the arbitration provision therein. The court disagreed<br />
with the financial advisor, explaining that he failed to adequately challenge the validity of the<br />
arbitration provision by contesting the validity of the contract as a whole. The validity of the<br />
arbitration provision must be specifically challenged. Alternatively, the financial advisor argued<br />
that his claims fell outside the scope of the arbitration provision because the arbitration provision<br />
required the parties to arbitrate any disputes arising from the promissory note. The court held<br />
that even the financial advisor’s claims for conversion and statutory theft, which were based on<br />
the employer’s freezing various accounts after his resignation, were collateral matters that were<br />
encompassed by the promissory note’s broad arbitration provision. The arbitration clause had an<br />
exception for injunctive relief, but the court found this issue to be moot because the financial<br />
advisor’s complaint failed to adequately plead his right to injunctive relief. Accordingly, the<br />
R.<br />
R.<br />
451
court found that an arbitral panel was responsible for determining all of the financial advisor’s<br />
remaining claims and it dismissed the action for arbitration.<br />
Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp.2d 445 (S.D.N.Y. 2011).<br />
A stock broker, on behalf of himself and other similarly situated stock brokers, sued a<br />
brokerage firm for its alleged failure to pay overtime, commissions, and timely wages.<br />
Additionally, the stock broker asked the court to designate his claims as a collective action<br />
pursuant to the Fair Labor Standards Act (“FLSA”) and as a class action under the federal rules<br />
for his state law claims. The brokerage firm moved to dismiss or, alternatively, to compel<br />
arbitration based on an arbitration clause in the broker’s employment agreement. The stock<br />
broker argued that his claims fell within an exception of the FINRA arbitration rules, which<br />
prohibited arbitration of class action claims. The court agreed that the broker’s state law class<br />
action claims fell within the exception, but held that the broker’s FLSA collective action was<br />
distinguishable from a class action and not subject to the exception to arbitration. The court<br />
focused on a key distinction between class actions and collective actions: that members must optin<br />
to collective actions whereas class actions require class members to opt-out. The court also<br />
noted that every other court to address whether an FLSA claim is arbitrable under the FINRA<br />
rules has found in favor of arbitrability. As a result, the court compelled the parties to submit to<br />
arbitration on the broker’s FLSA claims and stayed the proceedings on the class action claim<br />
while arbitration was pending.<br />
Bayme v. GroupArgent Secs., LLC, 2011 WL 2946718 (S.D.N.Y. July 19, 2011)<br />
A former employee brought a FINRA arbitration action against a broker-dealer for<br />
damages arising out of claims for compensation and expenses paid during his employment. The<br />
broker-dealer defended the arbitration on the basis that FINRA lacked jurisdiction to hear the<br />
matter because the broker-dealer was not the entity for which the employee had worked. After a<br />
hearing on the issue, the arbitral panel determined that it lacked jurisdiction over the matter and<br />
dismissed the case. The employee sought to vacate the award, arguing that FINRA did not have<br />
the authority to decide the question of jurisdiction. The court denied the employee’s petition<br />
because the arbitration agreement gave the panel the right to consider the issue of arbitrability<br />
and, in considering that issue, the arbitral panel acted properly. The court considered the facts<br />
that the arbitral panel held a hearing, allowed both sides to argue, and evaluated testimonial and<br />
documentary evidence in deciding that the panel properly decided the issue of arbitrability. Even<br />
though the Director of FINRA gave an opinion that FINRA had jurisdiction, the court ruled that<br />
the Director’s opinion was not binding. The court confirmed the award because the record<br />
supported the panel’s decision.<br />
R.<br />
R.<br />
452
R.<br />
Frankel v. McDonough, 2011 WL 5059181 (S.D.N.Y. Oct. 24, 2011)<br />
Arbitrators found a broker and her employer jointly liable to investors for fraud. The<br />
broker appealed the decision to the New York Supreme Court on the basis that the arbitral panel<br />
erred in awarding joint and several liability to the investors. In confirming the award, the New<br />
York Supreme Court noted that the parties fully arbitrated the issue of joint and several liability<br />
and the Appellate Division added that the investors’ allegations substantially related to the<br />
broker’s own misconduct, rendering an award of joint and several liability appropriate. After the<br />
arbitration and related appeals concluded, the broker sued her former attorney and law firm for<br />
legal malpractice and breach of fiduciary duty. The broker alleged that her attorney committed<br />
malpractice by failing to take action to limit the investors’ joint liability claim because the<br />
investors never sought relief against the broker. The broker’s former attorney moved to dismiss<br />
the case and the court granted the motion. The court relied heavily on the fact that the investors’<br />
claim against the broker’s employer were derivative of her own misconduct in dismissing the<br />
broker’s claims for negligence. Looking to this fact, the court found that the broker could not<br />
allege negligence based upon the attorney’s failure to challenge the joint liability claim because<br />
the broker could have been individually liable. This fact also evidenced the mutual interests<br />
between the broker and her employer, negating her claim that the attorney should have disclosed<br />
a conflict of interest arising from their joint defense and that the attorney failed to adequately<br />
represent her interests as a result of that conflict. The court further found that the broker failed to<br />
plead that the lawyer’s actions caused the award against her because the investors’ statement of<br />
claim and the liberal rules for amending pleadings clearly included individual liability against the<br />
broker. As such, an allegation that her attorney was negligent in not challenging the arbitral<br />
panel’s right to issue an award against her was unfounded. Because the claim for legal<br />
malpractice was dismissed, the court was bound by state law to dismiss the breach of fiduciary<br />
duty claim. The court also denied the broker leave to re-plead because the record clearly<br />
established that the arbitral award was entered against the broker as a result of her own<br />
misconduct, not from a deficiency in representation. Accordingly, the court dismissed the<br />
broker’s complaint in its entirety.<br />
Reljic v. Tullett Prebon Americas Corp., 2011 WL 2491342 (D.N.J. June 21, 2011)<br />
A broker-dealer moved to compel arbitration of its former broker’s claims of gender<br />
discrimination, sexual harassment, and retaliation. The firm argued that the claims should be<br />
arbitrated pursuant to an arbitration agreement in the broker’s employment agreement. The<br />
district court agreed. The broker argued that the arbitration clause should not be enforced<br />
because it interfered with her right to pursue a claim with the Equal Employment Opportunity<br />
Commission (“EEOC”). The district court found that the arbitration clause did not interfere with<br />
the broker’s EEOC rights because the broker still could – and did –file a charge with the EEOC.<br />
The arbitration clause only affected the remedies available to the broker after the EEOC’s<br />
determination: the broker was limited to appealing the EEOC’s decision in an arbitral forum<br />
instead of in federal court. This limitation on remedies was not enough to affect the<br />
R.<br />
453
enforceability of the arbitration agreement. The broker knowingly and voluntarily waived her<br />
rights to a jury trial by signing the agreement because the arbitration clause in the agreement was<br />
unambiguous, and it clearly specified that the broker’s discrimination claims were arbitrable<br />
matters. The court also dismissed the broker’s argument that the arbitration clause was<br />
unconscionable. The contract was not procedurally unconscionable in light of the broker’s<br />
educational and professional background and the broker’s failure to provide evidence that she<br />
was precluded from carefully reviewing the contract or negotiating its terms. The contract was<br />
not substantively unconscionable because the contract was not one-sided; both parties were<br />
required to arbitrate disputes under the arbitration clause. The district court also noted that the<br />
contract was not substantively unconscionable because the arbitral panel could award any relief<br />
available in a court of law. As a result, the district court compelled arbitration of the broker’s<br />
claims, including claims against the broker’s coworkers, who were not subject to the<br />
employment agreement. Even though the broker’s coworkers were not signatories, they were<br />
employees of one of the parties to the contract. As a result, the court decided that the broker’s<br />
employment contract fairly required her to arbitrate those claims as well.<br />
Walker v. Morgan Stanley Smith Barney LLC, 2011 WL 1603490 (E.D. Pa. Apr. 28, 2011).<br />
A broker-dealer terminated an investment counselor’s employment. The investment<br />
counselor sued his former employer in state court, alleging that the broker-dealer had denied him<br />
the opportunity to gather his personal belongings before escorting him out of the office. The<br />
employer removed the case to federal court and filed a motion to compel arbitration. The<br />
arbitration agreement required the investment counselor to arbitrate “any controversy or claim<br />
arising out of or in any way relating to Employee’s employment … or termination thereof.” The<br />
investment counselor opposed the motion, arguing that the relief he sought was outside the scope<br />
of the arbitration clause. Specifically, he argued that his claims concern his personal property<br />
and, as such, the claims do not relate to his employment. Based on its review of the complaint,<br />
the court held that the claims fell within the scope of the arbitration agreement, which it noted<br />
was “particularly broad.” The investment counselor’s complaint alleged that his personal<br />
belongings included employment-related materials. For example, he sought return of his<br />
personal computer, which contained a database of prospective clients. The court decided that<br />
these claims fell squarely within the scope of the arbitration agreement and granted the brokerdealer’s<br />
motion to compel arbitration.<br />
Alvarado v. Wells Fargo Advisors, LLC, 2011 WL 677354 (S.D. Tex. Feb. 15, 2011)<br />
After a financial advisor was terminated from her employment with a brokerage firm, she<br />
and the firm had a dispute regarding commissions and payment on a promissory note the<br />
financial advisor signed during her employment. The parties arbitrated their dispute and the<br />
arbitral panel issued an award in favor of the brokerage firm. The financial advisor moved to<br />
vacate the arbitration award on the basis that the award was ambiguous. First, she argued that<br />
the arbitration award did not specifically address one of her defenses, and, as such, the panel<br />
R.<br />
R.<br />
454
must not have ruled on that defense. The court dismissed this argument because the award’s<br />
broad language suggested that the panel considered all defenses and rejected them in awarding<br />
damages to the brokerage firm, especially since the defense was discussed during the<br />
proceedings. Second, the financial advisor argued that the arbitration award was ambiguous<br />
because it did not state whether her previous payments should be applied to the firm’s damages<br />
award. The court dismissed this argument based on the terms of the arbitral award. The award<br />
stated that the financial advisor “shall pay” the damages to the firm, which mean that the<br />
arbitrators intended the award to be paid in the future. Also, the court noted that the damages<br />
award was less than the difference between the sum sought by the firm and the sums the<br />
financial advisor had already paid, so the arbitrators could have easily subtracted the previously<br />
paid amount from the award in favor of the firm. As a result, the court concluded that the<br />
arbitral award was final and definite because it resolved all the disputed issues. The court<br />
confirmed the arbitral award and denied the financial advisor’s motion to vacate.<br />
In re QA3 Fin. Corp., 2011 WL 2678591 (Bankr. D. Neb. July 7, 2011)<br />
Former clients of a broker-dealer filed arbitration claims against the broker-dealer and its<br />
employees. After the broker-dealer filed for bankruptcy, it sought to have its automatic stay<br />
extended to its employees in certain claims. The court granted the extension of the automatic<br />
stay because a judgment against the employees would effectively be a judgment against the<br />
debtor, the broker-dealer. The court refused to extend the automatic stay to the employees on<br />
claims against them personally because those claims would not extend to the debtor.<br />
Shaffer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 779 F. Supp.2d 1085 (N.D. Cal. 2011).<br />
A financial advisor moved to confirm an arbitration award entered in his favor and<br />
against his former employer. The former employer, a broker-dealer, sought to vacate the award<br />
because the arbitrator had hired two research attorneys for assistance in deciding the case. The<br />
court determined that the arbitrator not acted improperly and confirmed the award. Specifically,<br />
the court found that hiring the research attorneys did not constitute arbitrator misconduct because<br />
state statutory law did not require the arbitrator to disclose its legal research sources nor the use<br />
of non-expert attorneys. Further, the broker-dealer had not shown any evidence that the research<br />
attorneys had any conflicts of interest or were otherwise biased. The arbitrator gave the brokerdealer<br />
the benefit of its contractual bargain by making an independent decision and obeying the<br />
relevant statutes and standards. The court noted that even if the broker-dealer established<br />
arbitrator misconduct, it waived its right to object on that ground by waiting to raise the issue<br />
until after the arbitrator issued its final decision, months after learning about the research<br />
attorneys. The court confirmed the arbitration award in favor of the financial advisor and<br />
corrected a miscalculation in the total sum. The court denied the employer’s motion to vacate.<br />
R.<br />
R.<br />
455
R.<br />
Wells Fargo Advisors, LLC v. Shaffer, 2011 WL 2669479 (N.D. Cal. July 7, 2011).<br />
A broker-dealer brought a FINRA arbitration against its former employee to recover the<br />
balance of a forgivable loan. The arbitral panel found the promissory note for the loan to be<br />
procedurally and substantively unconscionable and dismissed the broker-dealer’s claims. The<br />
panel also recommended expunging the language in the employee’s Form U-5, which stated that<br />
he had charged an excessive fee and failed to forward a customer complaint to his supervisor.<br />
The broker-dealer brought an action to set aside the arbitral award and the employee moved to<br />
confirm the award and for attorneys’ fees. The court rejected the broker-dealer’s argument that<br />
the panel ignored California law in ruling that the terms of the promissory note were<br />
unconscionable and that it defamed the employee through the statements on the employee’s U-5.<br />
Because unconscionability is determined on a case-by-case basis, the court ruled that the brokerdealer<br />
was merely trying to reargue the facts. The court also ruled that the arbitrators acted<br />
properly in finding that the broker-dealer defamed the employee because there was a colorable<br />
basis for defamation and the FAA only gives the court a highly deferential standard of review for<br />
arbitral awards. As a result, the court confirmed the award. The court granted the employee’s<br />
motion for attorneys fees and costs because the one-sided attorneys’ fees provision in the<br />
promissory note was interpreted under California law to apply to any party to the contract.<br />
Shaffer v. Merrill Lynch, Pierce, Fenner, and Smith, Inc., 2011 WL 3047478 (N.D. Cal. July 25,<br />
2011)<br />
A financial advisor and his coworker had a wage dispute. A FINRA arbitration resolved<br />
the dispute in favor of the coworker. A month after the FINRA arbitration concluded, the<br />
financial advisor initiated an arbitration with another arbitration organization: Judicial<br />
Arbitration and Mediation Services, Inc. (“JAMS”). The arbitral panel at JAMS entered an award<br />
in favor of the financial advisor and against his former employer for unpaid compensation, which<br />
was confirmed by the district court. The financial advisor sued his former employer again,<br />
alleging gender discrimination, inter alia, arising out of the wage dispute with his coworker. The<br />
former employer filed a motion asking the court to hold that the findings of the FINRA<br />
arbitration were binding and could not be re-litigated in the gender discrimination lawsuit. The<br />
financial advisor filed a similar motion asking the court to hold that findings of the JAMS<br />
arbitration were binding.<br />
The court agreed with the former employer that the results of the FINRA arbitration had a<br />
preclusive effect, but held that the JAMS award did not. As an initial matter, the court<br />
determined that Pennsylvania law applied because the FINRA arbitration took place in<br />
Pennsylvania. The financial advisor had argued against the application of Pennsylvania law<br />
because California has a strong public policy against non-mutual collateral estoppel, which<br />
Pennsylvania law permits. The court dismissed the financial advisor’s argument and<br />
distinguished the California precedent that the financial advisor cited because the underlying<br />
arbitrations took place in California. Applying Pennsylvania law, the court reasoned that the<br />
R.<br />
456
FINRA award was entitled to full faith and credit, even though it was not confirmed, because it<br />
was a judicial proceeding with a final judgment on the merits. The issues that the employer<br />
sought to preclude – relating to the wage dispute with the financial advisor’s coworker – were<br />
fully litigated during the FINRA arbitration, and, even though the panel did not outline the basis<br />
for its award, the court could infer based on the circumstances that the panel decided the issues.<br />
The award was binding upon the financial advisor, who was a party to those proceedings. As a<br />
result, the court granted the former employer’s motion and held that the FINRA arbitration did<br />
preclude re-litigating certain issues. The court declined to find that the JAMS arbitration had a<br />
preclusive effect, however, because the issues that the financial advisor sought to preclude were<br />
not litigated during the JAMS arbitration. The arbitration related only to the financial advisor’s<br />
entitlement to deferred compensation, while the issues that the financial advisor sought to<br />
preclude related to the wage dispute with his coworker. The court found that issue preclusion<br />
was inappropriate because the former employer did not have a full and fair opportunity to litigate<br />
the issues relating to the wage dispute with the financial advisor’s coworker. The court refused<br />
to preclude the issues from the JAMS arbitration and denied the financial advisor’s motion.<br />
Lewis v. UBS Fin. Servs. Inc., 2011 WL 4727795 (N.D. Cal. Sept. 30, 2011).<br />
A financial advisor brought a putative class action in state court against his former<br />
employer, a broker-dealer. The financial advisor claimed that the broker-dealer’s administration<br />
of its recruiting bonuses violated California state law. After removing the case to federal court,<br />
the broker-dealer moved to compel arbitration based on five separate arbitration agreements: one<br />
in the financial advisor’s Form U-4, which he used to register as a securities advisor, two<br />
arbitration agreements in promissory notes for forgivable loans he received from the brokerdealer,<br />
and two employment agreements with arbitration clauses. The financial advisor argued<br />
that the case was not appropriate for arbitration under any of the five agreements because the<br />
agreements provide that the NASD or NYSE govern arbitration and neither of those entities<br />
exist. The financial advisor also argued that the case was not appropriate for arbitration because<br />
the arbitration agreements have class action waivers that are not enforceable under California<br />
law. The court disagreed with both of the financial advisor’s arguments. First, the court noted<br />
that one of the arbitration agreements specifically provided for FINRA arbitration and, even if it<br />
had not, the court could compel FINRA arbitration because FINRA is a successor entity to the<br />
NASD/NYSE. Second, the court found that a recent U.S. Supreme Court decision overruled the<br />
California precedent holding that class action waivers in arbitration agreements are<br />
unenforceable. Specifically, the court noted that AT&T Mobility v. Concepcion, 131 S.Ct. 1740<br />
(2011) expressly stated when state law prohibits arbitration of a category of claims, the FAA<br />
preempts state law. The court further held that all of the financial advisor’s claims were subject<br />
to arbitration, including his statutory claims and claim for injunctive relief. The court reasoned<br />
that the statutory claims could be arbitrated because he was able to pursue these claims to the<br />
same extent in arbitration as he could in court. The court reasoned that the injunctive relief claim<br />
was likewise subject to arbitration because, even though it was expressly excluded from<br />
arbitration under the terms of one promissory note, the injunctive relief the financial advisor<br />
sought was not based on that promissory note. The court dismissed the matter for arbitration<br />
based on these findings.<br />
R.<br />
457
R.<br />
Cortina v. Citigroup Global Markets, Inc., 2011 WL 3654496 (S.D. Cal. Aug. 19, 2011)<br />
A financial advisor sought an arbitration award for discrimination and harassment against<br />
his former employer, who filed a counterclaim to enforce a promissory note. The arbitral panel<br />
dismissed the financial advisor’s claim and entered an award in favor of his former employer.<br />
The financial advisor filed a petition to vacate the award in state court. The former employer<br />
removed the matter to federal court and cross-moved to confirm the award. The district court<br />
granted the former employer’s motion and confirmed the award. As an initial matter, the court<br />
had to decide whether the Federal Arbitration Act (“FAA”) applied because the FAA contained<br />
different standards for vacatur than state law. The arbitration agreement contained a choice of<br />
law provision electing to proceed under New York – not California, the forum state – law.<br />
Ultimately, instead of undergoing an analysis between New York and California law, the court<br />
applied the FAA because the promissory note incorporated the rules and regulations of the<br />
NASD and NYSE, which bears on interstate commerce and precedent held that choice of law<br />
provisions cannot trump the application of the FAA. The financial advisor argued that the award<br />
should be vacated because the arbitration panel did not clearly articulate its decision and he was<br />
entitled to a reasoned decision because statutory employment claims are subject to a more<br />
rigorous review. The court distinguished the precedent that the financial advisor relied upon,<br />
because the cases did not apply the FAA and, even if it did, those cases involved mandatory<br />
arbitration, whereas the financial advisor voluntarily submitted to arbitration in this matter. The<br />
court added that, regardless of the applicability of the case law, the arbitral award complied with<br />
it by revealing the essential findings and conclusions underlying the award. The financial<br />
advisor also argued that the award should be vacated because the panel denied his request for a<br />
continuance to obtain outstanding discovery responses. The court again disagreed with the<br />
financial advisor and found that the arbitral panel properly found that there was not sufficient<br />
cause nor a reasonable basis for a postponement, especially in light of the previous continuances<br />
the panel granted to the financial advisor. Next, the court dismissed the financial advisor’s<br />
argument that the award should be vacated because one of the arbitrators was not a specialist in<br />
employment law, because this is not a valid ground upon which to challenge an arbitral award.<br />
The court also dismissed the financial advisor’s claim that the arbitrator was biased because he<br />
had an ongoing relationship with banks, which the arbitrator disclosed before the arbitration.<br />
The financial advisor’s claim that the arbitrator was racially biased was unsupported by the<br />
record. Finally, the court disagreed with the financial advisor’s argument that the award should<br />
be vacated based on clear errors of law because the FAA does not provide vacatur of arbitration<br />
awards based on clear errors of law. Because there was no basis to vacate it, the court affirmed<br />
the arbitration award.<br />
458
Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 WL 855354 (D. Nev. Mar. 9,<br />
2011)<br />
A financial advisor and a broker-dealer executed an employment agreement in 2009.<br />
Contemporaneously, the financial advisor executed a Form U-4 to register with various<br />
regulatory organizations. Less than a year later, the broker-dealer terminated the financial<br />
advisor’s employment. The financial advisor sued the broker-dealer alleging that it had<br />
terminated his employment without cause and, thus, breached the parties’ employment<br />
agreement. The broker-dealer moved to compel arbitration pursuant to the terms of the<br />
arbitration clause in the Form U-4. The financial advisor opposed the motion, arguing that the<br />
employment agreement, which was executed on the same day as the Form U-4, does not require<br />
arbitration and contains a merger clause. The court determined that, although both facts about<br />
the employment agreement were true, the arbitration clause in the Form U-4 was still a valid<br />
agreement to arbitrate under which the court could compel arbitration. Moreover, the<br />
employment agreement was silent on the method of resolving disputes and accordingly, the court<br />
could infer that the Form U-4 was intended to answer how the parties were to resolve disputes.<br />
Once the court determined that the Form U-4 contained a valid arbitration agreement, it turned to<br />
whether the parties’ dispute fell within the scope of the arbitration clause. Pursuant to the<br />
arbitration clause, “members” and “associated persons” were required to arbitrate their disputes.<br />
The broker-dealer was a “member” because it was admitted to FINRA membership and the<br />
financial advisor was an “associated person” because he was a former member. The dispute<br />
arose out of their business activities because hiring, employment, and termination directly<br />
implicated some of the most fundamental aspects of the parties’ business relationship.<br />
Accordingly, the court stayed the proceedings pending arbitration and compelled the parties to<br />
arbitrate their dispute.<br />
Feller v. Wells Fargo Advisors, LLC, 2011 WL 3331265 (M.D. Fla. Aug. 3, 2011)<br />
A broker-dealer brought an arbitration action against its former employee, a financial<br />
advisor, seeking to recover the balance due on a promissory note for an outstanding loan. The<br />
financial advisor filed an action in state court seeking rescission of the promissory note, among<br />
other things. The broker-dealer removed the case to federal court and filed a motion to compel<br />
arbitration. The financial advisor conceded the validity of the arbitration clause in her<br />
promissory note, but argued that the claims were outside the scope of the agreement. The court<br />
found that the arbitration clause was broad, covering “any controversy arising out of this note,”<br />
and included the financial advisor’s claim for fraud in the inducement of the contract. Even if<br />
the claims fell outside the scope of the arbitration agreement in the promissory note, the court<br />
found that the parties would be required to arbitrate their claims pursuant to at least two other<br />
arbitration agreements: one in the financial advisor’s employment contract and one in the Form<br />
U-4 which the financial advisor signed to register with the NASD and others. Accordingly, the<br />
court stayed the case so that the parties could arbitrate their dispute.<br />
R.<br />
R.<br />
459
R.<br />
Bank of the Commonwealth v. Hudspeth, 714 S.E.2d 566 (Va. 2011).<br />
The former vice president of a bank’s affiliate sued the bank following his termination,<br />
alleging various compensation claims. The bank sought to compel arbitration of the vice<br />
president’s claims. Both the county court and the appellate court denied the bank’s motion to<br />
compel arbitration. The bank appealed to the Virginia Supreme Court. The bank argued the<br />
dispute must be arbitrated because the bank was either a “customer” or a “member” and because<br />
the former vice president was an associated person of a member. FINRA requires disputes to be<br />
arbitrated if the disputes arise from the business activities of a member and an associated person<br />
or if arbitration is requested by a customer. The vice president conceded that he was an<br />
associated person of a member, but asserted that the bank is neither a member firm nor a<br />
customer. As a matter of first impression, the Virginia Supreme Court held that the bank was not<br />
a member firm, but it was a customer entitled to compel arbitration of the vice president’s claim.<br />
The Virginia Supreme Court reasoned that one interpretation of the FINRA rules could consider<br />
anyone, including the bank, who receives investment and brokerage services and who is not a<br />
broker-dealer, to be a customer. Because the U.S. Supreme Court has stated that any doubts as<br />
to the scope of arbitrable issues should be resolved in favor of arbitration and the bank could be<br />
considered a customer, the Virginia Supreme Court ruled that the parties must resolve their<br />
dispute through arbitration.<br />
Wells Fargo Advisors, LLC v. Stifel Nicolaus, LLC, 2011 WL 4695369 (Cal. App. Ct. Oct. 7,<br />
2011).<br />
A financial advisor resigned from his employment and began working for a new branch<br />
of a different securities firm. His former assistant and three of his former coworkers joined the<br />
new branch as well. The former employer brought an arbitration action against the financial<br />
advisor and his new employer, alleging that they were stealing clients and employees and<br />
misappropriating trade secrets, among other things. The arbitral panel rejected all of the former<br />
employer’s claims and awarded the financial advisor and his new employer attorneys’ fees<br />
totaling nearly one million dollars. The district court confirmed the arbitral award. The former<br />
employer appealed. Initially, the court had to decide whether the California Arbitration Act<br />
(“CAA”) or the Federal Arbitration Act (“FAA”) specified the grounds for vacatur. The court<br />
concluded that California state arbitration law governed based on precedent holding that petitions<br />
to vacate arbitration awards filed in California courts are automatically governed by the CAA. In<br />
doing so, the court distinguished U.S. Supreme Court precedent set in Hall Street Associates,<br />
LLC v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008) (holding that Section 10 of FAA<br />
provides exclusive grounds for vacatur) because, according to the court, Hall Street only governs<br />
when the arbitration is governed solely by the FAA, typically pursuant to the terms of the<br />
agreement to arbitrate. Applying the CAA, the court held that the arbitral award should not be<br />
vacated due to exclusion of evidence nor due to the new employer’s failure to disclose<br />
documents. The former employer argued that the exclusion of two emails substantially<br />
prejudiced its rights, but the court disagreed. The court explained that the former employer<br />
R.<br />
460
failed to show that it was prejudiced by the decision to exclude the emails because the arbitral<br />
panel likely would not have attached enough weight to them to have produced a different result.<br />
The former employer also argued that the new employer’s failure to disclose a “recruiting log”<br />
deprived it of a fair hearing. Again, the court disagreed because the former employer failed to<br />
prove that the exclusion was prejudicial. Finally, the court dismissed the former employer’s<br />
claim that the award should be vacated because the panel erred in failing to specifically state that<br />
legal fees were limited to the trade secret misappropriation claim. The court explained that<br />
manifest disregard of the law is not a basis for vacatur under the CAA and that the former<br />
employer could not prove that the arbitrators exceeded their authority by merely alleging that the<br />
arbitrators failed to comply with a statute. Instead, arbitrators exceed their authority only when<br />
the arbitrator decides issues that were not submitted for decision. The court affirmed the district<br />
court’s judgment, confirming the arbitral award.<br />
Muthukamatchi v. Citigroup Global Markets, Inc., Docket No. 10-05322, 2011 WL 5025062<br />
(FINRA Oct. 9, 2011).<br />
A broker-dealer terminated an employee, who was also a client. The employee brought<br />
an arbitration action against the broker-dealer for its failure to disclose brokerage fees and to<br />
timely process the employee’s account transfer. The broker-dealer sought to expunge a nonparty’s<br />
registration record, which contained references to the arbitration and his wrongdoing in<br />
the incident underlying the arbitration. The arbitrator dismissed the employee’s claims in their<br />
entirety. The arbitrator recommended expungement as to the non-party, but, because the<br />
registration records belonged to a non-party, the arbitrator advised the broker-dealer to obtain<br />
confirmation of the arbitral award from a court before executing on the expungement directive.<br />
The arbitrator held that all of the employee’s claims were without merit and dismissed the case.<br />
R.<br />
461
TABLE OF AUTHORITIES<br />
Page<br />
380544 Canada, Inc. v. Aspen Technology, Inc.,<br />
2011 WL 4089876 (S.D.N.Y. Sept. 14, 2011)...................................................................... 141<br />
Abene v. Jaybar, LLC,<br />
2011 WL 2847436 (E.D. La. July 14, 2011). ....................................................................... 301<br />
Akamai Tech., Inc. v. Deutsche Bank AG,<br />
764 F. Supp. 2d 263 (D. Mass. 2011). .................................................................... 72, 128, 241<br />
Alack v. Jaybar, LLC,<br />
2011 WL 3626687 (E.D. La. Aug. 17, 2011). ...................................................................... 301<br />
Alki Partners, L.P. v. Vatas Holding GmbH,<br />
769 F. Supp. 2d 478 (S.D.N.Y. 2011)..................................................... 74, 133, 230, 243, 367<br />
Allen v. Devon Energy Holdings, L.L.C.,<br />
2011 WL 3208234 (Tex. App. Hous. (1st Dist.) July 28, 2011). ......................................... 310<br />
Alvarado v. Wells Fargo Advisors, LLC,<br />
2011 WL 677354 (S.D. Tex. Feb. 15, 2011) ........................................................................ 454<br />
Amacker v. Renaissance Asset Mgmt. LLC,<br />
657 F.3d 252 (5th Cir. 2011). ............................................................................................... 268<br />
Ambert v. Caribe Equity Group, Inc.,<br />
2011 WL 4626012 (D. Puerto Rico Sept. 30, 2011)....................................................... 28, 130<br />
Amorosa v. AOL Time Warner Inc.,<br />
2011 WL 310316 (2nd Cir. 2011)................................................................................... 79, 122<br />
Amorosa v. AOL Time Warner Inc.,<br />
409 Fed. App’x 412 (2d Cir. 2011)..................................................................................... 4, 95<br />
Amos v. Franklin Fin. Servs. Corp.,<br />
2011 WL 2111991 (M.D. Pa. May 26, 2011)....................................................................... 300<br />
AnchorBank, FSB v. Hofer,<br />
649 F.3d 610 (7th Cir. 2011). ......................................................................................... 65, 125<br />
Anderson v. Beland,<br />
2011 U.S. App. LEXIS 22209 (2d Cir. Nov. 3, 2011).......................................................... 331<br />
Anschutz Corp. v. Merrill Lynch & Co.,<br />
785 F. Supp. 2d 799 (N.D. Cal. 2011). ......................................................... 327, 328, 359, 373<br />
i
Antelis v. Freeman,<br />
2011 WL 6009609 (N.D. Ill. Nov. 30, 2011). ...................................................................... 156<br />
Antelis v. Freeman,<br />
799 F.Supp.2d 854 (N.D. Ill. 2011). ....................................................................... 90, 154, 325<br />
Anwar v. Fairfield Greenwich Ltd.,<br />
2011 WL 5282684 (S.D.N.Y. Nov. 2, 2011)........................................................ 222, 227, 355<br />
Applestein v. Medivation, Inc.,<br />
2011 WL 3651149 (N.D. Cal. Aug. 18, 2011). .............................................................. 92, 163<br />
Asensio v. SEC,<br />
2011 WL 6032933 (11th Cir. Dec. 5, 2011)......................................................................... 329<br />
Ashland Inc. v. Morgan Stanley & Co., Inc.,<br />
652 F.3d 333 (2d Cir. 2011).................................................................................................... 63<br />
Ashland, Inc. v. Oppenheimer & Co., Inc.,<br />
648 F.3d 461 (6th Cir. 2011). ......................................................................... 64, 124, 221, 225<br />
AT&T Mobility LLC v. Concepcion,<br />
131 S. Ct. 1740 (2011).......................................................................................................... 330<br />
Atkinson, MD v. Morgan Asset Mgmt., Inc.,<br />
2011 WL 3926376 (6th Cir. Sept. 8, 2011). ......................................................................... 207<br />
Aubrey v. Barlin,<br />
2011 U.S. Dist. LEXIS 15332 (W.D. Tex. Feb. 16, 2011)................................................... 252<br />
Aventa Learning, Inc. v. K12, Inc.,<br />
2011 WL 5438960 (W.D. Wash. Nov. 8, 2011)....................................................................... 2<br />
Aviles v. Charles Schwab & Co., Inc.,<br />
435 Fed. Appx. 824 (11th Cir. 2011)............................................................................ 349, 451<br />
Bachman v. A.G. Edwards, Inc.,<br />
344 S.W.3d 260 (Mo. Ct. App. 2011)................................................................................... 316<br />
Backus v. Conn. Cmty. Bank, N.A.,<br />
2011 WL 2119240 (D. Conn. May 27, 2011)....................................................................... 209<br />
Backus v. Conn. Cmty. Bank, N.A.,<br />
2011 WL 2183984 (D. Conn. March 30, 2011).................................................................... 209<br />
Bacon v. Stiefel Labs., Inc.,<br />
275 F.R.D. 681 (S.D. Fla. 2011)........................................................................................... 366<br />
ii
Baldwin v. Cavett,<br />
2011 U.S. Dist. LEXIS 117755 (E.D. Tex. Sept. 12, 2011). ................................................ 302<br />
Banco Indus. De Venezuela C.A., Miami Agency v. De Saad,<br />
68 So.3d 895 (Fla. 2011)....................................................................................................... 318<br />
Bang v. Acura Pharms., Inc.,<br />
2011 WL 91099 (N.D. Ill. Jan. 11, 2011)............................................................................. 186<br />
Bank of the Commonwealth v. Hudspeth,<br />
714 S.E.2d 566 (Va. 2011).................................................................................................... 460<br />
Barnard v. Verizon Communications, Inc.,<br />
2011 WL 294027 (E.D. Pa. Jan. 31, 2011)........................................................................... 149<br />
Barnard v. Verizon Communications, Inc.,<br />
2011 WL 5517326 (3d Cir. Nov. 14, 2011)............................................................ 96, 124, 351<br />
Basis Yield Alpha Fund v. Goldman Sachs Group, Inc.,<br />
798 F.Supp.2d 533 (S.D.N.Y. 2011)....................................................................................... 96<br />
Baxi v. Ennis Krupp & Assocs., Inc.,<br />
2011 WL 3898034 (N.D. Ill. Sept. 2, 2011). ........................................................................ 305<br />
Bayme v. GroupArgent Secs., LLC,<br />
2011 WL 2946718 (S.D.N.Y. July 19, 2011) ....................................................................... 452<br />
BCJJ, LLC v. Lefevre,<br />
2011 WL 1296682 (M.D.Fla. Mar. 31, 2011) ...................................................................... 174<br />
Beaman v. Barth,<br />
2011 Bankr. LEXIS 819 (E.D.N.C. Mar. 2, 2011) ............................................................... 301<br />
Bear Stearns & Co., Inc. v. Int’l Capital & Mgmt. Co., LLC,<br />
926 N.Y.S.2d 826 (N.Y. Sup. Ct. 2011) ............................................................................... 316<br />
Bello v. Chase Home Finance,<br />
2011 WL 133351 (S.D. Cal. 2011)......................................................................................... 82<br />
Benincasa v. Lafayette Life Ins. Co.,<br />
2011 WL 5967300 (D. Minn. Nov. 29, 2011). ..................................................................... 309<br />
Bensinger v. Denbury Res. Inc.,<br />
2011 WL 3648277 (E.D.N.Y. Aug. 17, 2011)........................................................................ 13<br />
Bensley v. FalconStor Software, Inc.,<br />
2011 WL 3849541 (E.D.N.Y. Aug. 29, 2011)...................................................................... 177<br />
iii
Berman v. Morgan Keegan & Co.,<br />
2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011) ...................................................... 226, 228, 271<br />
Besinger v. Denbury Resources Inc.,<br />
2011 U.S. Dist. LEXIS 91905 (E.D.N.Y., Aug. 11, 2011)..................................................... 99<br />
Billitteri v. Sec. Am, Inc.,<br />
2011 WL 3586217 (N.D. Tex. Aug 4, 2011).......................................................................... 39<br />
Black v. Cincinnati Fin. Corp.,<br />
2011 U.S. Dist. LEXIS 46852 (S.D. Ohio 2011).................................................................. 105<br />
Board of Trustees of the City of Ft. Lauderdale General Employees’ Retirement System<br />
v. Mechel OAO,<br />
2011 WL 3502016 (S.D.N.Y. Aug. 9, 2011)................................................................ 140, 247<br />
Bobrowski v. Red Door Group,<br />
2011 WL 3555712 (D. Ariz. Aug. 11, 2011)........................................................................ 303<br />
Borsellino v. Putnam,<br />
2011 WL 6090694 (Ill. App. 1st Dist. Dec. 2, 2011) ........................................................... 227<br />
Botton v. Ness Techs., Inc.,<br />
2011 WL 3438705 (D.N.J. Aug. 4, 2011). ........................................................................... 376<br />
Bourienne v. Calamos,<br />
2011 WL 3421559 (N.D. Ill. Aug. 4, 2011). ........................................................................ 215<br />
Bowler v. Green Tree Servicing, LLC,<br />
2011 WL 320398 (E.D. Cal. Jan. 28, 2011) ........................................................................... 44<br />
Branch v. Sicker,<br />
2011 U.S. Dist. LEXIS 19392 (N.D. Ga. Feb. 28, 2011) ..................................................... 335<br />
Brecher v. Citigroup Inc.,<br />
2011 WL 5525353 (S.D.N.Y. Nov. 14, 2011)........................................................................ 37<br />
Brecher v. Citigroup, Inc.,<br />
797 F. Supp. 2d 354 (S.D.N.Y. 2011)................................................................................... 136<br />
Brooks v. Transamerica Fin. Advisors,<br />
57 So. 3d 1153 (La. Ct. App. 2011)...................................................................................... 233<br />
Brown v. Calamos,<br />
2011 WL 5505375 (7th Cir. Nov. 10, 2011)......................................................................... 208<br />
Brown v. Schwartzberg,<br />
2011 WL 5599214 (M.D. La. Nov. 16, 2011) ...................................................................... 151<br />
iv
Broyles v. Cantor Fitzgerald & Co.,<br />
2011 WL 4737197 (M.D. La. Sept. 14, 2011)...................................................................... 214<br />
Burgraff v. Green Bankshares, Inc.,<br />
2011 WL 613281 (E.D. Tenn. Feb. 11, 2011) ...................................................................... 185<br />
Busacca v. SEC,<br />
2011 U.S. App. LEXIS 25933 (11th Cir. Dec. 28, 2011)..................................................... 283<br />
Camofi Master LDC v. Riptide Worldwide Inc.,<br />
2011 U.S. Dist. LEXIS 31237 (S.D.N.Y. Mar. 23, 2011) .................................................... 247<br />
Campbell v. Castle Stone Homes, Inc.,<br />
2011 WL 902637 (D. Utah Mar. 15, 2011) ............................................................................ 48<br />
Canson v. WebMD Health Corp.,<br />
2011 WL 5331712 (S.D.N.Y. Nov. 7, 2011)........................................................................ 182<br />
Carbon Capital Mgmt., LLC v. Am. Express Co.,<br />
932 N.Y.S.2d 488 (N.Y. App. Div. 2011) ............................................................................ 328<br />
Casula v. AthenaHealth, Inc,<br />
2011 WL 45661155 (D. Mass. Sept. 30, 2011) .................................................................... 129<br />
Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial Corp.,<br />
793 F. Supp. 2d 1138 (C.D. Cal. 2011) .......................................................................... 68, 165<br />
Charles Schwab Corp. v. Bank of Am. Sec. LLC,<br />
2011 WL 864978 (N.D. Cal. Mar. 11, 2011)........................................................................ 374<br />
Charles Schwab Corp. v. BNP Paribas Sec.,<br />
2011 WL 724696 (N.D. Cal. Feb. 23, 2011) ........................................................................ 373<br />
Charles Schwab Corp. v. J.P. Morgan Sec. Inc.,<br />
2011 WL 1642459 (N.D. Cal. May 2, 2011).......................................................................... 45<br />
Chau v. Aviva Life and Annuity Co.,<br />
2011 WL 1990446 (N.D. Tex. May 20, 2011) ..................................................................... 357<br />
Chechelle v. Sheetz,<br />
2011 U.S. Dist. LEXIS 97489 (S.D.N.Y., Aug. 29, 2011)................................................... 114<br />
Cianci v. Sentaurus Fin.,<br />
2011 Cal. App. Unpub. LEXIS 3346 (May 5, 2011)............................................................ 238<br />
Citibank, N.A. v. Franco,<br />
2011 U.S. Dist. LEXIS 150741 (S.D.N.Y. Dec. 29, 2011) .................................................. 333<br />
v
Citigroup Smith Barney v. Henderson,<br />
241 Ore. App. 65 (Or. Ct. App. 2011). ................................................................................. 338<br />
City of Ann Arbor Employees’ Retirement System v. Sunoco Products Co.,<br />
2011 WL 5041367 (D.S.C. Oct. 19, 2011). .............................................................. 78, 88, 198<br />
City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp.,<br />
632 F.3d 751 (1st Cir. 2011)................................................................................................. 121<br />
City of Livonia Employees’ Retirement System v. The Boeing Company,<br />
2011 WL 824604 (N.D. Ill. Mar. 7, 2011)............................................................................ 155<br />
City of Marysville General Employees Retirement System v. Nighthawk Radiology<br />
Holdings, Inc.,<br />
2011 WL 4584778 (D. Idaho Sept. 12, 2011)....................................................................... 170<br />
City of Monroe Employees’ Retirement System v. Hartford Financial Services Group,<br />
Inc.,<br />
2011 WL 4357368 (S.D.N.Y. Sept. 19, 2011)...................................................................... 141<br />
City of New Orleans Employees’ Retirement System v. Private Bankcorp, Inc.,<br />
2011 WL 5374095 (N.D. Ill. Nov. 3, 2011) ............................................................. 18, 41, 156<br />
City of Omaha v. CBS Corporation,<br />
2011 WL 2119734 (S.D.N.Y. May 24, 2011) ...................................................................... 140<br />
City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc.,<br />
637 F.3d 169 (2d Cir. 2011).......................................................................................... 319, 350<br />
City of Pontiac General Employees Retirement System v. Schweitzer-Maudit<br />
International, Inc.,<br />
806 F. Supp. 2d 1267 (N.D. Ga. 2011)................................................................................. 175<br />
City of Roseville Employees Ret. Sys. v. Horizon Lines, Inc.,<br />
2011 U.S. App. LEXIS 17701 (3d Cir. June 23, 2011) ........................................................ 234<br />
City of Roseville Employees’ Retirement Sys. v. EnergySolutions, Inc.,<br />
2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011)............................................ 15, 35, 77, 143, 195<br />
City of Roseville Employees’ Retirement Sys. v. Horizon Lines, Inc,<br />
2011 WL 3695897 (3d Cir. Aug. 24, 2011).......................................................................... 123<br />
City of Roseville Employees’ Retirement Sys. v. Textron, Inc.,<br />
2011 WL 3740768 (D.R.I. Aug. 24, 2011)........................................................................... 130<br />
Clifford v. Morgan Keegan & Co., Inc.,<br />
2011 WL 5025045 (FINRA Oct. 11, 2011) (Pieroni, Arb.) ................................................... 24<br />
vi
Cobalt Multifamily Investors I, LLC v. Arden,<br />
2011 WL 4542734 (S.D.N.Y Sept. 30, 2011)......................................................................... 36<br />
Commonwealth of Pa. Pub. Sch. Emp. Ret. Sys. v. Citigroup, Inc.,<br />
2011 WL 1937737 (E.D. Pa. May 20, 2011)........................................................................ 370<br />
Connecticut Retirement Plans and Trust Funds v. Amgen Inc.,<br />
660 F.3d 1170 (9th Cir. 2011). ....................................................................................... 66, 362<br />
Conwill v. <strong>Greenberg</strong> <strong>Traurig</strong>, <strong>LLP</strong>,<br />
2011 WL 1103728 (E.D. La. Mar. 22, 2011). ...................................................................... 302<br />
Coquina Investments v. Rothstein,<br />
2011 WL 4971923 (S.D. Fla. Oct. 19, 2011)........................................................................ 304<br />
Cortina v. Citigroup Global Markets, Inc.,<br />
2011 WL 3654496 (S.D. Cal. Aug. 19, 2011) ...................................................................... 458<br />
Costa v. Carambola Partners, LLC,<br />
2011 WL 397949 (M.D. Fla. Feb. 4, 2011) ............................................................................ 49<br />
Cumberland & Ohio Co. of Tex. v. Goff,<br />
2011 U.S. Dist. LEXIS 52897 (M.D. Tenn. May 17, 2011)................................................. 253<br />
Curry v. Hansen Medical, Inc.,<br />
2011 WL 3741238 (N.D. Cal. Aug. 25, 2011). ...................................................... 92, 163, 203<br />
Darocy v. Abildtrup,<br />
345 S.W.3d 129 (Tex. App. 2011)........................................................................................ 264<br />
Davis v. Duncan Energy Partners L.P.,<br />
801 F. Supp. 2d 589 (S.D. Tex. 2011). ................................................................................. 377<br />
Dean v. China Agritech, Inc.,<br />
2011 WL 5148598 (C.D. Cal. Oct. 27, 2011)......................................................... 20, 168, 258<br />
Department of Enforcement v. ACAP Financial, Inc.,<br />
Disciplinary Proceeding No. 2007008239001, 2011 FINRA Discip. LEXIS 32 (OHO,<br />
May 3, 2011)......................................................................................................................... 396<br />
Department of Enforcement v. AIS Financial, Inc.,<br />
Disciplinary Proceeding No. 2008012169101, 2011 FINRA Discip. LEXIS 24,<br />
(OHO, March 3, 2011).......................................................................................................... 397<br />
Department of Enforcement v. Gallagher,<br />
Disciplinary Proceeding No. 2008011701203, 2011 FINRA Discip. LEXIS 40 (OHO<br />
June 13, 2011)....................................................................................................................... 395<br />
vii
Department of Enforcement v. Hedge Fund Capital Partners LLC,<br />
Disciplinary Proceeding No. 2006004122402, 2011 FINRA Discip. LEXIS 20 (OHO,<br />
Jan. 26, 2011)........................................................................................................................ 397<br />
Department of Enforcement v. Max International <strong>Broker</strong>-<strong>Dealer</strong> Corp.,<br />
Disciplinary Proceeding No. 20070072538-03, 2011 FINRA Discip. LEXIS 58<br />
(OHO, Sept. 1, 2011). ........................................................................................................... 394<br />
Department of Enforcement v. Midas Securities, LLC,<br />
Complaint No. 2005000075703, 2011 FINRA LEXIS 71, (NAC, March 3, 2011)............. 393<br />
Department of Enforcement v. Otalvaro,<br />
Disciplinary Proceeding No. 2008011725901, 2011 FINRA Discip. LEXIS 39 (OHO,<br />
June 24, 2011)....................................................................................................................... 395<br />
Department of Enforcement v. Thomas Weisel Partners, LLC,<br />
Disciplinary Proceeding No. 2008014621701, 2011 NASD Discip. LEXIS 59 (OHO,<br />
Nov. 8, 2011). ....................................................................................................................... 394<br />
Dixon v. Ladish Company, Inc.,<br />
785 F.Supp.2d 746 (E.D.Wis. 2011)............................................................................. 106, 157<br />
Doucet v. First Fed. Guar.,<br />
72 So.3d 478 (La. Ct. App.), cert. denied, 76 So.3d 1207 (La. 2011). ................................. 316<br />
Drescher v. Baby It’s You, LLC,<br />
2011 WL 63615 (C.D. Cal. 2011)..................................................................................... 42, 81<br />
Dronsejko v. Grant Thornton,<br />
632 F.3d 658 (10th Cir. 2011) ........................................................................................ 96, 127<br />
Durden v. Citicorp Trust Bank, FSB,<br />
763 F. Supp. 2d 1299 (M.D. Fla. 2011)................................................................................ 314<br />
Durgin v. Mon,<br />
2011 WL 573483 (11th Cir. Feb. 18, 2011) ......................................................................... 127<br />
Egan v. Tradingscreen, Inc.,<br />
2011 WL 1672066 (S.D.N.Y. May 4, 2011) ........................................................................ 139<br />
Egan v. Tradingscreen, Inc.,<br />
2011 WL 4344067 (S.D.N.Y. Sept. 12, 2011)...................................................................... 141<br />
Elipas v. Jedynak,<br />
2011 WL 1706059 (N.D. Ill. May 5, 2011).................................................................. 254, 309<br />
Elton v. McClain,<br />
2011 WL 6934812 (W.D. Tex. Dec. 29, 2011). ................................................................... 308<br />
viii
Employees’ Ret. Sys. of the Gov’t of the Virgin Islands v. J.P. Morgan Chase & Co.,<br />
2011 WL 1796426 (S.D.N.Y. May 10, 2011). ................................................................. 12, 33<br />
Employees’ Ret. Sys. v. JP Morgan Chase & Co.,<br />
2011 Fed. Sec. L. Rep. (CCH) 96, 278 (S.D.N.Y. Mar. 23, 2011).................................... 246<br />
Emposimato v. CIFC Acquisition Corp.,<br />
932 N.Y.S.2d 33 (App. Div. 2011)............................................................................... 306, 310<br />
Endress v. Gentiva Health Servs., Inc.,<br />
276 F.R.D. 62 (E.D.N.Y. 2011)............................................................................................ 176<br />
Engstrom v. Elan Corporation PLC,<br />
2011 WL 4946434 (S.D.N.Y. Oct. 18, 2011)....................................................................... 144<br />
Erica P. John Fund, Inc. v. Halliburton Co.,<br />
131 S. Ct. 2179 (U.S. 2011)............................................................................................ 61, 362<br />
Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong>,<br />
781 F. Supp. 2d 913 (N.D. Ariz. 2011)......................................................................... 256, 274<br />
Fait v. Regions Fin. Corp.,<br />
655 F.3d 105 (2d Cir. 2011).......................................................................................... 4, 25, 63<br />
Faris v. Longtop Fin. Techs. Ltd.,<br />
2011 WL 4444176 (S.D.N.Y. Sept. 22, 2011)...................................................................... 182<br />
Fed. Home Loan Bank of Chicago v. Bank of Am. Sec. LLC,<br />
448 B.R. 517 (C.D. Cal. 2011). ............................................................................................ 372<br />
Feller v. Wells Fargo Advisors, LLC,<br />
2011 WL 3331265 (M.D. Fla. Aug. 3, 2011) ............................................................... 336, 459<br />
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,<br />
2011 Tex. App. LEXIS 5286 (Tex. App. July 12, 2011).............................. 265, 278, 284, 296<br />
Fiero v. Financial Ind. Regulatory Auth., Inc.,<br />
660 F.3d 569 (2d. Cir. 2011)......................................................................................... 118, 295<br />
Filho v. Safra Nat’l Bank,<br />
797 F. Supp. 2d 289 (S.D.N.Y. 2011)................................................................................... 332<br />
Findwhat Investor Group v. Findwhat.com,<br />
658 F.3d 1282 (11th Cir. 2011). ..................................................................................... 67, 127<br />
Finkelstein v. UBS Global Asset Management (US) Inc.,<br />
2011 U.S. Dist. LEXIS 89800 (S.D.N.Y. August 9, 2011). ................................................. 349<br />
ix
FINRA Department of Enforcement v. Kale E. Evans,<br />
FINRA Disc. Action Complaint No. 2006005977901, 2011 FINRA Discip. LEXIS 36<br />
(Oct. 3, 2011). ....................................................................................................................... 120<br />
FINRA Department of Enforcement v. William J. Murphy Midlothian, Carl M.<br />
Birkelbach, and Birkelbach Investment Securities, Inc.,<br />
FINRA Disc. Action Complaint No. 2005003610701, 2011 FINRA Discip. LEXIS 42<br />
(Oct. 20, 2011). ..................................................................................................................... 120<br />
First Bank P.R., Inc. v. La Vida Merger Sub, Inc.,<br />
638 F.3d 37 (1st Cir. 2011)................................................................................................... 319<br />
Fishman v. Morgan Keegan & Co.,<br />
2011 WL 4853367 (E.D. La. Oct. 13, 2011) ........................................................................ 222<br />
Fishman v. Morgan Keegan & Co., Inc.,<br />
2011 WL 3705187 (E.D. La. Aug. 24, 2011). ........................................................................ 99<br />
Fishoff v. Coty, Inc.,<br />
634 F.3d 647 (2d Cir. 2011).................................................................................................. 360<br />
FleetBoston Fin. Corp. v. Alt,<br />
638 F.3d 70 (1st Cir. 2011)................................................................................................... 449<br />
Foley v. Transocean Ltd.,<br />
272 F.R.D. 126 (S.D.N.Y. 2011). ......................................................................................... 177<br />
Footbridge Ltd. Trust v. Countrywide Fin. Corp.,<br />
770 F.Supp.2d 618 (S.D.N.Y. 2011)......................................................................................... 8<br />
Fosbre v. Las Vegas Sands Corp.,<br />
2011 WL 3705023 (D. Nev. Aug. 24, 2011) ................................................................ 172, 204<br />
Frank v. Dana Corporation,<br />
646 F.3d 954 (6th Cir. 2011) ................................................................................ 124, 240, 352<br />
Frankel v. McDonough,<br />
2011 WL 5059181 (S.D.N.Y. Oct. 24, 2011)....................................................................... 453<br />
Freecharm Ltd. v. Atlas Wealth Holdings Corp.,<br />
2011 U.S. Dist. LEXIS 113172 (S.D. Fla. Sep. 30, 2011).................................................... 344<br />
Frias v. Dendreon Corp.,<br />
2011 WL 6330179 (W.D. Wash. Dec. 19, 2011). ................................................................ 191<br />
Fried v. Lehman Brothers Real Estate Associates III, L.P.,<br />
2011 WL 1345097 (S.D.N.Y. Mar. 29, 2011). ..................................................................... 137<br />
x
Fulton Bank, N.A. v. UBS Securities, LLC,<br />
2011 WL 5386376 (E.D. Pa. Nov. 7, 2011). ................................................ 150, 222, 226, 228<br />
Garden City Employees’ Retirement System v. Anixter International, Inc.,<br />
2011 WL 1303387 (N.D.Ill. Mar. 31, 2011)......................................................................... 155<br />
Garden City Employees’ Retirement System v. Psychiatric Solutions, Inc.,<br />
2011 WL 1335803 (M.D.Tenn. Mar. 31, 2011). .......................................................... 153, 199<br />
GE Investor, v. General Electric Company,<br />
2011 WL 5607137 (2d Cir. Nov. 18, 2011).......................................................................... 122<br />
Gehron v. Best Reward Credit Union,<br />
2011 WL 976624 (S.D. Cal. 2011)......................................................................................... 82<br />
General Retirement System of City of Detroit v. Onyx Capital Advisors, LLC,<br />
2011 WL 4528304 (E.D. Mich. Sept. 29, 2011)................................................................... 303<br />
Genesee County Employees’ Retirement Sys. v. Thornburg Mortg. Sec. Trust 2006-3,<br />
2011 WL 5840482 (D.N.M. Nov. 12, 2011). ................................................. 48, 206, 263, 309<br />
Gerstner v. Sebig, LLC,<br />
426 Fed. App’x. 470 (8th Cir. 2011). ..................................................................................... 26<br />
Gibbons v. Malone,<br />
801 F. Supp. 2d 243; (S.D.N.Y. 2011). ................................................................................ 115<br />
Gibbons v. Nat’l Real Estate Investors, LC,<br />
2011 WL 1086364 (D. Utah Mar. 23, 2011) .................................................................. 49, 224<br />
Gilmore v. Brandt,<br />
2011 U.S. Dist. LEXIS 125812 (D. Colo. Oct. 31, 2011). ................................................... 344<br />
Glaser v. The9, Ltd.,<br />
772 F. Supp. 2d 573 (S.D.N.Y. 2011)................................................................................... 134<br />
Goldenson v. Steffens,<br />
802 F. Supp. 2d 240 (D. Me. Aug. 4, 2011). .............................................. 57, 73, 83, 241, 320<br />
Goldstein v. Puda Coal, Inc.,<br />
2011 WL 6075861 (S.D.N.Y. Dec. 6, 2011). ....................................................................... 183<br />
Good v. DeLange,<br />
2011 WL 6888649 (S.D. Cal. Nov. 29, 2011). ..................................................................... 219<br />
Gordon v. Royal Palm Real Estate Inv. Fund I, <strong>LLP</strong>,<br />
2011 U.S. Dist. LEXIS 22911 (E.D. Mich. Mar. 8, 2011). .................................................. 334<br />
xi
Grecco v. Local.Com Corp.,<br />
806 F. Supp. 2d 653; 2011 U.S. Dist. LEXIS 4319 (S.D.N.Y. 2011). ................................. 115<br />
Grund v. Delaware Charter Guar. & Trust Co.,<br />
2011 WL 2118754 (S.D.N.Y. May 26, 2011). ..................................................................... 211<br />
Guenther v. B.C. Ziegler and Company,<br />
FINRA Case No. 10-00558, Jan. 13, 2011. ............................................................................ 60<br />
Haarbauer v. Morgan Keegan & Co.,<br />
2011 WL 457971 (FINRA Feb. 1, 2011) (Gomez, Barrett, Dorsey, Arbs.)........................... 24<br />
Haase v. GunnAllen Fin., Inc.,<br />
2011 WL 768045 (E.D.Mich. Feb. 28, 2011)......................................................... 40, 223, 229<br />
Hanson v. Morgan Stanley Smith Barney, LLC,<br />
762 F. Supp. 2d 1201 (C.D. Cal. 2011). ............................................................................... 216<br />
Hantz Group, Inc. v. Van Duyn,<br />
2011 Mich. App. LEXIS 1212 (Mich. Ct. App. June 30, 2011)........................................... 344<br />
Hawaii Ironworkers Annuity Trust Fund v. Cole,<br />
2011 WL 1257756 (N.D.Ohio Mar. 31, 2011). .................................................................... 152<br />
Healthy Habits, Inc. v. Fusion Excel Corp.,<br />
2011 WL 2448256 (C.D. Cal. June 17, 2011) ................................................................ 43, 166<br />
Hellum v. Breyer,<br />
194 Cal. App. 4th 1300 (2011). ............................................................................................ 266<br />
Henning v. Orient Paper, Inc.,<br />
2011 WL 2909322 (C.D. Cal. July 20, 2011)....................................................................... 167<br />
Hill and NECA-IBEW Pension Fund, v. Gozani,<br />
638 F.3d 40 (1st Cir. 2011)..................................................................................................... 62<br />
Hill v. Gozani,<br />
638 F.3d 40 (1st Cir. 2011)................................................................................................... 121<br />
Hill v. State Street Corporation,<br />
2011 WL 3420439 (D. Mass. Aug. 3, 2011). ................................................. 84, 129, 192, 353<br />
Hines v. Cal. Pub. Utils. Comm.,<br />
2011 U.S. Dist. LEXIS 134583 (N.D. Cal. Nov. 21, 2011).................................................. 118<br />
HMV Props., LLC v. IDC Ohio Mgmt., LLC,<br />
2011 U.S. Dist. LEXIS 1161 (S.D. Ohio Jan. 4, 2011). ....................................................... 274<br />
xii
Hodges v. Akeena Solar, Inc.,<br />
274 F.R.D. 259 (N.D. Cal. 2011).................................................................................... 68, 365<br />
Homestore.com, Inc. Sec. Litig.,<br />
2011 U.S. Dist. LEXIS 46552 (C.D. Cal. Apr. 22, 2011). ................................................... 256<br />
Hook v. UBS Fin. Servs.,<br />
2011 U.S. Dist. LEXIS 48036 (D. Conn. May 4, 2011)............................................... 333, 451<br />
Hopson v. MetroPCS Communications, Inc.,<br />
2011 WL 1119727 (N.D. Tex. Mar. 25, 2011)....................................................... 89, 151, 199<br />
Horvath v. Banco Comercial Portuges, S.A.,<br />
2011 U.S. Dist. LEXIS 15865 (S.D.N.Y. Feb. 15, 2011)..................................................... 271<br />
Hosier v. Citigroup Global Markets, Inc.,<br />
2011 U.S. Dist. LEXIS 1446670 (D. Colo. Dec. 21, 2011).................................. 238, 311, 346<br />
Howard Family Charitable Found., Inc. v. Trimble,<br />
259 P.3d 850 (Okla. Civ. App. 2011). .......................................................................... 233, 279<br />
Hudes v. Aetna Life Ins. Co.,<br />
2011 WL 3805679 (D.D.C. Aug. 30, 2011) ........................................................................... 27<br />
Huelbig v. Aurora Loan Servs., LLC,<br />
2011 WL 4348281 (S.D.N.Y. May 18, 2011) ........................................................................ 33<br />
Hufnagle v. RINO Int’l Corp.,<br />
2011 WL 2650755 (C.D. Cal. July 6, 2011)......................................................................... 377<br />
Hufnagle v. RINO Int’l Corp.,<br />
2011 WL 710676 (C.D. Cal. Feb. 16, 2011)......................................................................... 187<br />
Hufnagle v. RINO Int’l Corp.,<br />
2011 WL 710704 (C.D. Cal. Feb. 14, 2011)......................................................................... 186<br />
Hussain v. Garson,<br />
783 F. Supp. 2d 846 (W.D. La. 2011)................................................................................... 334<br />
Hutchison v. Deutsche Bank Sec. Inc.,<br />
2011 WL 3084969 (2d Cir. July 26, 2011)............................................................................... 5<br />
Hutchison v. Deutsche Bank Sec. Inc.,<br />
647 F.3d 479 (2d Cir. 2011).................................................................................................... 25<br />
Hysong v. Encore Energy Partners LP,<br />
2011 U.S. Dist. LEXIS 130688 (D. Del. Nov. 10, 2011). .................................................... 103<br />
xiii
IAC/InterActiveCorp v. O’Brien,<br />
26 A.3d 174 (Del. 2011). ...................................................................................................... 317<br />
IBEW Local 90 Pension Fund v. Deutsche Bank AG,<br />
2011 WL 6057812 (S.D.N.Y. Dec. 5, 2011) ........................................................................ 183<br />
In re Access Cardiosystems, Inc.,<br />
460 B.R. 67 (Bankr. D. Mass. 2011). ................................................................................... 313<br />
In re Adams,<br />
Release No. 63850, 2011 SEC LEXIS 454 (Feb. 7, 2011)................................................... 420<br />
In re Ahn,<br />
Release No. 63963, 2011 SEC LEXIS 681 (Feb. 24, 2011)................................................. 420<br />
In re Am. Funds Distrib., Inc.,<br />
Release No. 64747, 2011 SEC LEXIS 2191 (June 24, 2011)............................................... 440<br />
In re Amerlink, Ltd.,<br />
2011 WL 802794 (Bankr. E.D.N.C. Mar. 2, 2011). ............................................................. 301<br />
In re Anadigics, Inc., Securities <strong>Litigation</strong>,<br />
2011 WL 4594845 (D. N.J. Sept. 30, 2011) ................................................... 86, 148, 252, 356<br />
In re Apollo Group, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 5101787 (D.Ariz. Oct. 27, 2011).......................................................................... 159<br />
In re Application of Kamiski,<br />
Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).............................................. 292<br />
In re Application of Philip L. Spartis and Amy J. Elias,<br />
FINRA Admin. Proc. File No. 3-13979, 2011 SEC LEXIS 1693 (May 13, 2011).............. 119<br />
In re Awan,<br />
Release No. 65961, 2011 SEC LEXIS 4410 (Dec. 15, 2011); SEC v. OCC Holdings,<br />
Ltd., Litig. Release No. 22200, 2011 SEC LEXIS 4442 (S.D.N.Y. Dec. 16, 2011). ........... 404<br />
In re Bahl,<br />
Release No. 65323, 2011 SEC LEXIS 3182 (Sept. 12, 2011).............................................. 446<br />
In re Banc of Am. Capital Mgmt, LLC,<br />
Release No. 9254, 2011 SEC LEXIS 3020 (Aug. 30, 2011)................................................ 415<br />
In re Bank of America Corp. Auction Rate Securities (ARS) Marketing <strong>Litigation</strong>,<br />
2011 WL 740902 (N.D. Cal. Feb. 24, 2011). ....................................................................... 160<br />
In re Bank of America Corp. Securities, Derivative, and ERISA <strong>Litigation</strong>,<br />
2011 WL 3211472 (S.D.N.Y. 2011)............................................................................... 81, 140<br />
xiv
In re Bankatlantic Bancorp, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 1585605 (S.D. Fla. Apr. 25, 2011). ........................................................................ 93<br />
In re Barclays Bank PLC Sec. Litig.,<br />
2011 WL 31548 (S.D.N.Y. Jan. 5, 2011). ................................................................ 11, 32, 194<br />
In re Beachy,<br />
Release No. 614100, 2011 SEC LEXIS 970 (Mar. 18, 2011). ..................................... 409, 436<br />
In re Bear Stearns Companies, Inc. Sec., Derivative, and ERISA Lit.,<br />
763 F. Supp. 2d. 423 (S.D.N.Y. 2011).............................................. 58, 74, 132, 179, 193, 244<br />
In re Bell,<br />
Release No. 65941, 2011 SEC LEXIS 4379 (Dec. 13, 2011). ............................................. 428<br />
In re Biddlecome,<br />
Release No. 64500, 2011 SEC LEXIS 1725 (May 16, 2011)............................................... 409<br />
In re Bjork,<br />
Release No. 65520, 2011 SEC LEXIS 3536 (Oct. 7, 2011). ................................................ 411<br />
In re Blech,<br />
Release No. 63801, 2011 SEC LEXIS 345 (Jan. 31, 2011).................................................. 409<br />
In re Bloomfield,<br />
Release No. 416-A, 2011 SEC LEXIS 1457 (Apr. 26, 2011). ............................................. 290<br />
In re BNY Mellon Sec. LLC,<br />
Release No. 63724, 2011 SEC LEXIS 252 (Jan. 14, 2011).......................................... 285, 429<br />
In re Boston Scientific Corporation Securities <strong>Litigation</strong>,<br />
2011 WL 4381889 (D. Mass. Sept. 19, 2011). ..................................................................... 129<br />
In re BP S’holder Derivative Litig.,<br />
2011 WL 4345209 (S.D. Tex. Sept. 15, 2011). .................................................................... 372<br />
In re Brouwer,<br />
Release No. 65208, 2011 SEC LEXIS 3004 (Aug. 26, 2011).............................................. 403<br />
In re Buchholz,<br />
Release No. 63800, 2011 SEC LEXIS 344 (Jan. 31, 2011).................................................. 405<br />
In re Burton W. Wiand, as Receiver,<br />
2011 U.S. Dist. LEXIS 113212 (M.D. Fla. Sept. 29, 2011). .................................................. 99<br />
In re Caccioppoli,<br />
Release No. 66060, 2011 SEC LEXIS 4569 (Dec. 28, 2011). ............................................. 408<br />
xv
In re Cell Therapeutics, Inc. Class Action <strong>Litigation</strong>,<br />
2011 WL 444676 (W.D. Wash. Feb. 4, 2011)........................................................ 93, 172, 204<br />
In re Century Aluminum Co. Sec. Lit.,<br />
2011 WL 830174 (N.D. Cal. Mar. 3, 2011)............................................................................ 22<br />
In re Charles Schwab Inv. Mgmt.,<br />
Release No. 63693, 2011 SEC LEXIS 120 (Jan. 11, 2011).................................................. 414<br />
In re Chen,<br />
Release No. 65345, 2011 SEC LEXIS 3224 (Sept. 16, 2011).............................................. 443<br />
In re Chiaese,<br />
Release No. 64932, 2011 SEC LEXIS 2496 (July 20, 2011). .............................................. 411<br />
In re China Educ. Alliance, Inc. Sec. Litig.,<br />
2011 WL 4978483 (C.D. Cal. Oct. 11, 2011)............................................................... 167, 377<br />
In re Citigroup, Inc.,<br />
2011 WL 744745 (S.D.N.Y. Mar. 1, 2011). ......................................................................... 137<br />
In re ClassicStar Mare Lease <strong>Litigation</strong>,<br />
2011 WL 4591927 (E.D. Ky. Sept. 30, 2011). ..................................................................... 302<br />
In re Clifton,<br />
Release No. 443, 2011 SEC LEXIS 4185 (Nov. 29, 2011).................................................. 294<br />
In re Clifton,<br />
Release Nos. 9188 & 63926, 2011 SEC LEXIS 644 (Feb. 17, 2011). ................................. 287<br />
In re Cody,<br />
Release No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); In re Cody, Release No.<br />
65235, 2011 SEC LEXIS 3041 (Aug. 31, 2011). ................................................................. 439<br />
In re Coinstar Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 4712206 (W.D. Wash. Oct. 6, 2011). ........................................................... 172, 205<br />
In re Conventry Healthcare, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 1230998 (D. Md. Mar. 30, 2011)............................................................ 88, 150, 198<br />
In re Coventry Healthcare, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 3880431 (D. Md. Aug. 30, 2011). ........................................................................ 150<br />
In re Credit Suisse-AOL,<br />
2011 U.S. Dist. LEXIS 95889 (S.D. Mass. Aug. 26, 2011). ................................................ 242<br />
In re Crocs, Inc. Securities <strong>Litigation</strong>,<br />
774 F. Supp. 2d 1122 (D. Colo. 2011).................................................................................. 173<br />
xvi
In re Demizio,<br />
Release No. 63922, 2011 SEC LEXIS 649 (Feb. 17, 2011)................................................. 409<br />
In re Deutsche Bank AG Sec. Litig.,<br />
2011 WL 3664407 (S.D.N.Y. Aug. 19, 2011).......................................................... 14, 34, 247<br />
In re Divine Capital Mkts., LLC,<br />
Release Nos. 9247 & 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011) ................................. 290<br />
In re Divine Capital Mkts., LLC,<br />
Release No. 63980, 2011 SEC LEXIS 722 (Feb. 25, 2011)................................................. 288<br />
In re Divine Capital Mkts., LLC,<br />
Release No. 64998, 2011 SEC LEXIS 2609 (Aug. 1, 2011)........................................ 385, 431<br />
In re Divine Capital Mkts., LLC,<br />
Release No. 64999, 2011 SEC LEXIS 2610 (Aug. 1, 2011)................................................ 424<br />
In re DVI, Inc. Securities <strong>Litigation</strong>,<br />
639 F.3d 623 (3d Cir. 2011)............................................................................................ 64, 362<br />
In re Dynex Capital, Inc. Sec. Litig.,<br />
2011 WL 781215 (S.D.N.Y. Mar. 7, 2011). ......................................................................... 364<br />
In re EDGX Exchange, Inc.,<br />
Release No. 65556, 2011 SEC LEXIS 3592 (Oct. 13, 2011). .............................................. 438<br />
In re Ellis,<br />
Release No. 64220, 2011 SEC LEXIS 1199 (Apr. 7, 2011)................................................. 437<br />
In re Enron Corp. Sec. Derivative & ERISA Litig.,<br />
Nos. H–01–3624, H–03–0815, 2011 WL 3489524 (S.D. Tex. Aug. 9, 2011). ...................... 40<br />
In re Enron Corp. Sec., Derivative & ERISA Litig.,<br />
761 F. Supp. 2d 504 (S.D. Tex. 2011) ............................................................................ 40, 273<br />
In re Evergreen Ultra Short Opportunities Fund Sec. Litig.,<br />
275 F.R.D. 382 (D. Mass. 2011)............................................................................... 27, 73, 363<br />
In re Fayette,<br />
Release No. 63698, 2011 SEC LEXIS 151 (Jan. 11, 2011).................................................. 423<br />
In re FCS Sec.,<br />
Release No. 64852, 2011 SEC LEXIS 2366 (July 11, 2011); In re FCS Sec., Release<br />
No. 65267, 2011 SEC LEXIS 3330 (Sept. 6, 2011). .................................................... 444, 447<br />
In re Feinblum,<br />
Release No. 64575, 2011 SEC LEXIS 1893 (May 31, 2011)............................................... 421<br />
xvii
In re Franklin Bank Corp. Sec. Litig.,<br />
782 F.Supp.2d 364 (S.D. Tex. 2011). ............................................................... 17, 79, 152, 325<br />
In re Friedman,<br />
Release No. 64486, 2011 SEC LEXIS 1699 (May 13, 2011)............................................... 447<br />
In re Gallardo,<br />
Release No. 65422, 2011 SEC LEXIS 3370 (Sept. 28, 2011).............................................. 408<br />
In re Gallardo,<br />
Release No. 65658, 2011 SEC LEXIS 3848 (Oct. 31, 2011). ...................................... 294, 434<br />
In re Garcia,<br />
Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011). ............................................. 411<br />
In re Gautney,<br />
Release No. 65124, 2011 SEC LEXIS 2841 (Aug. 12, 2011)...................................... 291, 432<br />
In re Gautney,<br />
Release No. 65151, 2011 SEC LEXIS 2944 (Aug. 17, 2011)...................................... 291, 432<br />
In re Gilford Sec., Inc.,<br />
Release Nos. 9264 & 65450, 2011 SEC LEXIS 3419 (Sept. 30, 2011). .............. 293, 425, 433<br />
In re Ginder,<br />
Release No. 64098, 2011 SEC LEXIS 968 (Mar. 18, 2011). ............................................... 415<br />
In re Gizankis,<br />
Release No. 64391, 2011 SEC LEXIS 1576 (May 4, 2011)................................................. 442<br />
In re Gremo Invs., Inc.,<br />
Release No. 64481, 2011 SEC LEXIS 1695 (May 12, 2011)............................................... 446<br />
In re Hansen,<br />
Release No. 65513, 2011 SEC LEXIS 3532 (Oct. 7, 2011). ................................................ 419<br />
In re Harris,<br />
Release No. 64942, 2011 SEC LEXIS 2518 (July 21, 2011). .............................................. 424<br />
In re Heckmann Corp. Sec. Lit.,<br />
2011 WL 2413999 (D. Del. June 16, 2011).......................................................... 147, 250, 370<br />
In re Herald, Primeo, and Thema Sec. Litig.,<br />
2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011).............................................................. 212, 369<br />
In re Hertz,<br />
Release No. 64831, 2011 SEC LEXIS 2347 (July 7, 2011). ................................................ 422<br />
xviii
In re Houston,<br />
Release No. 66014, 2011 SEC LEXIS 4491 (Dec. 20, 2011). ............................................. 445<br />
In re Huntleigh Sec. Corp.,<br />
Release No. 64336, 2011 SEC LEXIS 1439 (Apr. 25, 2011)....................... 289, 386, 421, 431<br />
In re Icely,<br />
Release No. 62215, 2011 SEC LEXIS 3012 (Aug. 29, 2011).............................................. 406<br />
In re IMAX Sec. Litig.,<br />
2011 WL 1487090 (S.D.N.Y. Apr. 15, 2011)....................................................................... 180<br />
In re Immersion Corp. Sec. Litig.,<br />
2011 WL 6303389 (N.D.Cal. Dec. 16, 2011)....................................................................... 164<br />
In re Immucor, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 2619092 (N.D.Ga. June 30, 2011)........................................................................ 175<br />
In re Immucor, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 3844221 (N.D. Ga. Aug. 29, 2011). ....................................................................... 94<br />
In re IndyMac Mortgage-Backed Sec. Litig.,<br />
793 F.Supp.2d 637 (S.D.N.Y. 2011)........................................................................... 8, 29, 322<br />
In re Infineon Technologies AG Securities <strong>Litigation</strong>,<br />
2011 WL 7121006 (N.D.Cal. Mar. 17, 2011)....................................................................... 161<br />
In re Inv. Placement Group,<br />
Release No. 66055, 2011 SEC LEXIS 4547 (Dec. 23, 2011). ..................................... 295, 434<br />
In re J.P. Jeanneret Assocs., Inc.,<br />
769 F. Supp. 2d 340 (S.D.N.Y. 2011)........................................................... 133, 210, 244, 270<br />
In re Jamuna Real Estate, L.L.C.,<br />
460 B.R. 661 (Bankr. E.D. Pa. 2011) ............................................................................... 2, 300<br />
In re Janney Montgomery Scott LLC,<br />
Release No. 64855, 2011 SEC LEXIS 3166 (July 11, 2011). .............................................. 418<br />
In re Jennings,<br />
Release No. 65349, 2011 SEC LEXIS 3233 (Sept. 16, 2011).............................................. 407<br />
In re Jensen-Ames,<br />
No. 10-10684, 2011 WL 1238929 (Bankr. W.D. Wash. March 30, 2011). ............................. 2<br />
In re Kaminski,<br />
Release No. 65347, 2011 SEC LEXIS 3225 (Sept. 16, 2011).............................................. 441<br />
xix
In re Kim,<br />
Release No. 64862, 2011 SEC LEXIS 2389 (July 12, 2011). .............................................. 422<br />
In re Kingate Mgmt. Ltd. Litig.,<br />
2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) .............................................................. 210, 225<br />
In re Kobayashi,<br />
Release No. 64508, 2011 SEC LEXIS 1735 (May 17, 2011)............................................... 406<br />
In re Konaxis,<br />
Release No. 64298, 2011 SEC LEXIS 1334 (Apr. 13, 2011)............................................... 402<br />
In re Kraus,<br />
Release No. 64221, 2011 SEC LEXIS 1200 (Apr. 7, 2011), In re Levine, Release No.<br />
64222, 2011 SEC LEXIS 1201 (Apr. 7, 2011)..................................................................... 437<br />
In re Kummerfeld,<br />
44 B.R. 28 (Bankr. S.D.N.Y. 2011)........................................................................................ 31<br />
In re LeBouef,<br />
Release No. 65216, 2011 SEC LEXIS 3013 (Aug. 29, 2011).............................................. 436<br />
In re Legend Sec. Inc.,<br />
Release No. 64502, 2011 SEC LEXIS 1726 (May 16, 2011)............................................... 414<br />
In re Lehman Bros. Mortgage-Backed Sec. Litig.,<br />
650 F.3d 167 (2d Cir. 2011).............................................................................................. 4, 239<br />
In re Lehman Bros. Sec. and ERISA Litig.,<br />
799 F. Supp. 2d 258 (S.D.N.Y. 2011)......................................................................... 9, 30, 136<br />
In re Lehman Bros. Secs. & ERISA Litig.,<br />
800 F. Supp. 2d 477 (S.D.N.Y. 2011)................................................................................... 322<br />
In re Lincoln Educ. Srvs. Corp. Sec. Litig.,<br />
2011 WL 3912832 (D. N.J. Sept. 6, 2011) ............................................................. 87, 196, 251<br />
In re Lindsey,<br />
Release No. 64219, 2011 SEC LEXIS 1286 (Apr. 6, 2011); In re Capital Fin. Serv.,<br />
Inc., Release No. 65998, 2011 SEC LEXIS 4438 (Dec. 16, 2011); In re Capital Fin.<br />
Serv., Inc., Release No. 66000, 2011 SEC LEXIS 4440 (Dec. 16, 2011). ................... 412, 426<br />
In re Lopez-Tarre,<br />
Release No. 65391, 2011 SEC LEXIS 3311 (Sept. 23, 2011)...................................... 292, 432<br />
In re Malin,<br />
Release No. 64302, 2011 SEC LEXIS 1349 (Apr. 14, 2011)............................................... 417<br />
xx
In re Manulife Financial Corporation Securities <strong>Litigation</strong>,<br />
276 F.R.D. 87 (S.D.N.Y. 2011). ........................................................................................... 136<br />
In re Massey Energy Co. Sec. Litig.,<br />
2011 WL 4528509 (S.D. W. Va. Sept. 28, 2011)................................................................. 376<br />
In re Melhado, Flynn & Associates, Inc.,<br />
Release No. 64467, 2011 SEC LEXIS 1662 (May 11, 2011); In re Melhado, Flynn &<br />
Associates, Inc., Release No. 64468, 2011 SEC LEXIS 1663 (May 11, 2011); In re<br />
Melhado, Flynn & Associates, Inc., Release No. 64469, 2011 SEC LEXIS 1664 (May<br />
11, 2011). .............................................................................................................................. 427<br />
In re Merck & Co. Sec., Derivative, & ERISA Litig.,<br />
2011 WL 3444199 (D.N.J. Aug. 8, 2011) ........................................................ 16, 37, 148, 251<br />
In re Merkin and BDO Seidman Sec. Litig.,<br />
2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011)...................................................................... 212<br />
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>,<br />
2011 WL 1330847 (S.D.N.Y. Mar. 30, 2011) ........................................................ 85, 138, 195<br />
In re Merrill Lynch Auction Rate Securities <strong>Litigation</strong>,<br />
765 F. Supp. 2d 375 (S.D.N.Y. 2011)............................................................................. 75, 132<br />
In re Merrill Lynch,<br />
Release No. 63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).................................................. 285<br />
In re Meta Financial Group, Inc., Securities <strong>Litigation</strong>,<br />
2011 WL 2893625 (N.D. Iowa July 18, 2011) ............................................................. 158, 254<br />
In re MMR Inv. Bankers, LLC,<br />
Release No. 64622, 2011 SEC LEXIS 1963 (June 8, 2011); In re MMR Investment<br />
Bankers, LLC, Release No. 64623, 2011 SEC LEXIS 1964 (June 8, 2011); In re<br />
MMR Investment Bankers, LLC, Release No. 64624, 2011 SEC LEXIS 1965 (June 8,<br />
2011); In re MMR Investment Bankers, LLC, Release No. 64625, 2011 SEC LEXIS<br />
1966 (June 8, 2011); In re MMR Investment Bankers, LLC, Release No. 64626, 2011<br />
SEC LEXIS 1967 (June 8, 2011).................................................................................. 402, 410<br />
In re Moody’s Corp. Sec. Litig.,<br />
274 F.R.D. 480 (S.D.N.Y. 2011). ......................................................................................... 363<br />
In re Morgan Stanley Mortg. Pass-Through Certificates Litig.,<br />
2011 WL 4089580 (S.D.N.Y. Sept. 15, 2011).......................................................... 14, 35, 323<br />
In re MRU Holdings Securities <strong>Litigation</strong>,<br />
769 F. Supp. 2d 500 (S.D.N.Y. 2011)............................................................................. 97, 134<br />
xxi
In re Mutascio,<br />
Release No. 65351, 2011 SEC LEXIS 3254 (Sep. 19, 2011)............................................... 407<br />
In re Mutual Funds Inv. Litig.,<br />
767 F. Supp. 2d 542 (D. Md. 2011)...................................................................................... 213<br />
In re Neaton,<br />
Release No. 65863, 2011 SEC LEXIS 4232 (Dec. 1, 2011). ............................................... 448<br />
In re Nicholson,<br />
Release No. 64396, 2011 SEC LEXIS 1573 (May 4, 2011)................................. 406, 423, 436<br />
In re Novatel Wireless Securities <strong>Litigation</strong>,<br />
2011 WL 5873113 (S.D. Cal. Nov. 23, 2011) ................................................................ 93, 170<br />
In re Nuveen Funds/City of Alameda Securities <strong>Litigation</strong>,<br />
2011 WL 1842819 (N.D.Cal. May 16, 2011)....................................................................... 162<br />
In re NVIDIA Corporation Securities <strong>Litigation</strong>,<br />
2011 WL 4831192 (N.D. Cal. Oct. 12, 2011)....................................................................... 164<br />
In re Oldham,<br />
Release No. 64491, 2011 SEC LEXIS 1705 (May 13, 2011)............................................... 424<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig.,<br />
2011 WL 5042066 (D.Colo. Oct. 24, 2011) ............................................................. 23, 47, 262<br />
In re Optimal U.S. Litig.,<br />
2011 U.S. Dist. LEXIS 119141 (S.D.N.Y. Oct. 14, 2011) ..................................................... 98<br />
In re Optimal U.S. Litig.,<br />
2011 WL 6424988 (S.D.N.Y. Dec. 21, 2011) ...................................................................... 369<br />
In re Osborn,<br />
Release No. 64145, 2011 SEC LEXIS 1055 (Mar. 29, 2011). ............................................. 442<br />
In re Paganes,<br />
Release No. 65957, 2011 SEC LEXIS 4401 (Dec. 15, 2011) .............................................. 408<br />
In re Pagliarini,<br />
Release No. 63964, 2011 SEC LEXIS 682 (Feb. 24, 2011)......................................... 288, 430<br />
In re Peperno,<br />
Release No. 65018, 2011 SEC LEXIS 2649 (Aug. 3, 2011)................................................ 414<br />
In re Picozzi,<br />
Release No. 65569, 2011 SEC LEXIS 3609 (Oct. 14, 2011). .............................................. 444<br />
xxii
In re Platinum & Palladium Commodities Litig.,<br />
2011 U.S. Dist. LEXIS 105040 (S.D.N.Y. Sept. 13, 2011).................................................. 236<br />
In re QA3 Fin. Corp.,<br />
2011 WL 2678591 (Bankr. D. Neb. July 7, 2011)................................................................ 455<br />
In re Refco Inc. Sec. Litig,<br />
2011 WL 1219265 (S.D.N.Y. Mar. 30, 2011). ..................................................................... 299<br />
In re Refco Inc. Sec. Litig.,<br />
2011 WL 4035819 (S.D.N.Y. Sept. 6, 2011)........................................................................ 212<br />
In re Richard Goble,<br />
2011 SEC LEXIS 3492, SEC Initial Decision Release No. 435 (October 5, 2011)............. 112<br />
In re Rodriguez,<br />
Release No. 66056, 2011 SEC LEXIS 4546 (Dec. 23, 2011). ............................................. 404<br />
In re Royal Bank of Scotland Group PLC Sec. Litig.,<br />
765 F. Supp. 2d 327 (S.D.N.Y. 2011)..................................................................................... 30<br />
In re Ryan,<br />
Release No. 65173, 2011 SEC LEXIS 2930 (Aug. 19, 2011).............................................. 411<br />
In re Sabado,<br />
Release No. 64890, 2011 SEC LEXIS 2434 (July 14, 2011). .............................................. 413<br />
In re Sadia S.A. Secs. Litig.,<br />
2011 WL 6825235 (S.D.N.Y. Dec. 28, 2011). ..................................................................... 313<br />
In re Sam P. Douglass and Anthony R. Moore,<br />
Securities and Exchange Commission, Administrative Proceeding File No. 3-13934<br />
(Feb. 24, 2011)...................................................................................................................... 108<br />
In re Sanofi-Aventis Securities <strong>Litigation</strong>,<br />
774 F. Supp. 2d 549 (S.D.N.Y. 2011)..................................................................... 75, 134, 245<br />
In re Sarnicola,<br />
Release No. 63924, 2011 SEC LEXIS 651 (Feb. 17, 2011)................................................. 405<br />
In re Sawyers,<br />
Release No. 64759, 2011 SEC LEXIS 2214 (June 28, 2011); In re Harrison, Release<br />
No. 64965, 2011 SEC LEXIS 2558 (July 26, 2011)............................................................. 413<br />
In re Schaefer,<br />
Release No. 65278, 2011 SEC LEXIS 3178 (Sep. 7, 2011)......................................... 407, 425<br />
In re Sec. Capital Assur. Ltd. Sec. Litig.,<br />
2011 WL 4444206 (S.D.N.Y. Sept. 23, 2011)........................................................ 15, 141, 248<br />
xxiii
In re Shankar,<br />
Release No. 64714, 2011 SEC LEXIS 2185 (June 21, 2011)............................................... 418<br />
In re Sharemaster,<br />
Release No. 65570, 2011 SEC LEXIS 3610 (Oct. 14, 2011). .............................................. 445<br />
In re Shaw,<br />
Release No. 9174, 2011 SEC LEXIS 251 (Jan. 14, 2011).................................................... 426<br />
In re Shereshevsky,<br />
Release No. 64704, 2011 SEC LEXIS 2098 (June 20, 2011)............................................... 406<br />
In re Skowron,<br />
Release No. 65783, 2011 SEC LEXIS 4065 (Nov. 17, 2011).............................................. 419<br />
In re Smith & Wesson Holding Corp. Sec. Litig.,<br />
2011 WL 6089727 (D. Mass. Mar. 25, 2011)....................................................................... 129<br />
In re Smith Barney Transfer Agent Litig.,<br />
2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011). ..................................................................... 184<br />
In re Smith Barney Transfer Agent <strong>Litigation</strong>,<br />
765 F. Supp. 2d 391 (S.D.N.Y. 2011)............................................................... 80, 85, 132, 324<br />
In re Smith,<br />
Release No. 63834, 2011 SEC LEXIS 390 (Feb. 3, 2011)................................................... 429<br />
In re Smith,<br />
Release Nos. 63834 & 3152, 2011 SEC LEXIS 390 (Feb. 3, 2011). ................................... 286<br />
In re Spartis,<br />
Release No. 64489, 2011 SEC LEXIS 1693 (May 13, 2011)............................................... 440<br />
In re St. Jude Med., Inc. Sec. Litig.,<br />
2011 WL 6755008 (D. Minn. Dec. 23, 2011)............................................... 159, 201, 237, 255<br />
In re State Street Bank and Trust Co. Fixed Income Funds Inv. Litig.,<br />
774 F.Supp.2d 584 (S.D.N.Y. 2011)................................................................................. 10, 30<br />
In re STEC Inc. Sec. Litig.,<br />
2011 WL 2669217 (C.D. Cal. June 17, 2011) .................................................. 19, 91, 166, 201<br />
In re STEC Inc. Sec. Litig.,<br />
2011 WL 4442822 (C.D. Cal. Jan. 10, 2011) ................................................................. 18, 165<br />
In re STEC Inc. Sec. Litig.,<br />
Nos. SACV 09–1304 JVS (MLGx), SACV 09–01306–JVS(MLGx), SACV 09–1320–<br />
JVS(MLGx), SACV 09–1460–JVS(MLGx), CV09–08536–JVS(MLGx), 2011 WL<br />
2669217 (C.D. Cal. June 17, 2011). ................................................................................. 42, 43<br />
xxiv
In re Sturm, Ruger & Company, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 494753 (D. Conn. Feb. 7, 2011) ................................................................... 130, 192<br />
In re Suarez,<br />
Release No. 65981, 2011 SEC LEXIS 4415 (Dec. 15, 2011). ............................................. 412<br />
In re Sweat,<br />
Release No. 65117, 2011 SEC LEXIS 2814 (Aug. 11, 2011).............................................. 443<br />
In re TD Ameritrade, Inc.,<br />
Release No. 63829, 2011 SEC LEXIS 389 (Feb. 3, 2011)........................................... 286, 430<br />
In re Textron, Inc.,<br />
2011 U.S. Dist. LEXIS 103775 (D.R.I. Sept. 13, 2011)....................................................... 242<br />
In re Thornburg Mortg., Inc. Sec. Litig.,<br />
2011 WL 2429189 (D.N.M. June 2, 2011)....................................................... 23, 47, 174, 262<br />
In re Torrey Pines Sec. Inc.,<br />
Release Nos. 63835 & 3153, 2011 SEC LEXIS 391 (Feb. 3, 2011). ................................... 287<br />
In re Torrey Pines Sec. Inc.,<br />
Release Nos. 64317 & 3188, 2011 SEC LEXIS 1394 (Apr. 20, 2011)................ 289, 387, 431<br />
In re Toyota Motor Corp. Securities <strong>Litigation</strong>,<br />
2011 WL 2675395 (C.D.Cal. July 7, 2011).................................................................. 166, 257<br />
In re Tronox, Inc. Sec. Litig.,<br />
769 F. Supp. 2d 202 (S.D.N.Y. 2011)........................................................................... 236, 245<br />
In re Tudor,<br />
Release No. 65009, 2011 SEC LEXIS 2616 (Aug. 2, 2011)................................................ 419<br />
In re UBS Sec. LLC,<br />
Release No. 65733, 2011 SEC LEXIS 3985 (Nov. 10, 2011).............................................. 428<br />
In re United Health Gr. Shareholder Derivative Litig.,<br />
631 F.3d 913 (8th Cir. 2011). ............................................................................................... 312<br />
In re Verifone Holdings Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 1045120 (N.D. Cal. Mar. 22, 2011)........................................................ 91, 161, 259<br />
In re Vivendi Universal, S.A. Sec. Litig.,<br />
765 F. Supp. 2d 52 (S.D.N.Y. 2011)......................................................................... 75, 97, 194<br />
In re Wachovia Equity Sec. Litig.,<br />
753 F.Supp.2d 326 (S.D.N.Y. 2011)......................................................... 10, 31, 131, 245, 324<br />
xxv
In re Wash. Mut. Mortgage-Backed Sec. Litig.,<br />
2011 WL 5027725 (W.D. Wash. Oct. 21, 2011). ........................................................... 22, 365<br />
In re Wash. Mut., Inc.,<br />
2011 Bankr. LEXIS 5008 (Bankr. D. Del. Dec. 20, 2011)................................................... 250<br />
In re Weatherford Int’l Sec. Litig.,<br />
2011 WL 2652443 (S.D.N.Y. Jul. 6, 2011). ......................................................................... 180<br />
In re Wells Fargo Sec. LLC,<br />
Release No. 64182, 2011 SEC LEXIS 1202 (Apr. 5, 2011)................................................. 404<br />
In re Xenoport, Inc. Securities <strong>Litigation</strong>,<br />
2011 WL 6153134 (N.D. Cal. Dec. 12, 2011)...................................................................... 164<br />
In re Zaino,<br />
Release No. 64398, 2011 SEC LEXIS 1574 (May 4, 2011)................................................. 438<br />
In re Zangari,<br />
Release No. 63923, 2011 SEC LEXIS 650 (Feb. 17, 2011)................................................. 405<br />
Indah v. SEC,<br />
661 F.3d 914 (6th Cir. 2011) ................................................................................ 311, 360, 367<br />
Indiana State Dist. Council of Laborers v. Omnicare, Inc.,<br />
2011 WL 2786301 (E.D. Ky. July 14, 2011).......................................................................... 17<br />
Indus. Enters. of Am., Inc. v. Brandywine Consultants,<br />
2011 Bankr. LEXIS 3560 (Bankr. Del. Sept. 16, 2011). ...................................................... 299<br />
Ingham v. Thompson,<br />
931 N.Y.S.2d 306 (N.Y. App. Div. 2011). ........................................................................... 328<br />
Int’l Brotherhood of Elec. Workers Local 697 Pension Fund v. Int’l Game Tech.,<br />
2011 WL 915115 (D. Nev. Mar. 15, 2011) .................................................................. 171, 203<br />
Int’l Brotherhood of Electrical Workers v. Limited Brands, Inc.,<br />
788 F. Supp.2d 609 (S.D. Ohio 2011) .................................................................... 90, 153, 199<br />
Int’l Fund Mgmt. S.A., v. Citigroup Inc.,<br />
2011 U.S. Dist. LEXIS 113660 (S.D.N.Y. Sept. 30, 2011)............................ 36, 118, 248, 323<br />
Inter-Local Pension Fund GCC/IBT v. GE,<br />
2011 U.S. App. LEXIS 19271 (2d Cir. 2011) .............................................................. 122, 240<br />
International Fund Management S.A. v. Citigroup, Inc.,<br />
2011 WL 4529640 (S.D.N.Y. Sept. 30, 2011)................................................................ 78, 143<br />
xxvi
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co.,<br />
2011 N.Y. App. Div. LEXIS 8829 (N.Y. App. Div. Dec. 13, 2011).................................... 232<br />
Janus Capital Group, Inc. v. First Derivative Traders,<br />
131 S. Ct. 2296 (2011)........................................................................ 54, 62, 94, 238, 267, 276<br />
Janvey v. Alguire,<br />
647 F.3d 585 (5th Cir. 2011) ................................................................................................ 449<br />
Jasin v. Kozlowski,<br />
2011 U.S. Dist. LEXIS 91802 (M.D. Pa., Nov. 3, 2010). .................................................... 104<br />
Javitch v. Prudential Sec. Inc.,<br />
2011 U.S. Dist. LEXIS 6925 (N.D. Ohio Jan. 25, 2011)...................................................... 231<br />
Johnson v. Siemens AG,<br />
2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011)................................................................ 84, 131<br />
Jorling v. Anthem,<br />
2011 WL 6755157 (S.D. Ind. Dec. 23, 2011)....................................................................... 215<br />
Kadel v. Flood,<br />
2011 WL 2015379 (11th Cir. May 24, 2011) ....................................................................... 127<br />
Katyle v. Penn National Gaming, Inc.,<br />
637 F.3d 462 (4th Cir. 2011) .................................................................................. 64, 124, 351<br />
Katz v. China Century Dragon Media, Inc.,<br />
2011 WL 6047093 (C.D. Cal. Nov. 30, 2011).................................................................. 20, 44<br />
Katz v. Gerardi,<br />
655 F.3d 1212 (10th Cir. 2011). ......................................................................................... 6, 26<br />
Katz v. Pershing, LLC,<br />
2011 U.S. Dist. LEXIS 94107 (D. Mass. Aug. 23, 2011)..................................................... 230<br />
Katz v. SEC,<br />
647 F.3d 1156, 2011 U.S. App. LEXIS 16141 (DC Cir. 2011)............................................ 113<br />
KBR, Inc. v. Chevedden,<br />
2011 U.S. Dist. LEXIS 36431 (S.D. Tex. Apr. 4, 2011). ..................................................... 104<br />
KBR, Inc. v. Chevedden,<br />
776 F.Supp.2d 415 (S.D.Tex. 2011) ............................................................................. 104, 371<br />
Kexuan Yao v. Crisnic Fund, S.A.,<br />
2011 WL 3818406 (C.D. Cal. Aug. 29, 2011).............................................................. 167, 373<br />
xxvii
KeyBank, N.A. v. Bingo, Coast Guard Official No. 1121913,<br />
No. C09-849RSM, 2011 WL 1559829 (W.D. Wash. Apr. 22, 2011). ............................. 46, 59<br />
King County v. Merrill Lynch & Co.,<br />
2011 U.S. Dist. LEXIS 16483 (W.D. Wash. Feb. 18, 2011)................................................ 261<br />
Kingsley Capital Mgmt., LLC v. Sly,<br />
2011 WL 5008520 (D. Ariz. Sept. 30, 2011)........................................................................ 314<br />
Kinnett v. Strayer Educ., Inc.,<br />
2011 WL 317758 (M.D. Fla. Jan. 31, 2011)......................................................................... 191<br />
Klawonn v. YA Global Investments, L.P.,<br />
2011 U.S. Dist. LEXIS 88535 (D. N.J., Aug. 10, 2011)....................................................... 116<br />
Kokkinis v. Aegean Marine Petroleum Network,<br />
2011 WL 2078010 (S.D.N.Y. May 19, 2011). ..................................................................... 180<br />
Krieger v. Atheros Communc’n, Inc.,<br />
2011 WL 6153154 (N.D. Cal. Dec. 12, 2011)...................................................................... 188<br />
Kuriakose v. Federal Home Loan Mortgage Corp.,<br />
2011 WL 1158028 (S.D.N.Y. Mar. 30, 2011). ..................................................................... 138<br />
Lane v. Page,<br />
272 F.R.D. 558 (D.N.M. 2011)............................................................................................. 366<br />
Lapiner v. Camtek, Ltd.,<br />
2011 WL 445849 (N.D. Cal. Feb. 2, 2011). ................................................................. 160, 163<br />
Ledford v. Peeples,<br />
657 F.3d 1222 (11th Cir. 2011)....................................................................................... 67, 235<br />
Leibholz v. Hariri,<br />
2011 WL 1466139 (D.N.J. Apr. 15, 2011). .......................................................................... 299<br />
Lewis v. UBS Fin. Servs. Inc.,<br />
2011 WL 4727795 (N.D. Cal. Sept. 30, 2011). .................................................................... 457<br />
Lifschitz v. Nextwave Wireless Inc.,<br />
2011 WL 5839682 (S.D. Cal. Nov. 21, 2011). ..................................................................... 169<br />
Litchfield Capital, LLC v. BNY Clearing Services LLC,<br />
2011 U.S. Dist. LEXIS 120207 (S.D.N.Y. Oct. 14, 2011). .................................................. 231<br />
Litwin v. Blackstone Group, L.P.,<br />
634 F.3d 706 (2d Cir. 2011).......................................................................................... 5, 26, 63<br />
xxviii
Litwin v. Oceanfreight, Inc.,<br />
2011 WL 5223022 (S.D.N.Y., Nov. 2, 2011)............................................................... 101, 375<br />
LNB Bancorp, Inc. v. Osborne,<br />
2011 U.S. Dist. LEXIS 137705 (E.D.Ohio, Nov. 30, 2011)................................................. 105<br />
Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson,<br />
2011 WL 2444675 (D.Del. June 14, 2011)........................................................... 147, 196, 250<br />
Lorbietzki v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,<br />
2011 U.S. Dist. LEXIS 29601 (D. Nev. Mar. 9, 2011)................................................. 343, 459<br />
Louisiana Municipal Police Employees Retirement System, v. KPMG <strong>LLP</strong>,<br />
2011 WL 4629299 (N.D. Ohio Sept. 30, 2011)...................................................... 78, 153, 325<br />
Louisiana-Paific. Corp. v. Money Market 1 Institutional Investment <strong>Dealer</strong>,<br />
2011 WL 1152568 (N.D. Cal. Mar. 28, 2011)........................................................ 59, 224, 229<br />
Loumiet v. Office of Comptroller of Currency,<br />
650 F.3d 796 (D.C. Cir. 2011).............................................................................................. 317<br />
Love v. Alfacell Corp.,<br />
2011 WL 4915874 (D. N.J. Oct. 17, 2011)............................................................. 87, 149, 197<br />
Luciani v. Luciani ,<br />
2011 WL 3859707 (S.D. Cal. Sept. 1, 2011)........................................................................ 169<br />
Luther v. Countrywide Fin. Corp.,<br />
195 Cal. App. 4th 789 (Cal. Ct. App. 2011). ........................................................................ 221<br />
Lynch v. Whitney,<br />
419 F. App’x 826 (10th Cir. 2011) ....................................................................................... 312<br />
M & B Assocs., Inc. v. Wells Fargo Bank, N.A.,<br />
2011 Tex. App. LEXIS 2873 (Tex. App. Amarillo Apr. 15, 2011)...................................... 336<br />
Mallen v. Alphatec Holding, Inc.,<br />
2011 WL 175687 (S.D. Cal. Jan. 19, 2011).......................................................................... 188<br />
Mandelbaum v. Fiserv, Inc.,<br />
2011 WL 1225549 (D. Colo. Mar. 29, 2011). ...................................................................... 219<br />
Mandell v. Reeve,<br />
2011 U.S. Dist. LEXIS 114804 (S.D.N.Y. Oct. 4, 2011). .................................................... 249<br />
Mannkind Securities Actions,<br />
2011 WL 6327089 (C.D. Cal. Dec. 16, 2011) ...................................................... 168, 201, 258<br />
xxix
Marini v. Adamo,<br />
2011 WL 4442710 (E.D.N.Y. Sept. 26, 2011). .................................................................... 298<br />
Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-A Sec.,<br />
273 F.R.D. 363 (E.D.N.Y. 2011)...................................................................................... 7, 321<br />
Matrixx Initiative, Inc. v. Siracusano,<br />
131 S.Ct. 1309 (2011)............................................................................................... 61, 62, 121<br />
Matter of Bloomfield,<br />
Admin. Proc. File No. 3-13871, SEC Initial Dec. Release No. 416-A, 2011 SEC<br />
LEXIS 1457 (April 26, 2011). .............................................................................................. 386<br />
Matter of Blue Point Securities, Inc.,<br />
NYSE Hearing Panel Decision 11-NYSE-7; 2011 NYSE Disc. Action LEXIS 7<br />
(Sept. 27, 2011)..................................................................................................................... 398<br />
Matter of BNY Mellon Securities LLC,<br />
Admin. Proc. File No. 3-14191, SEC Release No. 34-63724, 2011 SEC LEXIS 252<br />
(Jan. 14, 2011)....................................................................................................................... 391<br />
Matter of Clifton,<br />
Admin. Proc. File No. 3-14266, SEC Init. Dec. Release No. 443, 2011 SEC LEXIS<br />
4185 (Nov. 29, 2011)............................................................................................................ 379<br />
Matter of Credit Suisse Securities (USA) LLC,<br />
NYSE Hearing Panel Decision 11-NYSE-5; 2011 NYSE Disc. Action LEXIS 5<br />
(Sept. 14, 2011)..................................................................................................................... 399<br />
Matter of Ellis,<br />
Admin. Proc. File No. 3-14328, SEC Release No. 34-64220, 2011 SEC LEXIS 1199<br />
(April 7, 2011). ..................................................................................................................... 388<br />
Matter of Gallardo,<br />
Admin. Proc. File No. 3-14139, SEC Release No. 34-65658, 2011 SEC LEXIS 3848<br />
(Oct. 31, 2011). ..................................................................................................................... 380<br />
Matter of Gilford Securities Inc.,<br />
Admin. Proc. File No. 3-14574, SEC Release No. 34-65450, 2011 SEC LEXIS 3419<br />
(Sept. 30, 2011)..................................................................................................................... 381<br />
Matter of Investment Placement Group,<br />
Admin. Proc. File No. 3-14677, SEC Release No. 34-66055, 2011 SEC LEXIS 4547<br />
(Dec. 23, 2011). .................................................................................................................... 378<br />
Matter of KCCI, Ltd.,<br />
NYSE Hearing Panel Decision 11-NYSE-8; 2011 NYSE Disc. Action LEXIS 8 (Nov.<br />
1, 2011). ................................................................................................................................ 398<br />
xxx
Matter of Keybanc Capital Markets, Inc.,<br />
NYSE Hearing Panel Decision 2011-1; 2011 NYSE Disc. Action LEXIS 1 (Jan. 31,<br />
2011). .................................................................................................................................... 401<br />
Matter of Lombardi & Co., Inc.,<br />
NYSE Hearing Panel Decision 2011-4; 2011 NYSE Disc. Action LEXIS 4 (May 25,<br />
2011). .................................................................................................................................... 399<br />
Matter of Lopez-Tarre,<br />
Admin. Proc. File No. 3-14562, SEC Release No. 34-65391, 2011 SEC LEXIS 3311<br />
(Sept. 23, 2011)..................................................................................................................... 382<br />
Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc.,<br />
Admin. Proc. File No. 3-14204, SEC Release No. 34-63760, 2011 SEC LEXIS 280<br />
(Jan. 25, 2011)....................................................................................................................... 390<br />
Matter of Pagliarini,<br />
Admin. Proc.File No. 3-14273, SEC Release No. 34-63964, 2011 SEC LEXIS 682<br />
(Feb. 24, 2011)...................................................................................................................... 389<br />
Matter of SG Americas Securities, LLC,<br />
NYSE Hearing Panel Decision 2011-3; 2011 NYSE Disc. Action LEXIS 3 (May 13,<br />
2011). .................................................................................................................................... 400<br />
Matter of Smith,<br />
Admin. Proc. File No. 3-14229, SEC Release No. 34-63834, 2011 SEC LEXIS 390<br />
(Feb. 3, 2011)........................................................................................................................ 387<br />
Matter of TD Ameritrade, Inc.,<br />
Admin. Proc. File No. 3-14225, SEC Release No. 34-63829, 2011 SEC LEXIS 389<br />
(Feb. 3, 2011)........................................................................................................................ 389<br />
Matter of the Application of Kaminski,<br />
Admin. Proc. File No. 3-14054, SEC Release No. 34-65347, 2011 SEC LEXIS 3225<br />
(Sept. 16, 2011)..................................................................................................................... 383<br />
Matter of UBS Securities LLC,<br />
NYSE Hearing Panel Decision 2011-2; 2011 NYSE Disc. Action LEXIS 2 (Feb. 2,<br />
2011). .................................................................................................................................... 400<br />
Maverick Fund, L.D.C. v. Comverse Tech. Inc.,<br />
801 F. Supp.2d 41 (E.D.N.Y. 2011). ............................................................ 117, 131, 193, 243<br />
MBIA Inc. v. Fed. Ins. Co.,<br />
652 F.3d 152 (2d Cir. 2011).................................................................................................. 317<br />
MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC,<br />
927 N.Y.S.2d 517 (N.Y. Sup. Ct. 2011) ....................................................................... 311, 319<br />
xxxi
McCafferty v. A.G. Edwards & Sons, Inc.,<br />
2011 U.S. Dist. LEXIS 89437 (D.N.J. Aug. 11, 2011)......................................................... 341<br />
McCann v. Hy-Vee,<br />
2011 WL 250262 (N.D. Ill. 2011) .......................................................................................... 81<br />
McCann v. Hy-Vee, Inc.,<br />
663 F.3d 926 (7th Cir. 2011)........................................................................................... 65, 320<br />
McCoy-McMahon v. Godlove,<br />
2011 WL 4820185 (E.D. Pa. Sept. 30, 2011). ...................................................................... 300<br />
McDonald v. Compellent Technologies, Inc.,<br />
805 F. Supp. 2d 725 (D. Minn. Aug. 1, 2011)...................................................................... 158<br />
McIntyre Mach., Ltd. v. Nicastro,<br />
131 S.Ct. 2780 (2011)........................................................................................................... 366<br />
Me. State Retirement Sys. v. Countrywide Fin. Corp.,<br />
No. 2:10–CV–0302 MRP (MANx), 2011 WL 4389689 (C.D. Cal. May 5, 2011) ................ 42<br />
Meram v. Citizens Title & Trust, Inc.,<br />
2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011).......................................................... 260<br />
Merkin v. Gabriel Capital, L.P.,<br />
2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011).................................................. 273<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Whitney,<br />
419 Fed. App’x. 826, (10th Cir. 2011). ................................................................................ 347<br />
Metz v. Unizan Bank,<br />
649 F.3d 492 (6th Cir. 2011). ............................................................................................... 327<br />
Meyer v. St. Joe Company ,<br />
2011 WL 3750324 (N.D. Fla. Aug. 24, 2011)...................................................................... 174<br />
Michael S. Rulle Family Dynasty Trust v. AGL Life Assurance Company,<br />
2011 WL 3510285 (3d Cir. July 14, 2011)........................................................................... 123<br />
Mid-Ohio Sec. Corp. v. Estate of Burns,<br />
790 F. Supp. 2d 1263 (D. Nev. 2011)........................................................................... 337, 343<br />
Milo v. Galante,<br />
2011 WL 1214769 (D. Conn. Mar. 28, 2011). ............................................................. 297, 329<br />
Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc.,<br />
2011 WL 6962826 (D. Minn. Dec. 12, 2011)....................................................................... 365<br />
xxxii
Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc. ,<br />
641 F.3d 1023 (8th Cir. 2011). ............................................................................................. 125<br />
Mishkin v. Zynex Inc.,<br />
2011 WL 1158715 (D.Colo. Mar. 30, 2011) ................................................................ 173, 205<br />
Mississippi Pub. Emps.’ Ret. Sys. v. Boston Scientific Corp.,<br />
649 F.3d 5 (1st Cir. 2011)..................................................................................................... 122<br />
MLSMK Inv. Co. v. JP Morgan Chase & Co.,<br />
651 F.3d 268 (2d Cir. 2011).......................................................................................... 267, 297<br />
Monk v. Johnson and Johnson ,<br />
2011 WL 6339824 (D.N.J. Dec. 19, 2011)................................................................... 149, 357<br />
Moomjy v. HQ Sustainable Maritime Indus., Inc.,<br />
2011 WL 4048796 (W.D. Wash. Sept. 12, 2011)......................................................... 190, 378<br />
Moorehead v. Deutsche Bank AG,<br />
2011 WL 4496221 (N.D. Ill. Sept. 26, 2011). ...................................................................... 303<br />
Moradi v. Adelson,<br />
2011 WL 5025155 (D. Nev. Oct. 20, 2011). ........................................................................ 189<br />
Morgan Keegan & Co. v. Jindra,<br />
2011 U.S. Dist LEXIS 135464 (W.D. Wash. Nov. 22, 2011). ............................................. 335<br />
Morgan Keegan & Co. v. Shadburn,<br />
2011 WL 5244696 (M.D. Ala. Nov. 3, 2011)......................................................................... 49<br />
Morgan Keegan & Co., Inc. v. Smythe,<br />
2011 Tenn. App. LEXIS 613 (Tenn. Ct. App. Jan. 19, 2011). ............................................. 345<br />
Mori v. Saito,<br />
802 F. Supp. 2d 520 (S.D.N.Y. 2011)................................................................................... 375<br />
Moriarty v. Equisearch Services, Inc.,<br />
2011 WL 4485176 (6th Cir. Sept. 29, 2011). ....................................................................... 305<br />
Morris v. Zimmer,<br />
2011 WL 5533339 (S.D.N.Y. Nov. 10, 2011)...................................................................... 298<br />
Moss v. Kroner,<br />
197 Cal. App. 4th 860 (2011). .............................................................................................. 266<br />
Murphy v. Reynolds,<br />
2011 WL 4502523 (Tex. App. Sept. 29, 2011). ........................................................... 279, 296<br />
xxxiii
Murray v. Citigroup Global Mkts., Inc.,<br />
2011 U.S. Dist. LEXIS 131197 (N.D. Ohio, Nov. 14, 2011). .............................................. 349<br />
Muthukamatchi v. Citigroup Global Markets, Inc.,<br />
2011 WL 5025062 (FINRA Oct. 9, 2011)............................................................................ 461<br />
N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc.,<br />
2011 WL 3874821 (S.D.N.Y. Aug. 16, 2011)...................................................................... 364<br />
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc.,<br />
2011 WL 1338195 (S.D.N.Y. Mar. 31, 2011) .......................................................... 12, 33, 307<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC,<br />
2011 Fed. Sec. L. Rep. (CCH) 96, 303 (S.D.N.Y. Apr. 28, 2011). ................................... 246<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC,<br />
2011 WL 2020260 (S.D.N.Y. May 19, 2011) .................................................................. 13, 34<br />
N.J. Carpenters Health Fund v. Residential Capital, LLC,<br />
272 F.R.D. 160 (S.D.N.Y. 2011). ................................................................................... 31, 363<br />
Narnia Investments Ltd. v. Harvestons Sec. Inc.,<br />
2011 Tex. App. LEXIS 6182 (Tex. Civ. App. Aug. 9, 2011)....................................... 265, 279<br />
NECA-IBEW Pension Trust Fund v. Bank of Am. Corp.,<br />
2011 WL 6844456 (S.D.N.Y. Dec. 29, 2011). ..................................................................... 376<br />
Negrete v. Allianz Life Ins. Co. of N. America,<br />
2011 WL 4852314 (C.D. Cal. Oct. 13, 2011)....................................................................... 304<br />
New Mexico State Investment Council v. Ernst & Young, <strong>LLP</strong>,<br />
641 F.3d 1089 (9th Cir. 2011). ............................................................................................. 125<br />
New Orleans Employees’ Retirement System v. Celestica, Inc,<br />
2011 WL 6823204 (2d Cir. Dec. 29, 2011). ......................................................... 123, 192, 351<br />
New York State Teachers’ Ret. Sys. v. Fremont General Corporation ,<br />
2011 WL 5930459 (9th Cir., Nov. 29, 2011)........................................................................ 126<br />
Nexbank, SSB v. BAC Home Loan Servicing, LP,<br />
2011 WL 5182118 (N.D. Tex. Oct. 28, 2011)................................................................ 39, 371<br />
Nguyen v. Radient Pharmaceuticals Corporation,<br />
2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011)................................... 167, 257, 359<br />
Niederklein v. PCS Edventures!.com, Inc.,<br />
2011 WL 759553 (D. Idaho Feb. 24, 2011).......................................................................... 190<br />
xxxiv
Northstar Fin. Advisors, Inc. v. Schwab Invs.,<br />
781 F. Supp. 2d 926 (N.D. Cal. 2011). ................................................................................. 217<br />
Northumberland Cty. Ret. Sys. v. GMX Resources, Inc.,<br />
2011 WL 5578963 (W.D. Okla. Nov. 16, 2011). ................................................................. 220<br />
Orr v. Calvert,<br />
2011 WL 6130799 (N.C. Dec. 9, 2011)................................................................................ 329<br />
Oughtred v. E*Trade Financial Corporation,<br />
2011 WL 1210198 (S.D.N.Y. Mar. 31, 2011). ..................................................................... 139<br />
Owens v. Gaffken & Barringer Fund, LLC,<br />
2011 WL 1795310 (S.D.N.Y. May 5, 2011). ......................................................................... 58<br />
Patel v. Patel,<br />
761 F. Supp. 2d 1375 (N.D. Ga. 2011)........................................................................... 70, 175<br />
Pension Trust Fund for Operating Eng’rs v. Mortgage Asset Securitization Trans., Inc.,<br />
2011 WL 4550191 (D.N.J. Sept. 29, 2011). ..................................................................... 17, 38<br />
Perfecting Church v. Royster, Carberry, Goldman & Assocs., Inc.,<br />
2011 WL 4407439 (E.D. Mich. Sept. 22, 2011)................................................................... 223<br />
Perlmutter v. Intuitive Surgical, Inc.,<br />
2011 WL 566814 (N.D. Cal. Feb. 15, 2011). ....................................................................... 187<br />
Pet Quarters, Inc. v. Ladenburg Thalmann and Company, Inc.,<br />
2011 WL 1135902 (E.D.Ark. Mar. 28, 2011). ..................................................................... 157<br />
Petrie v. Elec. Game Card Inc.,<br />
2011 U.S. Dist. LEXIS 6203 (C.D. Cal. Jan. 12, 2011). ...................................................... 256<br />
Pezza v. Investors Capital Corp.,<br />
767 F. Supp. 2d 225 (D. Mass. 2011). .................................................................................. 340<br />
PFS Invs., Inc. v. Imhoff,<br />
2011 U.S. Dist. LEXIS 31417 (E.D. Mich. Mar. 25, 2011). ................................................ 342<br />
Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enterprises, Inc.,<br />
2011 WL 4591541 (S.D. Fla. Sept. 30, 2011) .............................................................. 175, 264<br />
Philco Investments, LTD., v. Martin,<br />
2011 WL 4595247 (N.D. Cal. Oct. 4, 2011)......................................................................... 164<br />
Picard v. Kohn,<br />
2011 U.S. Dist. LEXIS 101261 (S.D.N.Y. Sept. 6, 2011).................................................... 298<br />
xxxv
Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC),<br />
458 B.R. 87 (Bankr. S.D.N.Y. 2011).................................................................................... 310<br />
Pipefitters Local No. 636 Defined Benefit Plan v. Bank of Am. Corp.,<br />
275 F.R.D. 187 (S.D.N.Y. 2011). ......................................................................................... 179<br />
Pipino v. Onuska,<br />
4:11CV00129 (N.D. Ohio Apr. 29, 2011). ....................................................................... 57, 59<br />
Plichta v. SunPower Corporation,<br />
790 F.Supp.2d 1012 (N.D. Cal. 2011) ...................................................................... 21, 68, 160<br />
Plumbers and Pipefitters Local Union No. 12 Pension-Annuity Fund v. Nomura Asset<br />
Acceptance Corp.,<br />
632 F.3d 762 (1st Cir. Mass. 2011) .................................................................................... 3, 24<br />
Plumbers and Pipefitters Local Union No. 200 Pension-Annuity Trust Fund v.<br />
Washington Post Co.,<br />
274 F.R.D. 33 (D.D.C 2011)................................................................................................. 176<br />
Plumbers and Pipefitters Local Union No. 562 Supplemental Plan & Trust v. J.P.<br />
Morgan Acceptance Corp. I,<br />
2011 WL 6182090 (E.D.N.Y. Dec. 13, 2011) ............................................................ 7, 28, 321<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-<br />
Misys Healthcare,<br />
778 F. Supp. 2d 858 (N.D. Ill. 2011) ...................................................................... 71, 154, 200<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-<br />
Misys In re Immucor, Inc. Sec. Litig.,<br />
2011 WL 2619092 (N.D. Ga. June 30, 2011)....................................................................... 207<br />
Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Arbitron,<br />
Inc.,<br />
2011 WL 5519840 (S.D.N.Y. Nov. 14, 2011)...................................................................... 375<br />
Plumbers and Pipefitters Local Union No. 719 Pension-Annuity Trust Fund v. Conseco<br />
Inc.,<br />
2011 WL 1198712 (S.D.N.Y. Mar. 30, 2011) ...................................................................... 138<br />
Plumbers and Pipefitters Local Union No. 719 Pension-Annuity Trust Fund v. Zimmer<br />
Holdings, Inc.,<br />
2011 WL 338865 (S.D. Ind. Jan. 28, 2011).......................................................................... 156<br />
Plumbers, Pipefitters & MES Local Union No. 392 Pension-Annuity Fund v. Fairfax Fin.<br />
Holdings Ltd.,<br />
2011 WL 4831209 (S.D.N.Y. Oct. 12, 2011)....................................................................... 182<br />
xxxvi
Police Retirement System of St. Louis v. Intuitive Surgical, Inc.,<br />
2011 WL 3501733 (N.D. Cal. Aug. 10, 2011). ............................................................ 162, 202<br />
Pope Investments II LLC v. Deheng Law Firm,<br />
2011 WL 5837818 (S.D.N.Y. Nov. 21, 2011)...................................................................... 144<br />
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC,<br />
792 F. Supp.2d 328 (D. Conn. 2011)............................................................................ 242, 353<br />
Prestwick Capital Mgmt. Ltd. v. Peregerine Fin. Group, Inc.,<br />
2011 U.S. Dist. LEXIS 95324 (N.D. Ill. Aug. 25, 2011)...................................................... 232<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Technologies, Inc.,<br />
793 F.Supp. 2d 651 (S.D. N.Y. 2011)..................................................... 85, 135, 177, 353, 368<br />
Probate Court of Warwick v. Bank of America, N.A.,<br />
2011 WL 3740478 (D.R.I. Aug. 24, 2011)........................................................................... 306<br />
Prud’homme v. Merrill Lynch, Pierce, Fenner, & Smith Inc.,<br />
FINRA Case No. 09-05271 Sep. 19, 2011.............................................................................. 60<br />
PT Bank Negara Indonesia (Persero) Tbk v. Barclays Bank PLC,<br />
2011 WL 4717360 (S.D.N.Y. Sept. 28, 2011)...................................................................... 354<br />
Public Employees Retirement Ass’n of N.M. v. Clearlend Secs.,<br />
798 F. Supp. 2d 1265 (D.N.M. 2011) ................................................................................... 314<br />
Public Employees Retirement Sys. of Miss. v. Goldman Sachs Grp.<br />
2011 WL 135821 (S.D.N.Y. Jan. 12, 2011). .................................................................... 11, 32<br />
Public Employees Retirement Sys. of Miss. v. Merrill Lynch & Co.,<br />
2011 WL 3652477 (S.D.N.Y. Aug. 22, 2011)................................................................ 34, 364<br />
Purvis v. Arizona Corp. Comm’n,<br />
No. 1 CA-CV 10-0311, 2011 WL 662842 (Ariz. Ct. App, Div. 1 Feb. 24, 2011). .................. 3<br />
Puskala v. Koss Corp.,<br />
799 F. Supp.2d 941 (E.D. Wis. 2011)............................................................. 79, 157, 236, 254<br />
Quail Cruises Ship Mgmt, Ltd. v. Agencia de Viagens CVC Tur Limitada,<br />
2011 WL 5057203 (S.D. Fla. Oct. 24, 2011)........................................................................ 374<br />
Quan v. Advanced Battery Tech., Inc.,<br />
2011 WL 4343802 (S.D.N.Y. Sept. 9, 2011)........................................................................ 181<br />
Rafton v. Rydex Series Funds,<br />
2011 WL 1642588 (N.D. Cal. May 2, 2011).......................................................................... 46<br />
xxxvii
Rafton v. Rydex Series Funds,<br />
2011 WL 31114 (N.D. Cal. Jan. 5, 2011)................................................................. 21, 45, 259<br />
Rai v. Barclays Capital, Inc.,<br />
2011 U.S. App. LEXIS 22365 (2d Cir., Nov. 2, 2011)......................................................... 348<br />
Raymond James Fin. Servs., Inc. v. Phillips,<br />
2011 WL 5555691 (Fla. Dist. Ct. App. Nov. 16, 2011). .............................................. 330, 338<br />
Reese v. BP Exploration (Alaska) Inc.,<br />
643 F.3d 681 (9th Cir. 2011). ......................................................................................... 66, 126<br />
Reljic v. Tullett Prebon Americas Corp.,<br />
2011 WL 2491342 (D.N.J. June 21, 2011)........................................................................... 453<br />
Rentea v. Janes,<br />
2011 WL 5822255 (C.D. Cal. Nov. 16, 2011)...................................................................... 168<br />
Resnik v. Boskin,<br />
2011 U.S. Dist. LEXIS 16634 (D.N.J. Feb. 17, 2011) ......................................................... 103<br />
Resnik v. Woertz,<br />
744 F. Supp. 2d 614 (D. Del. 2011)........................................................................ 69, 101, 146<br />
Reynolds v. Parklane Inv., Inc.,<br />
2011 Mich. App. LEXIS 1610 (Sept. 20, 2011). .................................................................. 337<br />
RGH Liquidating Trust v. Deloitte & Touche <strong>LLP</strong>,<br />
955 N.E.2d 329 (N.Y. 2011)................................................................................................. 220<br />
Rich v. Shrader ,<br />
2011 WL 4434852 (S.D. Cal. Sept. 22, 2011)...................................................................... 169<br />
Richard v. Nw. Pipe Co.,<br />
2011 U.S. Dist. LEXIS 96200 (W.D. Wash. Aug. 26, 2011). .............................................. 261<br />
Richek v. Bank of Am.,<br />
2011 WL 3421512 (N.D. Ill. Aug. 4, 2011). ........................................................................ 214<br />
Richman v. Goldman Sachs Group, Inc.,<br />
274 F.R.D. 473 (S.D.N.Y. 2011). ......................................................................................... 178<br />
Ridley v. Sullivan,<br />
2011 WL 1900156 (Ky. Ct. App. May 20, 2011)................................................................. 318<br />
Ritchie Capital Mgmt., L.L.C. v. Jeffries,<br />
653 F.3d 755 (8th Cir. 2011). ............................................................................................... 297<br />
xxxviii
Roseville Emps. Ret. Sys. v. EnergySolutions, Inc.,<br />
2011 U.S. Dist. LEXIS 113630 (S.D.N.Y. Sept. 30, 2011).................................................. 249<br />
Roseville Emps. Ret. Sys. v. Nokia Corp.,<br />
2011 U.S. Dist. LEXIS 101264 (S.D.N.Y. Sept. 6, 2011).................................................... 248<br />
RS-ANB Fund, LP, v. KMS SPE LLC ,<br />
2011 WL 5352433 (D. Idaho Nov. 7, 2011)......................................................................... 170<br />
Russo v. Bruce,<br />
777 F. Supp. 2d 505 (S.D.N.Y. 2011)............................................................................. 76, 135<br />
Russo v. Finisar Corp.,<br />
2011 WL 5117560 (N.D. Cal. Oct. 27, 2011)....................................................................... 188<br />
Sacks v. Dietrich,<br />
663 F.3d 1065 (9th Cir. 2011). ............................................................................................. 339<br />
Salameh v. Tarsadia Hotels,<br />
2011 WL 1044129 (S.D. Cal. Mar. 22, 2011) ........................................................................ 46<br />
Salzman v. KCD Financial, Inc.,<br />
2011 U.S. Dist. LEXIS 147170 (S.D.N.Y. Dec. 21, 2011). ................................................. 350<br />
San Franciso Residence Club, Inc. v. Amado,<br />
773 F. Supp. 2d 822 (N.D.Cal. 2011). .................................................................... 41, 237, 305<br />
Sanders v. Forex Capital Mkts., LLC,<br />
2011 U.S. Dist. LEXIS 137961 (S.D.N.Y. Nov. 29, 2011).................................................. 341<br />
Saunders v. Morton,<br />
2011 WL 1135132 (D. Vt. Feb. 17, 2011)............................................................................ 146<br />
Sawabeh Information Services, Co. v. Brody,<br />
2011 WL 6382701 (S.D.N.Y. Dec. 16, 2011). ....................................................... 76, 145, 355<br />
Scala v. Citicorp Inc.,<br />
2011 WL 900297 (N.D. Cal. Mar. 15, 2011)........................................................ 161, 218, 275<br />
Schueneman v. Arena Pharms., Inc.,<br />
2011 WL 3475380 (S.D. Cal. Aug. 8, 2011). ....................................................................... 189<br />
Scottrade, Inc. v. Broco Investments,<br />
774 F. Supp. 2d 573 (S.D.N.Y. 2011)..................................................................................... 80<br />
SEC v Mannion,<br />
789 F. Supp. 2d 1321 (N.D. Ga. 2011)................................................................................... 70<br />
xxxix
SEC v. Aragon Capital Advisors, LLC,<br />
2011 WL 3278907 (S.D.N.Y. July 26, 2011). .............................................................. 272, 354<br />
SEC v. Badian,<br />
Litig. Release No. 22070, 2011 SEC LEXIS 2931 (S.D.N.Y. Aug. 19, 2011); In re<br />
Drillman, Release No. 65172, 2011 SEC LEXIS 2929 (Aug. 19, 2011); In re Spinner,<br />
Release No. 65171, 2011 SEC LEXIS 2928, (Aug. 19, 2011)............................................. 422<br />
SEC v. Betta, Jr.,<br />
2011 WL 4369012 (S.D. Fla. Sept. 19, 2011) .................................................................. 56, 60<br />
SEC v. Big Apple Consulting U.S.A., Inc.,<br />
2011 U.S. Dist. LEXIS 95292 (M.D. Fla. Aug. 25, 2011) ................................................... 278<br />
SEC v. Carroll,<br />
2011 WL 5880875 (W.D. Ky. Nov. 23, 2011) ..................................................................... 358<br />
SEC v. Carroll,<br />
2011 WL 6141227 (W.D. Ky. Dec. 9, 2011)........................................................................ 372<br />
SEC v. Citigroup Global Markets Inc.,<br />
2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011)........................................................................ 53<br />
SEC v. Compania Internacional Financiera S.A.,<br />
2011 WL 3251813 (S.D.N.Y. July 29, 2011) ....................................................................... 368<br />
SEC v. Daifotis,<br />
2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011)..................................................... 260<br />
SEC v. Daifotis,<br />
2011 WL 2183314 (N.D. Cal. June 6, 2011)........................................................ 275, 276, 360<br />
SEC v. Daifotis,<br />
2011 WL 3295139 (N.D. Cal. Aug. 1, 2011). ........................................................................ 54<br />
SEC v. Devlin,<br />
Litig. Release No. 21854, 2011 SEC LEXIS 539 (S.D.N.Y. Feb. 14, 2011); In re<br />
Bowers, Release No. 63901, 2011 SEC LEXIS 632 (Feb. 14, 2011); In re Faulhaber,<br />
Release No. 63902, 2011 SEC LEXIS 633 (Feb. 14, 2011); In re Glover, Release No.<br />
63903, 2011 SEC LEXIS 634 (Feb. 14, 2011). .................................................................... 417<br />
SEC v. Espuelas,<br />
767 F. Supp. 2d 467 (S.D.N.Y. 2011)................................................................................... 270<br />
SEC v. Fareri,<br />
Litig. Release No. 21874, 2011 SEC LEXIS 819 (S.D. Fla. Mar. 7, 2011); In re<br />
Fareri, Release No. 64413, 2011 SEC LEXIS 1591 (May 5, 2011). ................................... 421<br />
xl
SEC v. Ficeto, Homm, Heatherington, Hunter World Markets, Inc., and Hunter Advisors,<br />
LLC,<br />
2011 SEC LEXIS 716, SEC <strong>Litigation</strong> Release No. 21865 (February 25, 2011) ................ 109<br />
SEC v. Finger and Black Diamond Securities LLC,<br />
2011 SEC LEXIS 3132, SEC <strong>Litigation</strong> Release No. 22087 (September 8, 2011).............. 111<br />
SEC v. Gabelli,<br />
653 F.3d 49 (2d Cir. 2011)...................................................................................... 50, 267, 320<br />
SEC v. Galleon Mgmt. LP,<br />
Litig. Release No. 22021, 2011 SEC LEXIS 2258 (S.D.N.Y. June 30, 2011)..................... 418<br />
SEC v. Geiger,<br />
Litig. Release No. 21831, 2011 SEC LEXIS 349 (D. Colo. Jan. 31, 2011); In re<br />
Geiger, Release No. 63849, 2011 SEC LEXIS 752 (Feb. 7, 2011); In re Geiger,<br />
Release No. 65265, 2011 SEC LEXIS 3096 (Sept. 6, 2011)................................................ 423<br />
SEC v. Geswein,<br />
2011 WL 4541308 (N.D. Ohio Aug. 2, 2011)........................................................................ 89<br />
SEC v. Goldman Sachs & Co.,<br />
790 F. Supp. 2d 147 (S.D.N.Y. 2011)..................................................................................... 52<br />
SEC v. J.P. Morgan Securities LLC,<br />
2011 SEC LEXIS 2329, SEC <strong>Litigation</strong> Release No. 22031 ............................................... 110<br />
SEC v. Kelly,<br />
2011 WL 44331161 (S.D.N.Y. Sept. 22, 2011)...................................................................... 53<br />
SEC v. Koji Goto,<br />
Litig. Release No. 22123, 2011 SEC LEXIS 3565 (Oct. 12, 2011). .................................... 435<br />
SEC v. Kovzan,<br />
2011 U.S. Dist. LEXIS 85794 (D. Kan. Aug. 4, 2011) ........................................................ 107<br />
SEC v. Locke Capital Mgmt. Inc.,<br />
794 F. Supp. 2d 355 (D.R.I. 2011)........................................................................................ 269<br />
SEC v. Mercury Interactive, LLC,<br />
2011 WL 5871020 (N.D. Cal. Nov. 22, 2011). .............................................................. 54, 106<br />
SEC v. Monterosso,<br />
768 F. Supp. 2d 1244 (S.D. Fla. Mar. 31, 2011)............................................................... 55, 69<br />
SEC v. Morgan Keegan & Co., Inc.,<br />
806 F. Supp. 2d 1253 (N.D. Ga. 2011)............................................................................. 70, 71<br />
xli
SEC v. N. Am. Clearing, Inc.,<br />
Litig. Release No. 21960, 2011 SEC LEXIS 1608 (M.D. Fla. May 5, 2011). ..................... 438<br />
SEC v. Retail Pro, Inc.,<br />
2011 U.S. Dist. LEXIS 68863 (S.D. Cal. June 23, 2011)..................................................... 277<br />
SEC v. Shanahan,<br />
646 F.3d 536 (8th Cir. 2011). ......................................................................................... 50, 269<br />
SEC v. Smith,<br />
798 F. Supp. 2d 412 (N.D.N.Y. 2011).......................................................................... 313, 361<br />
SEC v. Sponge Tech. Delivery Sys. Inc.,<br />
2011 Fed. Sec. L. Rep. (CCH) 96, 246 (E.D.N.Y. Mar. 14, 2011).................................... 269<br />
SEC v. Steffes,<br />
2011 WL 3418305 (N.D. Ill. Aug. 3, 2011) ......................................................................... 358<br />
SEC v. Stifel, Nicolaus & Co., Inc. and David Noack,<br />
2011 SEC LEXIS 2767, SEC <strong>Litigation</strong> Release No. 22064 (August 10, 2011) ................. 111<br />
SEC v. Tambone,<br />
802 F. Supp. 2d. 299 (D. Mass. 2011) .................................................................................. 320<br />
SEC v. Tecumseh Holdings Corp.,<br />
765 F. Supp. 2d 340 (S.D.N.Y. 2011)............................................................... 51, 97, 116, 194<br />
SEC v. Todd,<br />
642 F.3d 1207 (9th Cir. 2011) .............................................................................................. 240<br />
SEC v. UBS Financial Services Inc.,<br />
2011 SEC LEXIS 1555, SEC <strong>Litigation</strong> Release No. 21956 (May 4, 2011) ....................... 110<br />
SEC v. Vianna,<br />
Litig. Release No. 21905, 2011 SEC LEXIS 1039 (S.D.N.Y. Mar. 28, 2011)..................... 401<br />
SEC v. Vitesse Semiconductor Corp.,<br />
771 F. Supp. 2d 304 (S.D.N.Y. 2011)..................................................................................... 51<br />
SEC v. Weintraub,<br />
2011 U.S. Dist. LEXIS 14999 (S.D. Fla. Dec. 30, 2011) ..................................................... 107<br />
SEC v. Woodruff,<br />
778 F. Supp. 2d 1073 (D. Colo. March 31, 2011). ................................................................. 55<br />
SEC v. Wyly,<br />
788 F. Supp. 2d 92 (S.D.N.Y. 2011)................................................................................. 1, 325<br />
xlii
SEC v. Zhenyu Ni,<br />
SEC Litig. Rel. No. 21859 (N.D.Cal. Feb. 16, 2011)........................................................... 106<br />
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,<br />
454 B.R. 307 (S.D.N.Y. 2011).............................................................................................. 210<br />
Seinfeld v. Connor,<br />
774 F.Supp.2d 660 (D. Del. 2011)........................................................................................ 101<br />
Self v. Chase Bank, N.A.,<br />
2011 WL 3813106 (E.D. Cal. Aug. 25, 2011).................................................................. 45, 58<br />
Shaffer v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,<br />
779 F. Supp.2d 1085 (N.D. Cal. 2011). ........................................................................ 455, 456<br />
Shammami v. Allos,<br />
2011 WL 4805931 (E.D. Mich. Oct. 11, 2011) ...................................................... 57, 253, 335<br />
Sheedy v. Lehman Bros. Holdings Inc.,<br />
2011 U.S. Dist. LEXIS 131003 (D. Mass. 2011). ................................................................ 347<br />
Shenk v. Karmazin ,<br />
2011 WL 5148667 (S.D.N.Y Oct. 28, 2011)........................................................................ 144<br />
Shepard v. S3 Partners, LLC,<br />
2011 U.S. Dist. LEXIS 117957 (N.D. Cal. Oct. 12, 2011)................................................... 260<br />
Silverman v. Motorola, Inc.,<br />
772 F. Supp. 2d 923 (N.D. Ill. 2011). ................................................................................... 253<br />
Silverstrand Investments v. AMAG Pharm., Inc.,<br />
2011 WL 3566990 (D.Mass. Aug. 11, 2011). .................................................................... 7, 28<br />
Simmonds v. Credit Suisse Securities (USA), LLC,<br />
638 F.3d 1072 (9th Cir. 2011) .............................................................................................. 114<br />
Simmons Investments, Inc. v. Conversational Computing Corporation,<br />
2011 WL 673759 (D. Kan. Feb. 17, 2011) ................................................................... 173, 206<br />
Slaughter v. Laboratory Medicine Consultants, Ltd.,<br />
2011 WL 1486228 (D. Nev. 2011). ........................................................................................ 82<br />
Smit v. Charles Schwab & Co.,<br />
2011 WL 846697 (N.D. Cal. Mar. 8, 2011).......................................................................... 217<br />
Smith v. Mpire Holdings, LLC,<br />
2011 WL 3841676 (M.D. Tenn. Aug. 30, 2011) .................................................................... 40<br />
xliii
Solow v. Citigroup, Inc. ,<br />
2011 WL 5869599 (S.D.N.Y. Nov. 22, 2011)...................................................................... 145<br />
Sparano v. Lief,<br />
2011 WL 830109 (S.D. Cal. Mar. 3, 2011). ......................................................................... 189<br />
Spaz Bev. Co. Defined Benefit Pension Plan v. Douglas,<br />
2011 U.S. Dist. LEXIS 86019 (E.D. Pa. Aug. 4, 2011)........................................................ 333<br />
Special Situations Fund III, L.P. v. American Dental Partners, Inc.,<br />
775 F. Supp. 2d 227 (D. Mass. 2011) ............................................................. 72, 117, 128, 321<br />
SRM Global Fund Ltd P’ship v. Countrywide Fin. Corp.,<br />
2011 U.S. App. LEXIS 23526 (2d Cir. Nov. 23, 2011)........................................................ 117<br />
St. Lucie County Fire District Fire-Fighters’ Pension Trust Fund v. Motorola, Inc.,<br />
2011 WL 814932 (N.D. Ill. Feb. 28, 2011) .................................................................. 154, 200<br />
Standard Inv. Chartered, Inc. v. National Assoc. of Sec. <strong>Dealer</strong>s, Inc.,<br />
637 F.3d 112 (2d. Cir. 2011)................................................................................................. 119<br />
Steamfitters Local 449 Pension Fund v. Alter,<br />
2011 WL 4528385 (E.D. Pa. Sept. 30, 2011) ................................................. 87, 149, 197, 252<br />
Stephenson v. Pricewaterhousecoopers, <strong>LLP</strong>,<br />
768 F. Supp. 2d 562 (S.D.N.Y. 2011)................................................................................... 133<br />
Stevens v. Sembcorp Utilities PTE Ltd.,<br />
2011 WL 3296063 (S.D.N.Y. Aug. 1, 2011)........................................................................ 361<br />
Stichting Pensioenfonds ABP v. Countrywide Fin. Corp.,<br />
802 F. Supp.2d 1125 (C.D. Cal. 2011) ..................................................... 20, 44, 257, 326, 328<br />
STMicroelectronics v. Credit Suisse Group,<br />
775 F. Supp. 2d 525 (E.D.N.Y. 2011) .................................................................. 235, 243, 348<br />
Stone v. Chicago Inv. Grp., LLC,<br />
2011 WL 6841817 (N.D. Ill. Dec. 29, 2011)................................................................ 326, 327<br />
Stoody-Broser v. Bank of Am.,<br />
2011 WL 2181364 (9th Cir. June 6, 2011). .......................................................................... 208<br />
Strategic Diversity, Inc. v. Alchemix Corp.,<br />
666 F.3d 1197 (9th Cir. 2012). ............................................................................................... 66<br />
Stratte-McClure v. Stanley,<br />
784 F. Supp. 2d 373 (S.D.N.Y. 2011)................................................................................... 135<br />
xliv
Strugala v. Riggio,<br />
2011 U.S. Dist. LEXIS 115834 (S.D.N.Y. Oct. 4, 2011). .................................................... 100<br />
Suess v. FDIC,<br />
770 F. Supp. 2d 32 (D.D.C. 2011)........................................................................................ 312<br />
Szulik v. TAG Virgin Islands, Inc.,<br />
783 F. Supp. 2d 792 (E.D.N.C. 2011)................................................................................... 370<br />
Szymborski v. Ormat Technologies, Inc.,<br />
776 F. Supp. 2d 1191 (D.C. Nev. 2011) ................................................................. 73, 171, 203<br />
Taddeo v. Am. Invsco Corp.,<br />
2011 WL 4346380 (D. Nev. Sept. 15, 2011).......................................................................... 46<br />
TAGC Mgmt. LLC v. Lehman,<br />
2011 WL 3796350 (S.D.N.Y. Aug. 24, 2011)...................................................................... 369<br />
Taylor v. AIA Servs. Corp.,<br />
261 P.3d 829 (Idaho 2011).................................................................................................... 315<br />
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc.,<br />
2011 WL 1253250 (D.Ariz. Mar. 31, 2011)................................................................. 159, 358<br />
Teran v. Subaye, Inc.,<br />
2011 WL 4357362 (S.D.N.Y. Sept. 16, 2011)...................................................................... 181<br />
The Ayco Company, L.P v. Becker,<br />
2011 U.S. Dist. LEXIS 92380 (N.D.N.Y. Aug. 18, 2011) ................................................... 340<br />
Tiberius Capital, LLC v. Petrosearch Energy Corporation,<br />
2011 WL 1334839 (S.D.N.Y. Mar. 31, 2011) .............................................................. 100, 139<br />
Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Company, Inc.,<br />
2011 WL 4526517 (S.D.N.Y. Sept. 29, 2011)...................................................................... 142<br />
Toussie v. Smithtown Bancorp, Inc.,<br />
2011 WL 1155597 (E.D.N.Y. Feb. 7, 2011)......................................................................... 367<br />
Turner v. Shengdatech, Inc.,<br />
2011 WL 6110438 (S.D.N.Y. Dec. 6, 2011). ....................................................................... 183<br />
Tuttle v. Sky Bell Asset Mgmt., LLC,<br />
2011 WL 208060 (N.D. Cal. Jan. 21, 2011)......................................................................... 217<br />
Tyler v. Liz Claiborne, Inc. ,<br />
2011 WL 4498983 (S.D.N.Y. Sept. 29, 2011)...................................................................... 142<br />
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U.S. Bank N.A. v. Cold Spring Granite Co.,<br />
802 N.W.2d 363 (Minn. 2011).............................................................................................. 315<br />
U.S. Education Loan Trust III, LLC v. RBC Capital Markets Corp.,<br />
2011 WL 6778480 (S.D.N.Y. Dec. 21, 2011) ...................................................................... 145<br />
U.S. v. Bachynsky,<br />
415 F. App’x 167 (11th Cir. 2011). ...................................................................................... 281<br />
U.S. v. Behrens,<br />
2011 U.S. App. LEXIS 14294 (8th Cir. July 13, 2011).......................................................... 83<br />
U.S. v. Bowdoin,<br />
770 F. Supp. 2d 142 (D.D.C. 2011).......................................................................................... 1<br />
U.S. v. Gushlak,<br />
2011 WL 3159170 (E.D.N.Y. July 26, 2011)....................................................................... 307<br />
U.S. v. McDonald,<br />
2011 WL 1812782 (S.D.N.Y. May 10, 2011) .......................................................................... 2<br />
U.S. v. Rajaratnam,<br />
2011 U.S. Dist. LEXIS 91365 (S.D.N.Y. Aug. 16, 2011).................................................... 282<br />
U.S. v. Reyes,<br />
660 F.3d 454 (9th Cir. 2011). ............................................................................................... 235<br />
U.S. v. Skilling,<br />
638 F.3d 480 (5th Cir. 2011). ............................................................................................... 280<br />
U.S. v. Speer,<br />
419 F. App’x 562 (6th Cir. 2011). ........................................................................................ 281<br />
U.S. v. Sumeru,<br />
2011 U.S. App. LEXIS 18713 (9th Cir. Sept. 7, 2011). ....................................................... 281<br />
U.S. v. Tzolov & Butler,<br />
642 F.3d 314 (2nd Cir. 2011).................................................................................................. 95<br />
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc.,<br />
660 F.3d 643 (2d Cir. 2011).......................................................................................... 330, 339<br />
Underland v. Alter,<br />
2011 WL 4017908 (E.D. Pa. Sept. 9, 2011) ............................................................. 16, 38, 197<br />
Urman v. Novelos Therapeutics, Inc.,<br />
796 F. Supp. 2d 277 (D. Mass. 2011). .................................................................................. 128<br />
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Valentini v. Citigroup, Inc.,<br />
2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011) .................................. 86, 98, 146, 195, 284, 356<br />
VanCook v. SEC,<br />
653 F.3d 130 (2nd Cir. 2011).................................................................................. 95, 113, 268<br />
Vandevelde v. China Natural Gas, Inc.,<br />
2011 WL 2580676 (D. Del. Jun. 29, 2011) .......................................................................... 184<br />
Vandevelde v. China Natural Gas, Inc.,<br />
277 F.R.D. 126 (D. Del. 2011) ....................................................................................... 69, 185<br />
Velez v. Perrin Holden & Davenport Capital Corp.,<br />
769 F. Supp. 2d 445 (S.D.N.Y. 2011)........................................................................... 332, 452<br />
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd.,<br />
661 F.3d 164 (2d Cir. 2011).................................................................................................. 331<br />
Walker v. Morgan Stanley Smith Barney LLC,<br />
2011 WL 1603490 (E.D. Pa. Apr. 28, 2011) ........................................................................ 454<br />
Wanken v. Wanken,<br />
2011 WL 4495597 (5th Cir. Sept. 29, 2011) ........................................................................ 450<br />
Waterford Inv. Servs. v. Bosco,<br />
2011 U.S. Dist. LEXIS 96046 (E.D. Va. July 29, 2011). ..................................................... 334<br />
Waterford Twp. Police & Fire Ret. Sys. v. Smithtown Bancorp, Inc.,<br />
2011 WL 3511057 (E.D.N.Y. May 31, 2011) ...................................................................... 177<br />
Wehrs v. Benson York Group, Inc.,<br />
2011 WL 4435609 (N.D. Ill. Sept. 23, 2011) ............................................................... 155, 308<br />
Wells Fargo Advisors, LLC v. Shaffer,<br />
2011 WL 2669479 (N.D. Cal. July 7, 2011)......................................................................... 456<br />
Wells Fargo Advisors, LLC v. Stifel Nicolaus, LLC,<br />
2011 WL 4695369 (Cal. App. Ct. Oct. 7, 2011)................................................................... 460<br />
Wells Fargo Bank, N.A. v. WMR e-Pin, LLC,<br />
653 F.3d 702 (8th Cir. 2011). ............................................................................................... 346<br />
West Palm Beach Police Pension Fund v. Cardionet, Inc.,<br />
2011 WL 1099815 (S.D. Cal. Mar. 24, 2011). ..................................................................... 218<br />
West v. State of Indiana,<br />
942 N.E.2d 862 (Ind. Ct. App. 2011)........................................................................................ 3<br />
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West Va. Laborers Trust Fund v. STEC Inc.,<br />
2011 WL 6156945 (C.D. Cal. Oct. 7, 2011)......................................................................... 216<br />
Westley v. Oclaro, Inc.,<br />
2011 WL 4079178 (N.D. Cal. Sept. 12, 2011). .................................................................... 188<br />
White v. Kolinsky,<br />
2011 WL 1899307 (D.N.J. May 18, 2011)........................................................................... 148<br />
Wilamowsky v. Take-Two Interactive Software, Inc.,<br />
2011 WL 4542754 (S.D.N.Y. Sept. 30, 2011).............................................................. 143, 249<br />
Wilson v. Merrill Lynch & Co., Inc.,<br />
2011 WL 5515958 (2nd Cir. 2011)......................................................................................... 83<br />
Wirth v. Taylor,<br />
2011 U.S. Dist. LEXIS 101773 (D. Utah Sept. 8, 2011).............................................. 263, 277<br />
Wolfe v. Aspenbio Pharma, Inc.,<br />
2011 WL 2726019 (D. Colo. Jul. 11, 2011). ........................................................................ 191<br />
Wozniak v. Align Technologies, Inc.,<br />
2011 WL 2269418 (N.D.Cal. June 8, 2011)................................................................. 162, 202<br />
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc.,<br />
655 F.3d 1039 (9th Cir. 2011) ........................................................................................ 66, 126<br />
Wu v. Tang,<br />
2011 WL 145259 (N.D. Tex. Jan. 14, 2011) .................................................. 38, 151, 273, 282<br />
Wyatt v. Inner City Broadcasting Corporation ,<br />
2011 WL 4484071 (S.D.N.Y. Sept. 28, 2011)...................................................................... 142<br />
Wynns v. Citigroup Global Markets, Inc.,<br />
FINRA Case No. 10-00278 (Sep. 14, 2011)........................................................................... 60<br />
Wyo. State Treasurer v. Moody’s Investors Serv.,<br />
2011 Fed. Sec. L. Rep. (CCH) 96, 310 (2d Cir. May 11, 2011) ........................................ 239<br />
Yary v. Voight,<br />
2011 WL 6781003 (D. Minn Dec. 27, 2011)........................................................ 158, 255, 326<br />
Yuan v. Getco, LLC,<br />
2011 U.S. Dist. LEXIS 89991 (N.D. Ill. August 12, 2011).......................................... 337, 342<br />
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