Broker-Dealer Litigation - Greenberg Traurig LLP
Broker-Dealer Litigation - Greenberg Traurig LLP
Broker-Dealer Litigation - Greenberg Traurig LLP
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
<strong>Broker</strong>-<strong>Dealer</strong> <strong>Litigation</strong><br />
2012 Annual Survey<br />
Editor<br />
Terry R. Weiss<br />
GREENBERG TRAURIG <strong>LLP</strong><br />
Atlanta, Georgia<br />
© March 2013
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 2012. Although the Survey does not purport to necessarily be<br />
comprehensive, it is intended to include all notable decisions and proceedings during 2012.<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 Marisa Crawford, Jonathan Lippert, and Brenda McDonald of <strong>Greenberg</strong> <strong>Traurig</strong> in<br />
Atlanta, Georgia, for their efforts in editing, revising, and organizing the Survey.<br />
Dated: March 1, 2013<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 />
Bingham McCutchen<br />
Matthew C. Applebaum<br />
Timothy P. Burke<br />
Michael R. Weissman<br />
Bressler, Amery & Ross<br />
Bennett Falk<br />
Foley & Lardner, <strong>LLP</strong><br />
Joseph D. Edmondson, Jr.<br />
<strong>Greenberg</strong> <strong>Traurig</strong> <strong>LLP</strong><br />
Evelyn Bukchin<br />
Travis R. Chapin<br />
Andy Clark<br />
Jonathan Cyprys<br />
Marisa L. Crawford<br />
Brett M. Doran<br />
Leslie P. Fisher<br />
Sandra D. Gonzalez<br />
Joseph P. Griffith<br />
Vera Ranieri<br />
Matt Simmons<br />
Jennifer Tomsen<br />
Lauren R. Whetstone<br />
Keesal, Young & Logan<br />
Sean B. Cooney<br />
Christopher R. Farnsworth<br />
Michele R. Fron<br />
Jessica Luhrs<br />
Ian Ross<br />
Erin Weesner-McKinley<br />
Latham & Watkins<br />
Jeff G. Hammel<br />
Adrienne Wheatley
Loeb & Loeb <strong>LLP</strong><br />
Alyson M. Weiss<br />
Daniel Murphy<br />
Maynard Cooper & Gale PC<br />
Peter S. Fruin<br />
Miller Canfield, Paddock and Stone PLC<br />
Todd A. Holleman<br />
Rocky Pozza<br />
Miller Nash <strong>LLP</strong><br />
Thomas C. Sand<br />
Christine L. Taylor<br />
Neal Gerber & Eisenberg <strong>LLP</strong><br />
H. Nicholas Berberian<br />
Tina L. Winer<br />
Rogers & Hardin<br />
Thomas J. Mew<br />
Jeffrey W. Willis<br />
Stradley Ronon Stevens & Young <strong>LLP</strong><br />
Christine M. Debevec<br />
David E. Somers<br />
Vinson & Elkins <strong>LLP</strong><br />
Ari Berman<br />
Adrian J. Rodriguez<br />
Matthew R. Stammel
TABLE OF CONTENTS<br />
Page<br />
A. Definition of a Security............................................................................................................ 1<br />
B. Liabilities under the Securities Act of 1933 ........................................................................... 6<br />
1. Section 11 ..................................................................................................................... 6<br />
2. Section 12 ................................................................................................................... 26<br />
3. Section 17 ................................................................................................................... 52<br />
C. Liabilities under the Securities Exchange Act of 1934 ........................................................ 59<br />
1. Section 10(b) and Rule 10b-5 ................................................................................... 59<br />
a. Churning ........................................................................................................ 59<br />
b. Suitability ....................................................................................................... 60<br />
c. Insider Trading .............................................................................................. 63<br />
d. Misrepresentations/Omissions.................................................................... 101<br />
e. Standing ....................................................................................................... 107<br />
f. Affirmative Defenses .................................................................................. 110<br />
2. Section 14 ................................................................................................................. 115<br />
3. Section 15(c) ............................................................................................................ 131<br />
4. Section 16(b) ............................................................................................................ 138<br />
5. Section 17 ................................................................................................................. 143<br />
6. Section 18 ................................................................................................................. 144<br />
7. Section 19(b) ............................................................................................................ 144<br />
8. Margin Violations .................................................................................................... 145<br />
D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995 ........................................ 148<br />
1. Pleading .................................................................................................................... 148<br />
2. Appointment of Lead Plaintiff/Class Counsel ....................................................... 172<br />
3. Safe Harbor/Bespeaks Caution Defense................................................................. 189<br />
i
E. Liabilities under the Securities <strong>Litigation</strong> Uniform Standards Act of 1999 ..................... 203<br />
F. Liabilities under State Statutory and Common Law .......................................................... 214<br />
1. Blue Sky Laws ......................................................................................................... 214<br />
2. Consumer Protection and Other Statutes ............................................................... 219<br />
3. Common Law Fraud ................................................................................................ 219<br />
4. Breach of Fiduciary Duty and Other Common Law Claims ................................ 222<br />
G. Liabilities Involving Clearing <strong>Broker</strong>s ............................................................................... 227<br />
H. Secondary Liability .............................................................................................................. 230<br />
1. Respondeat Superior ................................................................................................ 230<br />
2. Control Person ......................................................................................................... 238<br />
3. Aiding & Abetting ................................................................................................... 311<br />
4. Conspiracy................................................................................................................ 347<br />
5. Failure to Supervise ................................................................................................. 357<br />
I. Private Rights of Action for Violations of SRO Rules ...................................................... 362<br />
J. RICO ..................................................................................................................................... 364<br />
K. Damages and Other Relief in Private Actions .................................................................... 377<br />
1. Damages as Element of Claim ................................................................................ 377<br />
2. Measure of Damages ............................................................................................... 381<br />
3. Punitive Damages .................................................................................................... 387<br />
4. Attorneys’ Fees and Costs ....................................................................................... 388<br />
L. Contribution, Indemnification ............................................................................................. 398<br />
M. Statute of Limitations ........................................................................................................... 400<br />
1. Federal Securities Claims ........................................................................................ 400<br />
2. State Securities Claims ............................................................................................ 408<br />
3. RICO......................................................................................................................... 412<br />
4. SRO Rules ................................................................................................................ 412<br />
ii
N. Arbitration............................................................................................................................. 413<br />
1. Scope ........................................................................................................................ 413<br />
2. Eligibility/Limitations ............................................................................................. 430<br />
3. Jurisdiction/Estoppel ............................................................................................... 431<br />
4. Motions to Vacate or to Enjoin ............................................................................... 436<br />
a. Punitive Damages ........................................................................................ 436<br />
b. Attorneys’ Fees............................................................................................ 436<br />
c. Other............................................................................................................. 438<br />
O. Practice and Procedure ......................................................................................................... 458<br />
1. Rule 9(b) of the Fed. R. Civ. P. .............................................................................. 458<br />
2. Rule 11 of the Fed. R. Civ. P. ................................................................................. 467<br />
3. Rule 23 of the Fed. R. Civ. P. ................................................................................. 468<br />
4. Venue, Pendent Jurisdiction Removal and Other Issues ....................................... 471<br />
5. Discovery ................................................................................................................. 475<br />
P. Failure to Supervise.............................................................................................................. 479<br />
1. SEC Enforcement Actions ...................................................................................... 479<br />
2. FINRA Enforcement Actions.................................................................................. 485<br />
3. NYSE Enforcement Actions ................................................................................... 495<br />
Q. SEC <strong>Litigation</strong> Affecting <strong>Broker</strong>-<strong>Dealer</strong>s .......................................................................... 499<br />
1. Direct SEC Proceedings .......................................................................................... 499<br />
a. Sales Practice Violations ............................................................................ 499<br />
b. Unfair/Fraudulent Markups or Commissions ............................................ 500<br />
c. Other Fraudulent Practices ......................................................................... 501<br />
(i) Misappropriation ............................................................................. 501<br />
(ii) Misrepresentation ........................................................................... 504<br />
(iii) Falsification of Documents ............................................................ 510<br />
iii
(iv) Failure to Maintain Accurate Books and Records ........................ 512<br />
d. Mutual Fund Trading and Disclosure Violations ...................................... 513<br />
e. Trading Practice Violations ........................................................................ 514<br />
(i) Insider Trading ................................................................................ 514<br />
(ii) Market Manipulation ...................................................................... 517<br />
(iii) Securities Offering Violations ....................................................... 520<br />
(iv) Trading Rules Violations ............................................................... 521<br />
f. Failure to Supervise..................................................................................... 521<br />
g. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed .................................... 523<br />
h. Procedural Issues ......................................................................................... 524<br />
(i) Jurisdiction and Time Bars............................................................. 524<br />
(ii) Standard of Review ........................................................................ 524<br />
(iii) Due Process ..................................................................................... 524<br />
(iv) Prior Disciplinary Histories............................................................ 524<br />
(v) Selective Prosecution...................................................................... 524<br />
(vi) Sanctions ......................................................................................... 524<br />
i. <strong>Broker</strong>/<strong>Dealer</strong> Registration Violations ...................................................... 525<br />
j. Miscellaneous .............................................................................................. 527<br />
2. SEC Review of SRO Proceedings .......................................................................... 528<br />
a. Sales Practice Violations ............................................................................ 528<br />
b. Unfair/Fraudulent Markups or Commissions ............................................ 529<br />
c. Other Fraudulent Practices ......................................................................... 529<br />
(i) Misrepresentation ........................................................................... 529<br />
(ii) Falsification of Documents ............................................................ 530<br />
(iii) Failure to Maintain Accurate Books and Records ........................ 530<br />
iv
(iv) Selling Away ................................................................................... 530<br />
d. Financial Responsibility Violations ........................................................... 530<br />
(i) Segregation of Customer Funds ..................................................... 530<br />
(ii) Regulation T Violations ................................................................. 530<br />
e. Trading Practice Violations/Market Manipulation ................................... 530<br />
f. Failure to Supervise..................................................................................... 531<br />
g. Registration Violations ............................................................................... 532<br />
h. Failure to Cooperate with FINRA Investigation/Failure to<br />
Comply with FINRA Requests for Financial Information ....................... 532<br />
i. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed .................................... 532<br />
j. Procedural Issues ......................................................................................... 532<br />
(i) Evidence .......................................................................................... 532<br />
(ii) Due Process ..................................................................................... 532<br />
(iii) Jurisdiction and Time Bars............................................................. 532<br />
(iv) Discovery ........................................................................................ 533<br />
(v) Sanctions ......................................................................................... 533<br />
(vi) Right to Counsel ............................................................................. 533<br />
k. Statutory Disqualification ........................................................................... 533<br />
l. Reporting Violations ................................................................................... 534<br />
m. Net Capital Violations................................................................................. 534<br />
n. Miscellaneous .............................................................................................. 528<br />
R. <strong>Broker</strong>-<strong>Dealer</strong> Employment <strong>Litigation</strong> and Arbitration .................................................... 535<br />
TABLE OF AUTHORITIES ........................................................................................................... 551<br />
RESEARCH CONTRIBUTIONS BY FIRM ................................................................................. 601<br />
v
SECURITIES LITIGATION<br />
A. Definition of a Security<br />
A.<br />
S.E.C. v. Merklinger, 489 Fed. Appx. 937, 2012 WL 3064777 (6 th Cir. July 30, 2012).<br />
The SEC had sufficiently alleged that the investments were “securities” under federal<br />
securities law when the investors provided “an investment of money,” collectively investing over<br />
$7.2 million, defendant commingled investors’ funds, and they were marketed as a “passive<br />
investment” from which “after five years the investors could expect returns on their investments<br />
ranging from 57% to 372%.”<br />
S.E.C. v. Schooler, No. 12–CV–2164, --- F. Supp. 2d ---, 2012 WL 4761917 (S.D. Cal. Oct. 5,<br />
2012).<br />
SEC made out a prima facie case that the general partnership interests at issue were<br />
securities based on the defendants’ likely involvement in selling the parcel of land in which the<br />
general partnerships were invested, its pivotal operational role with respect to the general<br />
partnerships, the fractional nature of the general partnerships’ interest in the land, and the<br />
apparent use of investors’ IRA funds.<br />
S.E.C. v. Shields, No. 11–CV–02121, 2012 WL 3886883 (D. Colo. Sept. 6, 2012).<br />
Interests in four joint ventures were not investment contracts and, therefore, not securities<br />
as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934.<br />
Goldberg v. 401 North Wabash Venture, LLC, No. 09 C 6455, --- F.Supp.2d ----, 2012 WL<br />
4932653 (N.D. Ill. Oct. 16, 2012)<br />
Hotel condominium units (HCUs) are not “securities” for purposes of the Illinois<br />
Securities Law, as there is no horizontal commonality, as required to satisfy the “common<br />
enterprise” element of the test for an “investment contract”; any net revenue from the rental of<br />
each HCU was paid directly to the owner of that particular HCU, there had never been any<br />
pooling of revenues, and to the extent any common revenue was “pooled,” there was no showing<br />
that the revenue was anything more than an offset of operational expenses, much less the fruits<br />
of an investment undertaking.<br />
A.<br />
A.<br />
A.<br />
1
S.E.C. v. Sentinel Mgmt. Group, Inc., No. 07 C 4684, 2012 WL 1079961 (N. D. Ill. Mar. 30,<br />
2012).<br />
Defendant offered investment contracts to potential investors who invested their money<br />
in a pooled fund with other investors, i.e., a common enterprise, and they expected a return on<br />
their investment solely from defendant’s efforts. Therefore, the court held that the investment<br />
agreements entered into by defendant and its investors were, as a matter of law, securities.<br />
Ferguson v. Purvis, No. 11–cv–573, 2012 WL 1029388 (S.D. Ind. Mar. 26, 2012).<br />
Note secured by a mortgage on a home was not a security and claim related to same did<br />
not invoke federal court jurisdiction under securities laws.<br />
Valley Forge Renaissance, L.P. v. Greystone Servicing Corp., Inc., No. 09-CV-00131, 2012 WL<br />
1340802 (S.D. Ind. Apr. 18, 2012).<br />
Commercial loan agreement with a rate lock mechanism was not an investment, which is<br />
necessarily accompanied by at least some degree of risk. Instead, the plaintiff merely purchased<br />
certainty in the form of a locked interest rate. There was simply no risk inherent in the financial<br />
instrument itself and the rate lock mechanism was not a security.<br />
Delgado v. Center on Children, Inc., No. 10–2753, 2012 WL 2878622 (E.D. La. July 13, 2012).<br />
Promissory notes were “securities” because three of the four Reeves v. Ernst & Young,<br />
494 U.S. 56 (1990), factors clearly weighed in favor of characterizing the notes as securities,<br />
and, under a balancing approach, these three factors outweighed the one factor that weighed in<br />
favor of classifying the notes as non-securities.<br />
S.E.C. v. Gagnon, No. 10–CV–11891, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012).<br />
Defendant offered and sold securities within the meaning of the Securities and Exchange<br />
Acts when all the investors made or were solicited to make investments of money in a common<br />
enterprise where the funds went into a common pool from which all might benefit; the investors<br />
were motivated to earn profits, evidenced by their desire to earn returns rather than by a desire to<br />
use or consume the item purchased; and the expectation of profits was to be derived from the<br />
entrepreneurial efforts of the defendants.<br />
A.<br />
A.<br />
A.<br />
A.<br />
A.<br />
2
A.<br />
S.E.C. v. Morriss, No. 12-CV-80, 2012 WL 6822346 (E.D. Mo. Sept. 21, 2012).<br />
When defendants characterized their offerings as securities under circumstances where<br />
investors had reason to believe this characterization, the investments at issue satisfied the<br />
definition of “security.”<br />
Baroi v. Platinum Condo. Dev., LLC, No. 09-CV-00671, --- F.Supp.2d ----, 2012 WL 2847819<br />
(D. Nev. July 11, 2012).<br />
Interest in condominium units was a security under Nevada securities laws when sale of<br />
condominium units and rental agreements constituted a single transaction, sale of condominium<br />
units constituted a “common enterprise,” and purchasers lacked the practical ability to control<br />
their investment. The unregistered sale of the securities violated Nevada securities laws.<br />
Levin v. Barry Kaye & Assocs., Inc., 858 F.Supp.2d 914 (S.D. Ohio 2012).<br />
The court held that fact issues precluded summary judgment on the issue of whether life<br />
insurance policy was a security under Ohio’s Blue Sky Law.<br />
Wolfe v. Bellos, No. 11–CV–02015, 2012 WL 652090 (N.D. Tex. Feb. 28, 2012).<br />
The court held that loans to partnership were not securities but rather ordinary<br />
commercial transactions outside the purview of the federal securities laws because the only<br />
money plaintiff expected to receive was repayment of principal, she did not anticipate any<br />
appreciation in the value of the amounts loaned, repayment of the loans was not conditioned on<br />
success of the investment, and the loans were not extended so partnership could obtain<br />
investment assets but to pay partnership’s business debt to solve its financial problems.<br />
Boulware v. Baldwin, No. 11–CV–762, 2012 WL 1412698 (D. Utah Apr. 23, 2012).<br />
Where plaintiff was motivated to purchase shares solely by the prospect of a return on the<br />
investment and not by any desire to “use or consume” the shares, and plaintiff relied on the<br />
management efforts of defendants to generate that return, the court found that the shares<br />
purchased by the plaintiff were securities.<br />
A.<br />
A.<br />
A.<br />
A.<br />
3
A.<br />
S.E.C. v. Mowen, No. 09–CV–00786, 2012 WL 2120249 (D. Utah June 11, 2012).<br />
Promissory notes at issue were securities subject to federal securities laws because (1)<br />
seller’s purpose was to raise money for a business enterprise and buyer’s purpose was to make a<br />
profit; (2) the note was offered and sold to a broad segment of the public; and (3) the investing<br />
public reasonably viewed the promissory notes as investment securities based upon the terms of<br />
the notes and the fact that the seller’s offering materials clearly and repeatedly identified the<br />
notes as “securities” and the purchasers as “investors.”<br />
Carlucci v. Han, No. 12-CV-451, --- F. Supp. 2d ---, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).<br />
Under the “family resemblance” test, investor’s convertible promissory notes were<br />
“securities” within meaning of the Securities Exchange Act of 1934, even though seller’s<br />
purpose in selling notes was for corporation’s legitimate business purposes and notes did not<br />
appear to have been offered to broad segment of public, where investor’s motivation in<br />
purchasing notes was to make profit, corporation’s owner approached investor to solicit<br />
“investments” so notes would have been construed accordingly by reasonable investor, notes<br />
were convertible into corporation’s common stock, and no other regulatory scheme would<br />
significantly reduce risk of notes and render application of securities laws unnecessary.<br />
In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012).<br />
Trustee’s allegations described a passive investment scheme that could meet the<br />
definition of an investment contract and thus a security when Trustee alleged that investors<br />
purchased interests in commercial properties for a combination of cash and the assumption of<br />
pre-existing debt, were guaranteed a 20–year return on investment of upwards of 7 percent, and<br />
the properties were managed by a master lessee, who sublet the property, collected rents, and<br />
handled the expenses related to capital expenses and improvements.<br />
In re Gables Mgmt., LLC, 473 B.R. 352 (Bankr. D. Idaho 2012).<br />
Transactions at issue were held to be loans and not investments or the sale of securities<br />
based on evidence submitted, including debtor’s characterization of transaction as a loan in its<br />
Schedule F, and testimony that purchaser never believed the monies given to debtor were to be<br />
anything other than loans.<br />
A.<br />
A.<br />
A.<br />
4
A.<br />
In re Mona Lisa at Celebration, LLC, 472 B.R. 582 (Bankr. M.D. Fla. 2012).<br />
Condominium sales contracts which gave each purchaser of condominium unit in<br />
proposed hotel and condominium complex the right to occupy unit for 179 days of year, but<br />
which did not obligate purchasers to rent units out when they were not occupying them and gave<br />
purchasers complete freedom, if they elected to rent units out, to use company affiliated with<br />
developer or any other company of their choice to effect rentals, were not “securities,” such as<br />
should have been registered under federal or Florida law, especially where developer’s<br />
promotional materials generally did not highlight investment opportunities, but unit features and<br />
amenities.<br />
Passatempo v. McMenimen, 461 Mass. 279, 960 N.E.2d 275 (2012).<br />
Uniform Securities Act as enacted by Massachusetts excludes insurance policies from the<br />
definition of a “security.”<br />
Redding v. Montana First Judicial Dist. Court, 365 Mont. 316, 281 P.3d 189 (2012).<br />
Investor, who purchased tenants-in-common investments (TICs) from promoter who was<br />
also property manager, filed suit against promoter and others, alleging unlawful sale of securities<br />
and other claims, after investment scheme collapsed. The court held that the TIC investment<br />
scheme was a common venture and was derived through the entrepreneurial or managerial<br />
efforts of others. Thus, the TICs were “securities” under Montana securities law at time the<br />
investor purchased them.<br />
Digges v. State of Texas, No. 05–10–00239–CR, 2012 WL 2444543 (Tex. Ct. App. June 28,<br />
2012).<br />
Testimony by Director of the Enforcement Division of the Texas State Securities Board<br />
that he reviewed the agreements between appellant’s company and its investors and that the<br />
agreements were contracts containing a promise to pay in the future for consideration presently<br />
received was sufficient to establish that the agreements were securities within the meaning of the<br />
Texas Securities Act.<br />
A.<br />
A.<br />
A.<br />
5
McDowell v. Lopez, No. 2 CA–CV 2011–0073, 2012 WL 376690 (Ariz. Ct. App. Feb. 7, 2012).<br />
Evidence at trial was sufficient to support jury verdict that investment did not involve the<br />
purchase of a security when the plaintiff described the relationship as a partnership that involved<br />
her participation in planning and marketing.<br />
Hicks v. State of Georgia, 315 Ga. App. 779, 728 S.E.2d 294 (Ga. Ct. App. 2012).<br />
Evidence was sufficient, in prosecution under Georgia Securities Act (GSA) of 1973, to<br />
show existence of an “investment contract,” as included within GSA’s definition of “security.”<br />
Victims parted with their money in anticipation of investment gains from bank debenture and a<br />
foreign currency trading program, there was a common enterprise because victims’ funds were<br />
pooled to reach minimum amounts for participation set by defendant; expectation of profits<br />
rested solely on the efforts of others, i.e., the “program manager” or “bank trader”; and defendant<br />
acted as a dealer or salesperson who would receive 50 percent of the profits as commission for<br />
his help and expertise.<br />
Desteph v. Commissioner, Connecticut Dept. of Banking, No. CV105015042S, 2012 WL 953741<br />
(Conn. Super. Ct. Feb. 29, 2012).<br />
When note was issued to accomplish an investment purpose and was not a receipt for a<br />
loan, it qualified as a security under Connecticut securities laws.<br />
A.<br />
A.<br />
A.<br />
B. Liabilities under the Securities Act of 1933<br />
1. Section 11<br />
B.1<br />
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).<br />
The Court of Appeals for the Second Circuit affirmed in part, vacated in part, and<br />
remanded dismissal of plaintiff-appellant’s putative class action complaint alleging violation of<br />
Section of 11 of the Securities Act of 1933, arising from allegedly false and misleading<br />
statements concerning mortgage-backed securities. The district court’s dismissal of the Section<br />
11 claims was vacated, and the claims reinstated. The central issue on appeal was whether<br />
plaintiff had “class standing” (as distinguished from Article III and statutory standing), or<br />
standing to assert claims on behalf of purchasers of securities issued under the same allegedly<br />
false and misleading registration statement (and backed by mortgages originating with the same<br />
lenders), but sold in separate offerings, pursuant to separate registration statements, and<br />
consisting of separate tranches. The court distilled Supreme Court precedent to stand<br />
6
collectively for the proposition that plaintiffs in a putative class action have class standing if they<br />
have personally suffered actual injury as a result of defendant’s allegedly illegal conduct and<br />
such conduct implicates the same set of concerns as the conduct allegedly causing injury to other<br />
putative class members. The court held that plaintiff-appellant did not have sufficient class<br />
standing to represent all investors who purchased certificates in 17 different offerings, each<br />
backed by a distinct set of loans issued by different originators. Because the Section 11 claims<br />
alleged misstatements about origination guidelines, the fact of different originators was material<br />
to determining whether plaintiff-appellant’s claims raised the same concerns as those of absent<br />
class members. Thus, plaintiff-appellant had class standing for offerings backed by a common<br />
originator, but not for offerings backed by different originators. With regard to tranche-level<br />
standing, the court held that certificates’ varying levels of payment priority did not raise such a<br />
fundamentally different set of concerns as to defeat class standing. And though damages may<br />
vary depending on the level of subordination, such individualized inquiries were also insufficient<br />
to defeat class certification, let alone class standing.<br />
The court also held that plaintiff-appellant sufficiently pleaded a cognizable injury under<br />
Section 11 by pleading a decline in the securities’ value based upon rating agency watch labels,<br />
downgrades, and exposure to a higher level of cash flow risk than represented in the offering<br />
documents. The court rejected defendants-appellees’ arguments that timely interest payments on<br />
the securities precluded a finding of loss on the ground that such an argument was inconsistent<br />
with basic securities valuation principles. The court also rejected defendants-appellees’<br />
arguments, and the district court’s conclusions, that the existence or liquidity of a secondary<br />
market precluded a showing of loss given that such conclusion improperly conflated liquidity<br />
and credit risk as well as price and value, and further given that plaintiff-appellant pleaded the<br />
existence of a secondary market. The court noted that Section 11 presumes diminution in value<br />
attributable to the alleged misrepresentations, and places the burden on defendants to disprove<br />
causation.<br />
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (2d Cir. 2012).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a<br />
class action complaint alleging violation of Section 11 of the Securities Act of 1933 based upon<br />
alleged misstatements concerning a pharmaceutical company’s clinical drug trial and business<br />
prospects. The court affirmed the lower court’s application of the heightened pleading standard<br />
of Federal Rule of Civil Procedure 9(b) because the Section 11 claim sounded in fraud. The<br />
court rejected the argument that nominal disclaimer of fraud is sufficient to avoid the heightened<br />
pleading standards of Rule 9(b) where the gravamen of the complaint sounds in fraud and no<br />
other basis for the claims is given. By relying on the same alleged misrepresentations central to<br />
the claim under Section 10(b) of the Securities Exchange Act of 1934, plaintiffs subjected<br />
themselves to, but did not meet, the heightened pleading standard of Rule 9(b).<br />
B.1<br />
7
B.1<br />
Panther Partners Inc., v. Ikanos Commc’ns Inc., 681 F.3d 114 (2d Cir. 2012).<br />
The Court of Appeals for the Second Circuit vacated the district court’s judgment<br />
denying a motion for leave to amend the complaint, with remand instructions to permit such<br />
amendment, for a dispute in which plaintiff-appellant alleged violation of Section 11 of the<br />
Securities Act of 1933 arising from issuer’s alleged failure adequately to disclose allegedly<br />
known defects in its semiconductor chips. The de novo standard of review applied because the<br />
district court denied leave to amend on the ground of futility, the review of which required an<br />
interpretation of law. The court determined that granting leave to amend would not be futile<br />
given that Item 303 of Regulation S-K imposes a disclosure duty where, as here, a trend is<br />
alleged to be presently known to management and reasonably likely to have a material effect on<br />
the registrant’s financial condition or results of operations. The alleged failure to disclose<br />
fundamentally defective semiconductor chips was allegedly known to management (as a matter<br />
of fact, if not of degree), and to be of substantial import given that defective chips were allegedly<br />
sold to clients representing 72% of revenues. The court held that this was more than “potentially<br />
problematic” – it was “very bad,” particularly given that Item 303’s disclosure obligations do not<br />
turn on restrictive mechanical or quantitative inquiries.<br />
New Jersey Carpenters Health Fund v. RALI Series 2006—Q01 Trust, 477 Fed.Appx. 809 (2d<br />
Cir. 2012).<br />
The Court of Appeals for the Second Circuit affirmed the district court’s denial of class<br />
certification in two class actions alleging violation of Section 11 of the Securities Act of 1933<br />
arising from allegedly false and misleading misstatements concerning mortgage-backed<br />
securities that substantially decreased in value following issuance. At issue was whether the<br />
purported class members were subject to certain statutory affirmative defenses on the ground that<br />
they had knowledge of any alleged untruths or omissions. Applying an abuse of discretion<br />
standard, the Second Circuit affirmed denial of class certification because the question of actual<br />
knowledge required individualized inquiries that outweighed common questions. Plaintiffs’<br />
broad and “cumbersome class definitions,” which included any purchaser from the initial<br />
offering to the present day without use of subclasses, further demonstrated that common issues<br />
did not predominate because purchasers over such a broad range of time could have had more or<br />
less public information (and thus stronger or weaker evidence of knowledge) depending on the<br />
timing of purchase.<br />
Lenartz v. Am. Superconductor Corp., Civ. No. 11-10582, 2012 WL 3039735 (D. Mass. July 26,<br />
2012).<br />
The district court granted in part and denied in part motions to dismiss a purported class<br />
action complaint alleging violation of Section 11 of the Securities Act of 1933 arising from<br />
allegedly false and misleading statements upon issuance of common stock. The court declined to<br />
8<br />
B.1<br />
B.1
apply the heightened pleading standard of Federal Rule of Civil Procedure 9(b) because<br />
plaintiffs’ Section 11 claims did not sound in fraud (notwithstanding the use of phrases such as<br />
“knew or should have known” and “materially false and misleading”) given plaintiffs’ disclaimer<br />
of fraud and a separate section pleading factual allegations supporting the Securities Act claims<br />
on a non-fraudulent basis. The court also held that plaintiffs had sufficiently complied with a<br />
prior instruction to amend the complaint to exclude underwriters from generalized allegations<br />
regarding a “fraudulent scheme”. Motions to dismiss by the issuer and individual defendants<br />
were dismissed because they did not dispute that the complaint satisfies the pleading standards of<br />
Rule 8. The court also dismissed the underwriters’ motion to dismiss the Securities Act claims<br />
because the complaint sufficiently pleaded that certain overstated (and restated), materially false<br />
and misleading financial statements were incorporated by reference in the registration statement.<br />
In re Vivendi Universal, S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).<br />
The district court granted defendants’ motion for partial judgment on the pleadings where<br />
plaintiffs alleged violation of Section 11 of the Securities Act of 1933 arising from allegedly<br />
false and misleading statements concerning a foreign issuer’s financial health, thus allegedly<br />
inflating the price of American Depositary Receipts acquired by plaintiffs. At issue were claims<br />
brought under the Securities Act and the Securities Exchange Act of 1934 by individual plaintiffs<br />
who purchased ordinary shares of Vivendi on the Parisian stock exchange. With respect to the<br />
Section 11 claim, the court accepted defendants’ uncontested argument that Morrison v. Nat’l<br />
Australia Bank Ltd., -- U.S. --, 130 S.Ct. 2869 (2010), which held that Section 10(b) of the<br />
Exchange Act does not apply extraterritorially, applies with equal force to Securities Act claims.<br />
This continues the emerging trend in the Southern District of New York that Morrison permits<br />
Securities Act claims only in connection with the purchase or sale of a security listed on an<br />
American stock exchange and the purchase or sale of any other security in the United States.<br />
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.<br />
2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
putative class action complaint alleging violation of Section 11 of the Securities Act of 1933 in<br />
connection with the sale of mortgage-backed security pass-through certificates. Named plaintiffs<br />
had constitutional standing because they purchased from each offering at issue and because<br />
tranches within each offering were constituted from a single pool of mortgages, issued pursuant<br />
to the same set of offering documents, and were part of the same case or controversy. The court<br />
rejected the argument that named plaintiffs lacked statutory standing because of dissimilarities<br />
between the tranches; the requirement in Section 11(a) that plaintiff acquire “such security”<br />
meant only that the security was issued pursuant to an offering document with actionable<br />
misrepresentations or omissions, even if the securities were in different tranches. Extending the<br />
holding of Merck & Co. v. Reynolds, -- U.S. --, 130 S. Ct. 1784 (2010), which invalidated<br />
inquiry notice for claims arising under the Securities Exchange Act of 1934, the court held that<br />
Securities Act claims were not time-barred because, absent a decline in the certificates’ specific<br />
9<br />
B.1<br />
B.1
atings, disclosure of “general, industry-wide practices” more than one year before the operative<br />
complaint was insufficient information on which to plead a claim capable of surviving a motion<br />
to dismiss. Applying the tolling rule in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974),<br />
the court also held that plaintiffs’ claims were not time-barred by the statute of repose;<br />
commencement of the original class action tolled the statute of repose for all putative class<br />
members, even where the original named plaintiff lacked standing. Plaintiffs were deemed to<br />
have adequately pleaded claims where the complaint: linked alleged disregard for underwriting<br />
standards to decline in the certificates’ value using public reports and confidential witness<br />
statements; alleged failure to follow appraisal industry standards identified in the offering<br />
documents; and alleged that defendants did not believe the accuracy of their subjective appraisal<br />
numbers. The court dismissed without prejudice claims concerning investment ratings because<br />
the complaint did not allege those subjective opinions were believed to be false at the time made.<br />
Declines in the certificates’ value and their resale at a loss were deemed legally cognizable<br />
injuries that generic disclosures about market fluctuations could not cure. Where systemic<br />
misrepresentations were alleged, the court declined to permit a “sole remedy” provision,<br />
contractually limiting remedies to repurchase or substitution, to overrule plaintiffs’ statutory<br />
remedies. The court rejected application of the “bespeaks caution” doctrine on the ground that it<br />
cannot apply to alleged misrepresentations and omissions of historical fact regarding compliance<br />
with underwriting standards.<br />
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012).<br />
The district court granted in part and denied in part defendants’ motion for judgment on<br />
the pleadings and for partial reconsideration of a motion to dismiss a complaint arising under<br />
Section 11 of the Securities Act of 1933 and regarding the issuer’s 2008 stock offering. The<br />
court granted the motion in its entirety for the Securities Act claims because the prior opinion<br />
impermissibly sustained claims based upon: non-actionable statements of opinion, not objective<br />
fact, without supporting allegations that the speaker disbelieved the opinion at the time<br />
expressed; statements that were not incorporated or superseded in the offering documents; and<br />
statements that lacked specificity as to the materiality of the issuer’s alleged violation of GAAP,<br />
and any allegedly artificial inflation of the issuer’s valuation resulting from such violation.<br />
In re Gen. Elec. Co. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
putative class action complaint alleging violation of Section 11 of the Securities Act of 1933<br />
arising from issuer’s alleged failure to disclose information regarding its financial health and that<br />
of a wholly owned subsidiary. The court sustained Securities Act claims based upon allegedly<br />
untrue and misleading statements about demand for and performance of GE’s commercial paper<br />
given that GE’s disclosures, taken as a whole, seemed to assure investors that there were no<br />
serious difficulties in GE’s access to short term financing, whereas plaintiffs’ allegations, taken<br />
as true on a motion to dismiss, undermined the accuracy of those representations. The court also<br />
sustained as actionable statements regarding GE’s reclassification of loans as held-to-maturity<br />
10<br />
B.1<br />
B.1
instead of available-for-sale to avoid having to write down the loans to their market value, where<br />
GE had insufficiently cautioned investors about the possibility of write-downs. The court<br />
rejected arguments that the second amended complaint established the absence of loss causation<br />
given that disclosures by GE did not fully reveal the severity of the short-term liquidity problems<br />
that plaintiffs alleged. The absence of a price decline after incomplete corrective disclosures was<br />
held not to establish negative causation on the face of the complaint. The court rejected as<br />
inactionable statements regarding: the quality of GE’s loan portfolio (which either expressed<br />
aspirations or were not false); GE’s 2009 dividend (where disclosures did not guarantee a<br />
dividend and where plaintiff failed to plead scienter as a basis of the Securities Act claims and<br />
that statements about the dividend were not truly held at the time made); GE’s loan loss reserves<br />
(where plaintiff failed to allege facts plausibly to claim with particularity that such reserves were<br />
misstated and where such reserves were not apparently inconsistent with GAAP); and statements<br />
touting GE’s AAA rating despite allegedly knowing that it was imperiled (given that the<br />
statements were roughly equivalent to saying merely that GE wanted to maintain its AAA rating<br />
and further given that reasonable investors would be informed about the relationship between<br />
credit ratings and borrowing costs).<br />
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).<br />
The district court conditionally granted a motion to certify for interlocutory appeal, and<br />
granted in part and denied in part defendants’ motion to dismiss a series of complaints by the<br />
Federal Housing Finance Agency (FHFA) as conservator of the Federal National Mortgage<br />
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), socalled<br />
“GSEs” or government-sponsored entities. The complaints alleged violation of Section 11<br />
of the Securities Act of 1933 arising from alleged misrepresentations made in connection with<br />
the marketing and sale of residential mortgage-backed securities. The court ruled that plaintiff’s<br />
claims were timely under the limitations period in the Housing and Economic Recovery Act of<br />
2008 (HERA), which runs for three years from the date of conservatorship, irrespective of any<br />
other provision of law (a decision that was certified for interlocutory review, which defendants<br />
agreed to seek on an expedited basis, along with resolution of whether HERA’s timeliness<br />
provision applies equally to federal and state causes of action). After extending the holding in<br />
Merck & Co. v. Reynolds, -- U.S. --, 130 S. Ct. 1784 (2010), which invalidated inquiry notice<br />
standards for claims arising under the Securities Exchange Act of 1934, to Securities Act claims,<br />
the court further held that Securities Act claims did not accrue and expire prior to FHFA’s<br />
conservatorship. Thus, the Securities Act claims did not accrue until a reasonably diligent<br />
plaintiff in the GSEs’ position would have had sufficient information about a given misstatement<br />
or omission adequately to plead it in a complaint. Under that standard, the court ruled that the<br />
Securities Act claims were still open when the GSEs were placed into conservatorship. The<br />
court held that FHFA adequately pleaded violations of the Securities Act, including Section 11,<br />
based upon: alleged understatement of the loan-to-value ratio of the underlying mortgage pool<br />
(which the court approved as the basis for Securities Act claims, notwithstanding that it<br />
depended on third party appraiser estimates, given plaintiff’s allegations that the appraisers did<br />
not believe their assigned valuations); alleged overstatement of the percentage of properties in<br />
the loan groups that were owner-occupied; and misrepresentations of the extent to which<br />
underlying mortgage loans conformed to risk guidelines for underwriting. The court rejected<br />
11<br />
B.1
defendants’ argument that Item 1111 of SEC Regulation AB, 17 C.F.R. § 229.1111(a)(3), limited<br />
liability to instances in which defendants failed to disclose deviations from underwriting<br />
guidelines that were known to them on the ground that such argument attempted to “alter the<br />
plaintiff’s pleading burden by grafting a scienter requirement onto Securities Act claims.”<br />
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 322 (S.D.N.Y.<br />
2012).<br />
The district court granted former lead plaintiff’s motion to withdraw as lead plaintiff in a<br />
class action alleging violation of Section 11 of the Securities Act of 1933 in connection with<br />
plaintiffs’ purchase of mortgage-backed securities. The court held that the proposed new lead<br />
plaintiff had constitutional standing because it purchased securities from the same offering as the<br />
withdrawing lead plaintiff; purchasing from the same tranche was not necessary to satisfy<br />
constitutional standing requirements because the alleged misstatements were not tranchespecific,<br />
and were based, instead, “on the entire pool of loans backing the certificates in the<br />
offering.” Because purchasers from different tranches can trace their injuries to the same offering<br />
documents (and, therefore, to the same alleged misconduct), each has a “personal stake” in the<br />
other’s claims. The court also found that because plaintiffs had pleaded that a drop in value in<br />
one tranche affected the value of all the tranches, all purchasers were allegedly affected equally.<br />
The court held that the proposed new lead plaintiff also had statutory standing because, in a class<br />
action arising from the same actionable conduct, Section 11’s “plain language” requiring<br />
plaintiff to have purchased “such security” did not necessarily preclude one purchaser from<br />
representing purchasers of a security from a different tranche. Acknowledging emergent case<br />
law in this area, the court sided with cases conferring statutory standing where plaintiffs are<br />
affected by the same actionable conduct, regardless of the tranche from which the security was<br />
issued.<br />
Pa. Pub. Sch. Emp. Ret. Sys. v. Bank of Am. Corp., 874 F.Supp. 2d 341 (S.D.N.Y. 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss<br />
plaintiff’s consolidated class action complaint alleging violation of Section 11 of the Securities<br />
Act of 1933 in connection with the sale of mortgage backed securities, including the allegedly<br />
attendant exposure to billions in loan repurchase claims and including alleged concealment of<br />
reliance on the Mortgage Electronic Registration Systems, Inc. (“MERS”) database. Although<br />
the court acknowledged conflicting law regarding whether the inquiry notice standard still<br />
applies to Section 11 claims following Merck & Co. v. Reynolds, -- U.S. –, 130 S. Ct. 1784<br />
(2010), the majority of courts in the district at the time of this opinion had declined to apply<br />
Merck to Section 11 claims, and plaintiff offered no argument to the contrary. The court<br />
therefore proceeded to dismiss the Section 11 claim as time-barred because publicly available<br />
information, including various news articles, SEC filings, and lawsuits, triggered inquiry notice<br />
of the facts underlying the Section 11 claim. The court rejected plaintiff’s argument that<br />
defendants’ “reliable words of comfort” excused plaintiff’s failure to inquire because investors of<br />
ordinary intelligence would not have reasonably relied on those statements to allay their<br />
12<br />
B.1<br />
B.1
concerns. Although there were fewer disclosures regarding reliance on MERS, the court still<br />
deemed the Section 11 claim time-barred on the ground that notice of all misconduct is not<br />
necessary when inquiry notice has been triggered.<br />
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012).<br />
The district court denied intervenor’s motion, and granted in part and denied in part<br />
defendants’ motion to dismiss a putative class action complaint alleging violation of, inter alia,<br />
Section 11 of the Securities Act of 1933 in connection with the sale of shares in certain tripleleveraged<br />
exchanged traded funds (ETFs). The court dismissed for lack of standing any claim<br />
based upon funds in which named plaintiffs had not purchased shares. One plaintiff’s claims<br />
were deemed timely based on the filing date of his complaint; certain other plaintiffs’ claims<br />
were deemed timely based on the tolling rule in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538<br />
(1974). The remaining plaintiffs’ claims were dismissed as untimely, but with leave to amend<br />
the statute of limitations allegations. The court held that the alleged misstatements and<br />
omissions were actionable because defendants’ disclosures insufficiently revealed the magnitude<br />
of risk associated with this investment, particularly because the disclosures were equivocal about<br />
the scope and extent of risk, which undercut the cautionary disclosures that were made. The<br />
court rejected defendants’ remaining arguments for dismissal, including that there can be no loss<br />
causation, which, given trading on the secondary market, was deemed too fact-intensive for<br />
resolution on a motion to dismiss. Resolution of whether and to what extent plaintiff<br />
experienced economic harm as a result of the alleged misstatements was also deemed<br />
inappropriate on a motion to dismiss. Plaintiffs’ untimely filing of certifications required under<br />
the PSLRA was deemed non-prejudicial and cured upon plaintiffs’ counsel’s representation at<br />
oral argument that their clients had read the second amended complaint before filing, as required<br />
by the PSLRA.<br />
Pub. Emps.’ Ret. Sys. of Miss. v. Goldman Sachs Grp., Inc., 280 F.R.D. 130 (S.D.N.Y. 2012).<br />
The district court granted a motion to certify a class alleging violation of Section 11 of<br />
the Securities Act of 1933 arising from a 2006 offering of certificates derived from a pool of<br />
securitized, fixed-rate, second-lien home mortgages. The court held that the proposed class met<br />
the certification requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(3).<br />
Numerosity and typicality were established because plaintiffs were allegedly affected by the<br />
same actionable conduct, regardless of the tranche from which the securities issued.<br />
Commonality was established because plaintiffs were allegedly affected by the same<br />
misstatements and omissions, to which defendants were likely to provide common answers.<br />
Adequacy was established given the alignment of interests between plaintiff and absent class<br />
members, because lead plaintiff had incentive to obtain the largest settlement possible, and<br />
because potential conflicts or perverse incentives given the waterfall structure of the tranches<br />
were speculative. The impact of statute of limitations defenses were deemed not sufficiently<br />
different as between plaintiff and any other institutional investor, thus preserving the court’s<br />
finding of adequacy, though such finding was made subject to a memorandum class counsel was<br />
13<br />
B.1<br />
B.1
instructed to submit addressing class and trial team diversity. The predominance requirement<br />
was satisfied, with individual questions of investor knowledge failing to overcome<br />
predominance, because: (1) individually negotiated transactions relied on the same due diligence<br />
described in the offering documents, and did not give those investors access to information<br />
beyond that generally provided therein; (2) there was insufficient evidence to show that any<br />
knowledge certain class members had regarding the loan originator’s appraisal and underwriting<br />
practices actually implicated the alleged misstatements at issue; (3) materiality and loss causation<br />
turned on objective standards and generalized proof, which was not undermined by differences in<br />
risk and performance among various certificates; and (4) statute of limitations concerns were<br />
capable of being resolved under objective criteria and with generalized proof, particularly given<br />
the court’s holding that the knowledge of lead plaintiff’s advisor would not be imputed to<br />
plaintiff where it was acquired prior to plaintiff’s retention of that agent.<br />
In re Bank of Am. Corp. Sec., Derivative, and Emp. Ret. Income Sec. Act (ERISA) Litig., 281<br />
F.R.D. 134 (S.D.N.Y. 2012).<br />
The district court granted a motion for class certification and appointment of class<br />
representatives and counsel in a putative class action alleging violation of Section 11 of the<br />
Securities Act of 1933 arising from material misstatements and omissions in connection with<br />
defendant Bank of America Corporation’s (“BofA”) acquisition of Merrill, Lynch & Co.<br />
(“Merrill”). The court certified the class on the ground that it met the certification requirements<br />
of Federal Rule of Civil Procedure 23(a) and 23(b)(3). At issue with respect to Section 11 claims<br />
was a 2008 common stock offering that allegedly misstated material information regarding<br />
Merrill bonuses. The court rejected defendants’ argument that numerosity could not be<br />
established absent specificity about the number of purchasers overall and those who held their<br />
shares until disclosure of the Merrill bonuses because the number likely would be in the<br />
thousands in any event, which was sufficient to establish numerosity. Commonality and<br />
typicality were established because the Section 11 claims were all based on the same alleged<br />
misstatements concerning bonus payments. Adequacy was established because the proposed<br />
class representatives were not antagonistic to the interests of proposed class members, and the<br />
proposed class was ascertainable through objective criteria regarding whether shares had been<br />
purchased and held until the corrective disclosure. The court rejected arguments that the Section<br />
11 claim raised individualized tracing problems to the extent BofA shares at issue traded<br />
alongside BofA shares not at issue (thus allegedly defeating the predominance requirement of<br />
Rule 23(b)), holding, instead, that plaintiffs had avoided such tracing complications by limiting<br />
the class to those shareholders who directly purchased shares, and excluding those who acquired<br />
shares in the secondary market. The court held that plaintiffs had sufficiently alleged the<br />
materiality of alleged misstatements concerning Merrill bonuses given that BofA share values<br />
fell 12 percent on the trading day following the announcement of accelerated bonus payments to<br />
Merrill personnel.<br />
B.1<br />
14
B.1<br />
Tsereteli v. Residential Asset Securitization Trust, 283 F.R.D. 199 (S.D.N.Y. 2012).<br />
The district court granted plaintiffs’ motion for certification of a class alleging violation<br />
of Section 11 of the Securities Act of 1933 arising from alleged misstatements and omissions<br />
concerning the issuance, distribution, and sale of certain mortgage-backed securities. The court<br />
held that the proposed class established the requirements of Federal Rule of Civil Procedure<br />
23(a), rejecting arguments that numerosity must be shown on a tranche-by-tranche basis (versus<br />
an offering-by-offering basis), and holding that commonality, typicality, and adequacy were all<br />
satisfied because alleged misrepresentations in the prospectus relate to all investors at issue, thus<br />
presenting common questions, common interests, and a common course of allegedly unlawful<br />
conduct. Damages were also found to present common questions given that they are calculated<br />
by statutory methods set forth in Section 11(e). Although the court acknowledged the potential<br />
for conflicts to arise during the course of the lawsuit (e.g., regarding settlement, materiality, and<br />
knowledge), such conflicts were deemed conjectural at this stage and insufficient to defeat<br />
certification. The proposed class satisfied the predominance requirement of Rule 23(b)(3) for<br />
reasons similar to those supporting certification under Rule 23(a). The court rejected as<br />
unpersuasive arguments that predominance could not be shown given that variation among<br />
individual class members in the level of knowledge of the misstatements and/or inquiry notice<br />
was insufficient to outweigh predominance. The court also held that receipt of monthly trustee<br />
reports supplemental to the alleged misstatements was insufficient to defeat the presumption of<br />
reliance (given that trustee reports are not statutorily defined as “earning statements”), and that<br />
offering documents set the standard for the existence of misrepresentations and omissions, which<br />
need not be proved on an individualized basis, especially where, as here, underwriting guidelines<br />
for the certificates at issue were the same. The objective nature of materiality, which need not be<br />
determined on an individual basis, further supported class certification. The court noted the<br />
insufficiency of loss causation and individualized damage calculations as bases for defeating<br />
certification.<br />
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin. Holdings Ltd.,<br />
No. 11 Civ. 5097, 2012 WL 3283481 (S.D.N.Y. Aug. 13, 2012).<br />
The district court granted defendants’ motion to dismiss a proposed class action<br />
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from defendants’<br />
allegedly false and misleading statements made in connection with the issuance of common<br />
stock. Given the parties’ concession that the proposed class action lies outside the statute of<br />
repose, plaintiffs cited Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) to argue that the<br />
limitations period should be tolled from the time another putative lead plaintiff filed substantially<br />
the same complaint. The court rejected application of American Pipe tolling given that it<br />
addressed statute of limitations, not the statute of repose at issue here. Plaintiffs also lacked<br />
standing to assert Section 11 claims based on shares purchased before the challenged offerings<br />
(and, therefore, not traceable thereto). Pursuit of claims on behalf of the entire class, some of<br />
whom might have standing, did not change this result given Second Circuit requirements that<br />
B.1<br />
15
named plaintiffs must personally show standing, and given that class certification is not a<br />
dispositive issue that must be resolved before the question of named plaintiffs’ standing.<br />
In re IndyMac Mortgage-Backed Sec. Litig., No. 09 Civ. 4583, 2012 WL 3553083 (S.D.N.Y.<br />
Aug. 17, 2012).<br />
The district court granted in part and denied in part a motion for class certification in<br />
action alleging violation of Section 11 of the Securities Act of 1933 arising from defendants’<br />
allegedly false and misleading statements upon issuance of mortgage pass-through certificates.<br />
Noting that suits alleging violations of Section 11 are “especially amenable to class<br />
certification,” the court nonetheless dismissed Securities Act claims for one offering due to lack<br />
of standing, given the court’s prior finding that Section 11 claims for that particular offering<br />
were time-barred. For the remaining Securities Act claims, the court held that defendants could<br />
not defeat requirements of Federal Rule of Civil Procedure 23(a) regarding commonality,<br />
typicality, or adequacy by arguing that plaintiffs’ varying levels of knowledge about their<br />
investments raised unique defenses since the fundamental nature of plaintiffs’ claims (i.e., that<br />
the offering documents were materially misleading) had remained the same. Allegedly unique<br />
issues in demonstrating materiality and damages were deemed inconsequential given that<br />
materiality is subject to generalized proof and Section 11 damages are calculated with a statutory<br />
formula. The court held class-wide issues predominate, thus satisfying Rule 23(b), because the<br />
record did not contain enough evidence that prospective class members – including sophisticated<br />
ones – likely knew or had any notice of the alleged misstatements or omission in the offering<br />
documents, let alone varying levels of notice or knowledge. The fact that deviations from<br />
underwriting standards may have occurred in some loan groups but not others, and that class<br />
members may have purchased offerings at different times did not defeat predominance given the<br />
substantial similarity of allegedly misleading statements in the offering documents. The<br />
presumption of reliance applied to all investors, even those who purchased certificates after the<br />
initial offerings, because trustee reports accompanying the offerings did not qualify as “earning<br />
statements” that could otherwise eliminate that presumption. As an objective standard,<br />
materiality also presented a common rather than individual issue. Whether each underwriter<br />
adequately performed due diligence did raise individualized underwriter defenses, but was<br />
deemed insufficient to defeat class certification because such findings related only to defenses<br />
and not to matters of proof by individual class members. Individualized damages and the<br />
defense of loss causation were also deemed insufficient to defeat predominance for class<br />
certification purposes. Finally, the court held that the superiority requirement could not be<br />
defeated by the presence of sophisticated investors or foreign plaintiffs absent proof that their<br />
home countries would give preclusive effect to this action.<br />
Ho v. Duoyuan Global Water Inc., No. 10 Civ. 7233, 2012 WL 3647043 (S.D.N.Y. Aug. 24,<br />
2012).<br />
The district court granted in part and denied in part a motion to dismiss a putative class<br />
action complaint alleging violation of Section 11 of the Securities Act of 1933 arising from<br />
16<br />
B.1<br />
B.1
defendants’ allegedly false and misleading statements regarding financial performance, company<br />
operations, and compliance with GAAP by a Chinese issuer of American Depositary Shares<br />
offered through an initial public offering (IPO) and a secondary public offering (SPO). Although<br />
plaintiffs did not and could not sufficiently plead traceability based on the SPO, given that they<br />
did not purchase on the date of the SPO and therefore did not purchase pursuant to the SPO, the<br />
court nonetheless denied defendants’ motion to dismiss the Section 11 claim for lack of standing<br />
because the claim was also based on the IPO, for which traceability was sufficiently pleaded.<br />
The court denied the underwriter defendants’ motion to dismiss the Section 11 claim as timebarred<br />
because red flags in the IPO documents did not indisputably lead to a reasonable investor<br />
to investigate and gave plaintiffs no reason to believe the financial figures were incorrect or<br />
grossly misstated. General disclaimers in the IPO documents that did not “clearly warn”<br />
plaintiffs were also deemed insufficient notice that the financials were misstated. The court<br />
applied the heightened pleading requirements of Rule 9(b) because plaintiffs’ Section 11 claims<br />
sounded in fraud, and failed to specify allegations that would support a negligence cause of<br />
action. The court sustained plaintiffs’ Section 11 claim to the extent based upon extreme<br />
discrepancies between financial statements filed with Chinese versus SEC regulators, with the<br />
more positive disclosures being made to the SEC. That the discrepancies may be explainable<br />
was insufficient grounds to dismiss the complaint given the reasonable conclusion that there was<br />
fraudulent motive to overstate the numbers to the SEC and no fraudulent motive to understate<br />
them to Chinese regulators. The court rejected Section 11 claims to the extent based on alleged<br />
misstatements concerning the issuer’s operations because the pleadings were insufficient to show<br />
how the statements were false. The court granted defendant-auditor Grant Thornton<br />
International’s motion to dismiss the Section 11 claim based upon statements made by Grant<br />
Thornton – Hong Kong, which was not shown to be an agent of Grant Thornton International.<br />
The court also dismissed a Section 11 claim against a defendant “outside investor” that acquired<br />
a 20 percent stake in the issuer because the investor was not a statutorily enumerated party<br />
subject to liability under Section 11 and was not otherwise liable on a theory of respondeat<br />
superior.<br />
In re Proshares Trust Sec. Litig., No. 09 Civ. 6935, 2012 WL 3878141 (S.D.N.Y. Sept. 7, 2012).<br />
The district court dismissed plaintiffs’ putative class action complaint alleging violation<br />
of Section 11 of the Securities Act of 1933 arising from the marketing and sale of exchange<br />
traded funds (ETFs). The court rejected plaintiff’s argument that the registration statements<br />
failed adequately to disclose that ETFs can lose substantial value in a relatively brief period of<br />
time, especially in periods of high volatility, holding, instead, that the disclosures were adequate.<br />
The registration statements clearly and directly addressed the relevant risk, emphasizing their<br />
daily investment objectives, and a reasonably prudent investor would have understood that ETFs<br />
could produce adverse results if held for longer than one day. Contrary to potentially analogous<br />
cases, the registration statements did not contain penalties or enticements that would have<br />
encouraged investors to hold the ETFs for longer than one day, nor did the ETFs impose<br />
penalties for short term trades, which could potentially be construed to encourage long-term<br />
holding and trading of these securities.<br />
B.1<br />
17
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, No. 11 Civ. 398, 2012 WL 4616958<br />
(S.D.N.Y. Sept. 28, 2012).<br />
The district court granted motions to dismiss a putative class action complaint against a<br />
foreign bank and certain of its directors alleging violation of Section 11 of the Securities Act of<br />
1933 arising from alleged misrepresentations made in connection with the sale and marketing of<br />
American Depositary Receipts (ADRs). Holding that plaintiffs’ Section 11 claims sounded in<br />
fraud – due to allegations concerning “untrue statements of material facts” and reliance on the<br />
same allegations to plead claims arising under the Securities Act and the Securities Exchange<br />
Act of 1934, which necessarily involves fraud – the court applied the heightened pleading<br />
requirements of Federal Rule of Civil Procedure 9(b). The Section 11 claims were dismissed<br />
because plaintiffs failed to include any discussion as to why statements forming the basis of the<br />
claim were fraudulent. Plaintiffs’ claims also failed under the lower pleading standard of Rule<br />
8(a) given that the statements complained of either were not false or were not actionable.<br />
Plaintiffs failed plausibly to allege that due diligence meetings held in connection with an<br />
acquisition did not happen, that the corporate credit environment was unstable, that statements<br />
about the value of defendants’ securitized holdings were objectively false or that defendants<br />
believed them to be false at the time they were made. The court also dismissed the Section 11<br />
claims as untimely, holding that plaintiffs were put on notice before write-downs of credit<br />
market assets given their involvement as a party to a prior lawsuit containing many of the same<br />
fraud claims; the dramatic price decline of defendant bank’s ADRs in 15 months – a drop that<br />
could not pass without reasonable shareholders being put on notice of potential problems; and<br />
plaintiffs’ failure to identify new information putting them on notice that was not previously<br />
available through other sources. Because plaintiffs failed to establish basic timeliness, the court<br />
declined to consider arguments regarding tolling of the statute of limitations.<br />
In re Lehman Brothers and ERISA Litig., No. 09 Civ. 6040, 2012 WL 4866504 (S.D.N.Y. Oct.<br />
15, 2012).<br />
The district court granted in part and denied in part motions to dismiss a consolidated<br />
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from alleged<br />
misrepresentations concerning Lehman’s accounting practices, real estate asset values,<br />
disclosures regarding liquidity and risk management, and use of Repo 105 to reduce reported net<br />
leverage. The court dismissed certain Section 11 claims as time-barred under the three year<br />
statute of repose, holding that pricing supplements to the registration statement were insufficient<br />
to establish timeliness unless the amendments were pursuant to 17 C.F.R. § 229.512(1)(1)(ii)<br />
(and they were not). Plaintiffs failed to state other Section 11 claims because they failed<br />
sufficiently to plead that the Repo 105 transactions were inconsistent with accounting rule SFAS<br />
140; failed adequately to allege that real estate asset valuations did not comply with accounting<br />
rules or were believed by Lehman to be unreasonable; failed to support allegations that Lehman<br />
regularly exceeded its purported risk limits; and, for securities purchases made before February<br />
13, 2007, failed sufficiently to allege that Lehman excluded its most risky investments from<br />
stress testing. With the exception of five purchases that were deemed sufficient to state a claim,<br />
18<br />
B.1<br />
B.1
plaintiffs otherwise failed to plead purchase of securities in a time period when Lehman had<br />
insufficiently disclosed concentrations of credit risk in violation of SFAS 107. The court limited<br />
Section 11 claims based upon Value-at-Risk, dismissing any such claim for plaintiffs who<br />
purchased their securities before the allegedly misleading statements were made. To the extent<br />
Section 11 claims were based on Repo 105 transactions, the court rejected defendants’ argument<br />
that transactions pre-dating Lehman’s 2007 Form 10-K were immaterial, regardless of whether<br />
Lehman’s bankruptcy examiner held such an opinion. The court sustained Section 11 claims for<br />
one Form 8-K signed by Lehman’s CFO, which allegedly contained misstatements, but<br />
dismissed the remainder of such claims as lacking supporting allegations. The court also<br />
sustained Section 11 claims against Ernst & Young because core allegations against them had<br />
not changed, with the court rejecting the argument that supplemental allegations created a new<br />
“action” for purposes of calculating the statute of repose.<br />
Federal Hous. Fin. Agency v. J.P. Morgan Chase & Co., No. 11 Civ. 6188, 2012 WL 5395646<br />
(S.D.N.Y. Nov. 5, 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss a<br />
complaint by the Federal Housing Finance Agency (FHFA) as conservator of the Federal<br />
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation<br />
(Freddie Mac), so-called “GSEs” or government-sponsored entities. The complaint alleged<br />
violation of Section 11 of the Securities Act of 1933 arising from alleged misrepresentations<br />
made in connection with the marketing and sale of residential mortgage-backed securities. The<br />
court declined to dismiss plaintiff’s claims as time-barred given that downgraded credit ratings<br />
of certificates subordinate to those purchased by the GSEs was insufficient to trigger notice of a<br />
potential claim concerning the GSE’s more highly-rated securities, especially given that the<br />
purpose of a subordinated structure is for junior tranches to absorb losses in the event of a<br />
downturn. The court also held that administrative exhaustion requirements under the Financial<br />
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) did not bar plaintiff’s<br />
claims given that those administrative procedures do not provide remedies for the class of<br />
defendants involved here. Applying the heightened pleading standard of Federal Rule of Civil<br />
Procedure 9(b), the court sustained claims based upon alleged misrepresentation of compliance<br />
with underwriting standards given allegations regarding private and government investigations<br />
concluding that certain originators whose loans supported the GSE certificates systematically<br />
disregarded their own underwriting guidelines; the certificates alleged “total collapse” in credit<br />
ratings; an alleged 60 percent rate of default, foreclosure, or delinquency among the “safest”<br />
loans backing the certificates; and plaintiff’s forensic review of over 1,000 loan files, which<br />
allegedly found 98 percent that were not underwritten in accordance with established guidelines<br />
or otherwise breached representations in the transaction documents.<br />
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).<br />
The district court granted defendants’ motion to dismiss a class action complaint alleging<br />
violation of Section 11 of the Securities Act of 1933 arising from defendants’ public statements<br />
19<br />
B.1<br />
B.1
allegedly exaggerating the value of the issuer’s commercial mortgage portfolio. The court<br />
dismissed the Section 11 claim without prejudice because the complaint failed specifically to<br />
identify the false and misleading statements on which plaintiffs purported to base their claim.<br />
Short quotes allegedly constituting misstatements, without full context and without citation to the<br />
registration statement or prospectus, were deemed insufficient to sustain a Section 11 claim. The<br />
information pleaded suggested that several of the alleged misstatements would be inactionable,<br />
even after construing all inferences in plaintiffs’ favor.<br />
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., --- F. Supp. 2d ---, 2012 WL<br />
2450161 (D. Md. June 26, 2012).<br />
The district court granted in part and denied in part investor-plaintiffs’ putative class<br />
action complaint alleging violation of Section 11 of the Securities Act of 1933 through material<br />
misrepresentations and omissions in financial statements that were restated three years after<br />
filing, when the issuer changed its interpretation of accounting rules regarding low income<br />
housing tax credits that were in effect at the time of filing. The court applied the heightened<br />
pleading standard of Federal Rule of Civil Procedure 9(b) because the fact pattern supporting<br />
Section 11 claims also supported claims arising under the Securities Exchange Act of 1934.<br />
Although scienter was not required for Section 11 claims, plaintiffs were required to, and did,<br />
plead those claims with particularity. The court declined to dismiss a Section 11 claim against<br />
the CFO because arguments related thereto (i.e., that the allegedly false filing was issued before<br />
her tenure and withdrawn before she signed and certified the issuer’s 10-K) were raised for the<br />
first time in a reply memorandum. The court declined to dismiss the complaint on statute of<br />
limitations grounds because inquiry notice was not triggered before the scope of the restatement<br />
was announced in clear terms. The court did dismiss certain Section 11 claims as barred by the<br />
statute of repose, rejecting the argument that it runs from the date shares are first made available<br />
for sale, and adopting the argument that the repose period for registered securities issued prior to<br />
the Securities Offering Reform rules runs either from the effective date of the registration<br />
statement or the date of a post-effective amendment. Acknowledging disputes on whether Bell<br />
Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009),<br />
foreclose general and conclusory allegations of standing, the court held that they do not, and held<br />
that standing to pursue a Section 11 claim can be supported by general allegations that securities<br />
were purchased pursuant and traceable to offering materials that contained misstatements and<br />
omissions.<br />
In re Groupon Derivative Litig., No. 12-CV-5300, 2012 WL 3133684 (N.D. Ill. July 31, 2012).<br />
The district court granted in part and denied in part a motion to stay proceedings in a<br />
shareholder derivative action pending resolution of a motion to dismiss in a related securities<br />
class action alleging violation of Section 11 of the Securities Act of 1933 arising from alleged<br />
false and misleading statements made in connection with an IPO. The court held that staying the<br />
derivative action would simplify the issues in question and streamline the trial because resolution<br />
of the class claims – grounded in allegations that statements regarding the issuer’s business<br />
20<br />
B.1<br />
B.1
practices and financial results were false and misleading – would simplify the central issue in the<br />
derivative case, i.e., the scope of the individual defendants’ liability. The court was also<br />
persuaded to stay the derivative proceedings to reduce the burden of litigation on the parties and<br />
to preserve judicial resources in light of the duplicative nature of the parties, allegations,<br />
questions of fact, and sources of proof given that both actions rely on the same or closely related<br />
events, documents, and witnesses. Proceeding with the derivative case could prejudice defense<br />
to the securities claims and would divert resources away from the presently pending action.<br />
Acknowledging that a stay would allow defendants to operate with allegedly deficient internal<br />
controls, the court reasoned that such prejudice to plaintiffs could be minimized by periodically<br />
evaluating whether a stay continues to be warranted.<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss the<br />
portion of plaintiffs’ complaint alleging violation of Section 11 of the Securities Act of 1933 in<br />
connection with plaintiffs’ purchase of residential mortgage-backed securities originated and/or<br />
issued by Countrywide. Plaintiffs’ Section 11 claims were dismissed with prejudice as timebarred<br />
because the complaint post-dated the three-year statute of repose applicable to Section 11<br />
claims, which begins to run when the security is bona fide offered to the public. The court<br />
declined to toll plaintiffs’ claims for the reasons set forth in Allstate In. Co. v. Countrywide Fin.<br />
Corp., 824 F. Supp. 2d 1164, 1178-79 (C.D. Cal. 2011).<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal 2012).<br />
The district court granted defendants’ motion to dismiss complaints alleging violations of<br />
Section 11 of the Securities Act of 1933 arising from the structuring and sale of residential<br />
mortgage-backed securities. Plaintiffs’ Section 11 claims were dismissed with prejudice as timebarred<br />
because the complaint post-dated the three-year statute of repose. The court declined to<br />
apply Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), to toll the Section 11 claim because<br />
none of the plaintiffs in the previously-filed actions had statutory standing to sue on the claims at<br />
issue in this case, having purchased their securities from different tranches. The court rejected<br />
the argument that lack of standing in the previously-filed cases was unforeseeable.<br />
Acknowledging emergent caselaw in this area, the court nonetheless concluded that “no<br />
reasonable plaintiff” could conclude that named plaintiffs in the other action had statutory<br />
standing given that they purported to assert claims on behalf of purchasers from any tranche<br />
within 427 offerings. Reliance on the “bare assertion” that the named plaintiffs had acquired<br />
certificates traceable to the registration statements and prospectus supplements was deemed<br />
insufficient to toll the statute of repose or to support a reasonable belief that standing existed.<br />
B.1<br />
B.1<br />
21
B.1<br />
Brown v. China Integrated Energy, Inc., 875 F.Supp. 2d 1096 (C.D. Cal. 2012).<br />
The district court denied defendants’ motion to dismiss a putative class action complaint<br />
alleging violation of Section 11 of the Securities Act of 1933 arising from alleged<br />
misrepresentations made when issuer reported certain financial results. The court applied the<br />
heightened pleading requirements of Federal Rule of Civil Procedure 9(b) because the gravamen<br />
of the complaint was fraud and because plaintiffs failed to identify any factual allegations<br />
pleading negligent or innocent conduct. Plaintiffs met the heightened pleading standard through<br />
particularized allegations of inflated financial reports, as evidenced by significant discrepancies<br />
between the issuer’s filings with Chinese versus United States regulators, and concealed related<br />
party transactions and gains therefrom involving the issuer’s CEO and his son.<br />
Scott v. ZST Digital Networks, Inc., No. CV 11-03531, 2012 WL 4459572 (C.D. Cal. Aug. 7,<br />
2012).<br />
The district court granted in part and denied in part a motion to dismiss a class action<br />
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from allegedly<br />
false and misleading statements made in connection with a stock offering. The court dismissed<br />
plaintiffs’ Section 11 claims in their entirety and without leave to amend for failure to satisfy<br />
standing requirements by sufficiently pleading traceability. Plaintiffs had purchased the stock at<br />
issue after defendant filed a second registration statement, and failed to plead with specificity<br />
that their purchases could be traced to the initial offering. The court rejected plaintiffs’ argument<br />
that the second, sequential registration statement rendered a showing of traceability impossible.<br />
It also rejected arguments that the more functional rules employed to show standing for private<br />
placements could supplant the strict traceability requirements of Section 11, from which the<br />
court repeatedly and strenuously declined to deviate.<br />
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).<br />
The district court granted defendants’ motion to dismiss a putative class action complaint<br />
alleging violation of Section 11 of the Securities Act of 1933 through an alleged scheme to<br />
inflate stock price by acquiring a competitor under the pretext of immediate synergies and<br />
increased revenues. The court found the complaint to sound in fraud, given allegations that<br />
defendants were involved in a fraudulent scheme, despite plaintiffs’ disclaimer to the contrary.<br />
The court declined to dismiss the complaint on the basis that the challenged statements were<br />
protected by the Private Securities <strong>Litigation</strong> Reform Act’s safe harbor for forward-looking<br />
statements (because the statements at issue were unprotected omissions or representations of past<br />
or present facts). The court also declined to dismiss on the basis that the complaint demonstrated<br />
the absence of loss causation, or “negative causation,” noting that courts generally evaluate this<br />
affirmative defense during summary judgment. The court nonetheless dismissed the complaint<br />
on the ground that plaintiffs failed to meet the heightened pleading standard of Federal Rule of<br />
22<br />
B.1<br />
B.1
Civil Procedure 9(b) in that they failed to allege facts sufficient to show that defendants omitted<br />
certain trends and uncertainties (regarding pricing pressures, effects on productivity and sales,<br />
and reduced sales) that were required to be disclosed pursuant to Regulation S-K. The court also<br />
dismissed the Section 11 claim because plaintiffs failed to show that defendants omitted facts<br />
necessary to make statements about the acquisition, revenues, products, and distribution channels<br />
not misleading.<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).<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 Section 11 of the Securities Act of 1933 in connection with funds that were allegedly<br />
marketed as stable, income-seeking investments that would preserve capital when, in fact, they<br />
allegedly used risky investment strategies fundamentally incompatible with stated objectives.<br />
The court held that defendants’ disclosure duties were not satisfied given their failure to disclose<br />
sufficient information to render not misleading statements on investment objectives, highlyleveraged<br />
derivative instruments, and the volatility, liquidity, risk, and valuation of the securities<br />
at issue. As such, those omissions were sufficient to state a claim under Section 11. The court<br />
held that plaintiffs’ losses were adequately linked to the allegedly misleading statements and<br />
omissions, thus rejecting defendants’ loss causation arguments. The court also rejected<br />
defendants’ argument that plaintiffs’ claims were time-barred, holding that news articles and<br />
other press reports were insufficient to trigger inquiry notice. This opinion supersedes the<br />
opinion previously rendered in In re Oppenheimer Rochester Funds Grp. Sec. Litig., 2011 WL<br />
5042066 (D.Colo. Oct. 24, 2011).<br />
United Food and Commercial Workers Union, 281 F.R.D. 641 (W.D. Okla. 2012).<br />
The district court granted lead plaintiffs’ motion to certify a class alleging violation of,<br />
inter alia, Section 11 of the Securities Act of 1933 in connection with a 2008 public offering of<br />
defendant Chesapeake’s common stock. The court rejected defendants’ argument that individual<br />
issues predominated over common claims, thus precluding certification, because all plaintiffs<br />
could not trace their shares to the allegedly deficient registration statement. The court noted that<br />
the parties had previously stipulated to satisfaction of the tracing requirement, and that any<br />
alleged difficulties with tracing required assessment of plaintiffs’ claims on the merits, which<br />
was premature at the certification stage. The court permitted the certified class to include<br />
plaintiffs who purchased Chesapeake stock both directly and indirectly in the public offering,<br />
reasoning that no precise rule existed for defining a class, aftermarket purchasers are<br />
appropriately included to the extent they can satisfy Section 11’s tracing requirement, and the<br />
parties had stipulated to the inclusion of such aftermarket purchasers. Specific reference to the<br />
price at which class members must have purchased the shares was rejected on the grounds that it<br />
was without authority in the caselaw.<br />
B.1<br />
B.1<br />
23
Nat’l Credit Union Admin. Bd. v. RBS Sec. Inc., Nos. 11-2340, 11-2649, 2012 WL 3028803 (D.<br />
Kan. July 25, 2012).<br />
The district court granted and part and denied in part a motion to dismiss alleging<br />
violation of Section 11 of the Securities Act of 1933 arising from alleged misrepresentations in<br />
connection with the sale of residential mortgage-backed securities certificates (RMBS). The<br />
court held that Section 11 claims were not time-barred under the statute of repose because 12<br />
U.S.C. §1787(b)(14)(A) (“the extender statute”) applied to extend actions brought in plaintiff’s<br />
capacity as liquidating agent of a federally-chartered credit union. Section 11 claims were<br />
deemed time-barred on statute of limitations grounds for two certificates where a credit<br />
downgrade watch and an FDIC cease-and-desist order provided constructive notice that a<br />
plausible claim could be pleaded. The court rejected other arguments that the remaining Section<br />
11 claims should be dismissed on statute of limitations grounds because general, industry-wide<br />
problems and RMBS underperformance were insufficient to trigger inquiry notice; early spikes<br />
in default and delinquency rates for loans supplying income for the majority of RMBS<br />
certificates was also insufficient to trigger inquiry notice given that most of the certificates<br />
backed by those loans retained a double or triple-A rating until much later; risk disclosures in the<br />
offering documents did not warn investors that underwriting standards had been abandoned or<br />
virtually abandoned; and lawsuits filed against other defendants regarding RMBS did not clearly<br />
provide constructive notice in this case given the timing of those lawsuits and their varying<br />
allegations, though the court called it a close question. The court sustained the Section 11 claim<br />
as sufficiently pleaded to the extent based upon allegations that defendants systematically<br />
abandoned or recklessly deviated from underwriting standards (including failing to follow<br />
criteria for reduced documentation programs, failing to consider or intentionally exceeding loanto-value<br />
ratio limits, and intentionally inflating an appraisal), except for certificates where the<br />
complaint either did not identify the originators or did not make any allegations specifically<br />
addressing those originators’ underwriting practices. The court rejected defendant’s argument<br />
that plaintiff insufficiently pleaded materiality – publicly available information regarding<br />
deterioration in the housing market and warnings in the offering documents did not adequately<br />
warn reasonable investors that underwriting standards were systematically abandoned. The<br />
claim based upon alleged credit enhancement misrepresentations was dismissed because plaintiff<br />
failed to allege how the descriptions of credit enhancement features were material and untrue<br />
representations at the time they were made. This opinion included an opinion disposing of Nat’l<br />
Credit Union Admin. Bd. v. Wachovia Capital Mkts., No. 11-2649, 2012 WL 3028803 (D. Kan.<br />
July 25, 2012), in which the court denied the Wachovia defendants’ motion to dismiss for the<br />
same reasons it denied similar claims raised by RBS.<br />
Belmont Holdings Corp. v. Suntrust Banks, Inc., No. 1:09-cv-1185, 2012 WL 4096146 (N.D. Ga.<br />
Aug. 28, 2012).<br />
The district court granted a motion for reconsideration of an order denying defendants’<br />
motion to dismiss, and dismissed plaintiffs’ claims, but denied a motion against plaintiff and its<br />
counsel for sanctions in a putative class action alleging violation of Section 11 of the Securities<br />
24<br />
B.1<br />
B.1
Act of 1933 arising from defendants’ allegedly false and misleading statements upon issuance of<br />
preferred securities. The court granted defendants’ motion to reconsider in light of new evidence<br />
(in the form of declarations from the former Group Vice President of Risk Management) casting<br />
doubt on plaintiff’s allegations that the former officer had personal knowledge that certain<br />
statements were false and known to be false at the time made. The declarations clarified that,<br />
contrary to the allegations in the complaint, the former officer did not have personal knowledge<br />
of the subjective falsity of the statements at issue. The court then granted defendants’ motion to<br />
dismiss the Section 11 claim with prejudice because correction of this manifest factual error<br />
(caused, according to the court, at least by plaintiff’s counsel’s carelessness) resulted in only<br />
conclusory allegations of wrongdoing that were insufficient to state a plausible claim. The court<br />
also dismissed Section 11 claims against the auditor on the ground that the amended complaint<br />
failed to state a claim that the audit opinions were subjectively false when issued, and failed to<br />
satisfy the specificity requirements of Federal Rule of Civil Procedure 9(b) regarding any alleged<br />
falsity of such audit opinions.<br />
Mordecai v. Morgan Keenan & Co., Inc., No. 11-04320, 2012 WL 2504038 (FINRA June 18,<br />
2012) (Neal, Arb.)<br />
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted<br />
violation of Section 11 of the Securities Act of 1933 arising from claimants’ investments in<br />
certain bond funds. The arbitrator denied all requests for relief in their entirety, including<br />
claimants’ claims, requests for attorneys’ fees, and requests for punitive damages.<br />
Warwick v. Morgan Keenan & Co., Inc., No. 10-02682, 2012 WL 689087 (FINRA Feb. 23,<br />
2012) (Winter, Boufford, Hubbell, Arbs.).<br />
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted<br />
violation of Section 11 of the Securities Act of 1933 arising from claimants’ purchase of certain<br />
bond funds. After two pre-hearing sessions before the panel and ten hearing sessions, the panel<br />
denied the claimants’ statement of claim, thus rejecting claimants’ arguments that respondent’s<br />
alleged consent to findings of fact that respondent and its employees committed fraud necessarily<br />
rendered respondent’s financial statements materially misleading. All other relief not<br />
specifically addressed was denied, including claimants’ and respondent’s respective requests for<br />
attorneys’ fees. The panel assessed various fees for filing, adjournment, discovery and contested<br />
motions, and hearings. Member fees were assessed to respondent.<br />
Fischer Lime and Cement Co. v. Morgan Keegan & Co., Inc., No. 08-04856, 2012 WL 6759349<br />
(FINRA Dec. 28, 2012) (Pastor, Levine, Linden, Arbs.)<br />
In an arbitration before the Financial Industry Regulatory Authority, three claimants –<br />
two individuals and one corporate claimant – asserted violation of Section 11 of the Securities<br />
25<br />
B.1<br />
B.1<br />
B.1
Act of 1933 arising from alleged mismanagement of income funds and alleged<br />
misrepresentations made in connection with same. The arbitration panel denied respondent’s<br />
motion to dismiss as untimely. The arbitration panel rejected a motion in limine in which<br />
respondent asserted that fund mismanagement claims were in the nature of shareholder<br />
derivative claims and not subject to arbitration. Respondent moved to dismiss at the evidentiary<br />
hearing for claimants’ alleged failure to state a claim, which was denied on the ground that<br />
claimants had made a prima facie case. After one pre-hearing before a single arbitrator, eight<br />
pre-hearing sessions before the full panel, and nineteen hearing sessions, the panel held that<br />
respondent was liable for $61,726 in compensatory damages to the individual claimants. The<br />
panel denied claims of the corporate claimant in their entirety and with prejudice. The panel<br />
assessed $16,425 in hearing session fees jointly and severally to claimants and to respondent in<br />
the same amount. The panel also assessed FINRA member fees, as well as fees related to<br />
adjournments and contested motions. All other relief not specifically addressed was denied,<br />
including respondent’s request for attorneys’ fees.<br />
2. Section 12<br />
B.2<br />
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).<br />
The Second Circuit Court of Appeals affirmed the district court’s order granting the<br />
defendants’ motion to dismiss in part and vacated the order in part, holding that the plaintiff-fund<br />
had class standing to assert violations of Section 12(a)(2) of the Securities Act of 1933. The<br />
district court held that the plaintiff could not represent a putative class of all persons who<br />
acquired certain mortgage-backed certificates because the certificates were sold in 17 separate<br />
offerings through 17 separate trusts, using 17 separate registration statements. The plaintiff-fund<br />
argued that class certification was proper because the prospectus statements contained false and<br />
misleading statements that were essentially repeated in each statement, and therefore it could<br />
represent all purchasers, including purchasers of certificates from other offerings or from<br />
different tranches of the same offerings. The Second Circuit held that the plaintiff-fund had<br />
standing to assert the Section 12 claims on behalf of purchasers of certificates that were backed<br />
by mortgages from the same lenders that originated mortgages to back plaintiff’s certificates,<br />
reasoning that those claims raised a sufficiently similar set of concerns. However, the plaintifffund<br />
lacked standing to assert Section 12 claims on behalf of purchasers of certificates that were<br />
backed by mortgages from different lenders than those that originated mortgages backing<br />
plaintiff’s certificates.<br />
B.2<br />
Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (2d Cir. 2012).<br />
The Second Circuit Court of Appeals reversed the district court’s denial of plaintiff’s<br />
motion for leave to amend its complaint on the grounds of futility, finding that the proposed<br />
amendments to the complaint cured prior deficiencies and stated a claim under Rule 12(b)(6).<br />
Plaintiff brought its initial claim for a violation of Section 12(a)(2) of the Securities Act of 1933,<br />
among other securities claims, alleging that the defendant-manufacturer had failed to disclose<br />
known defects in the company’s semiconductor products in violation of Item 103 of SEC<br />
26
Regulation S–K. The district court dismissed plaintiff’s first complaint and first amended<br />
complaint for failure to state a claim, and the Second Circuit affirmed. On remand, plaintiff<br />
sought leave to amend its complaint for a second time, adding new allegations regarding a defect<br />
rate in the semiconductors and its customer demographics. The district court denied leave to<br />
amend. Reversing the district court, the Second Circuit held that the new complaint, which<br />
should be construed broadly, met Item 303’s disclosure obligations.<br />
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).<br />
The Sixth Circuit Court of Appeals affirmed the district court’s dismissal of plaintiffs’<br />
claims under Section 12(a)(1) of the Securities Act of 1933 as barred by the statute of<br />
limitations. Plaintiffs brought several claims against defendants in a separate state court lawsuit<br />
for undue influence, common law fraud, breach of contract, and breach of fiduciary duty.<br />
During discovery in the state court lawsuit, facts and circumstances giving rise to the federal and<br />
state securities claims in this lawsuit came to light. The district court dismissed plaintiff’s<br />
Section 12(a)(1) claims as barred by the one-year statute of limitations. On cross-appeal,<br />
plaintiffs argued that equitable tolling should extend their limitations period because the facts<br />
pertaining to the securities’ exemption status were concealed from them until discovery began in<br />
the state court litigation. The Sixth Circuit affirmed the district court’s dismissal, finding that<br />
because the statute permits claims under Section 12(a)(2) to proceed if brought within one year<br />
of discovery, and Section 12(a)(1) lacked a similar discovery rule, Congress’s intent is clear and<br />
the express language of the statute should be applied. Therefore, the court reasoned, there is no<br />
equitable tolling period for a Section 12(a)(1) claim.<br />
B.2<br />
Fencorp Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).<br />
B.2<br />
The Sixth Circuit Court of Appeals affirmed the district court’s decision to dismiss all<br />
claims under Section 12(a)(1) of the Securities Act of 1933. The district court had declined to<br />
apply equitable tolling and dismissed most of the plaintiff-investment corporation’s Section 12<br />
claims during pre-trial motions as beyond the three-year statute of repose. The remaining<br />
Section 12 claims were dismissed at the summary-judgment stage as barred by the one-year<br />
statute of limitations. On cross-appeal, plaintiff argued that the district court erred in applying<br />
the statute of repose because it is contrary to the Ohio state constitution’s “right to remedy”<br />
provision. The Sixth Circuit affirmed the district court, finding that there was not proof “beyond<br />
a reasonable doubt” that the statutorily-created rights took away other existing claims or<br />
remedies.<br />
Plumber’s Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-10446-<br />
RGS, 2012 WL 4480735 (D. Mass. Oct. 1, 2012).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12 of the<br />
Securities Act of 1933. The plaintiffs’ claims related to alleged misstatements and omissions<br />
27<br />
B.2
made in the issuance and underwriting of mortgage-backed securities. The defendants first<br />
argued that the plaintiffs lacked standing, in part, because the purchasing plaintiff had sold its<br />
certificate before the applicable “corrective disclosure” issued by the relevant defendant. The<br />
court ruled that loss causation is an affirmative defense to a Section 12 claim, and is not part of a<br />
prima facie case. Thus, it was not facially apparent that the plaintiffs could not establish loss<br />
causation. The court found it relevant that the defendant had issued other corrective disclosures<br />
before plaintiff sold the certificate. Although those disclosures did not relate specifically to the<br />
certificate that the plaintiff had purchased, they involved the same issuer, underwriter, and<br />
subject matter.<br />
The defendants also argued that the plaintiffs’ Section 12 claims were brought outside the<br />
statute of limitations period because prior claims that had been dismissed for lack of standing<br />
could not toll the statute of limitations. The court disagreed, finding that applying the tolling rule<br />
to claims that had been dismissed for lack of standing advanced efficiency and economy. To<br />
hold otherwise would force proposed class members to file duplicative proceedings to preserve<br />
their claims in the event the class representative was later found to lack standing.<br />
Lenartz v. Am. Superconductor Corp., No. CIV. 11-10582-WGY, 2012 WL 3039735 (D. Mass.<br />
July 26, 2012).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claims that arose under Section<br />
12(a) of the Securities Act of 1933. The plaintiffs alleged that materials distributed in connection<br />
with the issuer defendant’s offering contained misrepresentations. The plaintiff asserted Section<br />
12 claims against various defendants, including the issuer, individual officers of the issuer, and<br />
the underwriters. The defendants moved to dismiss, arguing that the Section 12 claims<br />
“sound[ed] in fraud” and were subject to the heighted pleading requirements of Federal Rule of<br />
Civil Procedure 9(b). The court denied the motion and held that the claims were not subject to<br />
the heightened pleading standard. Specifically, it held that (1) the claims against the issuer<br />
defendant were based on a theory of strict liability; (2) the claims against the individual<br />
defendants were based on the breach of a duty “to make a reasonable and diligent investigation<br />
of the truthfulness and accuracy” of the offering materials; and (3) the claims against the<br />
underwriter defendants were based on the breach of a duty “to investigate with due diligence the<br />
representations contained” in the offering materials.<br />
B.2<br />
Washtenaw Cnty. Employees’ Ret. Sys. v. Princeton Review, Inc., No. Civ. 11-11359-RGS, 2012<br />
WL 727125 (D. Mass. Mar. 6, 2012).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims under Section 12(a)(2)<br />
of the Securities Act of 1933. The court held defendants had no duty to disclose internallytracked<br />
sales-forecast data for the third quarter of 2010 at the time of the April 15, 2010-offering.<br />
The court found that the sales forecasts, projecting sales over four months after the date of the<br />
offering, constituted omission of forward-looking information not actionable under securities<br />
laws. The court also held defendants adequately disclosed risks of shifting consumer purchasing<br />
B.2<br />
28
trends and intense competition at the time of the offering. The court dismissed plaintiff’s<br />
complaints that defendants failed to disclose that they were distracted by “side projects” since<br />
defendants adequately disclosed their diversification strategy. Lastly, the court dismissed<br />
plaintiff’s claims that defendants failed to disclose management’s poor execution of its turnaround<br />
plan since plaintiff failed to identify any false or misleading statement in offering<br />
materials.<br />
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance<br />
Corp. I, No. 08 VC 1713(ERK)(WDW), 2012 WL 4053716 (E.D.N.Y. Sept. 14, 2012).<br />
The district court denied the lead plaintiff’s motion to amend the court’s prior opinion<br />
granting in part and denying in part the defendants’ motion to dismiss. In its prior ruling, the<br />
district court held that the lead plaintiff lacked standing to assert claims under mortgage passthrough<br />
certificates it did not purchase or hold. The lead plaintiff’s motion to amend that<br />
decision sought a certification for interlocutory appeal on the issue of standing that had been<br />
stayed pending the outcome of a factually identical Second Circuit case. The Second Circuit<br />
held that a lead plaintiff had standing as long as the certificates not held by the plaintiff shared an<br />
originator with the certificates the plaintiff held. In light of this authority, the Second Circuit<br />
denied the lead plaintiff’s motion to amend until the parties could advise the court of whether the<br />
lead plaintiff would have standing under the Second Circuit’s rule.<br />
Orlan v. Spongetech Delivery Sys., Inc., Sec. Litig., Nos. 10–CV–4093 (DLI)(JMA), 10–CV–<br />
4104 (DLI)(JMA), 2012 WL 1067975 (E.D.N.Y. Mar. 29, 2012).<br />
The court granted the defendant’s motion to dismiss the plaintiffs’ claim under Section<br />
12(a) of the Securities Act of 1933. Noting that Section 12 addresses seller liability, the court<br />
found that there were no allegations that the individual-defendant, a former company attorney,<br />
sold or offered to sell the company’s stock to plaintiffs or any other individuals.<br />
Desyatnikov v. Credit Suisse Grp., Inc., No. 10-CV-1870(DLI)(VVP), 2012 WL 1019990<br />
(E.D.N.Y. Mar. 26, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiff’s claim under Section<br />
12 of the Securities Act of 1933. The court found that any claim made by plaintiff under Section<br />
12(a)(1) of the Securities Act would be subject to the one-year statute of limitations under<br />
Section 13 of the Securities Act, which provides that “if the action is to enforce a liability created<br />
under [Section 12(a)(1)] of this title, [it must be] brought within one year after the violation upon<br />
which it is based.” In this case, the plaintiff filed the complaint nearly two years after purchasing<br />
B.2<br />
B.2<br />
B.2<br />
29
the security at issue, and thus, the claim arising under Section 12 was time-barred and dismissed<br />
with prejudice.<br />
B.2<br />
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance<br />
Corp., No. 08 CV 1713 (ERK)(WDW), 2012 WL 601448 (E.D.N.Y. Feb. 23, 2012).<br />
The court granted in part and denied in part the defendants’ motion to dismiss the<br />
plaintiff’s claims under Section 12(a) of the Securities Act of 1933. Plaintiff filed a putative<br />
class action against an issuer of mortgage-backed securities and individual defendant directors<br />
and officers, alleging violations arising from plaintiff’s purchase of certificates. Regarding<br />
Section 12 statutory standing, the court agreed with defendants that each tranche within a<br />
mortgage-backed securities offering was a unique security, and therefore, plaintiff’s standing<br />
was limited only to the tranches from which it actually purchased securities. Similarly, the court<br />
found plaintiff lacked standing under Section 12(a)(2) because plaintiff failed to allege it<br />
purchased the certificates during the IPO or from the defendants directly. On this basis, the court<br />
dismissed these claims but allowed plaintiff an opportunity to replead.<br />
Plaintiff alleged a number of material misstatements and omissions in the offering<br />
documents: (1) in detailing the loan originator’s underwriting standards; (2) regarding appraisal<br />
methods; (3) regarding credit enhancement; and (4) in calculating ratings. The court held that<br />
the plaintiff failed to plead any facts about the loan originator, which generated the loans<br />
underlying three certificates. Given that Section 12 claims “turn on whether the underlying loan<br />
originators’ conduct was different than described by the offering documents,” these claims were<br />
dismissed. The court denied the motion to dismiss as to several claims where plaintiff<br />
sufficiently pleaded that the defendants failed to follow its statements that the loan originators<br />
would use recognized appraisal standards and regarding deviations from the underwriting<br />
guidelines, where it “alleged systematic deviation motivated by management’s desire to increase<br />
the volume of business.” The court dismissed with leave to replead the claims as to the credit<br />
enhancement statements and the certificates ratings, where the plaintiff made no allegations that<br />
the cited “opinions” were not truly held when made in the offering documents.<br />
Cobalt Multifamily Investors I, LLC v. Arden, No. 06 CV 6172 (KMW)(MHD), 2012 WL<br />
3838834 (S.D.N.Y. Aug. 14, 2012).<br />
B.2<br />
The magistrate judge recommended that the district court judge grant plaintiffs’ motion<br />
for summary judgment against one defendant and enter a default judgment against the other. The<br />
plaintiffs’ claims arose under Section 12(a) of the Securities Act of 1933 and alleged that while<br />
the plaintiff company’s three principals were engaged in alleged securities fraud, the defendants<br />
wrongfully profited from the fraud through commissions from the sale of unregistered securities.<br />
On behalf of the plaintiffs, the court-appointed receiver sought recovery of these commissions<br />
through unjust enrichment and disgorgement. The only unsettled claims were against one<br />
defendant who failed to answer and another who failed to contest plaintiffs’ summary judgment<br />
motion. The court found that the receiver plaintiff had established a prima facie violation of<br />
30
Section 12 and that the defendant had not successfully demonstrated that a registration<br />
exemption applied. Defendant had essentially cold-called investors, which the court considered<br />
a general solicitation, making him ineligible for a Regulation D exemption. The default<br />
judgment was granted on similar grounds.<br />
Fed. Housing Fin. Agency v. UBS Americas, Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).<br />
The court denied defendants’ motion to dismiss plaintiff’s claims arising under Section<br />
12(a)(2) of the Securities Act of 1933. Plaintiff, as conservator for Fannie Mae and Freddie<br />
Mac, alleged that the offering documents for twenty-two securitizations related to residential<br />
mortgage-backed securities sponsored or underwritten by defendants contained materially false<br />
statements and omissions. Defendants moved to dismiss, chiefly arguing that plaintiff’s claims<br />
were untimely under Section 13 of the Securities Act, which generally applies to claims under<br />
Section 12(a)(2). Plaintiff countered that the timeliness of its claims was governed not by<br />
Section 13, but rather by the Housing and Economic Recovery Act of 2008 (“HERA”), which<br />
establishes superseding rules governing the timeliness of any action in which the Federal<br />
Housing Finance Agency is a plaintiff. The court agreed that because under HERA plaintiff had<br />
three years from when it was appointed conservator to bring its claims, its claims had not<br />
expired. The court rejected defendants’ argument that plaintiff failed to state a claim under<br />
Section 12 because, among other things, plaintiff properly alleged that various data and<br />
information in defendants’ offering materials were false (these data and appraisals were not mere<br />
statements of opinion); and, because Section 12 does not require scienter, defendants could not<br />
avoid liability by attributing the misstatements to third parties. Finally, defendants argued that<br />
plaintiff did not allege that one defendant who acted as a depositor was a “statutory seller” under<br />
Section 12(a)(2). The court rejected this contention and held that a depositor is included within<br />
the term “issuer,” and under SEC Rule 159A, an issuer is a statutory seller for purposes of<br />
Section 12(a)(2). In sum, the court denied defendants’ motion to dismiss as to all Securities Act<br />
claims.<br />
B.2<br />
Fed. Housing Fin. Agency v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC), 2012 WL 5451188<br />
(S.D.N.Y. Nov. 8, 2012).<br />
The court denied defendants’ motion to dismiss, holding that plaintiffs were not required<br />
to prove reliance under laws interpreted according to Section 12 of the Securities Act of 1933,<br />
and that plaintiffs had not unreasonably delayed to rescind their securities. In one of sixteen<br />
similar actions, the Federal Housing Finance Agency claimed that the lead defendant, corporate<br />
affiliates, and individual defendants violated Section 12 by marketing and selling residential<br />
mortgage-backed securities containing material misstatements or omissions regarding owneroccupancy<br />
status, loan-to-value ratio, and underwriting standards. Defendants moved to dismiss,<br />
asserting two arguments implicating Section 12 of the Securities Act. First, defendants argued<br />
that the District of Columbia Blue Sky Act required plaintiffs to prove reliance on an underlying<br />
untrue statement of material fact or omission to state a material fact. The court disagreed, noting<br />
that the DC Blue Sky Act is interpreted in accordance with Section 12, and Section 12 requires<br />
31<br />
B.2
no such showing of reliance. Second, defendants argued that plaintiffs should not be allowed to<br />
rescind a purchase under Section 12 if there is an “unreasonable delay” before their demand for<br />
rescission. The court disagreed, noting that courts and commentators have said that plaintiffs<br />
may do what they like with securities during the one-year statute of limitations on Section 12<br />
actions, and decide to rescind or not at any point during that time. The court also noted that the<br />
defendants were unable to establish that the plaintiff’s delay in demanding rescission was<br />
unreasonable. The court denied the motion to dismiss on these grounds.<br />
B.2<br />
Fed. Housing Fin. Agency v. Morgan Stanley, No. 11 Civ. 6739 (DLC), 2012 WL 5868300<br />
(S.D.N.Y. Nov. 19, 2012).<br />
The court granted defendant’s motion to dismiss, agreeing that it did not actively<br />
participate in solicitation under Section 12 of the Securities Act of 1933. In one of sixteen<br />
similar actions, the Federal Housing Finance Agency claimed that the lead defendant, corporate<br />
affiliates, and individual defendants violated Section 12 by marketing and selling residential<br />
mortgage-backed securities containing material misstatements or omissions regarding owneroccupancy<br />
status, loan-to-value ratio, and underwriting standards. An underwriter defendant<br />
moved to dismiss, arguing that its preparation and filing of a registration statement did not<br />
qualify as successfully soliciting the purchase, as is required by Section 12. The court agreed<br />
that the defendant was not in contractual privity with the plaintiffs, and to be liable under Section<br />
12, plaintiffs had to show that the defendant actively participated in solicitation. Holding that<br />
merely assisting in preparing and filing registration statements and assisting in marketing and<br />
selling certificates—which was all that plaintiffs alleged—was insufficient to show the requisite<br />
level of participation to impose solicitation liability, the court granted the underwriter<br />
defendant’s motion to dismiss.<br />
Fed. Housing Fin. Agency v. SG Americas., Inc., No. 11 Civ. 6203 (DLC), 2012 WL 5931878<br />
(S.D.N.Y. Nov. 27, 2012).<br />
The court denied defendants’ motion to dismiss, disagreeing that a single word in their<br />
offering documents should act to raise plaintiff’s pleading standard under Section 12 of the<br />
Securities Act of 1933. In one of sixteen similar actions, the Federal Housing Finance Agency<br />
claimed that the lead defendant, corporate affiliates, and individual defendants violated Section<br />
12 by marketing and selling residential mortgage-backed securities containing material<br />
misstatements or omissions regarding owner-occupancy status, loan-to-value ratio, and<br />
underwriting standards. Defendants argued that plaintiff’s offering document, which stated,<br />
“The following is a summary of the underwriting guidelines believed. . . to have been applied,”<br />
transformed the statements into opinions and that the plaintiff was required to prove that<br />
defendants subjectively knew they were false. The court disagreed, noting that the sentence<br />
preceding said, “All of the mortgage loans were originated. . . generally in accordance with the<br />
underwriting criteria described in this section.” The court held that this was “a classic statement<br />
of fact,” and that the subsequent reference to “believed” did not impose a different pleading<br />
standard on the plaintiff.<br />
B.2<br />
32
B.2<br />
Fed. Housing Fin. Agency v. Bank of Am. Corp., No. 11 Civ. 6195 (DLC), 2012 WL 6592251<br />
(S.D.N.Y. Dec. 18, 2012).<br />
The court denied defendants’ motion to dismiss and granted their motion for<br />
reconsideration under Section 12(a)(2) of the Securities Act of 1933. The plaintiff, acting as<br />
conservator for two government-sponsored entities (“GSEs”), had initially alleged that the<br />
offering documents used to advertise and sell certain residential mortgage-backed securities<br />
(“RMBS”) to the GSEs contained material misstatements or omissions. The RMBS certificates<br />
were each related to one of twenty-three securitizations offered for sale pursuant to shelf<br />
registration statements. The defendant bank was either the lead or co-lead underwriter for all<br />
twenty-three securitizations, was the depositor for eighteen securitizations, and a sponsor for<br />
seventeen securitizations. The defendants’ motion for reconsideration pertained to ten certificates<br />
that were issued pursuant to shelf registration statements and base prospectuses. After the<br />
settlement of the GSEs’ contracts for purchasing these certificates, a final prospectus was filed<br />
with the SEC. The plaintiff’s amended complaint alleged that there were false statements in the<br />
final prospectuses. Defendants argued that Section 12 requires any untrue statement to have<br />
been made before the contract of sale and contended that the plaintiff could not assert a Section<br />
12 claim on prospectuses filed after the sale of the ten certificates. Section 12 imposes liability<br />
on individuals who offer or sell a security by “means of a prospectus.” The court stated,<br />
however, that a sale procured by issuing a free writing prospectus is considered a sale made “by<br />
means of” a prospectus. The final prospectuses ultimately include the information contained in<br />
the earlier prospectuses. The court therefore determined that final prospectuses are a “means”<br />
through which defendants offered and sold securities. Defendants also asserted a Rule 159 claim<br />
as support for their argument. Rule 159 provides that information given to the purchaser after<br />
the time of the sale will not be taken into account when determining whether a prospectus or oral<br />
statement contains an untrue statement of a material fact.<br />
The court, after demarcating the difference between Section 11 and Section 12 claims,<br />
stated that under Section 12(a)(2), any sale or offer of a security by means of a free writing<br />
prospectus, whether or not it is filed, will be subject to disclosure liability. The court also noted<br />
that Rule 159 was not intended to change the pleading requirements for Section 12(a)(2). Rule<br />
159 should instead be viewed as an affirmative defense under Section 12(a)(2) if the defendant<br />
can show that false or misleading information in a final prospectus filed with the SEC was not<br />
conveyed at or before the sale. The court held that this determination was fact-specific, and<br />
could not be resolved on the motion to dismiss.<br />
Fed. Housing Fin. Agency v. Ally Fin. Inc., No. 11 Civ. 7010 (DLC), 2012 WL 6616061<br />
(S.D.N.Y. Dec. 19, 2012).<br />
B.2<br />
The court granted defendants’ motions to dismiss plaintiff’s Section 12(a)(2) claim under<br />
the Securities Act of 1933. The plaintiff, acting as conservator for two government-sponsored<br />
entities (“GSEs”), alleged that the offering documents used to advertise and sell residential<br />
33
mortgage-backed securities (“RMBS”) to the GSEs contained material misstatements or<br />
omissions with regard to owner-occupancy status, loan-to-value ratio, and underwriting<br />
standards for the underlying mortgages. This action was one of sixteen related actions before the<br />
court in which similar claims were alleged. The sponsor of the twenty-one securitizations, to<br />
which the RMBS certificates purchased by one of the GSEs pertain, was a non-party corporation.<br />
This corporation was a wholly-owned subsidiary of a named defendant, which, in turn, was a<br />
wholly-owned subsidiary of the lead defendant. Other non-parties were depositors for the<br />
securitizations. Securities law claims were asserted against the lead defendant as well as the<br />
underwriter banks of the securitizations. Groups of defendants filed separate motions to dismiss.<br />
Most of the arguments had been addressed by the court’s previous opinions, and the court<br />
adopted by reference the relevant rulings and reasoning of its prior opinions. The court<br />
dismissed plaintiff’s Section 12 claims against the lead defendant and one of the underwriter<br />
banks in connection with the RMBS certificates, but provided no detail in this particular opinion<br />
of its reasoning.<br />
Freidus v. ING Grp. N.V., No. 09-1049-LAK, 2012 WL 4857543 (S.D.N.Y. Oct. 11, 2012).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12 of<br />
the Securities Act of 1933, finding that plaintiffs had no standing to pursue their claims. The<br />
plaintiffs alleged injury sustained in connection with their purchases of securities at three<br />
offerings. The lone plaintiff who had purchased $10 million in securities at the relevant offering<br />
had subsequently transferred those securities to an affiliate entity in consideration of that entity’s<br />
assumption of a $10 million liability to a third party. The court ruled that, as a result of this<br />
transfer of the securities for equivalent consideration, plaintiffs lacked both statutory and Article<br />
III standing to bring their claims. The fact that the plaintiffs made an intercorporate transfer to a<br />
company under common ownership did not change the court’s conclusion.<br />
In re Austin Capital Mgmt. Ltd., Sec. & Employee Ret. Income Sec. Act (ERISA) Litig., No. 09<br />
M.D. 2075, 2012 WL 6644623 (S.D.N.Y. Dec. 21, 2012).<br />
The court granted defendants’ motion to dismiss claims arising under Section 12(a)(2) of<br />
the Securities Act of 1933. In this class action, plaintiffs included investors in hedge funds<br />
controlled by a capital management group. The hedge fund capital management group and some<br />
of its managers were named as defendants. Plaintiffs alleged that they had lost money because<br />
the defendant management group had invested in a particular fund that was managed, only<br />
nominally, by an investment manager. Plaintiffs further alleged that the fund was actually<br />
managed by convicted Ponzi schemer Bernard Madoff, and that Madoff had made all investment<br />
decisions and trades. Plaintiffs argued that the defendant had failed to perform adequate due<br />
diligence into Madoff, that it had knowingly engaged in investments with Madoff, and that all<br />
funds invested were ultimately given to Madoff. The Section 12 claim was dismissed because<br />
Section 12(a)(2) governs public securities offerings exclusively, and the offerings made by the<br />
defendant management group were private.<br />
B.2<br />
B.2<br />
34
B.2<br />
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.<br />
2012).<br />
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’<br />
claims under Section 12(a)(2) of the Securities Act of 1933. Defendants argued that plaintiffs’<br />
claims were time-barred because more than one year had passed since plaintiffs had been placed<br />
on “inquiry notice” of their claims. The court extended the Supreme Court’s decision in Merck<br />
& Co. v. Reynolds, __U.S.__, 130 S. Ct. 1784 (2010) (rejecting the inquiry notice standard in the<br />
context of a Section 10(b) suit), to the instant Section 12 claims. Because plaintiffs could not<br />
have pleaded their claims with sufficient particularity more than one year before filing their<br />
complaint, the complaint was not time barred. Furthermore, none of the claims were barred by<br />
the statute of repose because the commencement of the original class action tolled the statute of<br />
repose for all members of the putative class.<br />
The court also ruled that plaintiffs had adequately pleaded claims for misrepresentations<br />
and omissions regarding underwriting standards and appraisals, but had not pleaded sufficient<br />
facts to support an inference that the ratings agencies disbelieved the ratings at or before the time<br />
of the offerings. Accordingly, the court granted defendants’ motion to dismiss as to the ratingsrelated<br />
claims. The court also noted that plaintiffs alleged with specificity the decline in value<br />
and losses suffered as a result of the sale of the certificates and thus identified legally cognizable<br />
injuries. Finally, the court concluded that plaintiffs had standing to sue with respect to tranches<br />
they did not purchase because all named plaintiffs suffered the same form of injury as the<br />
members of the class, traceable to a single unlawful act.<br />
B.2<br />
In re China Valves Tech. Sec. Litig., No. 11 CIV. 0796 LAK, 2012 WL 4039852 (S.D.N.Y. Sept.<br />
12, 2012).<br />
The court granted defendants’ motion to dismiss the lead plaintiff’s claim under Section<br />
12(a) of the Securities Act of 1933. On behalf of a putative class, plaintiff alleged that<br />
defendants made material misstatements and omissions in their registration statement and<br />
offering documents. Specifically, plaintiff alleged that defendants failed to disclose material<br />
adverse facts about two of the company’s acquisitions and that defendants overstated financial<br />
results in the registration statement and prospectus. Plaintiff based these allegations on<br />
discrepancies between the defendant company’s SEC filings and filings made with the Chinese<br />
State Administration for Industry and Commerce. Defendants moved to dismiss the Section 12<br />
claim, arguing that plaintiff’s allegations were based on averments of fraud and were therefore<br />
required to meet the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil<br />
Procedure. Plaintiff argued that its Section 12 claim was not based on fraud and was not subject<br />
to the heightened pleading standard. The court granted defendants’ motion to dismiss, finding<br />
that plaintiff’s assertions were based upon the assumption that the defendant company’s actions<br />
were intentional and deliberate, and not merely negligent. As such, plaintiff’s Section 12 claim<br />
sounded in fraud and was required to be pleaded with particularity. Because the allegations did<br />
35
not meet the heightened pleading standard of Rule 9(b), plaintiff’s Section 12 claim was<br />
dismissed.<br />
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012).<br />
B.2<br />
The court granted the defendants’ motion for partial reconsideration and judgment on the<br />
pleadings with respect to claims brought under Section 12 of the Securities Act of 1933. As part<br />
of a class action against an issuer and the underwriters of a stock offering, as well as various<br />
executives, plaintiff alleged that the issuer failed to disclose information regarding its financial<br />
condition. In an earlier order, the court had granted the defendants’ 12(b)(6) motion to dismiss<br />
in part and denied it in part. When the case was reassigned to a new judge. defendants moved<br />
for reconsideration of the retained claims and for judgment on the pleadings, alleging that the<br />
misstatements were either inactionable opinions or immaterial. Plaintiff insisted that the offering<br />
documents contained materially false and misleading statements related to the issuer’s ability to<br />
issue commercial paper and the valuation of its assets. The court held that the statements related<br />
to commercial paper actually incorporated into the issuer’s offering documents were not<br />
materially misleading and that plaintiffs failed to plausibly allege how much the issuer’s assets<br />
were inflated, or that this amount was material.<br />
In re Gen. Elec. Co. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).<br />
B.2<br />
The court granted in part and denied in part defendants’ 12(b)(6) motion to dismiss<br />
plaintiff’s claims under Section 12(a) of the Securities Act of 1933. Plaintiff alleged defendants<br />
made materially misleading statements related to their success in meeting commercial paper<br />
needs, the quality of their loan portfolio, the size of future dividends, and the value of their<br />
assets. Noting the high bar defendants must overcome in filing 12(b)(6) motions under the<br />
Securities Act, the court determined that the plaintiff had successfully alleged claims regarding<br />
commercial paper and value of assets, but had not done so for claims related to the loan portfolio<br />
or future dividends. Regarding commercial paper, the court found it was plausible that the<br />
defendants’ statements were misleading in that they were intended to assure investors that there<br />
would be no serious difficulties related to short-term financing, while the facts alleged, taken as<br />
true, indicated otherwise. Regarding the value of their assets, it was sufficiently alleged that the<br />
defendants reclassified their loans to inflate the value of those assets in the relevant prospectus.<br />
Regarding the loan portfolio, the court found that defendants’ statements regarding plans to be<br />
“safe and secure” were inactionable statements of puffery or opinion. Finally, regarding future<br />
dividends, the court found that statements by the defendants involved planned, but not<br />
guaranteed, dividends, and therefore could not be relied upon by a reasonable investor.<br />
36
B.2<br />
In re IndyMac Mortg.-Backed Sec. Litig., No. 09 Civ. 4583 (LAK), 2012 WL 3553083<br />
(S.D.N.Y. Aug. 17, 2012).<br />
The court granted the lead plaintiff’s motion for class certification, appointment as class<br />
representative, and appointment of class counsel. The lead plaintiff sought to represent a class of<br />
plaintiffs in alleging claims arising under Section 12 of the Securities Act of 1933, along with<br />
other claims from the Securities Act. Plaintiff alleged that the offering documents for certain<br />
mortgage pass-through certificates, which were underwritten and registered by certain<br />
defendants, contained misleading statements regarding the evaluating standards applied by the<br />
now-defunct bank that had offered the certificates. The defendants claimed that the plaintiffs<br />
could not satisfy the predominance requirement for class certification, largely because the class<br />
contained investors with diverse levels of sophistication. The court held that “sophistication<br />
does not alone defeat a finding of predominance” and that the defendant must show diversity of<br />
actual knowledge regarding the misleading nature of any statements. The court denied<br />
certification as to only one offering and dismissed the claims as to that offering as well,<br />
including Section 12 claims, because the certificates were acquired in the secondary market.<br />
In re Merrill Lynch Auction Rate Sec. Litig., Nos. 09 MD 2030 (LAP), 10 Civ. 0124 (LAP), 2012<br />
WL 1994707 (S.D.N.Y. June 4, 2012).<br />
The court granted the defendant’s motion to dismiss the plaintiff’s claims under Section<br />
12(a)(1) of the Securities Act of 1933. The plaintiff alleged violations of Section 12 in<br />
connection with the 2007 sale of certain auction rate securities that were first offered to the<br />
public in 2002, for which the defendant was a sponsor and broker-dealer. The court found that<br />
plaintiff’s claim, brought in 2010, was time-barred by both the applicable statute of limitations<br />
(one year from the date of the transaction) and the statute of repose (three years from the first<br />
offering of the securities). The court rejected plaintiff’s attempt to distinguish auction rate<br />
securities from other types of securities subject to the statute of limitations and statute of repose.<br />
Alternatively, the court also held that plaintiff had failed to state a claim because the plaintiff<br />
was, or gave the defendant reason to believe it was, a “qualified institutional buyer” under Rule<br />
144A’s safe harbor for offerings of unregistered securities in private placements.<br />
In re Royal Bank of Scotland Grp. plc Sec. Litig., No. 09 Civ. 300 (DAB), 2012 WL 3826261<br />
(S.D.N.Y. Sept. 4, 2012).<br />
The court granted motions to dismiss filed by both the underwriter defendants and the<br />
individual defendants. Plaintiffs brought claims arising under Section 12(a) of the Securities Act<br />
B.2<br />
B.2<br />
37
of 1933, as well as several other claims under that Act. Plaintiffs’ Section 12 claims, brought on<br />
behalf of a putative class of plaintiffs who bought certain preferred shares from the defendant<br />
bank, were based on alleged failures to disclose and material misrepresentations regarding the<br />
defendant bank’s exposure to subprime mortgages in releases made before the preferred share<br />
offering. The plaintiffs alleged that these material misrepresentations and failures to disclose<br />
made the offering documents for the preferred shares materially untrue and misleading in<br />
violation of Section 12. The court held that when evaluated on the facts as they existed at the<br />
time of the offering, none of the alleged misstatements or failures to disclose could support a<br />
Section 12 claim. The court added that in cases where the defendant bank was aware of risks,<br />
those risks were adequately disclosed.<br />
In re UBS AG Sec. Litig., No. 07-11225-RJS, 2012 WL 4471265 (S.D.N.Y. Sept. 28, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section<br />
12 of the Securities Act of 1933. The plaintiffs’ claims stemmed from alleged misstatements<br />
made in a Rights Offering. The defendants first argued that the plaintiffs lacked standing to<br />
bring a Section 12(a)(2) claim because they failed to plead facts sufficient to show that they<br />
purchased their shares directly in the initial public offering. The court agreed, finding that the<br />
amended complaint lacked necessary details about the solicitation of the sale. The defendants<br />
also successfully argued that the plaintiffs failed to allege actionable misstatements or omissions.<br />
In connection with the Rights Offering, the defendant company disclosed that an ongoing<br />
government investigation—news of which had been widely reported—could expose the<br />
company to substantial civil, criminal, and regulatory penalties. The plaintiffs alleged that the<br />
defendants’ disclosures failed to describe the magnitude of the legal issues facing the company.<br />
The court found the company’s disclosures of uncharged illegal conduct to be adequate and that<br />
other statements were non-actionable “expressions of puffery and corporate optimism.” The<br />
court also held that certain alleged misstatements were not material because they were matters of<br />
general public knowledge.<br />
B.2<br />
In re Vivendi Universal, S.A. Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).<br />
The court granted defendants’ motion for partial judgment on plaintiffs’ claims under<br />
Section 12(a) of the Securities Act of 1933. Relying on the Supreme Court’s ruling in Morrison<br />
v. National Australia Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869 (2010), regarding similar claims<br />
under the Securities Exchange Act of 1934, defendants argued that Section 12(a) does not apply<br />
to purchases of securities on foreign exchanges. The court agreed and extended the ruling in<br />
Morrison to the instant case for three reasons: (1) the Securities Exchange Act of 1934 and the<br />
Securities Act were enacted as part of the same set of comprehensive regulations; (2) like the<br />
Exchange Act, the Securities Act lacked an affirmative indication of intent to overcome the<br />
presumption against extraterritorial application; and (3) the SEC had not interpreted the<br />
Securities Act to apply to sale of securities outside the United States.<br />
B.2<br />
38
B.2<br />
Lau v. Mezei, No. 10 CV 4838(KMW), 2012 WL 3553092 (S.D.N.Y. Aug. 16, 2012).<br />
The court granted the plaintiff’s motion for summary judgment as to one defendant<br />
company on a breach-of-contract claim, sua sponte, and granted in part and denied in part the<br />
defendants’ motion for summary judgment as to plaintiff’s claim under Section 12(a) of the<br />
Securities Act of 1933. The plaintiff’s claims, which included a Section 12 claims, arose out of<br />
the plaintiff’s investment in the defendant companies at the suggestion of his accountant, also a<br />
defendant. The plaintiff alleged the defendant accountant materially misrepresented the risks of<br />
the investment. The court denied summary judgment for the defendant accountant on the<br />
Section 12 claim because there were unresolved questions of fact regarding the defendant<br />
accountant’s involvement in the companies and the nature of the offering. The court did grant<br />
summary judgment on the Section 12 claims for the defendant companies and their defendant<br />
owner because there was no evidence that the accountant was acting as an agent for the<br />
companies.<br />
Lewy v. SkyPeople Fruit Juice, Inc., No. 11 CIV. 2700 PKC, 2012 WL 3957916 (S.D.N.Y. Sept.<br />
10, 2012).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a) of<br />
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit alleging defendants<br />
violated Section 12 by (1) incorporating false statements into the registration statement and<br />
prospectus of their public offering and (2) omitting to disclose a material transaction. To support<br />
their claims, plaintiffs pointed to discrepancies between the information contained in the<br />
defendant company’s financial statements filed with the SEC and those filed with the Chinese<br />
State Administration for Industry and Commerce. Defendants moved to dismiss plaintiffs’<br />
complaint for failure to state a claim. Defendants argued that plaintiffs had not identified any<br />
misstatements or omissions in the offering documents and that the omitted transaction was not<br />
material because it was a related-party transaction. The court found that plaintiffs plausibly<br />
alleged that the financial statements were false. The court also found that the omitted transaction<br />
was plausibly alleged to be material, particularly in light of the defendant company’s new policy<br />
to disclose related-party transactions after experiencing problems in that area.<br />
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., -- F. Supp. 2d --, 2012 WL 4616958<br />
(S.D.N.Y. Sept. 28, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section<br />
12 of the Securities Act of 1933, finding that the plaintiffs failed to state a claim and that the<br />
claims fell outside the statute of limitations. The plaintiffs, purchasers of American Depository<br />
Receipts (“ADRs”), alleged that the defendant bank had made various false statements about its<br />
39<br />
B.2<br />
B.2
acquisition of another bank, its exposure to the subprime market, and a rights offer. The court<br />
found that the plaintiffs’ allegations sounded in fraud and were subject to the heightened<br />
pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure. The court found that<br />
some of the alleged factual misstatements were neither literally false nor actionable, as the<br />
allegations were made with the benefit of hindsight about the 2008 financial crisis. With regard<br />
to the defendants’ statements based on opinion or belief, the plaintiffs failed to allege that the<br />
statements were both objectively false and disbelieved by the defendants at the time they were<br />
expressed.<br />
In addition, the court held that the plaintiffs’ Section 12 claims fell outside the statute of<br />
limitations. Plaintiffs argued that they had no notice of the violations until the defendant bank<br />
admitted the extent of its subprime and credit market exposures. This argument was undermined<br />
because (1) the plaintiffs had joined a similar lawsuit against defendants before the alleged<br />
disclosure; (2) the defendant’s share price had declined significantly before the disclosure, such<br />
that a reasonable person could be put on notice that the defendant was experiencing financial<br />
difficulties; and (3) the plaintiffs’ complaint did not contain any information that was not<br />
discoverable before the defendant’s disclosure.<br />
McKenna v. Smart Techs. Inc., No. 11 Civ. 7673 (KBF), 2012 WL 3589655 (S.D.N.Y. Aug. 21,<br />
2012).<br />
The court denied defendants’ motion to dismiss claims arising under Section 12(a) of the<br />
Securities Act of 1933, as well as several other claims under that Act. The plaintiffs alleged that<br />
the defendant company’s pre-initial public offering prospectus failed to disclose the risk of<br />
declining demand for the company’s product. The defendants argued that dismissal was<br />
warranted because the claims “sounded in fraud,” and were, therefore, subject to the heightened<br />
pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure. The defendants also<br />
argued that the defendant company’s disclosures were adequate, and the plaintiffs’ allegations<br />
regarding the defendant company’s awareness of the risk of a demand decrease lacked specificity<br />
and factual plausibility. The court found no fraud allegation in the complaint and concluded that<br />
the plaintiffs’ confidential witnesses, considered together, had established sufficient factual<br />
evidence to support the claim that the defendant was aware of the risk of a demand decrease and<br />
did not adequately disclose it.<br />
NECA–IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10 Civ. 440 (LAK)(HBP), 2012<br />
WL 3191860 (S.D.N.Y. Feb. 9, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section<br />
12(a) of the Securities Act of 1933. Plaintiffs filed a putative class action against Bank of<br />
America Corporation and certain of its affiliates (“BAC”), as well as a group of underwriter<br />
defendants. Plaintiffs alleged, inter alia, violations of Section 12(a) arising from BAC’s public<br />
40<br />
B.2<br />
B.2
securities offerings. Plaintiffs alleged that the offering documents were materially false and<br />
misleading and failed to disclose the extent to which BAC’s assets and mortgage-backed<br />
securities were impaired, that it lacked the internal controls to properly report on its impaired<br />
assets, that it misrepresented the thoroughness of its due diligence in its decision to acquire<br />
Countrywide in its 8-K filings, and that BAC’s capital base was not accurately represented and<br />
its leverage ratio for its risk-based capital was materially overstated. The court granted<br />
defendants’ motion to dismiss, finding that plaintiffs failed to state a plausible Section 12 claim<br />
because BAC’s statements concerning the sufficiency of its loss reserves, adequacy of its writedowns,<br />
and well-capitalized status were qualified estimates. Such qualified estimates did not<br />
“render those figures false at the time that they were publicly filed with the SEC” but may have<br />
been merely “bad predictions.” As to the claims involving the purchase of another financial<br />
institution reported in SEC filings, plaintiffs alleged that proper due diligence would have<br />
uncovered serious risks associated with that institution’s standards and practices. However, the<br />
court found that just because the due diligence reached incorrect results did not mean that the<br />
statement that it performed extensive due diligence was false. The court further held that BAC’s<br />
statement that certain loan originations were of a higher quality and producing better spreads as<br />
compared to prior years was not actionable when taken in context of the disclosures and<br />
warnings provided in the offering documents as a whole.<br />
N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ. 5310 (DAB), 2012 WL<br />
1076143 (S.D.N.Y. Mar. 29, 2012).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims under Section 12(a) of<br />
the Securities Act of 1933. Plaintiff brought a class action suit alleging that defendants had<br />
failed to disclose in offerings documents that defendants systematically disregarded their own<br />
mortgage underwriting guidelines. The court held that testimony from the defendants’ former<br />
employees concerning instances where defendants deviated from underwriting guidelines did not<br />
tie that conduct to a particular loan used as collateral in the securities offering at issue in this<br />
case. The court held that the plaintiffs ultimately did not cite one specific loan that should not<br />
have been included in the offering or any example of a loan that failed to meet applicable<br />
underwriting guidelines that was used as collateral for the securities offering. The court also<br />
found that the plaintiffs failed to show how any alleged misstatements or omissions would have<br />
been material given the extensive risk disclosures and “general mix” of information available to<br />
the plaintiff in the months preceding the offering. Because plaintiff’s claims were not<br />
sufficiently specific to state a claim and because plaintiff’s claims had already been dismissed<br />
without prejudice, the court dismissed plaintiff’s Section 12 claims with prejudice.<br />
In re Wilmington Trust. Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).<br />
The court granted the defendants’ motion to dismiss plaintiffs’ claims under Section<br />
12(a)(2) of the Securities Act of 1933 without prejudice. The court held that plaintiffs failed to<br />
specifically identify false and misleading statements on which plaintiffs based their claims.<br />
B.2<br />
B.2<br />
41
Plaintiffs’ quotations of allegedly misleading statements were short, without context, and failed<br />
to adequately identify an actionable violation of Section 12.<br />
B.2<br />
In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012).<br />
The court granted movants’ motion to dismiss the trustee plaintiff’s claims for<br />
declaratory relief under the Securities Act of 1933 and the Securities Exchange Act of 1934. The<br />
trustee sought a declaration that commissions and referral fees owed to the debtors were void<br />
because they violated both the Securities Act and the Exchange Act. Specifically, the trustee<br />
sought a declaration that: (1) the interests at issue were securities, as defined by the Securities<br />
Act and the Exchange Act; (2) that movants were not licensed to sell securities; (3) that the sale<br />
of the interests as real estate violated both the Securities Act and the Exchange Act; and (4) that<br />
the agreements between debtors and movants for referral fees and commissions were void<br />
because the sales were illegal. The trustee, however, did not specify which provisions of the<br />
Securities Act and Exchange Act upon which he was relying. The movants assumed he was<br />
relying on Section 12(a) of the Securities Act and argued that Section 12(a) does not provide a<br />
private right of action for a “non-purchaser.” Although the court agreed with this proposition, it<br />
interpreted the trustee’s claim as arising under Sections 5(a) and 5(c) of the Securities Act, and<br />
under Sections 14 and 36 of the Exchange Act. Ultimately, the court found the trustee’s<br />
complaint was deficient under those sections and granted the motion to dismiss with leave to<br />
amend.<br />
B.2<br />
In re Schering-Plough Corp./ENHANCE Sec. Litig., No. CIV. 8-397 DMC/JAD, 2012 WL<br />
4482032 (D.N.J. Sept. 25, 2012).<br />
The court rejected defendants’ argument that plaintiffs lacked standing to pursue claims<br />
under Section 12(a) of the Securities Act of 1933. On behalf of a putative class, plaintiffs filed<br />
suit claiming defendants violated Section 12 by misrepresenting and omitting the results of a<br />
clinical trial of prescription drugs. Plaintiffs moved for class certification and the appointment of<br />
class representatives. Defendants opposed this motion, arguing, among other things, that<br />
plaintiffs lacked standing to bring a Section 12 claim because plaintiffs’ damages were<br />
untraceable, plaintiffs did not experience a loss in the sale of their securities, and plaintiffs<br />
bought the securities on a secondary market. The court granted plaintiffs’ motion, finding<br />
defendants’ arguments to be either premature or without merit. The court held that a plaintiff is<br />
not required to trace Section 12 damages in order to establish standing. The court also found<br />
defendants’ argument that plaintiffs did not experience a loss to be without merit. Finally, the<br />
court held that the determination of whether a security was purchased in a secondary market was<br />
a factual dispute to be resolved at a later stage in the proceedings.<br />
42
Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions, Inc., No.<br />
CIV. 10-898 CCC, 2012 WL 3113981 (D.N.J. July 31, 2012).<br />
The court granted defendant’s motion to dismiss plaintiff’s claims with prejudice. In<br />
February 2010, the plaintiff asserted claims against the defendants under Section 12(a) of the<br />
Securities Act of 1933. In its complaint, the plaintiff alleged that defendants made various<br />
misrepresentations in connection with the sale of mortgage-backed securities. The defendants<br />
argued that the plaintiff’s claims were time-barred under Section 13 of the Securities Act, which<br />
provides that a claim must be filed within one year of the plaintiff’s discovery of facts<br />
constituting the violation of the Securities Act. The court found the appropriate question under<br />
Section 13 is whether the plaintiff had “sufficient information of possible wrongdoing to place<br />
[it] on inquiry notice, or to have excited ‘storm warnings’ of culpable activity.” Plaintiff argued<br />
that such notice did not exist until the security rating of its specific tranche of certificates was<br />
downgraded, but the court found that various newspaper articles, public reports, and lawsuits<br />
containing similar allegations exposed the plaintiff to information that was sufficient to put it on<br />
inquiry notice outside of the limitations period. Plaintiff’s claim was, therefore, barred.<br />
B.2<br />
Underland v. Alter, No. 10-3621, 2012 WL 2912330 (E.D. Pa. July 16, 2012).<br />
B.2<br />
The court denied the defendants’ motion to dismiss the plaintiffs’ claim under Section 12<br />
of the Securities Act of 1933. Plaintiffs alleged that certain defendants executed registration<br />
statements containing material misstatements and omissions, and that the accounting and<br />
auditing firm that reviewed the corporation’s financial statements was also liable for certifying<br />
the false and misleading registration statements. The defendants had moved to dismiss, arguing<br />
that plaintiffs failed to state a valid Section 12 claim, and that there was no genuine case and<br />
controversy since plaintiffs could possibly regain the losses through the corporation’s bankruptcy<br />
proceeding.<br />
In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., MDL No. 08-MD-1961 (D. Md.<br />
Nov. 8, 2012).<br />
The court denied plaintiff’s discovery request in this putative class action based on<br />
Section 12 of the Securities Act of 1933. In this multi-district litigation, the named plaintiff of a<br />
putative class, himself lacking standing to pursue a claim under Section 12, sought to use<br />
discovery to obtain the names and addresses of relevant purchasers in order to determine if one<br />
of them had standing to pursue the claim. The court denied the discovery request, reasoning that<br />
as the individual lacked standing, he could not seek discovery on behalf of a putative class. The<br />
individual lacking standing was not able to show that he would benefit from the discovery, as he<br />
himself had no valid claim.<br />
B.2<br />
43
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., No. MJG-08-1961-MDL, 2012 WL<br />
2450161 (D. Md. June 26, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiffs’ claim under Section<br />
12 of the Securities Act of 1933. The plaintiffs failed to demonstrate adequate standing to bring<br />
a Section 12(a)(2) claim under the Securities Act due to their failure to demonstrate that the<br />
securities were purchased directly from the issuer.<br />
Gallman v. Sovereign Equity Grp., Inc., No. AW-11-2750, 2012 WL 1820556 (D. Md. May 15,<br />
2012).<br />
The court denied plaintiffs’ motion for default judgment on their claim under Section<br />
12(a) of the Securities Act of 1933. Plaintiffs invested with defendants under investment<br />
contracts that were subsequently dishonored by defendants. Plaintiffs alleged a violation of<br />
Section 12(a)(2) for misleading communications associated with their investments. Defendants<br />
filed no responsive pleading. Nevertheless, the court denied the plaintiffs’ motion for default<br />
judgment as to their Section 12 claim. Under Section 12(a)(2), standing is limited to those who<br />
purchase securities pursuant to a public offering made via a prospectus and does not extend to<br />
individuals who purchase securities under private sales contracts. Plaintiffs lacked standing<br />
because they did not allege that defendants attempted to sell them securities through a prospectus<br />
or through a registered offering.<br />
Carlucci v. Han, No. 1:12CV451 JCC/TCB, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).<br />
The court granted defendants’ motion to dismiss plaintiff’s claims arising under the<br />
Securities Exchange Act of 1934, state statute, and common law. The court addressed Section<br />
12 of the Securities Act of 1933 in a footnote, noting that Section 12 provides a recognizable<br />
injury for plaintiffs as soon as securities are sold for less than their actual value and not, as<br />
defendants had alleged for plaintiff’s analogous Exchange Act claim, after principal and interest<br />
payments become due.<br />
B.2<br />
FDIC v. Morgan Stanley & Co., No. H-11-4187, 2012 WL 401203 (S.D. Tex. Feb. 7, 2012).<br />
The court granted the plaintiff’s motion to remand the action, involving violations of<br />
Section 12 of the Securities Act of 1933, among other things, to Texas state court. Plaintiff<br />
originally filed the action in state court alleging numerous misrepresentations regarding the<br />
credit quality of the mortgage-backed certificates it purchased from defendant, which attempted<br />
to remove the action to federal court, arguing that the Securities Act claims were baseless. In<br />
44<br />
B.2<br />
B.2<br />
B.2
order to successfully do so, defendant bore the burden of showing “that there is no possibility<br />
that plaintiff would be able to establish a cause of action.” The defendant argued that the Section<br />
12 claims were time-barred by the statute of limitations. The court concluded that the defendant<br />
“failed to demonstrate that there is no possibility the Texas district court would . . . find the 1933<br />
Act claims to be timely” and granted remand to Texas state court.<br />
FDIC v. Morgan Stanley & Co., No. H-11-4184, 2012 WL 423415 (S.D. Tex. Feb. 8, 2012).<br />
The court granted the plaintiff’s motion to remand the action, involving violations of<br />
Section 12 of the Securities Act of 1933, among other things, to Texas state court. Plaintiff<br />
originally filed the action in state court alleging numerous misrepresentations regarding the<br />
credit quality of the mortgage-backed certificates it purchased from defendant, which attempted<br />
to remove the action to federal court, arguing that the Securities Act claims were baseless. In<br />
order to successfully do so, defendant bore the burden of showing “that there is no possibility<br />
that plaintiff would be able to establish a cause of action.” The defendant argued that the Section<br />
12 claims were time-barred by the statute of limitations. The court concluded that the defendant<br />
“failed to demonstrate that there is no possibility the Texas district court would . . . find the 1933<br />
Act claims to be timely” and granted remand to Texas state court.<br />
Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, No. 12 C 4642, 2012 WL 5389734 (N.D.<br />
Ill. Nov. 2, 2012).<br />
The court granted defendants’ motion to dismiss plaintiff’s claim arising under Section<br />
12(a) of the Securities Act of 1933 because Section 12 only applies to securities offered or sold<br />
through a public offering. The securities here were sold in a private offering.<br />
Armstrong v. Am. Pallet Leasing Inc., No. C07-4107-MWB, 2012 WL 3906205 (N.D. Iowa<br />
Sept. 7, 2012).<br />
The district court accepted the magistrate judge’s report and recommendation to grant the<br />
plaintiff’s motion for default judgment against defendants for violations under Section 12(a) of<br />
the Securities Act of 1933. Plaintiffs filed suit against defendants for violations of Section 12,<br />
and when none of the defaulting defendants resisted plaintiffs’ motion, the magistrate judge<br />
entered judgment for plaintiffs.<br />
B.2<br />
B.2<br />
B.2<br />
45
Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC, No. Civ. 12-254 (RHK/JSM),<br />
2012 U.S. Dist. LEXIS 96263 (D. Minn. July 12, 2012).<br />
The court granted the defendants’ motion to dismiss the plaintiff’s claim under Section<br />
12 of the Securities Act of 1933. Defendants had sought dismissal alleging that plaintiff’s<br />
allegations of fraud failed to satisfy the particularity requirement under Rule 9(b) of the Federal<br />
Rules of Civil Procedure. In its defense, the plaintiff pointed to specific allegations in the<br />
amended complaint. These allegations, however, were all directed at the entity itself and did not<br />
reference individual speakers. The court agreed with the defendants’ argument, noting the<br />
defendants were unable to determine which allegations were directed at them.<br />
Rabbani v. DryShips, Inc., No. 4:12CV130 RWS, 2012 WL 5395787 (E.D. Mo. Nov. 6, 2012).<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 defendants’ statements in prospectuses<br />
regarding plans to spin-off a subsidiary corporation to its own shareholders were materially false<br />
and misleading because shareholders ultimately received only a fraction of subsidiary stock for<br />
each of their shares in the parent company. The court found that the defendants’ statements were<br />
“clearly forward-looking” and applied the “bespeaks caution” doctrine in light of the numerous<br />
cautionary statements in the prospectuses. Because the prospectuses specifically noted that the<br />
spin-off was dependent on market conditions, listed specific risk factors related to world<br />
markets, and explicitly contemplated the possibility that the spin-off would not occur, the court<br />
found that “a reasonable investor would not have ignored such warnings” and concluded that the<br />
“alleged misrepresentations [were] immaterial as a matter of law.” Alternatively, the court noted<br />
that the allegedly misleading statement was accompanied by sufficient cautionary language to<br />
fall within the statutory safe-harbor provision of the Securities Act.<br />
B.2<br />
SMA Irrevocable Trust v. R. Capital Advisors, LLC, No. 4:11CV00697 ERW, 2012 WL 5194332<br />
(E.D. Mo. Oct 19, 2012).<br />
In a suit under Section 12(a) of the Securities Act of 1933, the court dismissed plaintiffs’<br />
claims against a securities dealer as time-barred and for failure to state a claim. Plaintiffs<br />
alleged, among other things, that the securities dealer had misrepresented his position within his<br />
employer financial firm and that plaintiffs relied on these representations in choosing to invest<br />
with the firm. The court found that the one-year limitation period began to run when plaintiffs<br />
received the private-placement memorandum (“PPM”) containing allegedly false and misleading<br />
statements and substantial discrepancies, and not nearly two years later when plaintiffs<br />
discovered the dealer’s true position within the firm when he filed his personal declaration with<br />
the court. The facts contained in the PPM were sufficient to place the plaintiffs on “inquiry<br />
notice” because these circumstances would have alerted a reasonable person to the possibility<br />
46<br />
B.2<br />
B.2
that they had been provided false or misleading information. Because more than one year had<br />
passed since plaintiffs received the PPM, plaintiffs’ claims were dismissed as untimely. The<br />
court also noted that the complaint, liberally construed, failed to allege facts sufficient to<br />
establish liability on the dealer’s behalf or to show reliance upon any misrepresentations made by<br />
the dealer.<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12 of<br />
the Securities Act of 1933. The court held that plaintiffs’ claims were time-barred, as the repose<br />
period for the Section 12 claim began to run on the date of the sale. Plaintiffs argued that they<br />
reasonably believed a California class-action would protect their interests and the three-year<br />
statute of repose in Section 13 of the Securities Act of 1933 should have been tolled during the<br />
pendency of the California action. The court held that, since the plaintiffs in the California class<br />
action had purchased different securities than the ones at issue in the present case, the California<br />
action provided no basis for tolling and held that plaintiffs’ Section 12 claims were time-barred.<br />
Am. Int’l Grp., Inc. v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.-Backed<br />
Sec. Litig.), 834 F. Supp. 2d 949 (C.D. Cal. 2012).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section<br />
12(a) of the Securities Act of 1933 as time-barred. As part of multi-district litigation, plaintiffs<br />
alleged that the offering documents related to certificates originated by defendants contained<br />
various misrepresentations. At the court’s direction, defendants filed a motion to dismiss based<br />
solely on timeliness. The court found plaintiffs’ claims to be time-barred because Section 12<br />
claims are subject to a three-year statute of repose that begins to run on the date of sale.<br />
Plaintiffs filed their complaint more than three years after they purchased each certificate.<br />
Katz v. China Century Dragon Media, Inc., No. LA CV11-02769 JAK (SSx), 2012 WL 6644353<br />
(C.D. Cal. Dec. 18, 2012).<br />
The court denied the plaintiffs’ motion for class certification with respect to the claim<br />
arising under Section 12(a)(2) of the Securities Act of 1933. The plaintiffs purchased shares in<br />
the defendant company either before or after the initial public offering. The defendants included<br />
the company itself, some of its former directors and officers, the company’s former auditor, and<br />
underwriters of the IPO. The plaintiffs argued that defendants made false and incomplete<br />
statements regarding the revenues and income of the company in the prospectus and registration<br />
statements issued with the IPO. The Section 12 claim was brought only against the defendant<br />
company and an underwriter. There was only one proposed class representative who purchased<br />
shares from the underwriter defendant and alleged a Section 12 claim. The court determined that<br />
B.2<br />
B.2<br />
B.2<br />
47
the plaintiff failed to meet the “numerosity” requirement under Rule 23(a), which allows for<br />
class certification if a class is “so numerous that joinder of all members is impracticable.” The<br />
Section 12 claim was thus barred from proceeding on a class-wide basis.<br />
In re China Intelligent Lighting & Electronics, Inc. Sec. Litig., CV 11-2768 PSG SSX, 2012 WL<br />
3834815 (C.D. Cal. Sept. 5, 2012).<br />
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a) of<br />
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit, alleging that<br />
defendants violated Section 12 by making misrepresentations and omissions in a prospectus.<br />
The court dismissed their original complaint because it alleged that the plaintiffs purchased their<br />
securities one week before the registration statement at issue was declared effective by the SEC.<br />
Plaintiffs then amended their complaint, alleging that they purchased their shares pursuant to the<br />
initial offering for which the registration statement or prospectus was effective. Defendants<br />
again moved to dismiss the Section 12 claim, arguing that the court should not accept the new<br />
allegations. Plaintiffs opposed the motion, both explaining and certifying the amendments. The<br />
court denied defendants’ motion, holding that plaintiffs adequately pled standing in their<br />
amended complaint.<br />
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP (MANx), 2012 WL<br />
2161498 (C.D. Cal. June 1, 2012).<br />
The court had previously dismissed with prejudice certain of plaintiff’s claims under<br />
Section 12(a)(2) of the Securities Act of 1933, see 2012 WL 1798997 (Feb. 17, 2012), but the<br />
plaintiff nevertheless reasserted those same claims in an amended complaint. The court therefore<br />
struck those claims from the amended complaint.<br />
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP (MANx), 2012 WL<br />
1798997 (C.D. Cal. Feb. 17, 2012).<br />
The court granted, in part, the defendants’ motions to dismiss plaintiffs’ claims under<br />
Section 12 of the Securities Act of 1933. Plaintiffs brought suit against various defendants for<br />
violations of federal and state securities laws in connection with the sale of mortgage-backed<br />
securities. The court dismissed the plaintiffs’ Section 12 claims as to all but two tranches of the<br />
securities in question because the statute of repose had run with regard to the others. The court<br />
then further dismissed the Section 12 claims as to the remaining tranches to the extent they<br />
applied to defendants who were not “sellers” under the statute, or from whom the plaintiffs did<br />
not directly purchase the securities. The court provided little reasoning in its opinion, having<br />
B.2<br />
B.2<br />
B.2<br />
48
ecently issued several other opinions in related cases concerning the same transactions and<br />
similar parties.<br />
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).<br />
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)<br />
of the Securities Act of 1933 but granted plaintiffs leave to amend their complaint. The court<br />
held that plaintiffs’ pleadings failed to allege sufficient facts to show defendants made material<br />
misrepresentations or omissions in offerings documents. Further, the court held that the claimed<br />
material omissions regarding substantial pricing pressures had been properly disclosed, were not<br />
known, or could reasonably have been expected to have a material impact on the issuer’s sales.<br />
The court also found that one defendant that had invested in the entity that offered and sold the<br />
securities at issue in this case was not a “seller” for purposes of Section 12(a)(2). The court held<br />
the investor defendant was not a “seller” because (1) the investor defendant was not the<br />
immediate seller of the securities; (2) there were insufficient allegations that the investor ever<br />
prepared offerings materials or used those materials to solicit the purchase of the securities; and<br />
(3) SEC Rule 159(A)(a) did not apply.<br />
Elliot v. China Green Agricultures, Inc., No. 3:10-CV-0648-LRH-WGC, 2012 WL 5398863 (D.<br />
Nev. Nov. 2, 2012).<br />
The court dismissed plaintiff’s claims under Section 12(a) of the Securities Act of 1933<br />
because plaintiff—the named plaintiff representing a putative class—conceded that he had<br />
purchased the securities through a private offering. Section 12 only applies to publicly offered<br />
securities.<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).<br />
The court issued an amended opinion to clarify its earlier denial of defendants’ motions<br />
to dismiss plaintiffs’ claims under Section 12(a) of the Securities Act of 1933. Defendants<br />
argued that plaintiffs’ complaint failed to establish any misleading statements or omissions in the<br />
relevant offering statements; that the plaintiffs could not establish loss-causation; and that the<br />
fund defendants were not “sellers” of securities under the Securities Act. Viewing the alleged<br />
misstatements holistically rather than discretely, the court determined that the “preservation of<br />
capital” pitch made by defendants in their prospectuses was more material than a vague,<br />
aspirational statement. The court further held that it was sufficiently distinct from the relatively<br />
high-risk strategies actually employed—including the use of “inverse floaters” and a lack of<br />
external valuation methods—to satisfy the pleading requirements of Rule 8(a). Regarding losscausation,<br />
the court determined that it was at least plausible that the losses sustained were caused<br />
B.2<br />
B.2<br />
B.2<br />
49
y the defendants’ misrepresentations regarding the volatility of highly leveraged investment<br />
strategies, and found that it would be untimely to rule on issues as complex as loss causation in<br />
the securities fraud context at the pleading stage. Finally, the court found it had been sufficiently<br />
pleaded that the fund defendants were issuers of securities and therefore “sellers” as both “a<br />
matter of logic” and under SEC Rule 159A.<br />
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., No. 11-cv-00624-WYD-<br />
MJW, 2012 WL 6645097 (D. Colo. Dec. 19, 2012).<br />
The court granted the underwriter defendants’ motion to dismiss plaintiffs’ claim under<br />
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs filed an amended securities class action<br />
against underwriter entities, including a thrift holding company and its subsidiary, a bank. The<br />
holding company filed a registration statement with the SEC and later held a public offering at<br />
which it sold twenty million shares of common stock. In the five quarters following the offering,<br />
the defendant holding company realized over $69 million of “other-than-temporary impairment”<br />
(“OTTI”) in its securities. Plaintiffs alleged that the underwriter defendants were liable under<br />
Section 12(a)(2) because they were sellers or solicitors of the shares offered pursuant to the<br />
registration statement, which purportedly contained false and misleading statements and did not<br />
accurately state the holding company’s OTTI. The Section 12 claim thus required plaintiffs to<br />
demonstrate that the defendants had made an untrue statement of material fact. The court found<br />
that an OTTI determination is considered an opinion and that plaintiffs who assert claims under<br />
the Securities Act that are based on opinions must allege that the opinions are objectively and<br />
subjectively false. Plaintiffs’ counsel had conceded in open court that the amended securities<br />
class action did not allege subjective falsity regarding the OTTI claims. The court thus found<br />
that the plaintiffs failed to state a claim upon which relief could be granted, and the Section 12<br />
claim was dismissed.<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., No. 09-md-02063-JLK-KMT, 2012 WL<br />
156763 (D. Colo. Jan. 18, 2012).<br />
The court issued an amended order denying defendants’ motions to dismiss plaintiffs’<br />
claims under Section 12(a) of the Securities Act of 1933. In its initial order, the court looked to a<br />
later superseded opinion in In re TCW/DW North Am. Gov’t Income Trust Sec. Litig., 94 F. Supp.<br />
326 (S.D.N.Y. 1996), when considering defendants’ motion. The court determined that while<br />
the superseding opinion differed from the one superseded, the differences between the two did<br />
not affect the court’s ultimate decision. The court reiterated that the determination of whether or<br />
not stated investment objectives are materially misleading involves not only a review of the<br />
statements themselves, but also the totality of other actionable statements and omissions<br />
surrounding them.<br />
B.2<br />
B.2<br />
50
Nat’l Credit Union Admin. Bd. v. RBS Sec., Inc., No. 11-2340-RDR, 2012 WL 4210500 (D. Kan.<br />
Sept. 19, 2012).<br />
The court granted defendants’ motion to certify an interlocutory appeal on whether 12<br />
U.S.C. § 1787(b)(14)(A) (the “extender statute”) applies to claims brought under Section 12(a)<br />
of the Securities Act of 1933. In consolidated cases before the court, plaintiff, acting as<br />
liquidating agent of various credit unions, alleged violations of Section 12 in connection with the<br />
underwriting and sale of residential mortgage-backed securities. Defendants argued that<br />
plaintiff’s Section 12 claims were barred by the statute of repose contained in Section 13 of the<br />
Securities Act of 1933. The statute of repose states that a Section 12 claim may not be brought<br />
more than three years after the sale of a security. It was undisputed that the certificates at issue<br />
were offered and sold more than three years before these claims were filed. Plaintiff asserted,<br />
however, that its claims were timely filed because of provisions of the extender statute that allow<br />
appointed liquidators additional time to bring claims in that capacity. In denying defendants’<br />
motion to dismiss, the court ruled that the extender statute applied to the statute of repose and to<br />
federal and state statutory claims. Defendants sought an interlocutory appeal of this ruling. The<br />
court granted defendants’ motion to certify an interlocutory appeal, finding that the issues<br />
defendants sought to appeal were controlling questions of law, that there were substantial<br />
grounds for difference of opinion as to these questions, and that an immediate appeal to<br />
determine these issues might materially advance the litigation.<br />
Nat’l Credit Union Admin. Bd. v. RBS Sec., Inc., Nos. 11-2340-RDR, 11-2649-RDR, 2012 WL<br />
3028803 (D. Kan. July 25, 2011).<br />
In both cases the court granted, in part, defendants’ motion to dismiss certain claims<br />
under Section 12 of the Securities Act of 1933 as they concerned specific offerings. The court<br />
noted the defendants’ focus on the alleged untimeliness of plaintiffs’ Section 12 claims but still<br />
found in favor of a timely claim by plaintiffs due in part to its application of 12 U.S.C. § 1787<br />
(the “extender statute”). In its analysis, the court found that in the case of some offerings, the<br />
risk disclosures provided in the offering document gave insufficient notice of the alleged<br />
misrepresentations and omissions. However, for others, the court found a lack of specific<br />
allegations to adequately substantiate the claim.<br />
In re Thornburg Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2012 WL 6004176 (D.<br />
N.M. Nov. 26, 2012).<br />
The court granted the underwriter defendants’ motion to dismiss and denied the plaintiff<br />
class’s motion for reconsideration because the class failed to show that underwriters violated<br />
Section 12 of the Securities Act of 1933, or if they did violate Section 12, that plaintiffs had<br />
51<br />
B.2<br />
B.2<br />
B.2
standing to complain. Plaintiffs and defendants reached a class settlement regarding four public<br />
offerings that the class alleged were made in violation of Section 12. In its order granting<br />
plaintiffs’ motion for final approval of settlement, the court recounted its prior denial of<br />
plaintiffs’ claims against defendant underwriter, which was that the court had determined that<br />
plaintiffs failed to show that any statement from the underwriters was materially false or<br />
misleading. The court denied plaintiffs’ motion for reconsideration, holding that the<br />
underwriters’ Form 10-K was not materially false or misleading and that plaintiffs lacked<br />
standing to challenge the only public offering that the Form 10-K would implicate.<br />
Padilla v. Winger, No. 2:11CV897DAK, 2012 WL 1379228 (D. Utah Apr. 20, 2012).<br />
The court granted the defendants’ motion to dismiss plaintiffs’ claim arising under<br />
Section 12(a)(1) of the Securities Act of 1933. Plaintiffs alleged that an individual acting as the<br />
agent of the defendants operated a Ponzi scheme and violated Section 5 of the Securities Act by<br />
selling unregistered securities. Because Section 13 of the Act provides a one-year statute of<br />
limitations for a claim under Section 12(a)(1), the court held that plaintiffs’ claim was barred by<br />
the statute of limitations. The statute of limitations began to run when the plaintiffs invested<br />
their money, and the one-year limitations period expired over four years before plaintiffs brought<br />
their lawsuit.<br />
B.2<br />
Bamert v. Pulte Home Corp., No. 6:08-CV-2120-ORL-22, 2012 WL 3292875 (M.D. Fla. Aug.<br />
10, 2012).<br />
The court adopted the magistrate judge’s recommendation to dismiss the plaintiffs’<br />
claims with leave to amend and denied in part and granted in part a defendant’s limited objection<br />
to the recommendation. The plaintiffs alleged a property management agreement they entered<br />
into with the defendants was an “investment contract” and subject to the registration<br />
requirements of the Securities Act of 1933. The plaintiffs, however, improperly brought their<br />
claims under Section 5 of the Securities Act, rather than Section 12. The defendants argued that<br />
before the court could allow them to amend, the plaintiffs were required to demonstrate their<br />
claims were not “futile.” The magistrate judge recommended that since plaintiffs had only<br />
amended their complaint once as a matter of course, a further opportunity to amend was<br />
appropriate. The court adopted this recommendation and agreed that plaintiffs did not bear the<br />
burden of demonstrating that amendment would not be futile.<br />
B.2<br />
3. Section 17<br />
B.3<br />
In re Vivendi Univ., S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012)<br />
Plaintiffs asserted Section 17(a) claims based on misrepresentations concerning shares<br />
that were not listed for trading purposes on any United States exchange. The court dismissed<br />
Plaintiffs’ claims, holding that Morrison v. National Australia Bank Lt., which barred suits<br />
52
ought in the United States pursuant to Section 10(b) of the Securities Exchange Act of 1934<br />
and Rule 10b-5 for securities traded on a foreign stock exchange, applied equally to actions<br />
brought under Section 17(a) of the Securities Act.<br />
SEC v. Stoker, 865 F. Supp. 2d 457 (S.D.N.Y. 2012); SEC v. Stoker, 873 F. Supp. 2d 605<br />
(S.D.N.Y. 2012); SEC v. Stoker, <strong>Litigation</strong> Release 22541 (Nov. 21, 2012).<br />
The SEC alleged that Brian Stoker, a Director at Citigroup who structured and marketed<br />
collateralized debt obligations (“CDOs”), violated Sections 17(a)(2) and (3) by making material<br />
omissions in his “pitch book” to potential investors. The court first denied Stoker’s motion to<br />
dismiss the alleged violation of Section 17(a)(2), holding that Stoker need not have obtained<br />
money directly, but it was enough that he was an agent for Citigroup, which obtained millions<br />
due to the alleged misrepresentations and omissions. The court also held that it was plausible<br />
that Stoker’s compensation increase during the period was due in part to the alleged fraud. In<br />
addition, the court held that Stoker need not be the “maker” of the statement, as described in<br />
Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011), for the purposes of<br />
Section 17(a), and only need to “use” the statement to obtain money, regardless of the<br />
statement’s source. Finally, the court held that Section 17(a)(3) was not necessarily duplicative<br />
of Section 17(a)(2), so long as there was some device or scheme separate from the material<br />
misrepresentation or omission.<br />
The court also denied Stoker’s subsequent motion for summary judgment, restating the<br />
conclusions of law contained at the motion to dismiss stage and holding that there was a fact<br />
issue with respect to whether the CDO documents contained material misrepresentations and<br />
omission, whether Stoker obtained money as a result, and whether Stoker intentionally or<br />
negligently designed a CDO that harmed investors.<br />
On July 31, 2012, following a two-week trial, a jury found Stoker not liable for the<br />
alleged violations.<br />
SEC v. Mudd, No. 11 Civ. 09202, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10, 2012).<br />
In this action, the SEC alleged that defendant officers of the Federal National Mortgage<br />
Association (“Fannie Mae”) had understated how much of its portfolio consisted of “subprime”<br />
mortgages and “Alt-A” loans. The SEC alleged that the defendants were liable under Section<br />
17(a)(2) because they had obtained money by means of false statement in that they had received<br />
bonuses tied to Fannie Mae’s performance and their own performance goals. The defendants<br />
moved to dismiss the Section 17(a)(2) claim against because the SEC had failed to specifically<br />
allege that there was an offer or sale of FNMA stock during the relevant period. The court<br />
denied the defendants’ motion to dismiss, noting that Supreme Court precedent requires that the<br />
“offer or sale” requirement in securities fraud cases should be read broadly. Thus, the court took<br />
judicial notice of the fact that Fannie Mae stock was sold on the New York Stock Exchange,<br />
which was sufficient to state a claim under Section 17(a)(2).<br />
53<br />
B.3<br />
B.3
B.3<br />
SEC v. O’Meally, No. 06 Civ, 6483, 2012 U.S. Dist. LEXIS 76072 (S.D.N.Y. May 30, 2012).<br />
The SEC asserted fraud claims in this case under Section 10(b) of the Securities<br />
Exchange Act and Section 17(a) of the Securities Act arising from the defendants’ market timing<br />
practices he employed while at Prudential Securities. Among other facts relied on by the SEC,<br />
the defendant and his firm had received hundreds of letters from 60-70 mutual funds asking<br />
defendant to stop his market timing strategies. A jury found that he the defendant had acted<br />
negligently in violation of Section 17(a)(2) and (3), but found the defendant not liable on all<br />
other claims. The defendant moved for a judgment as a matter of law, claiming the SEC had not<br />
properly established the level of care required under Section 17(a) because there had not been<br />
expert testimony to establish the level of care required regarding the technical aspects of market<br />
timing transactions. The court noted that there were indeed technical issues at the trial relating to<br />
market timing transaction, but also straightforward, everyday tasks such as receiving letters from<br />
mutual funds and warnings from his employer to stop his market timing practices. Because the<br />
jury’s finding of liability Section 17(a)(2) and (3) could have been based on his failure to<br />
properly respond to these letters and warnings, the court rejected the defendant’s argument that<br />
an expert was required to establish the applicable standard of care. The court also found the<br />
evidence was sufficient to support a finding of liability.<br />
SEC v. Pentagon Capital Management, 844 F. Supp. 2d 377 (S.D.N.Y. Feb. 14, 2012).<br />
The SEC brought this enforcement action under Section 17(a) of the Securities Act and<br />
Section 10(b) of the Securities Exchange Act against a hedge fund and its CEO for allegedly<br />
engaging in market timing and late trading activities in certain mutual funds. After a bench trial,<br />
the district court found that defendants’ market timing trading activates did not violate Section<br />
17(a)(1) because the SEC had not established scienter. Despite showing that the defendants had<br />
a “general intent to deceive,” the SEC had not shown an effort to defraud the funds because it<br />
had not shown what the funds’ rules were with respect to the trading at issue. The SEC also<br />
argued that the defendants were liable for violations of Section 17(a)(2) and (3) with respect to<br />
market timed redemptions or exchange of mutual fund shares. Noting the lack of any particular<br />
rules promulgated by the SEC rules or the funds with respect to market timing, the court found<br />
no untrue statements or material omissions and no practice that would operate as a fraud on the<br />
funds and, thus, no liability under Section 17(a)(2) and (3). The defendants argued that they did<br />
not “make” any false statements and, thus, were not liable under the Janus Capital Group v.<br />
First Derivative Traders, 131 S. Ct. 2296 (2011). The court rejected the Janus argument on<br />
multiple grounds, including the fact that Janus was not a case brought by the SEC. The court<br />
also rejected the suggestion that Janus could apply to Section 17(a) cases because the word<br />
“make,” the key to the ruling in Janus, is not present in Section 17(a).<br />
B.3<br />
54
SEC v. True N. Fin. Corp., No. 10-3995, 2012 U.S. Dist. LEXIS 161044 (D. Minn., Nov. 9,<br />
2012).<br />
The SEC alleged that the defendants made misrepresentations to brokers and investors in<br />
the offer and sale of interests in a fund that was an unregistered investment pools. While the real<br />
estate projects the fund was financing were defaulting, the defendants continued to market the<br />
fund in Offering Memoranda, which the SEC alleges contained various misstatement in violation<br />
of Rule 10b-5 and Section 17(a), including, among other things, improper risk assessments,<br />
improperly described investment strategies, misleading terminology with respect to the default<br />
and foreclosure, and misstatements regarding the fund’s liquid assets. With respect to the Rule<br />
10b-5 and Section 17(a)(1) claims, the court denied Defendants’ motion for summary judgment,<br />
holding that several fact issues remained concerning materiality and scienter. The Court also<br />
denied the defendants’ motions as to Section 17(a)(2) and (3) liability for statements regarding<br />
the fund's purportedly successful strategy and its use of investor funds after the defaults. The<br />
court held that a reasonable finder of fact could determine that the defendants had a duty to<br />
disclose that the real estate market collapse negatively impacted the fund, particularly given their<br />
purported expertise in real estate finance. The court also held that that a finder of fact could<br />
determine that the defendants did not exercise ordinary reasonable care in not explicitly stating in<br />
clear, non-misleading terms that nearly all the parties that obtained financing from the fund were<br />
insolvent and that, as a result, an increasing percentage of investor funds would go to expenses<br />
rather than interest-earning investments.<br />
SEC v. Sentinel Management Group, No. 07 C 4684, 2012 U.S. Dist. LEXIS 57579 (N.D. Ill.<br />
Mar. 30, 2012).<br />
In this action, the SEC alleged that defendant investment advisors had improperly<br />
intermingled the assets of three investment portfolios and had allegedly made false<br />
representations regarding, among other things, the quality of investments in at least two of its<br />
portfolios. Defendants also allegedly used assets of the most conservative fund to collateralize<br />
short-term loans and used loans of more than $500 million to pay brokers redeeming reverse<br />
repurchase agreements from its most aggressive portfolio. Sentinel defaulted on the loans and<br />
declared bankruptcy. After Sentinel consented to the entry of a judgment, the SEC moved for<br />
summary judgment against two remaining defendants. One of the defendants cross-moved for<br />
summary judgment. As to that defendant, the court found genuine issues of material fact on all<br />
claims, including the Section 17(a)(1) claim. With respect to the other defendant, the court<br />
analyzed the applicability of Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296<br />
(2011), to claims under Section 17(a)(1). The court held that Janus did not apply to Section<br />
17(a) claims because Janus was based on the Supreme Court’s interpretation of “make,” which is<br />
not present in Section 17(a). In addition, the court said the Janus Court’s concern about<br />
expansion of private suits under Rule 10b-5 did not apply to claims brought by the SEC.<br />
Because the evidence showed that the defendant actively participated in the scheme to defraud,<br />
obtained money be means of misrepresentations and engaged in a course of fraudulent business,<br />
the SEC was entitled to summary judgment on is claims under Sections 17(a)(1) through (a)(3).<br />
55<br />
B.3<br />
B.3
B.3<br />
SEC v. Perry, No. CV111309R, 2012 U.S. Dist. LEXIS 136596 (C.D. Cal., Sept. 24, 2012).<br />
The SEC filed an enforcement action against Perry, the CEO of IndyMac Bank, alleging<br />
violation of Section 17(a)(1) and (2) of the Securities Act on the grounds that Perry profited from<br />
omissions in IndyMac’s Form 10-Q regarding its capitalization ratio. Since 2000, IndyMac<br />
Bank had been required in its capital ratios to double risk-weight subprime assets pursuant to an<br />
order by the Office of Thrift Supervision (“OTS”). In February 26, 2008, however, the OTS<br />
Director granted the Bank’s request that the Bank would not need to double risk-weight its<br />
subprime assets for purposes of determining whether its capital ratios exceeded the regulatory<br />
minimums for a “well-capitalized” institution. In its parent company’s Form 10-Q for the first<br />
quarter of 2008 the Bank reported a total risk-based capital ratio without double risk-weighting<br />
subprime assets. The court granted Perry summary judgment on the SEC’s scienter-based claims<br />
because the SEC filings accurately disclosed the Bank’s operating capital ratios and it was not<br />
misleading to omit information regarding the waiver granted by OTS concerning the double riskweighting.<br />
The court also granted Perry’s motion for summary judgment on the Section 17(a)(2<br />
claim. The court held that, although liability may attach even when actual transactions have not<br />
been consummated (i.e. stock offers were made during the relevant time period), Section<br />
17(a)(2) reaches only parties that obtain money or property in connection with these transactions.<br />
Because Perry made no money in connection with the allegedly fraudulent statements after they<br />
were made he was not liable. The court further held that Mr. Perry’s status as a salaried<br />
employee and shareholder, without more, was insufficient under Section 17(a)(2) because Perry<br />
did not sell any of his stock during the relevant time period, nor was his compensation tied to<br />
what was said in the subject SEC filings.<br />
SEC v. Sells, No. C11-4941CW, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal., Aug. 10, 2012).<br />
The SEC filed claims against Sells, the Senior Vice President of Commercial Operations,<br />
and Murawski, the Director of Nation Sales, at Hansen Medical, Inc., a medical equipment<br />
company that manufactured a complex catheter unit used in hospitals, alleging that they violated<br />
Sections 17(a)(1) and 17(a)(3) of the Securities Act. Hansen maintained a strict public policy for<br />
determining when revenue from the sales of the catheter units could properly be recognized,<br />
requiring an installation completion form, clinical training form, and subsequent review from<br />
Hansen’s management and accounting divisions. Under pressure to report high revenues, Sells<br />
and Murawski allegedly employed various methods to report revenue on a sale even when it was<br />
not proper to do so under the company’s policy as described to the public. Sells moved to<br />
dismiss the Section 17(a) claims on the grounds that he was not a “maker” of any statements<br />
under Janus. The court denied his motion because the word “make,” on which the Supreme<br />
Court was focused in Janus, is absent from the operative language of Section 17(a).<br />
B.3<br />
56
B.3<br />
SEC v. Radius Capital Corp., No. 2:11-cv-116-FtM-29DNF, 2012 U.S. Dist. LEXIS 26648<br />
(M.D. Fla. Mar. 1, 2012).<br />
The SEC alleged in this case that the defendants made false statements to Ginnie Mae<br />
and investors that loans packaged in a mortgage-backed security were eligible for Federal<br />
Housing Administration insurance. The defendants sold more than $23 million in mortgagebacked<br />
securities that defaulted. Ginnie Mae had guaranteed the securities, and was required to<br />
pay investors after defendant’s default. Many of the loans, in fact, were not insured, and Ginnie<br />
Mae suffered substantial losses. The defendants moved to dismiss the SEC’s complaint. The<br />
court found that by signing documents necessary to obtain Ginnie Mae guarantee mortgagebacked<br />
securities, the defendants both made false statements (as required by Section 10(b) of the<br />
Securities Exchange Act) and used false statements (as required by Section 17(a) of the<br />
Securities Act). The SEC also pursued fraud claims regarding statements the defendants had<br />
made in the prospectuses. The court found the complaint’s allegations insufficient to state a<br />
claim that the defendants had “made” false statements in the prospectuses. The court declined to<br />
dismiss claims under Section 17(a)(2), however, finding that the complaint sufficiently alleged<br />
that Radius used false claims found in the prospectuses to obtain money or property, regardless<br />
of who made the actual statements.<br />
In the Matter of Aladdin Capital, Adm. Proc. File No. 3-15134, 33 Act Release No. 9374, 2012<br />
SEC LEXIS 3911 (Dec. 17, 2012).<br />
This action involved an investment management program run by Alladin Management, a<br />
registered investment advisor, and Alladin Capital, a registered broker-dealer. The SEC alleged<br />
that the respondents marketed equity tranches of collateralized debt obligations (“CDOs”) to<br />
their clients and received commissions from the CDO underwriters for doing so. Allegedly, one<br />
of respondents’ key marketing tools was the claim that respondents would co-invest in the same<br />
equity tranches of the CDOs along with its clients. This promise of co-investment created an<br />
alignment of interests with investors that were attractive to investors as the equity trances of the<br />
CDOs were particularly risky. Respondents themselves touted that they had “skin in the game.”<br />
Contrary to respondent’s representations, the SEC alleged that respondent did not co-invest on a<br />
number of the products it marketed. The SEC claimed respondents, by failing to co-invest as<br />
represented, had violated Section 17(a)(2) of the Securities Act. Respondents settled with the<br />
SEC, agreeing to pay disgorgement of $900,000, interest of $268,000 and a civil money penalty<br />
of $450,000.<br />
In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-15098, 33 Act<br />
Release No. 9368, 2012 SEC LEXIS 3569 (Nov. 16, 2012).<br />
The SEC alleged that, from approximately 2005 to 2010, Credit Suisse and affiliated<br />
entities entered into a number of financial settlements with mortgage loan originators related to<br />
57<br />
B.3<br />
B.3
early defaulting mortgage loans Credit Suisse had previously sold to securitization trusts it had<br />
sponsored. Credit Suisse allegedly received many millions of dollars in these settlement, but<br />
kept the proceeds of those settlements and left the loans in the trusts without notifying or<br />
compensating the securitized trusts that owned the loans. Credit Suisse allegedly failed to<br />
disclose these settlement practices to its mortgage-backed securities investors despite its<br />
knowledge that investors were focused on early payment defaults and viewed such early<br />
payment defaults as a red flag suggesting a possible breach of underwriting standards or other<br />
loan origination problem. The SEC alleged that this negligent conduct violated Section 17(a)(3)<br />
of the Securities Act. Credit Suisse agreed to pay disgorgement of $55,747,769, prejudgment<br />
interest of $13,000,000, and a civil money penalty in the amount of $33,000,000 to the SEC for<br />
the undisclosed settlement.<br />
Additionally, in 2006, Credit Suisse closed two securitizations collateralized by $1.9<br />
billion of subprime mortgage loans purchase from mortgage loan originators. The mortgage sale<br />
documents contained an investor protection known as a “First Payment Default” covenant that<br />
required the mortgage loan originator to repurchase any loan that failed to make its first<br />
mortgage payment. If the originator failed to repurchase the mortgage Credit Suisse was<br />
required to do so. Credit Suisse touted the “First Payment Default” covenant when marketing<br />
the securitizations, but, in fact, did not required the originator to repurchase all of the defaulting<br />
loans as required by the governing documents. The SEC alleged that this negligent conduct<br />
violated Section 17(a) (3) of the Securities Act. To resolve these allegations, Credit Suisse<br />
agreed pay disgorgement of $10,056,561, prejudgment interest of $2,200,000, and a civil money<br />
penalty in the amount of $6,000,000 to the SEC.<br />
In the Matter of Wells Fargo <strong>Broker</strong>age Services, LLC, Adm. Proc. File No. 3-14982, 33 Act<br />
Release No. 9349, 2012 SEC LEXIS 2626 (Aug. 14, 2012).<br />
Wells Fargo and a former Vice President made recommendations to certain institutional<br />
customers, mostly municipalities and non-profit institutions, to purchase commercial paper<br />
backed largely by high-risk mortgage-backed securities and collateral debt obligations. The SEC<br />
alleged that the respondents sold these securities without understanding them, instead relying<br />
almost entirely upon the credit ratings that credit rating assigned to the commercial paper. The<br />
respondents allegedly did not read the private placement memoranda for these offerings. The<br />
respondents allegedly ignoring the nature and risk of these investments and did not distinguish<br />
them from other, less risky investments. As a result, Wells Fargo is alleged to have violated<br />
Sections 17(a)(2) and (3) by negligently recommended the asset-backed commercial paper<br />
programs without obtaining adequate information about them to form a reasonable basis for<br />
recommending these products and without disclosing the material risks of these products. In<br />
settling the matter, Wells Fargo agreed to pay $65,000 in disgorgement and a civil money<br />
penalty of $6.5 million. The former Vice President settled and agreed to pay a civil money<br />
penalty of $25,000.<br />
B.3<br />
58
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 />
Robert L. McCrary v. Steifel, Nicolaus & Co. Inc.,687 F.3d 1052 (8th Cir. 2012).<br />
The court affirmed the district court’s ruling in part and reversed in part. The Plaintiffs<br />
alleged that their accounts sustained losses as a result of Defendants’ churning and unauthorized<br />
trading in violation of section 10b-5. On appeal, Plaintiffs argued that the district court erred by<br />
refusing to enjoin their arbitration claim, and by dismissing Plaintiffs’ putative class and<br />
individualized actions. The court reversed the dismissal of Plaintiffs’ individual securities fraud<br />
claims as the complaint was comprised of both individual and class claims. The court also found<br />
that the Plaintiffs’ churning, unauthorized trading and misrepresentation claims were insufficient<br />
to satisfy the uniformity requirements under Rule 23(b)(3) due to their individualized nature.<br />
Lastly, the court held that Plaintiffs’ injunction request was properly denied as Plaintiffs failed to<br />
provide any legal authority to support their position.<br />
59<br />
C.1.a<br />
In the Matter of JP Turner & Company, LLC and William L. Mello, 2012 WL 3903395 (S.E.C.<br />
Release No. 3-15014, Sept. 10, 2012)<br />
The administrative law judge ordered Respondent Mello to be suspended from<br />
association with any broker, dealer or investment advisor for five months and pay a civil money<br />
penalty of $45,000 to the SEC. The SEC alleged that JP Turner and Mello failed to establish<br />
procedures and systems reasonably designed to detect churning of customer accounts. The judge<br />
held that JP Turner’s policies and procedures failed to “(i) specify the manner in which an<br />
internal review of an account flagged by the AARS was to occur; (ii) provide any guidelines for<br />
analyzing the accounts identified on the AARS, other than the levels themselves; or (iii) require<br />
contact or follow up of the trading activity with the customer, particularly when the AARS<br />
repeatedly flagged as actively traded a customer’s account.”<br />
C.1.a<br />
Securities and Exchange Commission, In the Matter of Michael Bresner, Ralph Calabro, Jason<br />
Konner, and Dimtrios Koustoubos, Administrative Proceeding File No. 3-15015, December 18,<br />
2012.<br />
The administrative judge denied the Respondent’s motion to sever. The Order Instituting<br />
Proceedings by the SEC alleged that the Respondent, Michael Bresner (“Bresner”) failed to<br />
exercise supervision over registered representatives who were allegedly churning their<br />
customers’ accounts. The judge held that Bresner failed to show good cause as to why the SEC<br />
should be required to try two cases. Bresner argued that the allegations and proceeding pending<br />
against him should depend on the outcome of the derivative churning claim against the
epresentatives. The judge found that this process would not be more efficient as the registered<br />
representatives could appeal the decision and ultimately prolong the action against Bresner.<br />
b. Suitability<br />
C.1.b<br />
Iconix Brand Group Inc. v. Merrill Lynch, Pierce Fenner & Smith Inc., 2012 WL 6097440 (2d<br />
Cir. Dec. 10, 2012).<br />
The Second Circuit dismissed Plaintiff, Iconix Brand Group Inc.’s securities fraud claim<br />
alleging misrepresentations and omissions with respect to its investments in Auction Rate<br />
Security (“ARS”) suitability, liquidity and safety. Plaintiff alleged that Merrill Lynch failed to<br />
disclose the ARS support bids which prevented auction failures and concealed the risks of<br />
illiquidity of the securities. The court held that a review of the offering memorandum for the<br />
ARS at issue would have disclosed the risks to “any minimally diligent investor” and lead to a<br />
suitability determination by the institutional customer.<br />
Baker Hughes Inc. v. BNY Mellon Capital Markets LLC, 2012 WL 5634397 (S.D. Tex. Nov. 4,<br />
2012).<br />
C.1.b<br />
The court dismissed Plaintiff’s securities action on the basis of res judicata. Plaintiff’s<br />
initial action against Defendant was litigated under the FINRA forum and ultimately dismissed.<br />
Plaintiff alleged, among other securities violations, that Defendant violated 10b-5 by failing to<br />
disclose that the securities at issue were comprised of “complicated credit default swaps.” The<br />
court held that Plaintiff’s complaint failed as a matter of law as it arose from the same set of facts<br />
as the claims submitted to arbitration.<br />
Cody v. Sec. Exchange Comm., 693 F.3d 251 (1st Cir. 2012).<br />
C.1.b<br />
The district court affirmed the findings from the FINRA action against Petitioner. A<br />
FINRA panel initially found that Petitioner had, among other securities laws, violated FINRA<br />
Rule 2310 and 2111 by conducting unsuitable and excessive trading for the purpose of<br />
generating substantial commissions on behalf of his clients. As a result, Petitioner received a<br />
three month suspension and was fined $27,500. The court held that Petitioner had no right to<br />
depart from the agreed upon investment strategy without his customer’s agreement despite the<br />
positions ultimately turning a profit. Defendant argued that there was no wrong doing because<br />
the securities at issue were profitable. The court responded by ruling that the outcome of the<br />
investment value impacted civil damages but not professional misbehavior.<br />
60
C.1.b<br />
Securities and Exchange Commission, v. Wealth Mgmt., 2012 WL 1424683 (E.D. Wis. Apr. 24,<br />
2012).<br />
The court granted the government’s motion for summary judgment. The SEC alleged<br />
that Defendant, James Putnam, the founder of Wealth Management, invested their retired clients<br />
in speculative real estate and life insurance investments. The government further alleged that<br />
Defendant failed to disclose the receipt of commissions from the sale of life insurance policies to<br />
its customers. The court held that Defendant Putnam misrepresented the suitability of his funds’<br />
investments for retirees with the investment objectives of wealth preservation, failing to disclose<br />
the contents of these investment products.<br />
In re Merrill Lynch Auction Rate Sec. Litig., 851 F.Supp. 2d 512 (S.D.N.Y. 2012).<br />
C.1.b<br />
The court granted Defendant’s motion to dismiss with respect to Plaintiff’s Section 10(b)-<br />
5 claims. Plaintiff alleged that Merrill Lynch failed to disclose the unsuitable nature of the<br />
Auction Rate Securities (“ARS”) that were recommended to Plaintiff. The court held that<br />
Plaintiff failed to prove that “the [D]efendant knew or reasonably believed the securities were<br />
unsuited to the buyer’s needs.” The court also found that Plaintiff’s complaint did not satisfy its<br />
own framework for analyzing the knowledge and scienter requirements for a 10b-5 suitability<br />
claim.<br />
Barrett v. J.P. Morgan Sec. Inc., 2012 WL 4754171 (FINRA Sept. 24, 2012).<br />
C.1.b<br />
The FINRA arbitration panel (the “panel”) dismissed Claimant’s action. Claimant<br />
alleged, among other things, violations of 10(b), 10b-5 and suitability with respect to Claimant’s<br />
investment in Auction Rate Securities (“ARS”). The panel held that Respondent did not engage<br />
in any violations with respect to suitability, fraud and misrepresentation. The panel reasoned that<br />
Claimant was a sophisticated investor who was aware of the various risks associated with ARS,<br />
including the risk of liquidity.<br />
C.1.b<br />
In the Matter of Michael Bresner; Ralph Calabro; Jason Konner; and Dimitrios Koustoubos,<br />
2012 WL 3903387 (S.E.C. Release No. 3-15015, Sept. 10, 2012).<br />
The initial administrative law judge (the “initial judge”) ordered that a public hearing<br />
take place concerning the allegations that Respondents willfully violated Section 17(a) of the<br />
Securities Act and Section 10(b) of the Exchange Act. Specifically, found the judge found that<br />
Respondents Konner and Koutsoubos each engaged in unsuitable trading activity that far<br />
exceeded the frequency of trades identified in the suitability questionnaire signed by the<br />
61
defrauded customers. The initial judge also found that Respondent Bresner failed to reasonably<br />
supervise Konner and Koutsoubos.<br />
C.1.b<br />
Seymour Topple v. Steven Andrew Jennings, 2012 WL 1898052 (FINRA May 16, 2012).<br />
The arbitration panel dismissed Claimant’s claim and recommended that Respondent’s<br />
CRD be expunged. Claimant alleged the following causes of action: breach of contract, breach<br />
of fiduciary duty, suitability, misrepresentation, omission of facts, violation of Rule10b-5, fraud,<br />
negligence, negligent misrepresentation, violation of FINRA Rules and respondeat superior.<br />
Claimant requested compensatory damages in the amount no less than $441,000 and lost<br />
opportunity costs in the amount of $100,000. The panel held that Claimant sold the investments<br />
at issue contrary to Respondent’s advice during the financial crisis in October 2008.<br />
C.1.b<br />
Winifred B. Loria et. al. v. Elmer Wayne Bullis Arnold Dorman Next Fin. Group, Inc., 2012 WL<br />
1795777 (FINRA May 7, 2012).<br />
The arbitration panel held Respondents liable for $75,000 in compensatory damages and<br />
$150,000 in punitive damages. Claimants asserted the following causes of action: fraud,<br />
constructive fraud, violation of Section 10 of the Securities Exchange Act and Rule 10b-5<br />
thereunder, violation of the Virginia Securities Act, suitability, violations of the Securities Act of<br />
1933 and the ’34 Act, violation of state, federal, FINRA, NASD and NYSE rules and<br />
regulations, breach of fiduciary duty, negligence, unauthorized transactions, breach of contract,<br />
and failure to supervise. At the close of the hearing, Claimants requested an unspecified amount<br />
of punitive damages, professional fees in the amount of $156,000 and losses, commission<br />
returns, managed fees, returns, general fees and costs totaling an amount of $294,000.<br />
Tim Haug v. VSR Fin. Servs. Inc., 2012 WL 259180 (FINRA Jan. 17, 2012).<br />
C.1.b<br />
The arbitration panel found Respondent VSR Financial Services, Inc. liable for<br />
$63,750.00 in compensatory damages, $13,958.03 in costs, $300 as reimbursement and $30,000<br />
in attorneys’ fees. Claimants asserted the following causes of action: violations of the Kansas<br />
Securities Act, violations of Rule 10b-5 of the Securities and Exchange Act and/or the common<br />
law tort of fraud, suitability/fraud, breach of fiduciary duty, negligence, and failure to supervise.<br />
62
c. Insider Trading<br />
C.1.c<br />
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).<br />
Shareholder brought derivative suit, alleging that various financial institutions<br />
underwrote and issued initial public offerings (“IPO”) that utilized methods to inflate the<br />
companies’ aftermarket stock price to a level above the initial IPO, in violation of “short-swing”<br />
stock transactions by insiders under Section 16(b) of the Securities Exchange Act of 1934. The<br />
district court dismissed 24 complaints on the grounds that the two-year limitations period of<br />
Section 16(b) expired before shareholder filed suit. The Ninth Circuit reversed in part. The<br />
Ninth Circuit held that Section 16(b) claims are tolled until the insider discloses the transactions<br />
in a Section 16(a) filing. The Supreme Court vacated the judgment and remanded the case on the<br />
grounds that Section 16(b) claims are not tolled until the filing of a Section 16(a) statement.<br />
Huppe v. WPCS Int’l Inc., 670 F.3d 214 (2d Cir. 2012).<br />
C.1.c<br />
Shareholder filed derivative suit, alleging that limited partnerships realized “short-swing”<br />
profits in violation of Section 16(b) of the Securities Exchange Act of 1934. The district court<br />
granted shareholder’s summary judgment motion. The Second Circuit affirmed. The court of<br />
appeals addressed whether “a beneficial owner’s acquisition of securities directly from an<br />
issuer—at the issuer’s request and with the board’s approval—should be exempt from the<br />
definition of a “purchase” under Section 16(b), on the theory that such a transaction lacks the<br />
‘potential for speculative abuse’ that Section 16(b) was designed to curb.” The Second Circuit<br />
found that such transactions are covered by Section 16(b). The limited partnerships were<br />
beneficial owners, despite that the limited partnerships’ delegated their “rights and power” to<br />
their respective general partners to vote and control investments of their securities portfolios.<br />
Levitt v. Brooks, 669 F.3d 100 (2d Cir. 2012).<br />
C.1.c<br />
Defendant failed to pay outstanding legal fees to plaintiff, who served as counsel to<br />
defendant in connection with charges of securities fraud, insider trading, and other criminal<br />
offenses. The district court granted plaintiff’s motion to compel payment of outstanding legal<br />
fees. The Second Circuit affirmed. It held that the district court did not abuse its discretion in<br />
exercising ancillary jurisdiction over the fee dispute. Further, the district court complied with the<br />
Federal Rules of Civil Procedure, did not violate defendant’s due process rights and did not<br />
deprive defendant of his right to a jury trial.<br />
63
Chechele v. Scheetz, 466 Fed.Appx. 39 (2d Cir. 2012).<br />
C.1.c<br />
Shareholder filed derivative suit, alleging that corporation’s former president and chief<br />
executive officer realized “short-swing” profits in violation of Section 16(b) of the Securities<br />
Exchange Act of 1934. The district court granted defendant’s motion to dismiss. The Second<br />
Circuit affirmed. It held that the district court properly declined to consider certain S.E.C. filings<br />
“for the truth of their assertions.” Also, shareholder failed to allege that defendant was part of an<br />
ownership group.<br />
Rosenthal v. New York University, 482 Fed.Appx. 609 (2d Cir. 2012).<br />
C.1.c<br />
University refused to certify student as qualified for the Master of Business<br />
Administration (“MBA”) degree because student was convicted of violating federal securities<br />
laws for providing his brother, an active securities trader, with material nonpublic information.<br />
The district court granted university’s motion for summary judgment. The Second Circuit<br />
affirmed. It held that university could reasonably believe that such conduct did not warrant an<br />
MBA degree. University was within its “contractual rights to discipline” student. Further,<br />
student failed to show that university acted “arbitrarily, irrationally, or in bad faith” in denying<br />
him MBA degree.<br />
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012).<br />
C.1.c<br />
Corporation brought action against investors for disgorgement of alleged “short-swing”<br />
insider profits. The district court granted in part corporation’s motion for summary judgment<br />
and entered judgment against investors in the amount of $4,965,898.95. The Second Circuit<br />
affirmed. It held that: (1) the “rarely-construed ‘debt exception’ to liability” under Section 16(b)<br />
of the Securities Exchange Act of 1934 did not apply, rejecting investors’ theory that they<br />
acquired a newly issued note in satisfaction of defaulted debt owed by corporation pursuant to an<br />
earlier note; (2) the “borderline transaction” exception did not apply because investors had<br />
access to inside information about the corporation; (3) the newly issued note evidenced<br />
differences that were “sufficiently material” to constitute a new security; (4) investors were<br />
“beneficial owners” for purposes of Section 16(b) and therefore subject to disgorgement of<br />
profits; and (5) the district court properly denied the investors’ motion for reconsideration.<br />
U.S. v. Contorinis, 692 F.3d 136 (2d Cir. 2012).<br />
C.1.c<br />
Appellant was convicted of conspiracy to commit securities fraud and insider trading.<br />
The district court ordered forfeiture in the amount of $12.65 million. The Second Circuit held<br />
that the jury instructions pertaining to the definition of material nonpublic information were<br />
proper. Further, the district court acted within its discretion to admit evidence regarding other<br />
64
trades. However, the district court erred in ordering appellant to forfeit gains acquired by his<br />
employer but not by him because neither he nor others acting in concert with him ever received<br />
or controlled those gains. Therefore, the Second Circuit vacated the forfeiture order and<br />
remanded the case to determine the proper forfeiture amount.<br />
SEC v. Obus, 693 F.3d 276 (2d Cir. 2012).<br />
C.1.c<br />
The S.E.C. brought an action against defendants, alleging insider trading in violation of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The S.E.C. alleged that<br />
one of the defendants learned of material non-public information regarding an acquisition during<br />
the course of his employment, and shared that information with his friend, who then relayed it to<br />
his boss, who in turn, traded on the information. The district court granted summary judgment in<br />
favor of defendants. The Second Circuit vacated and remanded, holding that the S.E.C.’s<br />
evidence created genuine issues of material fact under the misappropriation theory as to each of<br />
the defendants. Under the misappropriation theory, the employee had a duty to keep information<br />
about the acquisition confidential and breached that duty by tipping his friend. The two<br />
remaining defendants had tippee liability because they “inherited” employee’s duty of<br />
confidentiality, they had reason to know employee breached his fiduciary duty, and they traded<br />
on that information.<br />
Donoghue v. Bulldog Investors Gen. P’ship, 696 F.3d 170 (2d Cir. 2012).<br />
C.1.c<br />
Shareholder brought derivative suit against hedge fund partnership and its principal for<br />
disgorgement, alleging that principal received “short-swing” profits in violation of Section 16(b)<br />
of the Securities Exchange Act of 1934. Shareholder alleged that between November 2009 and<br />
March 2010, while continuing to own more than 10% of the issuer’s equity securities, principal<br />
purchased and then sold additional shares on the open market. The district court denied<br />
principal’s motion to dismiss and entered judgment in favor of shareholder in the amount of<br />
$85,491.00, representing the profits realized by principal from the “short-swing” transaction. On<br />
appeal, principal argued that the district court lacked jurisdiction because there was “no live case<br />
or controversy” to afford shareholder standing. The Second Circuit affirmed. It held that a<br />
Section 16(b) violation causes injury to the issuer and confers standing under Article III of the<br />
Constitution because “injury depends not on whether the §16(b) fiduciary traded on inside<br />
information but on whether he traded at all.”<br />
Mill Bridge V, Inc. v. Benton, No. 11-1184, 2012 WL 4017804 (3d Cir. Sept. 13, 2012).<br />
C.1.c<br />
Appellant former shareholder brought securities fraud action against appellee insider<br />
buyers of shareholder’s shares, alleging that appellee failed to disclose material non-public<br />
information regarding merger discussions that would have affected the market value of<br />
appellant’s shares. The district court denied appellant’s request to extend the close of discovery.<br />
65
The district court also held that information regarding the potential merger was not “material.”<br />
The Second Circuit affirmed. It held that the district court did not abuse its discretion in denying<br />
appellant additional discovery. Further, it held that the merger discussions had not yet become<br />
“material,” despite a signed confidentiality agreement. Finally, the Third Circuit held that<br />
appellant failed to demonstrate sufficient facts that appellee knew of the merger negotiations at<br />
the time of the stock sale.<br />
SEC v. Delphi Corp., No. 11-2624, 2012 WL 6600324 (6th Cir. Dec. 18, 2012).<br />
C.1.c<br />
Defendant appealed jury’s finding of civil liability for violations of federal securities laws<br />
with regard to erroneous accounting during his employment as chief accounting officer for<br />
corporation. Defendant argued that there was insufficient evidence of scienter. The Sixth<br />
Circuit affirmed. It held that there was sufficient evidence that defendant “acted recklessly or<br />
turned a blind eye” to the sale transaction. The Sixth Circuit also found that defendant ignored a<br />
number of red flags pertaining to the rebate transaction. Defendant should have conducted a<br />
critical investigation of both transactions before approving the accounting.<br />
Israni v. Bittman, 473 Fed. Appx. 548 (9th Cir. 2012).<br />
C.1.c<br />
Shareholder filed derivative suit, alleging that corporation’s directors intentionally made<br />
misleading public statements about the corporation’s financial position in an effort to sell their<br />
own stock at inflated prices and increase their own compensation. The district court dismissed<br />
the complaint. The Ninth Circuit affirmed. It held that shareholder failed to allege demand<br />
futility. The Ninth Circuit found that: (1) shareholder failed to raise reasonable doubt that<br />
directors were disinterested; (2) shareholder failed to establish sufficient facts that directors’ fees<br />
were “unusual or uncustomary;” (3) shareholder failed to establish that committee membership<br />
indicated that directors saw and failed to act on inside information; and (4) shareholder failed to<br />
allege that directors were “beholden to an interested party.”<br />
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ---, 2012 WL 6634351 (9th Cir. Dec. 21,<br />
2012).<br />
C.1.c<br />
Investors filed securities fraud class action against corporation, its chief executive officer<br />
(“CEO”) and former chief financial officer (“CFO”), alleging numerous violations under the<br />
Securities Exchange Act of 1934, including alleged insider trading. The district court granted<br />
defendants’ motion to dismiss, finding that the corporation issued falsified financial reports, but<br />
that plaintiffs failed to establish scienter. The Ninth Circuit reversed in part, finding that scienter<br />
was adequately pleaded under Section 10(b) and Rule 10b-5 to substantiate an insider trading<br />
claim. The Ninth Circuit held that the corporation, CEO and former CFO were “deliberately<br />
reckless” in reporting misleading financial results, in light of their receipt of accurate reports that<br />
66
the corporation did not meet its financial projections. Each time, the corporation made<br />
adjustments in overstating operating income and earnings. The Ninth Circuit held that in “the<br />
face of repeated such adjustments, the company cannot simply close its eyes with a sigh of<br />
relief.”<br />
Hubbard v. BankAtlantic Bancorp, Inc., No. 11-14703, 2012 WL 6013216 (11th Cir. Dec. 3,<br />
2012).<br />
C.1.c<br />
In a securities fraud class action, the district court granted in part and denied in part<br />
appellant’s motion for Rule 11 sanctions pertaining to allegations in the complaint and amended<br />
complaint. Appellant challenged the denial of sanctions as to appellee’s claims of insider<br />
trading, accounting fraud, manipulated loan loss reserves, and damages caused by securities<br />
fraud. The Eleventh Circuit affirmed, concluding that appellant did not meet its high burden of<br />
proving that the trial court abused its discretion in finding that the claims were not sanctionable.<br />
Lenartz v. Am. Superconductor Corp., --- F. Supp. 2d ---, 2012 WL 3039735 (D. Mass. July 26,<br />
2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action on behalf of two groups of purchasers of<br />
common stock against a power technologies company and certain of its officers and directors.<br />
One group alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934<br />
and Rule 10b-5, and the other group alleged violations of Sections 11, 12(a)(2), and 15 of the<br />
Securities Act of 1933. Defendants moved to dismiss. Plaintiffs attempted to raise an inference<br />
of scienter by alleging that defendants engaged in accounting fraud and that four individual<br />
defendants collectively sold shares of their personally-held common stock for proceeds of over<br />
$14.9 million during the class period. Plaintiffs further alleged that although the sales were<br />
made pursuant to a stock trading plan that was adopted in accordance with Rule 10b5-1, the<br />
individual defendants adopted or amended the plan to take advantage of inflation in the price of<br />
the stock, as they were in possession of material, nonpublic information. The district court found<br />
that plaintiffs failed to show that the insider sales were unusual or suspicious in timing or<br />
amount: one individual defendant’s stock sales were not suspicious because the defendant’s<br />
trades during the class period were almost equally as large as his trades before the class period,<br />
and the other two individual defendant’s stock sales were not suspicious in timing because the<br />
sales occurred after the stock price had dropped dramatically. Thus, the district court held that<br />
because the insider trading allegations failed to create a strong inference of scienter, plaintiffs’<br />
Rule 10b-5 claim necessarily failed.<br />
67
Brodzinsky v. Frontpoint Partner LLC, No. 11CV10 WWE, 2012 WL 1468507 (D. Conn. Apr.<br />
26, 2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against defendants and funds controlled<br />
by one of the defendants, alleging violation of Sections 10(b), 20A, and 20(a) of the Securities<br />
Exchange Act of 1934, based on defendants’ participation in an insider trading scheme, to which<br />
both individual defendants had pleaded guilty in the criminal actions brought against them.<br />
Defendants moved to dismiss plaintiffs’ complaint. The district court held that plaintiffs lacked<br />
standing to pursue their Section 10(b) and 20A claims because plaintiffs’ trades were not<br />
contemporaneous with the alleged insider trading. Plaintiffs’ trades occurred within two weeks<br />
of the alleged insider trading, which the district court found to be beyond the period considered<br />
to be the market relevant to the alleged insider trading. Because plaintiffs’ Section 20(a) claims<br />
were premised on liability for the Section 10(b) and 20A claims, and plaintiffs lacked standing to<br />
bring their Section 10(b) and 20A claims, the district court also dismissed plaintiffs’ Section<br />
20(a) claims.<br />
Hutchins v. NBTY, Inc., No. CV 10-2159 LDW, 2012 WL 1078823 (E.D.N.Y. Mar. 30, 2012).<br />
C.1.c<br />
Plaintiff brought a securities fraud class action against a nutritional supplement company<br />
and its CEO/chairman and its CFO/president, alleging violations of Section 10(b) and 20(a) of<br />
the Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss the amended<br />
complaint. Plaintiff alleged that company insiders collectively sold 1,655,063 shares of their<br />
personally-held common stock during the class period, generating over $73 million in proceeds,<br />
which amounted to 24 times the amount of insider sales in the prior year. Plaintiff further<br />
alleged that the individual defendants sold 9.4% and 50.9% of their stock, generating $21.2<br />
million and $29.5 million respectively. The district court held that plaintiff sufficiently alleged<br />
“unusual” sales by the company’s insiders – particularly by the individual defendants – during<br />
the class period to raise a strong inference of scienter, and denied defendants’ motion to dismiss.<br />
Levy v. Huszagh, No. 11-CV-3321, 2012 WL 4512038 (E.D.N.Y. Sept. 28, 2012).<br />
C.1.c<br />
Plaintiff filed shareholder derivative suit against certain officers and directors of<br />
company, alleging improprieties in how company stated its loan loss allowance. Defendants<br />
moved to dismiss the complaint on the basis of plaintiff’s failure to satisfy the demand<br />
requirement. Plaintiff alleged that the entire company board was responsible for concealing how<br />
the company stated its loan loss allowance; and defendants made suspicious insider trades for<br />
profit based on knowledge of the true loan loss allowance. The district court granted defendants’<br />
motion, finding that plaintiff failed to demonstrate that defendants’ alleged actions were so<br />
egregious to preclude demand and that defendants exercised valid business judgment.<br />
68
Barbara v. MarineMax, Inc., No. 12-CV-0368, 2012 WL 6025604 (E.D.N.Y. Dec. 4, 2012).<br />
C.1.c<br />
Plaintiffs alleged breach of contract, breach of fiduciary duty, violation of the Delaware<br />
Uniform Commercial Code and federal securities laws, unjust enrichment, tortious interference<br />
and fraud against defendants resulting from plaintiffs’ sale of their boat business to defendants<br />
for cash and stock. Plaintiffs alleged breach of fiduciary duty for alleged insider sales of<br />
corporate stock, during the period when plaintiffs attempted to lift stock restrictions, which<br />
caused the stock value to fall dramatically. Plaintiffs alleged that defendants knew that plaintiffs<br />
planned to sell their stock once the restrictions were lifted and thereby traded on “material<br />
inside” information. The district court dismissed this claim because it was derivative in nature.<br />
The district court ultimately granted defendants’ motion to dismiss on all of plaintiffs’ claims,<br />
except for breach of contract for failure to lift the stock restrictions.<br />
U.S. v. Rajaratnam, No. 09 CR 1184 RJH, 2012 WL 362031 (S.D.N.Y. Jan. 31, 2012).<br />
C.1.c<br />
Defendant was found guilty on all fourteen counts in an indictment charging him with<br />
conspiracies to commit and the commission of various insider trading schemes. After calculating<br />
the applicable sentencing guideline range to be 235 to 293 months in prison based on a total<br />
offense level of 38 and a criminal history category of I, the court sentenced defendant to a total<br />
of 132 months in prison on all counts. In this opinion, the court set forth the basis for that<br />
calculation.<br />
SEC v. Contorinis, No. 11-3-CR, 2012 WL 512626 (S.D.N.Y. Feb. 3, 2012).<br />
C.1.c<br />
The S.E.C. brought an action against defendant related to his involvement in an insider<br />
trading scheme that generated more than $12 million in profits and avoided losses, in violation of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The S.E.C. filed a motion<br />
for summary judgment against defendant, arguing that defendant was collaterally estopped from<br />
challenging facts established at his parallel criminal trial, where defendant was found guilty of<br />
conspiracy to commit securities fraud and securities fraud. The district court granted the<br />
S.E.C.’s motion for summary judgment as to liability, holding that because defendant was<br />
convicted of securities fraud in a criminal proceeding, he was collaterally estopped from<br />
relitigating the underlying facts in his subsequent civil trial. The court also granted the relief<br />
sought by the S.E.C., holding (i) that a permanent injunction enjoining defendant from violating<br />
Section 10(b) of the Exchange Act and Rule 10b-5 was warranted because defendant acted<br />
knowingly in making illegal trades, made multiple trades over the course of several weeks,<br />
profited substantially from his conduct, and consistently maintained that his past conduct was<br />
blameless; (ii) that defendant shall disgorge his profits plus prejudgment interest; and (iii) that<br />
defendant pay a civil penalty of $1,000,000.<br />
69
C.1.c<br />
Chechele v. Elstain, No. 11-3889, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).<br />
Plaintiff brought a shareholder derivative suit against the company’s trustee and fifteen<br />
corporate entities controlled by the trustee, which owned more than ten percent of the company’s<br />
outstanding common shares. Plaintiff alleged that defendants violated Section 16(b) of the<br />
Securities and Exchange Act of 1934 by purchasing the company’s stock from the company’s<br />
underwriters at its public offering and then selling that stock within six months for a profit.<br />
Defendants moved to dismiss, arguing that their purchase of stock was permissible under Rule<br />
16b-3, and therefore exempted from the prohibition on short swing insider profits, because it was<br />
authorized by the company’s board. The district court disagreed with defendants. The district<br />
court noted that the issue presented was discrete and novel. The plain language of Rule 16b-3<br />
provides that “[t]ransactions between an issuer and its officers or directors” that meet certain<br />
conditions are exempt, and because defendants were insiders who purchased stock from<br />
underwriters, who had been hired by the company to do a public offering, rather than from the<br />
issuer, the exemption did not apply. The district court denied defendant’s motion to dismiss for<br />
four reasons: (1) the underwriting agreement did not bind the underwriters to sell shares to<br />
defendants, so the underwriters were independent actors not synonymous with the issuer; (2) the<br />
transaction occurred on the open market as part of a public offering, which altered the prices at<br />
which other shares were sold and impacted other buyers; (3) Rule 16b-3 would not exempt an<br />
officer’s or director’s purchase of the issuer’s stock in a public offering pursuant to a “friends<br />
and family” allocation, confirming the plain meaning of the Rule; and (4) defendants provided<br />
no powerful reason to depart from the plain language of the Rule.<br />
U.S. v. Skowron III, 839 F. Supp. 2d 740 (S.D.N.Y. 2012).<br />
C.1.c<br />
Defendant pleaded guilty to and was convicted of conspiring to commit securities fraud<br />
and to obstruct an S.E.C. investigation. The conduct underlying defendant’s conviction<br />
consisted of an insider trading scheme and an ensuing cover-up. Defendant’s former employer<br />
sought restitution under the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. § 3663A,<br />
for (i) the full disgorgement amount it paid to the S.E.C. to settle S.E.C. claims against defendant<br />
and the hedge funds defendant managed; (ii) legal fees and related costs incurred responding to<br />
the government investigation of defendant; and (iii) a portion of the total compensation<br />
defendant’s former employer paid to defendant. The district court concluded that defendant’s<br />
former employer was a “victim” under the MVRA because defendant’s offenses directly and<br />
proximately harmed the employer, deprived the employer of honest services of its employee,<br />
diverted corporate time and energy in the defense of defendant, injured the employer’s<br />
reputation, and caused the employer to incur substantial legal costs during the S.E.C.<br />
investigation. Finding defendant’s former employer to be a “victim,” the district court granted<br />
the former employer restitution for legal fees and costs and twenty percent of defendant’s total<br />
compensation.<br />
70
C.1.c<br />
U.S. v. Gupta, 848 F. Supp. 2d 491 (S.D.N.Y. 2012).<br />
Defendant charged with insider trading and subject to a parallel civil enforcement<br />
proceeding moved for pretrial discovery in both cases, seeking the memoranda and notes of an<br />
S.E.C. attorney who attended the interviews of forty-four witnesses conducted jointly by the<br />
United States Attorney’s Office (“USAO”) and the S.E.C.. Finding that the USAO had<br />
conducted a “joint investigation” with the S.E.C., the district court held that the USAO’s duty to<br />
learn of any favorable evidence to the defendant extended to reviewing materials in the<br />
possession of the S.E.C. for Brady evidence and directed the USAO to review the S.E.C.’s<br />
memorandum for any Brady material, and if any was found, to disclose it to the defense. With<br />
respect to defendant’s motion in the civil case, the district court held that defendant had<br />
demonstrated substantial need for Brady material in connection with preparing for his criminal<br />
trial to overcome the work product protection afforded to the S.E.C.’s notes and memorandum,<br />
but only to the extent of any Brady material.<br />
SEC v. Gupta, 281 F.R.D. 169 (S.D.N.Y. 2012).<br />
C.1.c<br />
The S.E.C. brought an insider trading civil enforcement action against defendants.<br />
Following the deposition of a non-party witness, defendants moved to compel the non-party<br />
witness to answer questions about meetings with and documents shown to the non-party witness<br />
by attorneys from the S.E.C. and United States Attorney’s Office (“USAO”). The district court<br />
held that when an attorney discloses work product to prepare a non-party witness for a<br />
deposition, and that non-party witness does not share a common interest with the attorney’s<br />
client, there has been a deliberate, affirmative, and selective use of work product that waives the<br />
privilege. Finding that the S.E.C. and USAO waived any work product protection they had over<br />
legal strategy in their questioning and documents shown to the non-party witness when they<br />
prepared the non-party for his deposition, the district court ordered that defendants could<br />
question the non-party witness about his deposition preparation meetings with the S.E.C. and<br />
USAO.<br />
U.S. v. Gupta, 2012 WL 1066817 (S.D.N.Y. Mar. 27, 2012).<br />
C.1.c<br />
Pursuant to 18 U.S.C. §§ 2515, 2518(1) and the Fourth Amendment, defendant moved to<br />
suppress wiretap intercepts and the evidence derived from the wiretaps in his criminal trial for<br />
insider trading. The district court agreed with the reasoning in an order addressing the same<br />
arguments in defendant’s co-conspirator’s case and held that: (1) the wiretap of defendant’s<br />
phone had the “bona fide” purpose of investigating wire fraud, which is permitted under Title III,<br />
and so long as the government acts in good faith with respect to informing the court of the crimes<br />
it is investigating in connection with the wiretap, the government is free to use evidence obtained<br />
from an authorized wiretap in the prosecution of a crime not listed in Section 2516; and (2) under<br />
71
the Franks doctrine, the government’s failure to inform the judge who authorized the wiretap of<br />
the parallel S.E.C. investigation was immaterial to the judge’s finding of necessity for the<br />
wiretap. Thus, the district court denied defendant’s motion to suppress the wiretaps and the<br />
evidence derived from them.<br />
U.S. v. Gupta, 2012 WL 1066804 (S.D.N.Y. Mar. 27, 2012).<br />
C.1.c<br />
Defendant charged with insider trading moved to dismiss Count 2 of the superseding<br />
indictment charging defendant with securities fraud as unconstitutionally vague; to dismiss or<br />
consolidate Counts 3 and 4 of the superseding indictment as multiplicitous; to strike prejudicial<br />
surplusage from the superseding indictment; and to compel the government to provide additional<br />
details in its bill of particulars. The district court denied all four of defendant’s motions, holding<br />
that: (1) the allegations of Count 2 satisfied the requirement of a “definite written statement of<br />
the essential facts constituting the offense charged,” as they sufficiently apprise defendant of<br />
what the government intends to prove such that defendant can prepare his defense and avoid the<br />
potential for double jeopardy; (2) defendant’s motion to consolidate Counts 3 and 4 was<br />
premature; (3) the words, “for example” and “among other things,” which preceded allegations<br />
of how defendant benefited from his business dealings with his co-conspirator, did not in any<br />
material respect broaden or alter the essential allegations of the crimes charged, but simply<br />
indicated that the government’s proof will not be limited only to items of proof that the<br />
indictment specified; and (4) defendant had already received most if not all of the additional<br />
information he sought in the superseding indictment, the substantial discovery provided by the<br />
government, the additional discovery made available to defendant through his parallel civil<br />
action, and the previously ordered bill of particulars.<br />
In re Pfizer Inc. Sec. Litig., 282 F.R.D. 38 (S.D.N.Y. 2012).<br />
C.1.c<br />
Investors filed a securities fraud class action against a pharmaceutical manufacturer and<br />
its corporate officers, claiming violations of Sections 10(b), 18, 20(a), and 20A of the Securities<br />
Exchange Act of 1934, Rule 10b-5, and state laws. Investors moved for class certification. The<br />
district court certified the class under Rule 23(b)(3), finding that plaintiffs satisfied the<br />
requirements of Rule 23(a), that common questions of law and fact predominated over individual<br />
issues, and that a class action was the superior method of adjudicating the matter. The district<br />
court also held that certification of a Section 20A subclass for insider trading claims was<br />
appropriate because a distinct legal issue common to some members of the class existed and<br />
would expedite resolution of the case. In addition to proving a predicate violation of Section<br />
10(b), the subclass must also establish that they purchased the company’s stock<br />
contemporaneously with a sale by an individual defendant, and that the individual defendant<br />
possessed material nonpublic information at the time of the sale. Thus, the subclass was<br />
warranted.<br />
72
In re CRM Holdings, Ltd. Sec. Litig., No. 10-Civ. 975 RPP, 2012 WL 1646888 (S.D.N.Y. May<br />
10, 2012).<br />
C.1.c<br />
Plaintiffs filed a securities fraud class action against a holding company and several of its<br />
officers and one of its board members, alleging (1) violation of Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 as to all defendants; (2) violation of Section 10(b) as to<br />
three of the individual defendants for insider trading; and (3) violation of Section 20(a) as to all<br />
four individual defendants. The court held that plaintiffs failed to allege anything “unusual” or<br />
“suspicious” about the individual defendants’ stock sales during the class period. The stock sales<br />
simply did not demonstrate “an intent to deceive, manipulate , or defraud,” as required by<br />
Section 109b) and Rule 10b-5. Finding that there were no facts to raise an inference of scienter,<br />
the court concluded that plaintiffs failed to state a claim under Section 10(b) and Rule 10b-5.<br />
Because the court found that plaintiffs failed to state an underlying Section 10(b) violation<br />
against defendants, the court dismissed plaintiffs’ Section 20(a) claim as well.<br />
SEC v. Bankosky, No. 12 Civ. 1012 HB, 2012 WL 1849000 (S.D.N.Y. May 21, 2012).<br />
C.1.c<br />
Defendant traded in the securities of four companies based on material, nonpublic<br />
information that he obtained while working as a director of business development for a<br />
pharmaceutical company. The district court entered a consent judgment against defendant that<br />
permanently enjoined him from future violations of the securities laws and held him liable for<br />
disgorgement for the profits he gained. Pursuant to 15 U.S.C. § 78u(d)(2), the S.E.C. moved to<br />
prohibit defendant permanently from acting as an officer or director of a public company. In<br />
deciding the motion, the district court considered “(1) the ‘egregiousness’ of the underlying<br />
securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the defendant’s ‘role’ or<br />
position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s<br />
economic stake in the violation; and (6) the likelihood that misconduct will recur” and held that<br />
defendant was prohibited for a period of ten years from acting as an officer or director of any<br />
public company.<br />
SEC v. Compania Internacional Financiera, No. 11 Civ. 4904, 2012 WL 1856491 (S.D.N.Y.<br />
May 22, 2012).<br />
C.1.c<br />
The S.E.C. brought an action against three defendants, alleging that defendants traded on<br />
the basis of material, nonpublic information. The S.E.C. and one defendant stipulated to the<br />
dismissal of the action without prejudice. With regard to the other two defendants, the S.E.C.<br />
filed a motion pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure to dismiss its<br />
complaint without prejudice. The two defendants opposed the motion, arguing that the action<br />
should be dismissed with prejudice. The district court analyzed the Zagano factors and held that<br />
(1) while the S.E.C. could have acted earlier and avoided some prejudice to defendants, its<br />
73
failure to do so was not due to lack of diligence, but in part due to defendants’ conduct during<br />
discovery; (2) there was no evidence that the S.E.C. acted with any undue vexatiousness in<br />
initiating or maintaining the action against defendants; (3) the parties had not completed<br />
discovery in part due to defendants’ conduct so the case was not ripe for adjudication on the<br />
merits; (4) much of the expense had been incurred in discovery, which could be re-used in any<br />
future litigation, and defendants failed to identify any concrete harm or prejudice that would<br />
result from dismissal without prejudice; and (5) the S.E.C.’s explanation for the dismissal was<br />
adequate, as a dismissal without prejudice was in the interest of justice because the S.E.C. was<br />
unable to obtain critical information during the discovery period due to defendants’ conduct.<br />
Because the weight of the Zagano factors favored the S.E.C. and defendants would not suffer<br />
substantial legal prejudice if the action were dismissed without prejudice, the district court<br />
granted the S.E.C.’s Rule 41(a)(2) motion to dismiss without prejudice.<br />
Roth ex rel. Leap Wireless Int’l, Inc. v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524<br />
(S.D.N.Y. 2012).<br />
C.1.c<br />
Plaintiff brought a derivative shareholder action against a corporation, another<br />
shareholder, and its parent, alleging that defendant shareholder failed to comply with the<br />
reporting and disgorgement requirements of Section 16(b) of the Securities Exchange Act of<br />
1934 during the time that it held more than ten percent of the corporation’s common stock.<br />
Defendants moved to dismiss the complaint for failure to state a claim. The district court<br />
explained that in order to be liable under Section 16(b), defendant shareholder must have been a<br />
statutory insider at the time of the sale and the purchase of the securities at issue. The district<br />
court held that the equivalent of the sale was the writing of the short call options on September<br />
30, 2009, and the equivalent of the purchase was the expiration of the options in January 16,<br />
2010. Because defendant shareholder was no longer a ten percent owner on the options’<br />
expiration date, under the plain language of the statute, it could not be held liable under Section<br />
16(b). Thus, the district court granted defendants’ motions to dismiss the shareholder derivative<br />
complaint.<br />
XL Specialty Ins. Co. v. Level Global Investors, L.P., 874 F. Supp. 2d 263 (S.D.N.Y. 2012).<br />
C.1.c<br />
Plaintiff insurer filed a lawsuit against defendant insureds seeking (1) a declaration that<br />
under the “prior knowledge exclusion” of its policy with defendants, it has no duty to cover any<br />
defendant in connection with the S.E.C. and United States Attorney Office’s actions against<br />
defendant for alleged insider trading; and (2) restitution of all defense costs already advanced to<br />
the defendants. Defendants moved for a preliminary injunction requiring plaintiff to resume<br />
advancing their defense costs in connection with the federal investigations. The district court<br />
granted the defendants’ motion, holding that (1) the failure to receive defense costs under a<br />
professional liability insurance policy at the time they were incurred constituted an immediate<br />
and direct injury sufficient to satisfy the irreparable harm requirement for a preliminary<br />
injunction; (2) the balance of hardships tipped in favor of the defendants; (3) the defendants<br />
74
demonstrated that there were sufficiently serious claims going to the merits on the question of<br />
whether the prior knowledge exclusion was ambiguous; and (4) plaintiff did not have a duty to<br />
advance costs while plaintiff (insurer) and defendants (insureds) litigated whether the claims<br />
asserted against defendants in the federal criminal action were covered or excluded under<br />
defendants’ insurance policy with plaintiff.<br />
Lerner v. Immelt, No. 10 Civ. 1807 DLC, 2012 WL 2197456 (S.D.N.Y. June 15, 2012).<br />
C.1.c<br />
Plaintiff filed a shareholder derivative action against nominal defendant corporation for<br />
breach of fiduciary duty, insider trading, unjust enrichment, and other wrongs by former and<br />
current directors and officers of defendant corporation. The district court granted defendants’<br />
motion to dismiss. The district court also granted plaintiff leave to amend and submit a proposed<br />
amended complaint within thirty days based on plaintiff’s counsel’s representation that he<br />
recently received thousands of documents from the SEC that would support more particularized<br />
allegations. Although plaintiff filed a motion for leave to amend within thirty days, plaintiff did<br />
not include a proposed second amended complaint, but instead requested leave to amend on an<br />
undetermined date within six months. Holding that plaintiff had disregarded the court’s order<br />
and had not been diligent in pursuing the action, and finding that leave to amend would result in<br />
undue delay and undue prejudice to defendants, the district court denied plaintiff’s motion for<br />
leave to amend.<br />
Mercer v. Gupta, -- F. Supp. 2d --, 2012 WL 3095300 (S.D.N.Y. July 27, 2012).<br />
C.1.c<br />
Plaintiff brought an action pursuant to Section 16(b) of the Securities Exchange Act of<br />
1934 against defendant, a former director of a company, seeking to recover short swing profits<br />
that defendant allegedly realized from passing inside information about the company to a nonparty,<br />
who was convicted of insider trading in a separate criminal action. Plaintiff did not allege<br />
that defendant purchased or sold any of the company’s stock within a six-month period, but<br />
instead argued that defendant was a “beneficial owner” of the non-party’s illegal trading because<br />
(1) defendant received quid pro quo payments from the non-party for the inside information; (2)<br />
defendant had the “opportunity to profit” from the short-swing transaction; and (3) defendant’s<br />
financial interest in the funds managed by the non-party was an indirect pecuniary interest in the<br />
short-swing trades. The district court dismissed the action, finding that (1) while a tipper can be<br />
held liable under Section 16, the tipper did not become a “beneficial owner” of the tippee’s<br />
trades by virtue of payments received in exchange for insider information; (2) neither an<br />
insider’s “business dealings” with a person who realizes short-swing profits, nor allegations of<br />
improved business prospects between the insider and the actual trader constitute a pecuniary<br />
interest in the short-swing transactions for the insider; and (3) the safe harbor defense of Rule<br />
16a-1 applied such that defendant would not be deemed to have a pecuniary interest in the<br />
portfolio that was managed by the non-party.<br />
75
George v. China Auto. Sys., Inc., No. 11 Civ. 7533 KBF, 2012 WL 3205062 (S.D.N.Y. Aug. 8,<br />
2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against a power steering components and<br />
systems manufacturer, several of its officers and directors, and its former auditor, alleging<br />
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To establish<br />
scienter, plaintiffs alleged that the individual defendants collectively sold over $40 million in the<br />
manufacturer’s shares pursuant to 10b5-1 plans entered into during the class period in order to<br />
profit from the allegedly inflated value of the stock. The district court held that the defendant<br />
manufacturer could not invoke the 10b5-1 plan’s existence to disarm any inference of scienter<br />
when the trading plan was entered into during the class period. The district court also held that<br />
the individual defendants’ trading was unusual because (i) the individual defendants made a<br />
collective net profit of nearly $42 million; (ii) four of the seven individual defendants sold over<br />
fifty percent of their stock during the class period and two of the remaining individual defendants<br />
sold over twenty-five percent of their stock during the class period; and (iii) those same<br />
individual defendants did not sell any stock in the year and a half prior to the class period and<br />
have not sold any stock since the end of the class period, whereas they sold more than 2.3 million<br />
shares during the class period. Thus, the district court concluded that plaintiffs’ allegations<br />
sufficiently raised a strong inference of scienter, and denied defendant manufacturer’s motion to<br />
dismiss.<br />
C.1.c<br />
George v. China Auto. Sys., Inc., No. 11 CIV. 7533 KBF, 2012 WL 4493107 (S.D.N.Y. Sept. 25,<br />
2012).<br />
Following plaintiffs’ second amended complaint, defendant auditor moved to dismiss the<br />
claim brought against it under Section 10(b) of the Securities Exchange Act of 1934. The district<br />
court denied the motion, finding the allegations of the second amended complaint sufficiently<br />
stated a claim against auditor. Specifically, the second amended complaint adequately stated the<br />
size and magnitude of the restatement surrounding the convertible notes at issue. Further, the<br />
alleged “rampant insider trading” claims, which indicated that 85% of the insider trading<br />
occurred prior to the audit opinion, should have served as a red flag to the auditor to “dig deeper<br />
and insure the propriety of the financial statements.” Taken collectively, there was a strong<br />
inference of scienter.<br />
Chechele v. Morgan Stanley, --- F.Supp.2d ---, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012).<br />
C.1.c<br />
Stockholder brought suit against corporation in which she nominally held stock, and<br />
related entities, seeking recovery of “short-swing” profits pursuant to Section 16(b) of the<br />
Securities Exchange Act of 1934. Defendants moved to dismiss. The district court granted<br />
defendants’ motion. First, the court held that stockholder’s claim was time barred under Section<br />
76
16(b). Plaintiff’s claim was not equitably tolled because plaintiff knew, or should have known,<br />
the facts of fraudulent concealment necessary to plead her Section 16(b) claim. Second, plaintiff<br />
failed to provide specific factual allegations, beyond speculation, sufficient to establish that<br />
defendants may have engaged in other short-swing transactions.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., --- F.Supp.2d ---, 2012 WL<br />
4714799 (S.D.N.Y. Sept. 27, 2012).<br />
C.1.c<br />
Shareholders brought action alleging securities fraud, breach of warranty, negligent<br />
misrepresentation, and unjust enrichment against corporation, its joint-venture partner, and their<br />
directors and officers. Defendants moved to dismiss. The district court granted defendants’<br />
motion. In their breach of warranty claim, shareholders claimed that the corporation breached its<br />
representation and warranty when it sold warranties within six months of the closing of the<br />
securities purchase and product participation agreement between corporation and its jointventure<br />
partner, putting its ownership of the joint-venture over 10% and subjecting it to Section<br />
16(b) of the Securities and Exchange Act of 1934. The district court held that under Section<br />
16(b), to be a beneficial owner “at the time of purchase,” an insider must be a beneficial owner<br />
before the purchase, which corporation did not become until after the closing.<br />
In re Fannie Mae 2008 ERISA Litig., No. 09 Civ. 1350 PAC, 09 MDL 2013 PAC, 2012 WL<br />
5198463 (S.D.N.Y. Oct. 22, 2012).<br />
C.1.c<br />
Plaintiffs brought action on behalf of all current and former employees of Federal<br />
National Mortgage Association (FNMA), who are or were plan participants in FNMA’s<br />
employee stock option plan. Plaintiffs alleged that defendants breached their duty under the<br />
Employee Retirement Income Security Act (ERISA) by failing to properly manage the FNMA’s<br />
employee stock option plan and breached their duty under ERISA of avoiding conflicts of<br />
interest, and that the director defendants failed to adequately monitor the plan management<br />
defendants. The plan management defendants argued that they could not be liable for breach of<br />
their duty of prudence because divesting the plan’s assets of FNMA stock would constitute<br />
insider trading. The district court rejected that argument. At the motion to dismiss stage,<br />
plaintiffs’ prudence claim withstood any potential securities fraud violation competing with an<br />
ERISA obligation.<br />
U.S. v. Gupta, --- F.Supp.2d ---, 2012 WL 5246919 (S.D.N.Y. Oct. 24, 2012).<br />
C.1.c<br />
Defendant was found guilty of one count of conspiracy and three counts of substantive<br />
securities fraud for providing material non-public information during September and October<br />
2008, “when our financial institutions were in immense distress and most in need of stability,<br />
repose, and trust.” The district court reviewed the sentencing guidelines to determine whether 24<br />
77
months’ imprisonment was appropriate. The district court reasoned that defendant’s actions<br />
rested on his “egregious breach of trust” and affirmed the sentence.<br />
SEC v. One or More Unknown Purchasers of Sec. of Global Indus., Ltd., No. 11 Civ. 6500 RA,<br />
2012 WL 5505738 (S.D.N.Y. Nov. 9, 2012).<br />
C.1.c<br />
The United States Attorney for the Eastern District of New York (U.S. Attorney) moved<br />
to intervene in a civil action and stay discovery pending completion of an ongoing grand jury<br />
investigation into an insider trading scheme. The S.E.C. did not oppose the motion. The district<br />
court found that the civil case related to alleged fraudulent trades of stock that were among trades<br />
at issue in the criminal investigation. In balancing the interests, the district court found that the<br />
S.E.C. did not oppose the U.S. Attorney’s motion, defendant’s interest did not weigh against a<br />
stay, and the district court’s interest of efficient resolution and the public interest in effective<br />
prosecution of securities cases justified a stay of discovery of the civil case.<br />
U.S. v. Whitman, No. 12 CR 125 JSR, 2012 WL 5505080 (S.D.N.Y. Nov. 14, 2012).<br />
C.1.c<br />
Defendant was convicted of conspiracy to commit insider trading and substantive insider<br />
trading in violation of federal securities laws. During the charging conference, the district court<br />
held that the following were proper jury instructions: (1) an “employee’s duty to keep material<br />
non-public information confidential is defined by federal common law”; (2) a tippee must have a<br />
general understanding that in sharing inside information, the insider breached a duty of<br />
confidentiality “in exchange for some personal benefit”; and (3) to be criminally liable, a tippee<br />
must have “specific intent to defraud the company to which the information relates.”<br />
Warchol v. Green Mountain Coffee Roasters, Inc., No. 10 Civ. 227, 2012 WL 256099 (D.Vt.<br />
Jan. 27, 2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against specialty coffee company and<br />
several individual defendants, including the company’s CEO, CFO, and Chairman of the Board<br />
of Directors, alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15<br />
U.S.C. § 78j(b). Defendants moved to dismiss for failure to state a claim. Plaintiffs attempted<br />
to demonstrate scienter by alleging that the company permitted lucrative insider stock sales,<br />
evidencing motive and opportunity to commit the fraud. However, the district court held that<br />
plaintiffs failed to demonstrate scienter: (i) plaintiffs failed to allege that any individual<br />
defendants or other insiders sold stock during the class period or that the company department<br />
presidents who did sell stock during the class period were parties to the fraud; and (ii) although<br />
one department president’s stock sale had taken place a week before the company announced the<br />
S.E.C. investigation and the company’s Q3 10-Q financial restatement, and one day after the<br />
company claimed that it was first contacted by the S.E.C., none of the other transactions had<br />
78
taken place near the dates on which the officers were likely to maximize profits on the basis of<br />
that knowledge, and a number of the company’s directors had made stock purchases during the<br />
class period.<br />
Taylor v. Kissner, No. 11-1184, 2012 WL 4461528 (D. Del. Sept. 27, 2012).<br />
C.1.c<br />
Shareholder brought derivative suit against current and former members of corporation’s<br />
board of directors after its merger with another corporation, which allegedly violated their<br />
fiduciary duties to shareholders. The board of directors moved to dismiss. Among other<br />
allegations, shareholder alleged that two of the corporate officers engaged in insider trading. The<br />
district court granted the motion to dismiss. It held that shareholder’s insider trading allegations<br />
were conclusory and did not demonstrate that the two directors were in possession of material<br />
nonpublic information when they sold their stock. Further, shareholder failed to demonstrate<br />
demand futility because he did not allege sufficient facts that the two directors were incapable of<br />
exercising valid business judgment.<br />
Sec. Police and Fire Prof’l of Am. Ret. v. Pfizer, Inc., No. 10-CV-3105 MCA, 2012 WL 458431<br />
(D.N.J. Feb. 10, 2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against a pharmaceutical company and<br />
several of its senior executives alleging that defendants violated Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5, and that the individual defendants engaged in insider<br />
trading, in violation of Sections 20(a) and 20A of the Exchange Act. Defendants moved to<br />
dismiss under Rule 12(b)(6). The district court granted defendants’ motion to dismiss, holding<br />
that plaintiffs failed to plead with particularity any false or misleading statements made by<br />
defendants and failed to establish that defendants had a duty to disclose the information at issue<br />
or that such information was material. Because claims under Sections 20(a) and 20A require a<br />
predicate violation of the Exchange Act and plaintiffs failed to adequately plead a claim under<br />
Section 10(b), the district court held that plaintiffs failed to state a claim for insider trading.<br />
SEC v. Berlacher, No. Civ. A. 07-03800, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012).<br />
C.1.c<br />
After a bench trial, the district found that defendant had engaged in two instances of<br />
securities fraud, but that there was insufficient evidence to find defendant liable on two other<br />
counts of fraud and one count of insider trading. Specifically as to the insider trading count, the<br />
district court found that defendant’s expert’s use of an event study to determine the materiality of<br />
the information at issue was more consistent with the Third Circuit’s post hoc analysis to<br />
determine materiality than the S.E.C.’s expert’s approach, and consequently held that defendant<br />
had not engaged in insider trading because the information at issue was not material. Pursuant to<br />
the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412, defendant moved for attorneys’<br />
79
fees and costs expended in defending against the S.E.C. enforcement action, arguing that the<br />
S.E.C. was not substantially justified in bring the insider trading and fraud claims against him<br />
and that the S.E.C.’s demand was in excess of the judgment it obtained. The district court,<br />
however, held that the EAJA did not entitle defendant to an award of attorneys’ fees because,<br />
viewing the case in its entirety, the position of the S.E.C. was substantially justified and the<br />
S.E.C.’s demand was not in excess of the judgment it obtained.<br />
SEC v. McGee, --- F.Supp.2d ---, 2012 WL 4025409 (E.D. Pa. Sept. 13, 2012).<br />
C.1.c<br />
The S.E.C. brought securities fraud action against stock brokers and purported tippees,<br />
alleging violations under the misappropriation theory of liability under Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss. The district<br />
court denied the motions. It held that the S.E.C. exercised its rulemaking authority, and the rule<br />
was not void for vagueness. With respect to the sufficiency of the complaint, the district court<br />
held that the rule delineating a relationship of trust and confidence under the misappropriation<br />
theory was valid. The initial broker obtained material nonpublic information during the course<br />
of a confidential relationship between himself and the source of information. The S.E.C.<br />
sufficiently alleged that the broker who misappropriated the information had a duty of trust and<br />
confidence. Further, the S.E.C. sufficiently alleged that the other broker acted with requisite<br />
scienter to support tippee liability. The tippee knew the information was tainted. Finally, the<br />
S.E.C. sufficiently alleged that the defendants, the tippees’ family members, received ill-gotten<br />
gains to support disgorgement. However, the district court granted the motion to dismiss as to<br />
one defendant, who was the father of the tippee, because there were insufficient facts to support a<br />
“plausible inference” that the father acted with requisite scienter.<br />
U.S. v. McGee, --- F.Supp.2d ---, 2012 WL 4025342 (E.D. Pa. Sept. 13, 2012).<br />
C.1.c<br />
Defendant was charged with two counts of insider trading in violation of Section 10(b) of<br />
the Securities Exchange Act of 1934 and Rule 10b-5 and 10b5-2, and perjury. The indictment<br />
charged that defendant obtained confidential, nonpublic information during the course of a<br />
confidential relationship, arising out of defendant’s Alcoholics Anonymous membership.<br />
Defendant then allegedly traded on the basis of such information. The district court denied<br />
defendant’s motion to dismiss the securities fraud counts, holding that the S.E.C. exercised its<br />
rulemaking authority, which was “not arbitrary, capricious, or manifestly contrary to the statute.”<br />
The S.E.C. did not broadly define the nature of the confidential relationship essential to impose<br />
liability under the misappropriation theory. Further, the rule was not void for vagueness as<br />
applied to defendant. Finally, the indictment sufficiently alleged the elements of the offense<br />
under Section 10(b) and Rule 10b-5, and sufficiently alleged a confidential relationship under<br />
Rule 10b5-2.<br />
80
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., 876 F. Supp. 2d 616 (D.Md. 2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against a syndicator company and several<br />
of its officers, alleging that they had failed to disclose costs necessary to restate the company’s<br />
financial statements to comply with a change in the law, in violation of federal securities laws.<br />
Defendants moved to dismiss the complaint. Plaintiffs attempted to demonstrate scienter by<br />
arguing that timing and sales of stock by some of the individual defendants were suspicious due<br />
to the large percentage of holdings sold and the gross proceeds yielded. However, the district<br />
court disagreed and held that the trading that took place by insiders was not unusual or<br />
suspicious. Because any inference of fraudulent intent based on the timing and volume of insider<br />
sales was slight, the court concluded that the allegations did not raise an inference of scienter.<br />
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 1551703 (S.D. Tex.<br />
Apr. 30, 2012).<br />
C.1.c<br />
Plaintiff filed an amended complaint against defendants, alleging that defendants<br />
breached the duty of care, breached the duty of loyalty and good faith, engaged in self-dealing,<br />
and engaged in insider trading. Defendants moved to dismiss the complaint. Plaintiff conceded<br />
that defendants were entitled to dismissal of the insider trading claim. Thus, the court dismissed<br />
plaintiffs’ insider trading claim.<br />
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 5879608 (S.D. Tex.<br />
Nov. 20, 2012).<br />
C.1.c<br />
In its amended complaint, plaintiff alleged that defendants breached the duty of care,<br />
breached the duty of loyalty and good faith, engaged in self-dealing, and engaged in insider<br />
trading. Plaintiff voluntarily dismissed the count of insider trading. Pending before the District<br />
Court were two motions for summary judgment based on standing and res judicata, neither<br />
pertaining to the dismissed insider trading allegations.<br />
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 6160873 (S.D. Tex.<br />
Dec. 11, 2012).<br />
C.1.c<br />
In its amended complaint, plaintiff alleged that defendants breached the duty of care,<br />
breached the duty of loyalty and good faith, engaged in self-dealing, and engaged in insider<br />
trading. Plaintiff voluntarily dismissed the count of insider trading. Pending before the District<br />
Court were various motions, none pertaining to the dismissed insider trading allegations.<br />
81
City of Pontiac Gen. Emp.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).<br />
C.1.c<br />
Investors brought a securities fraud class action against a medical equipment<br />
manufacturer and two of its officers, alleging violations of Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss the complaint.<br />
Plaintiffs argued that stock sales by the individual defendants during the class period<br />
demonstrated the requisite scienter, but the court disagreed. While insider trading at a suspicious<br />
time or in an unusual amount is a factor relevant to scienter, insider trading “is suspicious only<br />
when it is dramatically out of line with prior trading practices at [a] time calculated to maximize<br />
the personal benefit from undisclosed inside information.” The court held that there was no basis<br />
for inferring scienter because (1) plaintiffs failed to allege that one of the individual defendants<br />
sold any stock during the class period; (2) plaintiffs failed to show that the other individual<br />
defendant’s stock sales were out of line with his history of prior trading; and (3) the individual<br />
defendants’ losses of more than $10 million each from the shares they retained undermined an<br />
inference of scienter. The court concluded that plaintiffs alleged, at most, poor management<br />
decisions, and granted defendants’ motion to dismiss.<br />
Stuckey v. Online Res. Corp., ---F.Supp.2d ---, 2012 WL 5467522 (S.D. Ohio Nov. 9, 2012).<br />
C.1.c<br />
Stockholder filed derivative suit against acquiring corporation, alleging breach of merger<br />
agreement, fraud, and breach of escrow agreement. Following a bench trial, the district court<br />
found in favor of plaintiff. The district court found that defendant violated state securities laws<br />
when it knowingly made false representations in the merger agreement. Defendant’s main<br />
argument was that an S.E.C. comment letter was not material. Defendant incorrectly relied on a<br />
statute prohibiting insider trading. The statute was inapplicable because defendant was the seller<br />
and it “obviously knew” about the S.E.C. comment letter.<br />
N. Miami Beach Gen. Emp. Ret. Fund v. Parkinson, No. 10 C 6514, 2012 WL 4180566 (N.D. Ill.<br />
Sept. 19, 2012).<br />
C.1.c<br />
Shareholder brought suit against certain officers and directors, alleging seven claims for<br />
breach of fiduciary duty, corporate waste, gross negligence, unjust enrichment, insider trading,<br />
and aiding and abetting conspiracy. Plaintiff alleged that several individual defendants engaged<br />
in insider trading by selling stock at times when they knew, on the basis of material nonpublic<br />
information, that the stock was artificially inflated. The district court granted defendants’ motion<br />
to dismiss, finding, among other things, that a majority of the directors remained disinterested<br />
and did not engage in the allegations of insider trading. Also, the complaint failed to specify the<br />
“negative developments” that constituted material nonpublic information. Similarly, plaintiff<br />
failed to allege impropriety. Thus, plaintiff’s claim for insider trading was nothing more than<br />
82
“trading in the normal course by directors who received a substantial portion of their<br />
compensation in the form of stock and stock options.”<br />
SEC v. Berrettini, No. 10-CV-01614, 2012 WL 5557993 (N.D. Ill. Nov. 15, 2012).<br />
C.1.c<br />
Defendant employee prepared a due diligence report pertaining to whether his employer<br />
should acquire three medical service companies. The employee shared the information gained<br />
during his due diligence with his co-defendant, a president of another company, who<br />
occasionally contracted with his employer. The president traded shares on the basis of this inside<br />
information and reaped substantial profits. The S.E.C. alleged that defendants’ conduct<br />
amounted to insider trading, and defendants moved for summary judgment. The district court<br />
denied defendants’ motions for summary judgment, finding sufficient evidence that defendant<br />
employee shared material nonpublic information, breached his duty of confidentiality, obtained a<br />
benefit, and acted with scienter. Similarly, defendant president acted with requisite scienter.<br />
Wade v. WellPoint, Inc., ---F.Supp.2d ---, 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012).<br />
C.1.c<br />
Investor brought putative class action against corporation and its officers and directors,<br />
alleging defendants artificially inflated corporation’s stock price in violation of the Securities<br />
Exchange Act of 1934. Plaintiff moved to file a second amended complaint. The district court<br />
denied the motion. Investor asserted allegations regarding “suspicious” stock sales, whereby<br />
certain “insider” defendants sold shares of their stock to take advantage of artificial price<br />
inflation caused by defendants’ misrepresentation. The court held that investor failed to<br />
sufficiently plead scienter. Plaintiff failed to allege facts pertaining to trading history, and the<br />
stock sales were not unusual or suspicious regarding the timing and amount of the stock sales.<br />
SEC v. Bauer, No. 03-C-1427, 2012 WL 2217045 (E.D. Wis. June 15, 2012).<br />
C.1.c<br />
The district court had granted the S.E.C.’s motion for summary judgment, finding that<br />
defendant possessed material, nonpublic information when she redeemed her shares of a short<br />
duration fund, but declined to enter judgment immediately as the remaining claims could affect<br />
the remedies at issue. Subsequently, the S.E.C. dismissed the remaining claims with prejudice<br />
and moved for the entry of judgment pursuant to Rule 65 of the Federal Rules of Civil<br />
Procedure. The S.E.C. sought (i) a permanent injunction enjoining defendant from committing<br />
future violations of the securities laws and acting as, among other things, an officer, director,<br />
member of any board; (ii) the disgorgement of funds equal to the losses defendant avoided with<br />
prejudgment interest; and (iii) a civil penalty equivalent to three times the avoided losses. The<br />
district court held that the S.E.C. did not demonstrate a reasonable likelihood of future violations<br />
to support its request for a permanent injunction, finding that the defendant’s conduct was an<br />
isolated incident and that defendant has made assurances that she will not violate securities laws<br />
83
again, and denied the S.E.C.’s motion for final judgment of permanent injunction. The district<br />
court also granted the S.E.C.’s motion for disgorgement in part. concluding that the S.E.C. was<br />
entitled to disgorgement of the losses avoided with prejudgment interest, but held that the<br />
S.E.C.’s request for a civil penalty was excessive.<br />
In re Apollo Group, Inc. Sec. Litig., Nos. CV-10-1735-PHX-JAT, CV-10-2044-PHX-JAT, CV-<br />
10-2121-PHX, JAT, 2012 WL 2376378 (D. Ariz. June 22, 2012).<br />
C.1.c<br />
Plaintiffs brought a class action against a postsecondary education institution and several<br />
of its officers and directors, alleging that (i) defendants made false and misleading statements of<br />
material fact and/or failed to disclose material facts in violation of Sections 10(b) and 20(a) of<br />
the Securities Exchange Act of 1934 and Rule 10b-5; (ii) the individual defendants engaged in<br />
insider trading and sold stock while in possession of material, adverse, nonpublic information in<br />
violation of Sections 10(b), 20A, and 20(a) and Rule 10b-5. Defendants moved to dismiss the<br />
amended complaint. Because plaintiffs’ insider trading allegations were based on defendants’<br />
knowledge that certain statements were materially false and misleading, and plaintiffs’ failed to<br />
adequately allege scienter with regard to those statements, the district court held that plaintiffs<br />
failed to allege that defendants were in possession of material, nonpublic information and<br />
dismissed plaintiffs’ insider trading claims.<br />
Smith ex rel. Apollo Group, Inc. v. Sperling, No. CV 11-722 PHX JAT, 2012 WL 3064261 (D.<br />
Ariz. July 26, 2012).<br />
C.1.c<br />
Plaintiff brought a shareholder derivative suit against various officers and directors of a<br />
postsecondary education institution, alleging violations of federal securities laws and state law<br />
claims for breaches of fiduciary duties, abuse of control, gross mismanagement, unjust<br />
enrichment, corporate waste, and insider trading. Defendants moved to dismiss the complaint,<br />
arguing that plaintiff lacked standing to bring the action on behalf of the institution. The district<br />
court held that plaintiff failed to satisfy the contemporaneous/continuous ownership requirement<br />
of Rule 23.1 and therefore lacked standing to bring a shareholder derivative suit based on alleged<br />
acts that occurred prior to plaintiff’s stock ownership. Accordingly, the district court granted<br />
defendants’ motions to dismiss.<br />
In re First Solar Derivative Litig., No. CV-12-00769-PHX-DGC, 2012 WL 6570914 (D. Ariz.<br />
Dec. 17, 2012).<br />
C.1.c<br />
Nominal defendant filed motion to stay derivative action pending resolution of a<br />
securities class action involving substantially the same issues. The district court granted<br />
defendant’s motion because both the derivative action and the class action relied on “the same<br />
84
misrepresentations, omissions, and underlying facts,” including that corporation withheld and<br />
misrepresented material information regarding its products and engaged in insider trading.<br />
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012 WL 137457<br />
(C.D. Cal. Jan. 17, 2012).<br />
C.1.c<br />
Shareholder plaintiffs brought a shareholder derivative suit on behalf of the company<br />
against the company’s directors. Plaintiffs asserted violations of Sections 14(a) and 29(b) of the<br />
Securities Exchange Act of 1934, breach of fiduciary duty, corporate waste, unjust enrichment,<br />
and insider trading, based on the director defendants’ alleged illegal promotion of Botox for offlabel<br />
uses not approved by the FDA. The district court granted defendants’ motion to dismiss for<br />
failure to state a claim with prejudice because plaintiffs had failed to adequately plead demand<br />
futility under the two tests recognized by applicable Delaware law. The district court found that<br />
the director defendants were disinterested because there was no evidence that they would be<br />
subject to a substantial likelihood of liability, and that there was no evidence that the director<br />
defendants would have broken the law or acted in a way that would be an invalid exercise of<br />
business judgment.<br />
Talley v. Mann, No. CV 11-05003, 2012 WL 946990 (C.D. Cal. Feb. 14, 2012).<br />
C.1.c<br />
Plaintiffs filed a shareholder derivative action against a biopharmaceutical company’s<br />
officers and directors alleging that they breached their fiduciary duties to the company by<br />
engaging in a systematic effort to misrepresent facts to the investing public relating to the FDA’s<br />
approval of the company’s lead product candidate. Plaintiffs asserted claims for (i) breach of<br />
fiduciary duty; (ii) breach of fiduciary duty for insider selling and misappropriation of<br />
information; (iii) violations of Cal. Corp. Code § 25402; (iv) violations of Cal. Corp. Code §<br />
25403; and (v) unjust enrichment. Defendants moved to dismiss the complaint, arguing that<br />
plaintiff failed to adequately allege demand futility and state a claim. Plaintiff did not make a<br />
demand on the company prior to filing suit, and argued that a demand would have been futile.<br />
However, the district court found that plaintiff had not adequately pleaded demand futility based<br />
on a control theory or a substantial likelihood of liability theory, and granted defendants’ motion<br />
to dismiss.<br />
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012 U.S. Dist. LEXIS<br />
22065 (C.D. Cal. Feb. 22, 2012).<br />
C.1.c<br />
Shareholder plaintiffs brought a shareholder derivative suit on behalf of the company<br />
against its directors, asserting violations of Sections 14(a) and 29(b) of the Securities Exchange<br />
Act of 1934, breach of fiduciary duty, corporate waste, unjust enrichment, and insider trading.<br />
Defendants moved to dismiss the complaint. The district court granted the motion to dismiss on<br />
85
the grounds that plaintiffs field to establish demand futility. Plaintiffs moved for reconsideration<br />
on the grounds that the district court failed to consider material facts. The district court denied<br />
plaintiffs’ motion for reconsideration, holding that plaintiffs’ motion did not provide any new<br />
facts that call into question the court’s conclusion in its order granting the motion to dismiss.<br />
SEC v. King Chuen Tang, No. C-09-05146 JCS, 2012 WL 10522 (N.D. Cal. Jan. 3, 2012).<br />
C.1.c<br />
The S.E.C. filed a complaint alleging that defendants, a group comprised of trading<br />
partners and their friends and relatives, engaged in extensive insider trading in the securities of a<br />
mattress manufacturer and a computer and data processing services company. Three of the<br />
defendants moved for summary judgment. As to the first defendant (a purported tipper), the<br />
district court granted the motion in part, finding that there was an issue of material fact as to<br />
whether the defendant lied about not tipping another defendant on one occasion, but that the<br />
S.E.C. had not submitted admissible evidence that the defendant had access to insider<br />
information on another occasion. As to the second defendant (a purported tippee), the district<br />
court denied the motion, holding that there was a question of fact as to whether defendants<br />
knowingly traded on insider information. While the S.E.C. offered evidence of telephone calls<br />
and subsequent suspicious trading patterns by defendant, sufficient to support a reasonable<br />
inference of insider trading, defendant argued that the trading was in line with his normal trading<br />
patterns, raising an inherently factual question more appropriately decided by the jury. As to the<br />
third defendant (a purported tippee), the district court denied the motion for summary judgment,<br />
finding that there were questions of fact as to whether he received any inside information and<br />
whether the information he did receive was material.<br />
Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).<br />
C.1.c<br />
Plaintiff brought a class action against a teeth alignment company and an individual for<br />
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as to both<br />
defendants, insider trading violations of Section 10(b) and Rule 10b-5 as to the individual<br />
defendant, and violation of Section 20(a) of the Exchange Act as to both defendants. Defendants<br />
moved to dismiss plaintiff’s second amended complaint under Rule 12(b)(6). The district court<br />
granted defendants’ motion to dismiss. The district court found that the allegations in the second<br />
amended complaint were essentially identical to the allegations in the first amended complaint<br />
and remained insufficient to demonstrate a material misrepresentation or omission, scienter, or<br />
loss causation.<br />
Applestein v. Medivation, Inc., 861 F. Supp. 2d 1030 (N.D. Cal. 2012).<br />
C.1.c<br />
Plaintiffs brought a securities class action against a biopharmaceutical company and its<br />
senior officers, asserting a claim for securities fraud pursuant to Section 10(b) of the Securities<br />
86
Exchange Act of 1934 and Rule 10b-5, and a derivative claim under Section 20(a) of the<br />
Exchange Act. Plaintiffs’ case concerned the clinical testing of a drug used to treat Alzheimer’s<br />
disease. Defendants moved to dismiss plaintiffs’ third amended complaint. The district court<br />
held that the individual defendants’ stock sales of $22 million were insufficient to create a strong<br />
inference of scienter because defendants also lost $82 million in stock value when the phase<br />
three of the drug testing results were released. The court found that while suspicious insider<br />
trading can be indicative of scienter, “[i]nsider trading is suspicious only when it is dramatically<br />
out of line with prior trading practices at times calculated to maximize the personal benefit from<br />
undisclosed inside information.” Accordingly, the court granted defendants’ motion to dismiss<br />
with prejudice, finding that further amendment would be futile. .<br />
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 11 Civ. 4904 JPO, 2012 WL 1868874<br />
(N.D. Cal. May 22, 2012).<br />
C.1.c<br />
Plaintiffs filed a securities class action against a medical device manufacturer and several<br />
of its employees, alleging that defendants misled investors about the company’s financial<br />
prospects knowing that the financial guidance was false and misleading when issued, and that<br />
each individual defendant reaped significant proceeds from insider sales. Plaintiffs assert<br />
violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. Defendants<br />
moved to dismiss plaintiffs’ amended complaint. The district court held that plaintiffs failed to<br />
plead a material misrepresentation or omission. The district court also held that plaintiffs’<br />
allegations did not create a strong inference of scienter. Plaintiffs’ allegations provided no<br />
context by which the court could assess whether the individual defendants’ stock sales were<br />
suspicious. The district court found that although some of the individual defendants may have<br />
profited richly from their stock sales during the class period, the court was unable to determine<br />
what percentage of such defendants’ stock holdings was sold, or whether the sales deviated from<br />
defendants’ stock sale patterns. Because plaintiffs failed to plead a material misrepresentation or<br />
omission and facts supporting an inference of scienter, and because plaintiffs’ failed to correct<br />
deficiencies in their amended complaint, the district court granted defendants’ motion to dismiss<br />
with prejudice.<br />
In re Finisar Corp. Derivative Litig., No. C-06-07660 RMW, 2012 WL 2873844 (N.D. Cal. July<br />
12, 2012).<br />
C.1.c<br />
Plaintiffs brought a derivative suit against a technology company and several of its<br />
current and former directors and officers, asserting that defendants violated federal securities and<br />
state laws by manipulating option grants, making false statements in S.E.C. filings and press<br />
releases, engaging in illegal insider trading, and causing financial and reputational harm to the<br />
company. Although plaintiffs did not identify individual transactions, but instead alleged the<br />
total number of shares sold by each defendant during the relevant time period, the court held that<br />
such allegations were sufficient to state a claim for insider trading under Delaware and California<br />
law because plaintiffs also had sufficiently alleged scienter (i.e., knowledge of backdating) as to<br />
87
four of the five individual defendants accused of engaging in insider trading. Consequently, the<br />
district court granted the motion to dismiss as to one of the individual defendants, but denied the<br />
motion to dismiss as to the remaining four defendants.<br />
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., No. 11-2340-RDR, 2012 WL 3010992<br />
(N.D. Cal. July 23, 2012).<br />
C.1.c<br />
Plaintiffs brought a securities fraud class action against a technology company and three<br />
individual defendants, alleging violations of Section 10(b) of the Securities Exchange Act of<br />
1934 and Rule 10b-5 against all defendants, and violations of Sections 20(a) and 20A of the<br />
Exchange Act against the individual defendants. As evidence of scienter, plaintiffs alleged that<br />
the individual defendants engaged in stock sales that were suspicious, unusual, and inconsistent<br />
with prior sales. The district court held that the allegations concerning the individual defendants’<br />
stock sales during the class period did not support a strong inference of scienter: one individual<br />
defendant had only made one sale of a mere two percent of his total holdings; another made nondiscretionary<br />
sales pursuant to a Rule 10b-5 trading plan made prior to the class period; and<br />
while the third individual defendant may have displayed unusual stock trades, absent<br />
corroborating evidence, such allegations were insufficient to support an inference of scienter.<br />
Finding that plaintiffs failed to plead both a material misrepresentation or omission and scienter,<br />
the district court granted defendants’ motion to dismiss the Section 10(b) claims. Because<br />
plaintiffs failed to plead a primary securities law violation, the district court also concluded that<br />
plaintiffs failed to plead a violation of Sections 20(a) and 20A, and granted defendants’ motion<br />
to dismiss those claims.<br />
Westley v. Oclaro, Inc., ---F.Supp.2d ---, 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012).<br />
C.1.c<br />
Shareholders brought class action against corporation, its board chairman and chief<br />
executive officer, and its chief financial officer, alleging false and misleading statements about<br />
the corporation’s fiscal future, in violation of Section 10(b) of the Securities Exchange Act of<br />
1934 and Rule 10b-5. Defendants moved to dismiss. The district court granted defendants’<br />
motion. With regard to alleged misleading statements about good visibility into customers’<br />
needs made by defendants, plaintiffs asserted that the court should not take into consideration the<br />
lack of insider trading by the individual defendants. However, the court determined that it could<br />
consider the “presence of absence of insider trading” as part of its “holistic approach” in<br />
evaluating scietner. As such, there were insufficient facts to support a strong inference of<br />
scienter.<br />
88
Luciani v. Luciani, No. 10-CV-2583 JM WVG, 2012 WL 4953110 (S.D. Cal. Oct. 17, 2012).<br />
C.1.c<br />
Plaintiffs filed amended complaint, alleging that defendants engaged in California<br />
securities fraud, federal securities fraud, California insider trading, fraud by a fiduciary and<br />
breach of fiduciary duty. Defendants filed a motion for summary judgment on the basis that<br />
plaintiffs failed to establish admissible evidence of damages due to the alleged fraudulent<br />
nondisclosures. The district court denied the motion. It held that the expert opinion submitted<br />
by plaintiffs provided enough evidence to withstand the motion for summary judgment.<br />
Moreover, the district court found that plaintiffs may recover additional damages, beyond out-ofpocket<br />
damages, under the claims alleged.<br />
In re Novatel Wireless Sec. Litig., No. 08CV1689 AJB RBB, 2012 WL 5463214 (S.D. Cal. Nov.<br />
8, 2012).<br />
C.1.c<br />
Plaintiffs filed class action, alleging that defendants engaged in fraudulent scheme to<br />
inflate company’s stock so that defendants could sell their stock for a profit. Defendants filed a<br />
motion to exclude testimony of plaintiff’s expert pertaining to Rule 10b5-1 trading plans,<br />
pursuant to Federal Rules of Evidence (“FRE”) 403, 702, 703 and 704. The district court denied<br />
defendants’ motion to exclude the expert’s testimony pursuant to FRE 403, 702 and 703 because<br />
the expert’s training and experience provided a sufficient basis for his opinions about the trading<br />
plans, and his discussion of the trading plans went to the weight of his testimony, not<br />
admissibility. The district court granted defendants’ motion to exclude the testimony pursuant to<br />
FRE 704 because the expert offered his legal opinions.<br />
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 475653 (D. Nev. Feb. 14, 2012).<br />
C.1.c<br />
The S.E.C. alleged that defendant engaged in insider trading when he gave his codefendant<br />
confidential information regarding the company’s impending negative announcement<br />
about its stock, which his co-defendant relied on in selling the company’s stock. The S.E.C.<br />
asserted that defendants violated Section 10(b) of the Securities Exchange Act of 1934, Rule<br />
10b-5, and Section 17(a) of the Securities Act of 1933 by engaging in insider trading. Defendant<br />
moved the district court to exclude various items of evidence and anticipated arguments. The<br />
district court held the following: (1) evidence that defendant offered tips regarding nonpublic<br />
information concerning the company at any time other than February 26, 2007 was admissible<br />
because the evidence was relevant to establish defendants’ relationship; (2) the S.E.C.’s expert’s<br />
opinion testimony regarding the co-defendant’s rationale for trading was admissible because it<br />
would give the jury much needed context regarding market conditions and dynamics; (3) the<br />
S.E.C.’s expert’s opinion regarding the co-defendant’s trading strategy and experience was<br />
admissible as to relevant market conditions and whether the co-defendant’s explanations<br />
comport with the reality of the market, but not as to whether the explanations are credible; (4) the<br />
89
S.E.C.’s expert’s opinion regarding the co-defendant’s trading was admissible with limiting<br />
instructions to prevent unfair prejudice; (5) evidence or argument relating to the September 2007<br />
phone call between defendants was admissible because it was relevant to show that defendant<br />
was aware of the S.E.C. investigation and improper trading, and that defendants share<br />
information related to the buying and selling of securities; and (6) the admissibility of evidence<br />
or argument relating to pretrial motion practice was tabled for another time.<br />
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 3096646 (D. Nev. July 30, 2012).<br />
C.1.c<br />
The S.E.C. brought a civil enforcement action against defendant, alleging that defendant<br />
engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934,<br />
Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The parties settled all matters in the<br />
case except for the S.E.C.’s motion for a permanent officer and director ban against defendant<br />
pursuant to Sections 20(e) and 21(d)(2) of the Exchange Act. In considering the Patel factors<br />
relevant to determining whether to grant an officer and director ban, the district court found that<br />
(1) defendant’s securities law violation was not egregious, as defendant did not personally gain<br />
any profit from his alleged insider tipping besides sold-out Broadway tickets, for which<br />
defendant paid face value; (2) defendant was not a repeat offender; (3) although defendant was<br />
an executive officer at the time when he traded the insider information, abused his fiduciary<br />
position, and violated his employment agreement and the company’s code of conduct, defendant<br />
did not do so in an effort to defraud investors out of money or otherwise profit at the expense of<br />
shareholders; (4) defendant had a “high degree” of scienter regarding the impropriety of his<br />
conduct; (5) the fact that defendant was able to obtain tickets at face value for a sold-out<br />
Broadway show in exchange for insider information qualified as a pecuniary gain, but the gain<br />
paled in comparison to the monetary benefits gained by other defendants in similar cases; and (6)<br />
there was no evidence that defendant was likely to violate the federal securities laws in the<br />
future. On that basis, the district court held that a permanent officer and director bar was<br />
inappropriate. However, the district court ordered a two year ban in addition to the three years<br />
defendant had already not served as an officer or director, resulting in a total restriction of five<br />
years from the date when the action was first filed.<br />
U.S. v. Ovist, No. 11-CV-00076-BR, 2012 WL 5830296 (D. Or. Nov. 16, 2012).<br />
C.1.c<br />
A grand jury indicted defendant on one count of wire fraud for defendant’s alleged<br />
preparation of fraudulent residential loan applications. Defendant was subsequently charged in a<br />
superseding indictment on three counts of bank fraud and 12 counts of wire fraud. As<br />
background to those charges, the Federal Housing Finance Agency (“FHFA”) filed civil actions<br />
against various financial institutions, alleging that those institutions sold faulty subprime<br />
mortgage-backed securities. Further, the S.E.C. filed a civil action against three senior<br />
executives of Countrywide Financial Corporation alleging fraud and insider trading related to<br />
alleged fraudulent statements made during the loan securitization process, allegations which<br />
resulted in a stipulated settlement without admission of liability. Also, the Board of Governors<br />
90
of the Federal Reserve (“Federal Reserve Board”) entered a cease and desist order and<br />
assessment of civil penalties pertaining to violations by Wells Fargo & Company and Wells<br />
Fargo Financial, Inc. of federal and state rules applicable to home mortgage lending. Defendant<br />
alleged that in the present criminal case, the allegations of FHFA, S.E.C. and Federal Reserve<br />
should be precluded from evidence because the filings were not “statements” within the meaning<br />
of Federal Rule of Evidence (“FRE”) 801 and were irrelevant. The district court concluded that<br />
the allegations were not “admissions by a party opponent” under FRE 801(d)(2) because the<br />
FHFA, S.E.C. and Federal Reserve Board were not the same party as the government for<br />
purposes of the instant action. Further, the allegations were not relevant to defendant’s<br />
misrepresentations. The district court also denied defendant’s motion to dismiss certain counts<br />
of the superseding indictment, and denied as moot the government’s motion in limine to preclude<br />
evidence of the financial institution’s fault.<br />
Prissert v. Emcore Corp., --- F.Supp.2d ---, 2012 WL 4504512 (D.N.M. Sept. 28, 2012).<br />
C.1.c<br />
Shareholders brought derivative class action against corporation and certain officers and<br />
directors, alleging securities fraud and “control person” liability. Defendants moved to dismiss<br />
the complaint, and the district court granted defendants’ motion. With respect to the securities<br />
fraud claim, plaintiffs alleged that one of the individual defendants engaged in insider trading<br />
during the class period. The district court rejected that argument because plaintiffs failed to<br />
establish “any meaningful trading history” to support the alleged suspicious nature of the<br />
transactions, and therefore, failed to create an inference of scienter.<br />
In re Thornburg Mortg., Inc., --- F.Supp.2d ---, 2012 WL 6004176 (D.N.M. Nov. 26, 2012).<br />
C.1.c<br />
Investors brought consolidated class action, alleging that corporation, officers, directors<br />
and underwriters made false or misleading statements in their offering documents, in violation of<br />
the Securities Act of 1933 and the Securities Exchange Act of 1934. Investors moved for final<br />
approval of the proposed settlement, plan of allocation, and certification of class for settlement,<br />
and counsel sought award of attorneys’ fees and costs. In a prior memorandum opinion and<br />
order on plaintiff’s motion for reconsideration, the court found that the “abstain-or-disclose rule”<br />
applied in insider trading cases, but not to plaintiffs’ claims under the Securities Act.<br />
Kinnett v. Strayer Educ., Inc., No. 10-CV-2317-T-23MAP, 2012 WL 933285 (M.D. Fla. Jan. 3,<br />
2012).<br />
C.1.c<br />
Plaintiff brought a securities fraud class action individually and on behalf of a class of<br />
purchasers of for-profit school defendant’s common stock, alleging that defendants violated<br />
Sections 10(b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5. Defendants<br />
moved to dismiss the complaint arguing that plaintiff failed to state a claim for securities fraud<br />
91
and failed to satisfy the heightened pleading requirements of Rule 9(b) and the PSLRA. The<br />
district court granted defendants’ motion to dismiss in part because the requisite scienter could<br />
not be inferred from the fact that the individual defendants had sold shares after press releases<br />
announcing strong enrollment numbers, as plaintiff did not demonstrate that any inside<br />
information existed.<br />
Howard v. Nano, No. 11 CV 366 MCR CJK, 2012 WL 3668045 (N.D. Fla. Aug. 25, 2012).<br />
C.1.c<br />
Plaintiff alleged that he and defendant were members of the board of directors for a<br />
company, whereby defendant sent email communications to other board members and the<br />
S.E.C., making false claims that plaintiff engaged in insider trading. The lower court dismissed<br />
the cause of action for libel per se because plaintiff failed to establish personal jurisdiction.<br />
Plaintiff filed a motion for relief from judgment or to alter and amend the judgment. The district<br />
court denied the motion on the grounds that plaintiff did not demonstrate “manifest error of fact<br />
or law” to necessitate reconsideration of the personal jurisdiction issue because the email<br />
communications were not sent to or accessed in Florida.<br />
SEC v. Li, Release No. 3379, <strong>Litigation</strong> Release No. 22324, 2012 WL 1894168 (Apr. 9, 2012).<br />
C.1.c<br />
An Arizona federal court entered final judgment against former chief executive officer<br />
and director (“CEO”) of corporation. The court ordered the CEO to pay disgorgement plus<br />
prejudgment interest, an insider trading penalty and a civil penalty. The court also imposed an<br />
officer and director bar against the CEO. The S.E.C. previously obtained a permanent injunction<br />
against the CEO prohibiting him from future violations of the securities laws. The S.E.C. also<br />
previously revoked the registration of each class of the corporation’s securities registered under<br />
the Securities and Exchange Act of 1934.<br />
In re H. Clayton Peterson, Release No. 3391, Release No. 67282, Release No. 34-67282,<br />
Release No. AE-3391, 2012 WL 2411469 (June 27, 2012).<br />
C.1.c<br />
The S.E.C. issued an order of suspension of Clayton Peterson. Peterson was convicted of<br />
securities fraud and conspiracy to commit securities fraud for tipping his son with insider<br />
information regarding an impending acquisition. The S.E.C. found that Peterson had been<br />
convicted of a felony pursuant to Rule 102(e)(2) of the S.E.C.’s Rules of Practice. Accordingly,<br />
the S.E.C. suspended Peterson from appearing or practicing before the S.E.C.<br />
92
C.1.c<br />
In re John Jantzen, Release No. 472, 2012 WL 5422022 (Nov. 6, 2012).<br />
In the civil action brought by the S.E.C. against defendant and his wife, the District Court<br />
for the Western District of Texas entered a final judgment permanently enjoining defendant and<br />
his wife from violating federal securities laws and ordering disgorgement in the total amount of<br />
$29,374.20 and imposed civil monetary penalties of $26,920.50 each on defendant and his wife.<br />
Subsequently, the S.E.C. issued an order instituting administrative proceedings pursuant to<br />
Section 15(b) of the Securities Exchange Act of 1934. The Division of Enforcement and<br />
defendant filed motions for summary disposition. To determine whether a an associational bar<br />
was warranted, the administrative law judge (“ALJ”) analyzed the well-established public<br />
interest factors listed in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979). Although the<br />
Division requested a permanent associational bar, the ALJ found that defendant had made a<br />
persuasive showing with respect to some of the Steadman factors. Consequently, the ALJ<br />
granted the Division’s motion for summary disposition; denied defendant’s motion for summary<br />
disposition; and barred defendant from associating with a broker, dealer, investment adviser,<br />
municipal securities dealer, transfer agent, or nationally recognized statistical rating organization<br />
for five years.<br />
In re Jilaine H. Bauer, Esq., Release No. 68214, 2012 WL 5493356 (Nov. 13, 2012).<br />
C.1.c<br />
The S.E.C. had issued an order instituting proceedings against defendant, which<br />
temporarily suspended defendant, an attorney, from appearing or practicing before the S.E.C.<br />
based on the findings of the Eastern District of Wisconsin that defendant violated federal<br />
securities laws by engaging in insider trading. Defendant filed a petition requesting that her<br />
temporary suspension be lifted. The S.E.C. found that continuing defendant’s temporary<br />
suspension served the public interest and protected the SEC’s processes because as a licensed<br />
attorney who continued to work in the securities field as a compliance consultant, defendant was<br />
in a position to harm the S.E.C.’s processes if the temporary suspension was lifted and defendant<br />
was permitted to practice before the S.E.C. Accordingly, the S.E.C. denied defendant’s petition<br />
and ordered that the proceeding be set down for a public hearing before an administrative law<br />
judge.<br />
SEC v. Treadway, <strong>Litigation</strong> Release No. 22251, 2012 SEC LEXIS 433 (Feb. 3, 2012).<br />
C.1.c<br />
A New York federal court entered a final judgment against defendant, an attorney, for<br />
insider trading. The judgment enjoined defendant from violation Sections 10(b) and 14(e) of the<br />
Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3. It also orders defendant to pay<br />
full disgorgement of ill-gotten gains plus prejudgment interest and a civil penalty. The S.E.C.<br />
also issued an administrative order suspending defendant from appearing or practicing before the<br />
S.E.C. as an attorney.<br />
93
SEC v. CytoCore, Inc., <strong>Litigation</strong> Release No. 22260, 2012 SEC LEXIS 537 (Feb. 16, 2012).<br />
C.1.c<br />
An Illinois federal court entered a default judgment against defendant Daniel J. Burns, in<br />
an action filed by the S.E.C. The S.E.C. alleged that Burns, former chairman of the board of<br />
directors of CytoCore, Inc., engaged in insider trading and other illegal acts. The court’s final<br />
judgment enjoined Burns from violations of the Securities and Exchange Acts of 1934 and<br />
Securities Act of 1933, and the rules promulgated thereunder, ordered him to pay disgorgement<br />
plus prejudgment interest, and permanently barred him from acting as an officer or director of a<br />
public company.<br />
SEC v. Woodruff, <strong>Litigation</strong> Release No. 22271, 2012 SEC LEXIS 664 (Feb. 28, 2012).<br />
C.1.c<br />
A Colorado federal court entered final judgment in a civil action against defendant.<br />
Defendant, without admitting or denying the S.E.C.’s allegations, consented to the entry of a<br />
final judgment that enjoined him from violations of the Security and Exchange Act of 1933 and<br />
the Securities Act of 1933, and the rules promulgated thereunder, ordered him to pay<br />
disgorgement plus prejudgment interest, and imposed a civil penalty. In addition, the judgment<br />
barred defendant from acting as an officer or director of a public company for a period of five<br />
years.<br />
SEC v. Jantzen, <strong>Litigation</strong> Release No. 22273, 12012 SEC LEXIS 693 (Mar. 1, 2012).<br />
C.1.c<br />
A Texas federal court entered summary judgment against defendants, husband and wife,<br />
for insider trading in violation of the Securities and Exchange Act of 1934. The S.E.C.’s<br />
complaint alleged that the wife, a former assistant to an executive at Dell, learned through an<br />
internal Dell email, material nonpublic information and thereafter tipped her husband to the<br />
inside information. The husband then used this information to illegally profit from trading<br />
securities. The court enjoined the defendants from future violations of the Exchange Act and<br />
ordered them to pay disgorgement plus prejudgment interest. The court deferred final ruling on<br />
the S.E.C.’s request for monetary penalties, pending submission of further briefing by the parties.<br />
SEC v. Keung, <strong>Litigation</strong> Release No. 22284, 2012 WL 1894130 (Mar. 12, 2012).<br />
C.1.c<br />
A New York federal court entered final judgment against defendant in an insider trading<br />
action involving tipping and trading prior to an announcement of an acquisition. The final<br />
judgment permanently enjoined her from violating Section 10(b) of the Securities and Exchange<br />
Act of 1934 and Rule 10b-5 and ordered her to pay a civil penalty. Defendant consented to the<br />
94
final judgment, without admitting or denying the allegations against her in the complaint.<br />
Defendant also agreed to the issuance of an administrative order barring her from association<br />
with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer<br />
agent, or nationally recognized statistical rating organization and barring her from participating<br />
in the offering of a penny stock, with right to reapply for both after ten years.<br />
SEC v. Acord, <strong>Litigation</strong> Release No. 22282A, 2012 WL 1894129 (Mar. 12, 2012).<br />
C.1.c<br />
After a two-week trial, a jury found defendant liable for insider of corporate securities<br />
before an announcement of corporate acquisition in violation of Section 10(b) of the Securities<br />
and Exchange Act of 1934 and Rule 10b-5. The jury found another defendant not liable for the<br />
same charge. The guilty defendant was ordered to pay disgorgement plus prejudgment interest<br />
and a civil penalty. Additionally, on December 22 and December 23, 2010, a Florida federal<br />
court entered final judgment of permanent injunctions by consent, against 3 defendants,<br />
including guilty defendant, enjoining those defendants from violations of Section 10(b) and Rule<br />
10b-5. The court ordered defendants to pay disgorgement plus prejudgment interest and a civil<br />
penalty.<br />
SEC v. Hardin, <strong>Litigation</strong> Release No. 22297, 2012 WL 1894142 (Mar. 19, 2012).<br />
C.1.c<br />
A New York federal court entered final judgment against company in an insider trading<br />
case. The S.E.C. alleged that a former managing director at company engaged in insider trading<br />
on behalf of company hedge fund prior to an announcement of an acquisition. Company agreed<br />
to a final judgment ordering it to disgorge illicit trading profits plus prejudgment interest.<br />
SEC v. Cutillo, <strong>Litigation</strong> Release No. 2299, 2012 WL 189144 (Mar. 20, 2012).<br />
C.1.c<br />
A New York federal court entered final judgment against defendant. The S.E.C. charged<br />
defendant Michael Kimelman, a securities trader, with trading on inside information regarding an<br />
announced acquisition. Defendant Kimelman consented to the entry of final judgment which<br />
permanently enjoined him from violations of 10(b) of the Securities and Exchange Act of 1934<br />
and Rule 10b-5, and ordered him to pay disgorgement plus prejudgment interest. In a related<br />
S.E.C. administrative proceeding, defendant Kimelman consented to entry of an S.E.C. order<br />
barring him from association with any broker or dealer, investment advisor, municipal securities<br />
dealer or transfer agent, and barring him from participating in any offering of a penny stock.<br />
Additionally, in a related criminal case, defendant Kimelman was found guilty of securities fraud<br />
and conspiracy to commit securities fraud.<br />
95
C.1.c<br />
SEC v. Longoria, <strong>Litigation</strong> Release No. 22308, 2012 WL 189153 (Mar. 27, 2012).<br />
A New York federal court entered final judgment on consent as to defendant in the<br />
S.E.C.’s insider trading case. The S.E.C. alleged that defendant was a consultant who passed<br />
material nonpublic information about certain companies to other persons. The other persons then<br />
made illegal profits by trading on that information. The final judgment permanently enjoined<br />
defendant from violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule<br />
10b-5. The S.E.C. separately recovered illegal trading profits from defendant’s tippees. In a<br />
parallel criminal action against defendant, she was ordered to pay more than $3 million in<br />
forfeiture and was sentenced to a 48-month term of imprisonment.<br />
SEC v. Adondakis, <strong>Litigation</strong> Release No. 22325, 2012 WL 1894169 (Apr. 10, 2012).<br />
C.1.c<br />
A New York federal court entered final judgment on consent as to Diamondback Capital<br />
Management LLC (“Diamondback”) in the S.E.C.’s insider trading case. The final judgment<br />
against Diamondback permanently enjoined the firm from violations of the Securities and<br />
Exchange Act of 1934, Rule 10b-5, and the Securities Act of 1933. It further ordered<br />
Diamondback to pay disgorgement plus pre-judgment interest, and ordered Diamondback to pay<br />
a civil penalty.<br />
SEC v. Longoria, <strong>Litigation</strong> Release No. 22358, 2012 WL 1894201 (May 8, 2012).<br />
C.1.c<br />
A New York federal court entered a final judgment on consent as to Fleishman in the<br />
S.E.C.’s insider trading case. The case alleged insider trading by ten individuals and one<br />
investment advisor entity, for illegally tipping hedge funds and other investors, as well as<br />
illegally trading on material nonpublic information. The S.E.C. alleged that Fleishman, as vice<br />
president of sales of the so-called “expert network” firm, facilitated the transfer of material<br />
nonpublic information to firm consultants and clients. The final judgment permanently enjoined<br />
Fleishman from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule<br />
10b-5, and ordered disgorgement of ill-received profits in the amount of $49,510.00. In a<br />
parallel criminal action, Fleishman was sentenced to 30-month term of imprisonment. Because<br />
he is currently serving his prison term, the S.E.C. did not seek civil penalty in its final judgment.<br />
Fleishman also consented to the entry of an order by the S.E.C. to institute proceedings under<br />
Section 15(b) of the Exchange Act, barring Fleishman from association with any investment<br />
adviser, broker, dealer, municipal advisor, transfer agent, or nationally recognized statistical<br />
rating organization, and from participating in any offering of a penny stock.<br />
96
C.1.c<br />
SEC v. Khan, <strong>Litigation</strong> Release No. 22364, 2012 WL 1894207 (May 10, 2012).<br />
A Georgia federal court entered a consent order, requiring defendant Georgia-based<br />
doctor, to pay more than double the amount of profits obtained through alleged insider trading of<br />
pharmaceutical company stock. The doctor received material nonpublic information of a tender<br />
offer by a Japanese company to purchase all of the company’s shares. Thereafter, he opened an<br />
online brokerage account to transfer approximately one-third of his liquid net worth, and<br />
purchased shares of the company stock before the public announcement of acquisition. The<br />
doctor sold all of his shares of the stock following the announcement for the profit of $47,171.<br />
The doctor was ordered to pay a total of $100,857.79, representing disgorgement, prejudgment<br />
interest and a civil penalty. The doctor also consented to permanent injunctions against<br />
violations of Section 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5<br />
and 14e-3.<br />
SEC v. Compania Int’l Financiera S.A., et al., <strong>Litigation</strong> Release No. 22378, 2012 WL 1943783<br />
(May 29, 2012).<br />
C.1.c<br />
A New York federal court granted the S.E.C.’s motion to dismiss without prejudice its<br />
complaint against defendants in a civil action alleging insider trading. The complaint alleged<br />
that defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and<br />
Rules 10b-5 and 14e-3, by trading prior to a public announcement regarding an acquisition<br />
through tender offer. The motion sought to dismiss two of the three defendants, without<br />
prejudice, because the S.E.C. was unable to obtain critical information during the discovery<br />
period. The federal court granted the motion in the “interest of justice.”<br />
SEC v. Peterson, <strong>Litigation</strong> Release No. 22404, 2012 WL 2457467 (June 28, 2012).<br />
C.1.c<br />
A New York federal court entered final judgment on consent as to H. Clayton Peterson<br />
and his direct and indirect tippees. The S.E.C. alleged that H. Clayton Peterson, former director<br />
of company learned through confidential board meetings that company was about to be acquired<br />
by another corporation. H. Clayton Peterson tipped his son about the acquisition. The son used<br />
this material nonpublic information to trade company securities for his own accounts, his family<br />
members, his investment club and investment clients, and to tip certain friends. One of these<br />
friends used the material nonpublic information to trade shares from his own account, for his<br />
family members and for hedge funds managed by the friends’ registered investment advisory<br />
firm. The final judgments entered permanently enjoined each defendant from violations of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Additionally H. Clayton<br />
Peterson and his son were ordered to pay disgorgement of the illegal profits generated by the<br />
son’s trading and the trading of his tippees, as well as prejudgment interest. Similarly, the friend<br />
and investment advisory firm were ordered to pay disgorgement of the illicit profits gained. The<br />
97
final judgment also barred H. Clayton Peterson from serving as an officer or director of any<br />
public company. Additionally, the S.E.C. issued an order in a related administrative proceeding<br />
suspending H. Clayton Peterson from appearing or practicing before the SEC as an accountant.<br />
Moreover, the S.E.C. issued an administrative order barring the son and friend from association<br />
with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor,<br />
transfer agent, or nationally recognized statistical rating organization.<br />
SEC v. Dunn, <strong>Litigation</strong> Release No. 22439, 2012 WL 3224452 (Aug. 8, 2012).<br />
C.1.c<br />
A Nevada federal court barred former executive at Shuffle Master, Inc. from serving as<br />
an officer or director of a public company for five years. The order was based on a 2009<br />
complaint file by the S.E.C. against executive and another individual for insider trading. The<br />
S.E.C.’s complaint alleged that the executive shared material, nonpublic information about<br />
Shuffle Master’s financial condition with another individual, who then used this information to<br />
illegally profit from trading Shuffle Master stock. The S.E.C.’s lawsuit had been previously<br />
settled as to all issues except the officer and director bar issues. The order found that the<br />
executive abused his fiduciary position, and violated his employment agreement and the<br />
company’s code of conduct, by sharing confidential information. The court further found that<br />
the executive was aware that sharing information was improper but chose to ignore company<br />
policy when he divulged the confidential information.<br />
SEC v. Clay Cap. Mgmt., <strong>Litigation</strong> Release No. 22464, 2012 WL 3801333 (Aug. 31, 2012).<br />
C.1.c<br />
The S.E.C. brought an enforcement action against a New Jersey hedge fund and its<br />
former chief investment officer (“CIO”) for their roles in an insider trading scheme. The S.E.C.<br />
alleged that the former CIO’s brother-in-law and his close friend each tipped confidential<br />
information to the former CIO, who in turn traded on the basis of such non-public information.<br />
The hedge fund and former CIO agreed to have judgment entered against them on consent,<br />
without admitting or denying the S.E.C.’s allegations, and further agreed to disgorge $2 million,<br />
a reduced amount based on the financial conditions of the hedge fund and former CIO.<br />
SEC v. LoBue, <strong>Litigation</strong> Release No. 22519, 2012 WL 5267548 (Oct. 25, 2012).<br />
C.1.c<br />
The S.E.C. filed an insider trading civil action against defendant, a former director of<br />
store operations at a clothing store, alleging that defendant used material, nonpublic information<br />
about sales and expenses of the company’s stores to purchase the company’s common stock in<br />
advance of earnings announcements. Without admitting or denying the allegations in the<br />
complaint, defendant consented to the entry of a proposed final judgment permanently enjoining<br />
him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5;<br />
98
ordering defendant to pay disgorgement of $60,735.60 plus prejudgment interest of $6,749.33;<br />
and imposing a civil penalty of $60,735.60.<br />
SEC v. Flanagan, <strong>Litigation</strong> Release No. 22524, 2012 WL 5360953 (Oct. 31, 2012).<br />
C.1.c<br />
In August 2012, defendant, a certified public accountant and former partner at a major<br />
accounting firm, pleaded guilty to one count of criminal securities fraud for engaging in insider<br />
trading after he obtained material, nonpublic information about several of the firm’s clients. On<br />
October 26, 2012, the United States District Court for the Northern District of Illinois sentenced<br />
defendant to twenty-one months of incarceration followed by supervised release of twelve<br />
months and ordered defendant to pay a $100,000 penalty. The criminal charges arose out of the<br />
same facts that were the subject of a civil action and related administrative and cease-and-desist<br />
proceedings, in which the SEC had alleged that defendant violated Sections 10(b) and 14(e) of<br />
the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The administrative action had<br />
found that defendant violated the S.E.C.’s auditor independence rules on seventy-one occasions<br />
by trading in the securities of nine of the firm’s audit clients. Without admitting or denying the<br />
S.E.C.’s allegations and the findings in the administrative order, defendant had consented to the<br />
entry of an order of permanent injunction, to pay disgorgement with prejudgment interest and<br />
civil penalties, and to a denial of the privilege of appearing or practicing before the S.E.C. as an<br />
accountant.<br />
SEC v. Gupta and Rajaratnam, <strong>Litigation</strong> Release No. 22582, 2012 WL 6726432 (Dec. 27,<br />
2012).<br />
C.1.c<br />
A New York federal court entered a final judgment, on consent, ordering defendant<br />
Rajaratnam to disgorge his share of profits gained and losses avoided as a result of insider<br />
trading, plus prejudgment interest on that amount. Pursuant to the final judgment, defendant<br />
Rajaratnam must pay $1,299,120 in disgorgement and $147,738 in prejudgment interest, for a<br />
total of $1,446,858.<br />
In re Kimelman, 94 A.D.3d 148 (N.Y. App. Div. 2d Dep’t 2012).<br />
C.1.c<br />
The Grievance Committee for the Ninth Judicial District moved to strike an attorney’s<br />
name from the roll of attorneys based upon the attorney’s felony conviction. The attorney, one<br />
of several conspirators who engaged in an insider trading scheme utilizing nonpublic information<br />
provided by certain of the conspirators, was found guilty upon a jury verdict for securities fraud<br />
and conspiracy to commit securities fraud. The New York Appellate Division found automatic<br />
disbarment based on the attorney’s felony conviction and granted the motion to strike the<br />
attorney’s name from the roll of attorneys to reflect the attorney’s disbarment.<br />
99
C.1.c<br />
In re Goldfarb, 96 A.D.3d 12 (N.Y. App. Div. 2d Dep’t 2012).<br />
The Grievance Committee for the Second, Eleventh, and Thirteenth Judicial Districts<br />
moved to strike an attorney’s name from the roll of attorneys, on the theory that the attorney was<br />
automatically disbarred based on his felony conviction. The attorney had engaged in insider<br />
trading by passing material nonpublic information from other attorneys and their clients to a<br />
securities trader who made stock purchases on the basis of such information. The attorney<br />
pleaded guilty to securities fraud and conspiracy to commit securities fraud. He admitted that he<br />
participated in the scheme, knew that the other attorneys involved were likely breaching a<br />
fiduciary duty, and that what he was doing was wrong and illegal. The New York Appellate<br />
division found automatic disbarment based on the attorney’s felony conviction and granted the<br />
motion to strike the attorney’s name from the roll of attorneys to reflect the attorney’s<br />
disbarment.<br />
Steinhardt v. Howard-Anderson, No. C. A. 5878-VCL, 2012 WL 29340 (Del. Ch. Jan. 6, 2012).<br />
C.1.c<br />
Plaintiffs filed a lawsuit on behalf of a class of stockholders of a company alleging that<br />
the company’s directors breached their fiduciary duties in approving a merger at an unfair price.<br />
Defendants moved for sanctions against some of the plaintiffs for trading shares of the<br />
company’s stock on the basis of confidential information obtained in the litigation. The<br />
confidentiality order governing the case prohibited parties and non-parties who receive<br />
confidential discovery material from purchasing, selling, or otherwise trading in the securities of<br />
any company on the basis of such confidential information. After the confidentiality order was<br />
in place and defendants had almost completed their document production, one named plaintiff<br />
and the funds he managed (also named plaintiffs) began short selling the stock of the acquisitive<br />
company. At the time the plaintiff and his funds decided to sell, the plaintiff had been receiving<br />
regular written and oral updates about the litigation from another named plaintiff, whose insights<br />
were based on discussions with plaintiffs’ counsel and the discovery record. The court held that<br />
trading by representative plaintiff-fiduciaries on the basis of nonpublic information obtained<br />
through discovery undermines the integrity of the representative litigation process. Thus, by<br />
trading on nonpublic information obtained through litigation, the named plaintiff and his funds<br />
had breached their fiduciary obligations as representative plaintiffs and violated the<br />
confidentiality order. As a remedy for their improper trading, the court (i) dismissed the named<br />
plaintiff and his funds from the case with prejudice and barred them from receiving any recovery<br />
from the litigation, (ii) required them to self-report to the S.E.C., (iii) directed them to disclose<br />
their improper trading in any future application to serve as lead plaintiff, and (iv) ordered them to<br />
disgorge their trading profits.”<br />
100
C.1.c<br />
Cole v. Patricia A. Meyer & Assoc., APC, 206 Cal. App. 4th 1095 (Cal. App. 2012).<br />
Plaintiff brought malicious prosecution and defamation action against attorneys of record<br />
for the plaintiffs in a prior shareholder action against plaintiff and other directors of a software<br />
company that declared bankruptcy after engaging in accounting fraud. The trial court granted<br />
the anti-SLAPP motions as to some defendants and denied it as to other defendants. The parties<br />
appealed. On appeal, the California Court of Appeals reversed the trial court’s order granting the<br />
anti-SLAPP motion as to some defendants and affirmed the order denying the anti-SLAPP<br />
motion as to the other defendants, finding that plaintiff had shown the requisite likelihood of<br />
prevailing on his malicious prosecution claims against all defendants. There was no probable<br />
cause that plaintiff’s trading patterns and overall trading history were suspicious or that plaintiff<br />
maximized his personal benefit from any undisclosed information, which would evince that<br />
plaintiff had engaged in insider trading.<br />
d. Misrepresentations/Omissions<br />
Automotive Indus. Pension Trust Fund v. Textron, Inc., 682 F.3d 34 (1 st Cir. 2012).<br />
C.1.d<br />
The court granted defendants’ motion to dismiss because the complaint failed to<br />
adequately allege scienter, as required for securities fraud claims under Section 10(b); nothing in<br />
complaint suggested that any named officer believed, or was recklessly unaware, that the<br />
backlog of orders’ significance had been undermined by weakened underwriting standards, sales<br />
to intermediates, or any other flaws on which investors relied.<br />
In re Smith & Wesson Holding Corp. Sec. Litig. 669 F.3d 68 (1 st Cir. 2012).<br />
C.1.d<br />
The court affirmed the grant of summary judgment to defendants on the basis that there<br />
was no material omission or misrepresentation sufficient to support a claim that defendants had<br />
violated Section 10(b) or Rule 10b-5 when, once the downward trend in sales became clear, the<br />
company explicitly acknowledged that its forecasts had been undermined and it offered<br />
preliminary negative figures well before the final numbers were in hand, attributing the decline<br />
to a combination of factors that emerged late in the quarter. The court stated that “whether or not<br />
it was negligent to have remained too sanguine in early September, there is no evidence of<br />
anything close to fraud.”<br />
101
C.1.d<br />
Filing v. Phipps, No. 11–4157, 2012 WL 5200375 (6 th Cir. Oct. 23, 2012).<br />
Plaintiff alleged violation by defendant of Section 10(b) and Rule 10b-5 in relation to<br />
failure to disclose discussions with competitor regarding purchase of corporation. The court<br />
affirmed the grant of summary judgment to the defendant, holding that preliminary discussions<br />
that did not result in an acquisition were not material, and not every business negotiation gives<br />
rise to a legal obligation to disclose.<br />
Nolfi v. Ohio Kentucky Oil Corp., 675 F.3d 538 (6 th Cir. 2012).<br />
C.1.d<br />
The court affirmed a jury verdict against defendant on basis that investor justifiably relied<br />
on misrepresentations by corporation and its officers regarding purchase of what was proposed to<br />
be a 50% share in numerous oil wells despite non-reliance clauses in contract, where investor<br />
had been of frail health and mind, he had trusted officer as friend, neither investor nor his<br />
associates had information regarding corporation’s business model, there was fiduciary<br />
relationship under Ohio law, and officer had initiated most of transactions by approaching<br />
investor and giving him little time to make a decision.<br />
S.E.C. v. Delphi Corp., No. 11–2624, 2012 WL 6600324 (6 th Cir. Dec. 18, 2012).<br />
C.1.d<br />
The court affirmed jury verdict holding chief accounting officer liable for violations of<br />
Section 10(b) and Rule 10b-5 because, with respect to the four transactions at issue, the jury<br />
could have reasonably concluded that the defendant demonstrated a pattern of shielding himself<br />
from the true facts of the transactions by over-reliance on information provided by subordinates<br />
and/or by elevating the form of the transaction over the substance. Therefore, there was<br />
sufficient evidence to support jury’s determination that the defendant acted with scienter as to<br />
the reporting of the transactions.<br />
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9 th Cir. 2012).<br />
C.1.d<br />
The court held that the failure of corporation’s principal to disclose to a then-potential<br />
investor that he was civil defendant in securities fraud case, which involved completely different<br />
company that was unrelated to corporation in which investment was sought except by principal’s<br />
association, and which was unconnected to investment, was not material omission providing<br />
basis for investor’s securities fraud claim.<br />
102
C.1.d<br />
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ----, 2012 WL 66343 (9 th Cir. 2012).<br />
Investors adequately pleaded scienter, under PSLRA, for corporation, chief executive<br />
officer (CEO), and former chief financial officer (CFO), as required to support securities fraud<br />
claims under Section 10(b) and Rule 10b–5; investors’ allegations, viewed holistically, gave rise<br />
to strong inference that corporation, CEO, and CFO were deliberately reckless to truth or falsity<br />
of their statements regarding corporation’s financial results, particularly gross margin<br />
percentages, and inference was cogent and equally as compelling as competing inference that<br />
they were simply overwhelmed with integration following merger. CEO and CFO were handson<br />
managers regarding operational details and financial statements and would have been aware<br />
of merger complications, they received accurate reports that gross margins and earnings were<br />
short of projections, and in response they directed baseless adjustments to financial statements,<br />
failed to further inquire once projections were met, and encouraged employees to engage in<br />
“aggressive” accounting to ensure hitting other financial targets.<br />
S.E.C. v. Smart, 678 F.3d 850 (10 th Cir. 2012).<br />
103<br />
C.1.d<br />
The court affirmed the summary judgment entered against defendant on the basis that he<br />
misrepresented or omitted material facts in connection with offer, sale, or purchase of securities,<br />
and did so with scienter in violation of Section 10(b) and Rule 10b-5, where defendant told<br />
investors that their money would be placed in secure investment vehicles like mutual funds, but<br />
then pooled money into one account and used it to engage in risky financial ventures, make<br />
partial payments to other investors, and cover his and his wife’s personal expenses, and also<br />
ignored investors’ inquiries about status of their funds and provided false accountings.<br />
S.E.C. v. Morgan Keegan & Co., Inc., 678 F.3d 1233 (11 th Cir. 2012).<br />
C.1.d<br />
The court held that for purposes of the materiality element of securities fraud in a SEC<br />
civil enforcement action under Section 10(b) or Rule 10b–5, a misstatement or omission by an<br />
individual broker to an individual investor, as opposed to the public as a whole, may be included<br />
in the analysis of the total mix of information available to the hypothetical reasonable investor.<br />
C.1.d<br />
Embraceable You Designs, Inc. v. First Fidelity Group, Ltd., No. 09–cv–03271, 2012 WL<br />
6012852 (C.D. Cal. Dec. 3, 2012).<br />
The court granted plaintiff summary judgment on Section 10(b) and Rule 10b-5 claims,<br />
holding there was no genuine issue of fact that there were a number of misstatements or<br />
omissions of material facts during the offer and sale of bonds to plaintiff, including an assurance<br />
that plaintiff could redeem the bonds prior to maturity, as well as failure to inform the plaintiff
that defendants were prohibited from offering or selling securities in California, the bonds were<br />
worthless, and one of the defendants had been convicted of aiding and abetting wire fraud and<br />
money laundering.<br />
S.E.C. v. Wilde, No. SACV 11–0315, 2012 WL 6621747 (C.D. Cal. Dec. 17, 2012).<br />
C.1.d<br />
The court granted plaintiff summary judgment on claims that defendants misrepresented<br />
and omitted material facts in connection with the offering and sale of a “prime bank” or “high<br />
yield” investment scheme. The plaintiff presented a comprehensive and largely undisputed set of<br />
documents, declarations, depositions, and admissions showing that there was no genuine issue of<br />
material fact regarding defendants’ violation of federal securities laws and liability for the illgotten<br />
gains obtained through their illegal conduct.<br />
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).<br />
C.1.d<br />
Shareholders failed to allege sufficient facts to show that corporation and its officers and<br />
directors, underwriters, and majority shareholder omitted facts from prospectus that were<br />
necessary to make challenged statements not misleading, as required to state a claim for violation<br />
of Securities Act sections imposing civil liability for misrepresentations in registration<br />
statements and prospectuses, where, despite corporation’s delays in integrating rival company it<br />
acquired, statement that it had already begun to realize synergies from the acquisition was<br />
literally true, integration delays were not inconsistent with the statement, and defendants did<br />
disclose pricing pressures in the prospectus.<br />
C.1.d<br />
Chipman v. Aspenbio Pharma, Inc., No. 11–CV–00163, 2012 WL 4069353 (D. Colo. Sept. 17,<br />
2012).<br />
Motion to dismiss Section 10(b) and Rule 10b-5 claims granted when alleged omitted<br />
information was publicly available and there was no authority that would require a company to<br />
reveal unfavorable, intermediate rulings of a court in a case that did not involve the company<br />
itself.<br />
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F.Supp.2d 249 (D. Conn. 2012).<br />
C.1.d<br />
In denying motion to dismiss, court held that defendant finance company had duty to<br />
disclose, under the Securities Exchange Act of 1934, material information that it was not<br />
conducting initial due diligence of company seeking loan and that it was not appropriately<br />
104
monitoring the loans, contrary to representations the company made in communications to<br />
investors.<br />
Phelps v. Stomber, 883 F. Supp. 2d 188 (D.D.C. 2012).<br />
Wu v. Stomber, 883 F. Supp. 2d 233 (D.D.C. 2012).<br />
C.1.d<br />
Offering to investors in a company which bought residential mortgage-backed securities<br />
on margin was not rendered materially false and misleading, for purposes of Section 10(b) and<br />
Rule 10b–5, by an alleged failure to adequately disclose an increase in the difference between<br />
loan amounts and the market value of loan collateral due to a rise in interest rates that occurred<br />
prior to the offering; failure to use the specific terminology preferred by the investors, i.e.,<br />
“dramatic” and “haircuts,” did not render the disclosures misleading, and information regarding<br />
the interest rates was presented in the context of clear warnings that the company’s business<br />
model was completely dependent on loans, and that even a small increase in the rates could have<br />
devastating results.<br />
S.E.C. v. Merkin, No. 11–23585, 2012 WL 5245561 (S.D. Fla. Oct. 3, 2012).<br />
C.1.d<br />
Summary judgment entered in favor of plaintiff on Section 10(b) and Rule 10b-5 claims<br />
when it was undisputed that defendant authored and published four letters containing false<br />
statements regarding the SEC’s investigation of the issuer.<br />
S.E.C. v. Ehrenkrantz King Nussbaum, Inc., No. 05 CV 4643 (E.D.N.Y. Mar. 15, 2012).<br />
C.1.d<br />
The court granted summary judgment to the plaintiff and held that the defendant made<br />
misrepresentations to various mutual funds when the defendant’s clients’ market timing activity<br />
was stopped by the mutual funds, and defendant then created (or directed the creation of)<br />
multiple mirror accounts with the sole purpose of allowing those clients to continue market<br />
timing without detection.<br />
In re General Elec. Co. Sec. Litig., 857 F.Supp.2d 367 (S.D.N.Y. 2012).<br />
C.1.d<br />
The court held that a subsidiary’s chief operating officer’s statement, “[w]e feel pretty<br />
good about our plans around both collections and our forecast for new volume” was the sort of<br />
vague statement of optimism which was not an actionable misstatement under federal securities<br />
laws.<br />
105
C.1.d<br />
Shenk v. Karmazin, 868 F. Supp. 2d 299 (S.D.N.Y. 2012).<br />
The court granted defendants’ motion for summary judgment on Section 10(b) and Rule<br />
10b-5 claims when the officers and directors of a subscription radio service did not make<br />
materially false statements or omit material facts where service made and kept very specific<br />
promises that were consistent with statements concerning “more choices and lower prices”<br />
resulting from merger of two subscription services.<br />
106<br />
C.1.d<br />
In re Bank of America Corp. Sec., Deriv. and Employee Ret. Income Sec. Act Litig. No. 09 MD<br />
2058, 2012 WL 1353523 (S.D.N.Y. 2012).<br />
The court dismissed Section 10(b) and Rule 10b-5 claims when, at most, the complaint<br />
allegations would only raise an inference that the defendants misjudged the scope of<br />
Countrywide’s potential litigation exposure, and the complaint did not plausibly allege a false<br />
and misleading statement by any defendant regarding the nature, extent or results of preacquisition<br />
due diligence in Countrywide’s litigation and regulatory exposure.<br />
C.1.d<br />
Ross v. Lloyds Banking Group, PLC, No. 11 Civ. 8530, 2012 WL 4891759 (S.D.N.Y. Oct. 16,<br />
2012).<br />
The court dismissed the claims made under Section 10(b) and Rule 10b-5 because the<br />
alleged omissions and misrepresentations were immaterial as broad, optimistic generalizations<br />
about the benefits of an acquisition, and the complaint failed to identify any specific individuals<br />
who knowingly made an alleged misstatement.<br />
C.1.d<br />
S.E.C. v. Greenstone Holdings, Inc., No. 10 Civ. 1302, 2012 WL 1038570 (S.D.N.Y. Mar. 28,<br />
2012).<br />
The court granted summary judgment to the plaintiff, finding defendants liable for<br />
violating Section 10(b) and Rule 10b-5 in connection with false statements made by them about<br />
securities being exempt from registration requirements and their issuance and sale of such<br />
securities.<br />
S.E.C. v. Pentagon Capital Mgmt. PLC, 844 F.Supp.2d 377 (S.D.N.Y. 2012).<br />
C.1.d<br />
After a bench trial, the court held defendant violated Section 10(b) through late-trading<br />
scheme, which allowed customers to enter mutual fund trades after end of trading day but secure
that day’s net asset value (NAV). Final trades were received before funds’ daily pricing time but<br />
critical trading decisions were made well after such time, and advisor-manager was aware its<br />
broker-dealer falsely stamped timesheets to make it appear buy and sell orders had been finalized<br />
by daily pricing time so that mutual funds would give the trades that day’s NAV. Defendant<br />
knew late trading was impermissible and it was obtaining advantage over other investors,<br />
contrary to funds’ rules and Securities and Exchange Commission regulation.<br />
S.E.C. v. Gagnon, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012).<br />
C.1.d<br />
The court entered summary judgment for plaintiff on Section 10(b) and Rule 10b-5<br />
claims when defendant presented investment program as a low-risk, high yield program,<br />
promised investors they would earn “10 to 12.5% on their money per month with No Work and<br />
Little to No Risk!”, and represented he had thoroughly researched those selling the investments<br />
and gave them his stamp of approval. However, he knew one seller was an underemployed auto<br />
worker who sold health supplements for extra income, performed no due diligence, took sellers’<br />
representations at face value without reviewing supporting documents to confirm claims of<br />
exorbitant returns, and failed to disclose that he and sellers were splitting the profits 50/50.<br />
e. Standing<br />
C.1.e<br />
Brodzinsky v. Frontpoint Partner LLC, 2012 WL 1468507 (D. Conn. Apr. 26, 2012).<br />
As shareholders of Human Genome Sciences, Inc., plaintiffs brought a class action suit<br />
against defendants, a group of hedge funds and investments advisors, alleging a violation of<br />
Section 10(b) of the Securities Exchange Act of 1934 in connection with the sale of HGSI stock<br />
based on non-public information. Defendants argued that plaintiffs lacked standing because they<br />
did not purchase shares contemporaneously with any alleged insider sale. Specifically, the<br />
plaintiffs’ purchases occurred approximately two weeks after and two weeks before the time<br />
periods in which defendants made trades based on alleged inside information. The question for<br />
the court was how to interpret the “contemporaneous” requirement, which is not statutorily<br />
defined and has been subjected to differing interpretations in other jurisdictions. The court<br />
rejected the plaintiffs’ argument that “contemporaneous” should span across the time period in<br />
which the alleged trades on inside information were being made. The better interpretation,<br />
according to the court, is that the purchases must be made within a few days of the time the<br />
trades on inside information settle – i.e., typically within a week of the trades.<br />
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F.Supp.2d 249 (D. Conn. 2012).<br />
107<br />
C.1.e<br />
Plaintiffs, investors who incurred losses in an investment fund, brought suit against<br />
defendants for non-disclosures and mismanagement of the fund, alleging they were fraudulently<br />
induced to purchase securities in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5. Defendants argued that plaintiffs lacked standing to assert their own<br />
losses because the suit was brought derivatively. Plaintiffs countered that they were asserting<br />
direct claims and therefore had standing based on their assertions of individual harm. The court<br />
noted that there is no clear precedent on whether fraudulent inducement is a direct or derivative<br />
claim. Defendants relied on cases that found that whenever a plaintiff’s harm is due to losses<br />
that are suffered by all shareholders, the plaintiff’s claim is necessarily derivative regardless of<br />
individual losses. Plaintiffs pointed to cases in which fraudulent inducement is held to be a<br />
separate and individual injury, permitting a plaintiff to state a direct claim in addition to a<br />
derivative claim. The court agreed with plaintiffs, finding that fraudulent inducement claims can<br />
be both direct and derivative when plaintiffs suffer an individualized harm not suffered by all<br />
shareholders – namely, when the plaintiff is induced to make its individual purchase or sale.<br />
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012).<br />
C.1.e<br />
Plaintiffs, investors in a Beacon investment fund, brought several class action suits<br />
against individuals and companies associated with the Beacon fund, alleging a violation of<br />
Section 10(b) of the Securities Exchange Act of 1934 in connection with investments with<br />
Bernie Madoff. Certain defendants argued plaintiffs lacked standing because none of the<br />
plaintiffs were induced by those defendants to purchase securities from or sell securities to<br />
Madoff. Instead, these defendants argued, only the Beacon fund had standing because only the<br />
fund made the investments with Madoff. The court rejected defendants’ argument and held that<br />
standing does not require a plaintiff to have personally been induced by the fraud to purchase or<br />
sell a security. Instead, plaintiffs, as direct investors in the fund, were in a “sufficiently close<br />
relationship” with the fund to satisfy the requirement of being “in connection with” the purchase<br />
or sale as required by Section 10(b).<br />
In re Satyam Computer Servs. Ltd. Sec. Litig., 2013 WL 28053 (S.D.N.Y. Jan. 2, 2013).<br />
C.1.e<br />
Plaintiff, a former Satyam employee who participated in certain employee stock option<br />
plans, brought a class action suit asserting violations of Section 10(b) of the Securities Exchange<br />
Act of 1934 and Rule 10b-5 in connection with alleged fraud and misstatements by Satyam.<br />
Plaintiff sought to represent a sub-class current and former employees who acquired and<br />
exercised options to purchase Satyam shares through one of Satyam’s five employee stock<br />
options plans pursuant to the allegedly false and misleading statements. Plaintiff participated in<br />
only two of the five options plans, and exercised his options under only one of the plans.<br />
Plaintiff argued he had standing to represent the sub-class because the offering documents<br />
affiliated with each of the five plans were incorporated by reference into the allegedly misleading<br />
registration statements and exercised his options pursuant to Satyam’s annual reports just as<br />
would have been the case for purchasers of any securities during the class period. The court<br />
found that plaintiff did not have standing because a purchaser of securities pursuant to one filing<br />
does not suffer the same injury as a different purchaser who acquires securities pursuant to<br />
108
another filing merely because the two offerings derive from or are incorporated into a common<br />
registration statement.<br />
In re Schering-Plough Corp. / Enhance Sec. Litig., 2012 WL 4482032 (D.N.J. Sept. 25, 2012).<br />
In re Merck & Co. Inc., Vytorin / Zetia Sec. Litig., 2012 WL 4482041 (D.N.J. Sept. 25, 2012).<br />
C.1.e<br />
In these related class actions, plaintiffs, as purchasers of common stock of Schering-<br />
Plough (in one of the suits) or Merck (in the other) asserted violations of Section 10(b) of the<br />
Securities Exchange Act of 1934 in connection with defendants’ suppression and non-disclosure<br />
of a study critical of the effectiveness of defendants’ drug Vytorin. Plaintiffs in the Schering-<br />
Plough suit sought to represent, among others, options traders and preferred stock traders who<br />
traded Schering-Plough securities, despite none of the plaintiffs having purchased any Schering-<br />
Plough options during the class period or incurred a loss on preferred securities issued by<br />
Schering-Plough. Similarly, plaintiffs in the Merck suit sought to represent, among others,<br />
options traders who traded Merck securities, despite three of the four plaintiffs not having traded<br />
any Merck options and the fourth plaintiff conceding he profited from its options trades.<br />
Defendants in both actions argued that plaintiffs did not have standing to bring claims on behalf<br />
of a class that invested in options that plaintiffs themselves did not trade during the class period.<br />
The court found that plaintiffs in both actions had standing on the basis that both option and<br />
stock holders have an interest in proving that stock prices were artificially inflated by the<br />
defendants’ misstatement and omissions.<br />
Freedom Envtl. Servs., Inc. v. Borish, 2012 WL 2505723 (M.D. Fla. June 20, 2012).<br />
C.1.e<br />
Members of Freedom’s board of directors brought suit on behalf of Freedom against the<br />
CEO and stock transfer company alleging violations of Section 10(b) of the Securities Exchange<br />
Act of 1934 and Rule 10b-5 based on the loss in stock value due to defendants’ unauthorized<br />
issuance and transfer of shares. The court held that plaintiff did not having standing. First, the<br />
plaintiff, Freedom, was the issuer of the stock and not a purchaser. Second, although the<br />
directors brought the securities claims putatively as the corporate entity Freedom, their claims<br />
are essentially individual claims relating to their individual stock losses. As such, there is no<br />
standing based on the U.S. Supreme Court’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S.<br />
723 (1975), which excluded from standing potential plaintiffs who are related to an issuer who<br />
suffered loss in the value of their investment due to corporate or insider activities in connection<br />
with the change of ownership in the stock. Third, the court found the directors cannot have<br />
standing because they did not allege any sale of securities, and instead alleged only that their<br />
shares were offered in exchange for debt conversion and public relations work.<br />
109
f. Affirmative Defenses<br />
C.1.f<br />
Amarosa v. AOL Time Warner, Inc., 409 Fed. App’x 412 (2d Cir. 2011) (unpublished)<br />
On appeal from a grant of a motion to dismiss, the Second Circuit held, inter alia, that<br />
where an affirmative defense appears on the face of the complaint, it is the appropriate subject of<br />
a motion to dismiss. Here, the defense of no loss causation appeared on the face of the<br />
complaint, and so the district court was correct to grant the motion to dismiss.<br />
S.E.C. v. Gabelli, 653 F.3d 49 (2d Cir. 2011).<br />
C.1.f<br />
On appeal from a grant of a motion to dismiss, Judge Rakoff (sitting by designation) held<br />
that the SEC was not required to plead reasonable diligence in order to survive a motion to<br />
dismiss. That is, because lack of reasonable diligence is an affirmative defense, and the SEC had<br />
pleaded it did not learn of the allegedly unlawful activity until within the 5 year limitations<br />
period.<br />
Costello ex rel. Comdisco Litig. Trust v. Grundon, 651 F.3d 614 (3d Cir. 2011).<br />
C.1.f<br />
Trustee brought claims against former employees to enforce promissory notes. Summary<br />
judgment to trustee was entered, and employees appealed. The Third Circuit vacated and<br />
remanded the lower court opinion. It found, inter alia, that the employees were not required to<br />
bring a private right of action in order to assert defenses under Section 29(b) of the Securities<br />
Exchange Act of 1934, and that the employees were entitled to assert violations of Regulations<br />
G and U as an affirmative defenses. It further found that the Trustee was not entitled to a grant<br />
of summary judgment on the employees’ affirmative defense of Section 10(b) illegality, as the<br />
district court relied on issues not raised by the trustee until its reply. Finally, the Third Circuit<br />
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).<br />
C.1.f<br />
The district court granted a motion to dismiss investors’ Section 20(b) claims under the<br />
Securities Exchange Act of 1934. On appeal, the Sixth Circuit reversed. The investors were not<br />
required to plead lack of good faith. Instead, good faith is an affirmative defense and therefore it<br />
was inappropriate for the lower court to dismiss the complaint for failing to plead lack of good<br />
faith.<br />
110
United States v. Behrens, 644 F.3d 754 (8th Cir. 2011).<br />
C.1.f<br />
United States brought criminal charges under the Securities Exchange Act of 1934. The<br />
defendant pleaded guilty. At sentencing however, he argued that he was entitled to assert the<br />
defense of “no knowledge” under Section 32(a) in order to avoid incarceration. The district<br />
court found that the statute did not allow a party that pleaded guilty to assert the defense. The<br />
Eighth Circuit vacated and remanded the district court’s opinion. It held that a defendant is<br />
permitted to assert the “no knowledge” defense under Section 32(a), given the unambiguous<br />
plain language of Sections 78j(b) and 78ff(a).<br />
United States v. Johnson, 413 Fed. App’x 151 (11th Cir. 2011).<br />
111<br />
C.1.f<br />
On appeal, the Eleventh Circuit held that Section 32 of the Securities Exchange Act was<br />
partial affirmative defense that did not allow for an increase in a penalty beyond the statutory<br />
maximum and thus the defendant was not entitled to have the issue tried to a jury, and the district<br />
court did not err in requiring the defendant to show lack of knowledge by a preponderance of the<br />
evidence.<br />
Easton Cap. Partners, LP v. Rush, No. 09 Civ. 1307(LLS), 2011 WL 3809927 (S.D.N.Y. Aug.<br />
26, 2011).<br />
C.1.f<br />
Investors brought suit against president and CEO alleging, inter alia, violations of<br />
Section 10(b) of the Securities Exchange Act of 1934. Defendant moved for summary judgment,<br />
arguing among other things, that the claims were barred by the statute of limitations, and that the<br />
plaintiff had ratified the investments. The court denied the motion. It found that because the<br />
facts viewed in the light most favorable to the non-movant raised questions as to whether the<br />
affirmative defenses applied, summary judgment was inappropriate.<br />
Farber v. Goldman Sachs Group, Inc., No. 10 Civ. 873(BSJ)(GWG), 2011 WL 666396<br />
(S.D.N.Y. Feb. 16, 2011).<br />
C.1.f<br />
Plaintiff initially filed an action before FINRA alleging, inter alia, violation of Section<br />
10(b) of the Securities Exchange Act of 1934. Defendant successfully argued at FINRA that the<br />
claims should be dismissed based on FINRA Rule 12504(a)(6)(B), which allows claims to be<br />
dismissed where the moving party was not associated with the securities at issue. Subsequent to<br />
dismissal, plaintiff filed suit in federal court, alleging similar claims. The district court<br />
dismissed the claims. It held that because the claims were decided by the FINRA panel, plaintiff<br />
could not raise them in district court in a collateral attack on the arbitration panel decision.<br />
Instead, the plaintiff was required to file a motion to vacate the arbitration award to challenge the<br />
FINRA ruling.
C.1.f<br />
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011).<br />
On motion to dismiss investors’ securities fraud class action, court denied the motion<br />
with respect to the defendants’ affirmative defense of failure to state a claim, as the motion relied<br />
on SEC statements, which were materials not properly before the court on a motion to dismiss.<br />
Stichting Pensioenfonds ABP v. Countrywide Financial Corp., 802 F. Supp. 2d 1125 (S.D.N.Y.<br />
2011).<br />
C.1.f<br />
Investor in mortgage backed security brought claims alleging, inter alia, violations of<br />
section 10(b) of the Securities Exchange Act of 1934. Defendant moved to dismiss, arguing,<br />
inter alia, that the claims were barred by the statute of limitations. The district court granted the<br />
motion. The district court took judicial notice of public press reports, that, together with the<br />
complaint and the documents incorporated into it, showed the claims were barred by the statute<br />
of limitations.<br />
S.E.C. v. Cuban, 798 F. Supp. 2d 783 (N.D. Tex. 2011).<br />
C.1.f<br />
SEC brought enforcement action against defendant alleging, inter alia, violations of<br />
Section 10(b) of the Securities Exchange Act of 1934. Defendant answered and alleged “unclean<br />
hands” as an affirmative defense. SEC moved to strike. The district court held that although<br />
unclean hands was available as an affirmative defense—in disagreement with at least one N.D.<br />
Tex. court—its application was strictly limited. For the defense to be available, the alleged SEC<br />
conduct need be egregious, must occur before the filing of the enforcement action, must cause<br />
the defendant prejudice, and must rise to a constitutional level by showing a direct nexus<br />
between the alleged misconduct and a constitutional injury. The defendant’s allegations did not<br />
rise to the level, and thus the motion to strike was granted.<br />
S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867 (N.D. Tex. 2011).<br />
C.1.f<br />
SEC brought enforcement action against defendant alleging, inter alia, violations of<br />
Section 10(b) of the Securities Exchange Act of 1934. The parties cross-motioned for partial<br />
summary judgment. The court held that because the SEC learned of the operative facts within<br />
the limitations period, the statute of limitations was not tolled due to the doctrine of fraudulent<br />
concealment. However, the parties had agreed to toll claims as of October 30, 2007, thus any<br />
claim which arose 5 years prior to that date was dismissed.<br />
112
C.1.f<br />
Puskala v. Koss Corp., 799 F. Supp. 2d 941 (E.D. Wis. 2011).<br />
Investors brought, inter alia, claims alleging violations of Section 20(a) of the Securities<br />
Exchange Act of 1934. One defendant brought a motion to dismiss, arguing good faith regarding<br />
the alleged unlawful acts. The court found that although an affirmative defense, the defendant<br />
could be successful in his motion if the complaint pleaded sufficient facts to show a good faith<br />
affirmative defense applied. The court, however, denied the motion, finding that although facts<br />
were pleaded that showed the defendant had no knowledge of the violations, the plaintiff pleaded<br />
facts which could lead to a finding of recklessness. This was sufficient to allow plaintiffs to take<br />
discovery on the issue.<br />
Wehrs v. Benson York Group, Inc., No. 07 C 3312, 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).<br />
C.1.f<br />
Investor brought suit against securities broker, alleging, inter alia, violations of Section<br />
10(b) of the Securities Exchange Act of 1934. Defendants failed to appear and a default<br />
judgment was entered. In relevant part, default judgment against one defendant was vacated as<br />
to damages only. Defendant then argued that he was not liable because plaintiff had both not<br />
mitigated his damages and ratified the transactions at issue. The district court held that because<br />
both issues were affirmative defenses, the defendant waived arguments relying on their<br />
applicability by not answering or otherwise pleading to the complaint.<br />
Yary v. Voigt, No. 11-694 (JNE/FLN), 2011 WL 6791003 (D. Minn. Dec. 27, 2011).<br />
C.1.f<br />
Plaintiffs brought suit alleging, inter alia, violations of Section 10(b) of the Securities<br />
Exchange Act of 1934. Defendant moved to dismiss, arguing several bases for dismissal. The<br />
court found that an affirmative defense of contractual release, though appropriate in some<br />
instances for a motion to dismiss, was not appropriate in the case given that the applicability of<br />
the release was not determinable from the face of the complaint. The plaintiffs had alleged that<br />
they were defrauded by executing the contract containing the release. Secondly, the court found<br />
that the five year statute of repose barred all claims based on acts occurring more than 5 years<br />
before a tolling agreement was entered, which for some claims was apparent from the face of the<br />
complaint.<br />
Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011).<br />
C.1.f<br />
Investors brought a suit alleging, inter alia, violations of Section 10(b) of the Securities<br />
Exchange Act of 1934. Defendant moved to dismiss, arguing that the claims were time-barred in<br />
that the plaintiff knew or should of known of his claims more than 2 years before filing suit. The<br />
113
court granted the motion. It found that the court’s previous decisions should have put Allstate on<br />
notice of the defendants’ alleged violations of Section 10(b).<br />
In re Novatel Wireless Sec. Lit., 830 F. Supp. 2d 996 (S.D. Cal. 2011)<br />
C.1.f<br />
Shareholders brought a securities class action alleging fraudulent business practices,<br />
including, inter alia, insider trading in violation of the Section 10(b) of the Securities Exchange<br />
Act of 1934. Defendants argued on summary judgment that the trades-at-issue were made<br />
pursuant to a trading plan, and thus were not actionable under SEC Rule 10b5-1. The Court<br />
denied the defendants’ motion, finding that a disputed issue of fact existed as to whether or not<br />
the sales were an improper use of a Rule 10b5-1 trading window. The trade of 110,000 shares<br />
the day after the stock plan came into effect thus raised a question as to whether those trades<br />
were done with scienter.<br />
Bennett v. Sprint Nextel Corp., No. 099-2122-EFM, 2011 WL 4553055 (D. Kan. Sept. 29, 2011).<br />
C.1.f<br />
Investors brought putative class action against company. Company, in its answer<br />
asserted several affirmative defenses. Investors moved to strike, arguing that the affirmative<br />
defenses lacked factual support in violation of Twombly/Iqbal, or alternatively did not admit or<br />
deny allegations contrary to Federal Rule of Civil Procedure 8. The district court held that,<br />
because of textual and policy reasons, the pleading standards of Twombly/Iqbal did not apply to<br />
affirmative defenses. The court also found that a reference to documents cited in the complaint<br />
did not violate Rule 8. Accordingly, investors’ motion was denied.<br />
Lane v. Page, 272 F.R.D. 581 (D.N.M. 2011).<br />
C.1.f<br />
Shareholders brought a class action lawsuit alleging violations of securities laws.<br />
Corporation answered and asserted several affirmative defenses. Shareholders moved to strike<br />
defenses which did not have supporting facts and those described as “negative” defenses. The<br />
court denied the shareholders’ motion regarding factually unsupported defenses, finding that the<br />
Twombly/Iqbal pleading standards did not apply to affirmative defenses. The court further found<br />
that “failure to state a claim,” as illustrated in Form 30 of the Federal Rules of Civil Procedure,<br />
was a sufficient affirmative defense. Finally, the court struck so-called “negative defenses” that<br />
merely claimed that the shareholders could not prove elements of their claims as redundant, and<br />
struck a preservation of defenses as inappropriate, given Rule 15 and the ability to request leave<br />
to amend the answer.<br />
114
C.1.f<br />
Sec. Exch. Comm’n v. Kovzan, 807 F. Supp. 2d 1024 (D. Kan. 2011)<br />
The SEC brought an action against the CFO of a company alleging violations of the<br />
Securities Exchange Act of 1934. The CFO moved to dismiss. The district court granted in part<br />
and denied in part the motion. In relevant part, the district court denied the motion to the extent<br />
the CFO argued that the SEC had not sufficiently pleaded due diligence. The district court found<br />
that the SEC was not required to plead reasonable due diligence beyond the allegation that it had<br />
proceeded with due diligence.<br />
Hochuli v. Delgado, No. 09-23225-CIV, 2011 WL 844240 (S.D. Fla. Mar. 8, 2011)<br />
C.1.f<br />
Investor brought putative class action alleging, inter alia, violations of Section 10(b) of<br />
the Securities Exchange Act of 1934. Defendant asserted an affirmative defense of failure to join<br />
indispensable parties. Specifically, the defendant alleged that failing to bring a claim against the<br />
company—as opposed to the individual—would not allow the court to grant complete relief.<br />
The district court granted the motion to strike. Specifically, the district court found that the<br />
plaintiff could obtain complete relief from the defendant.<br />
2. Section 14<br />
C.2<br />
Blakeslee v. PHC, Inc. (In re PHC, Inc. S'holder Litig.), 2012 U.S. Dist. LEXIS 44616 (D. Mass.<br />
Mar. 30, 2012).<br />
The U.S. District Court for the District of Massachusetts partially granted and partially<br />
denied Defendant’s motion to dismiss claims asserted by Plaintiff Blakeslee for breaches of<br />
fiduciary duties against PHC and the individual Defendants. The Plaintiffs also alleged<br />
violations of Section 14(a) of the Securities Exchange Act of 1934 against PHC and the<br />
Individual Defendants.<br />
Plaintiff Blakeslee originally claimed that the proxy statement for a merger vote was<br />
deceptive and omitted material information. The proxy statement initially addressed, however,<br />
was only a preliminary version. The finalized proxy statement was later filed with the SEC, after<br />
months of review and revision. In a letter to the Court, the Defendants explained that the<br />
finalized version of the proxy statement "reflects numerous material changes that address or<br />
obviate the 'disclosure violations' alleged in Plaintiff's Amended Complaint." Since Blakeslee's<br />
complaint did not allege claims arising from the finalized proxy, the count of his complaint<br />
alleging a violation of Section 14(a) was dismissed without prejudice.<br />
115
C.2<br />
IBEW Local 98 Pension Fund v. Central Vermont Public Serv. Corp., 2012 U.S. Dist. LEXIS<br />
36784 (D. Vt. Mar. 19, 2012).<br />
The U.S. District Court for the District of Vermont dismissed Plaintiffs federal securities<br />
law claims without prejudice. Plaintiffs alleged in Count V of their complaint that Defendants<br />
violated Section 14(a) of the Securities Exchange Act by filing incomplete and potentially<br />
misleading proxy statements. The Plaintiffs alleged the omissions were such that a reasonable<br />
shareholder would consider them important in deciding how to vote on the proposed acquisition,<br />
and would view a full and accurate disclosure as significantly altering the total mix of<br />
information made available in the Proxy and in other information reasonably available to<br />
shareholders.<br />
In considering Plaintiffs’ allegation, the court found that Plaintiffs neither identified<br />
specific statements in the Proxy Statement which they contended were false or misleading by<br />
virtue of those omissions, nor explained why they were false or material for the purposes of<br />
satisfying the requirements of the PSLRA. The court stated it would consider the PSLRA in<br />
conjunction with the pleading requirements of Iqbal and Twombly because of how intertwined<br />
Plaintiffs failure to state a claim was with failure to satisfy the heightened pleading standard of<br />
PSLRA. The court found under those standards, although Plaintiffs identified those omissions<br />
they found material, they did not identify any statements which were rendered false or<br />
misleading by virtue of those omissions, which is required to plead a 14(a) violation.<br />
Additionally, the court found that the amended complaint’s unsupported speculation that a<br />
Defendant may have additional, undisclosed conflicts of interest insufficient to state a claim.<br />
Thus, the court dismissed Plaintiff’s count V.<br />
C.2<br />
In re Novell, Inc. S'holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).<br />
The U.S. District Court for the District of Massachusetts granted Defendant’s motion to<br />
dismiss claims asserted by Plaintiffs for violations of Section 14 of the Securities Exchange Act<br />
of 1934. The Defendant Attachmate contended that the Plaintiff had not stated a claim upon<br />
which relief could be granted.<br />
Plaintiffs asserted their 1934 Act claims against Attachmate on two theories: "primary"<br />
liability under § 14(a) and Rule 14a-9(a) for material misstatements and/or omissions in a proxy.<br />
The first theory foundered on Plaintiffs' concession at oral argument that their theory of liability<br />
against Attachmate for material misstatements and/or omissions in Novell’s proxy materials rests<br />
on Attachmate's alleged "ability to control" Novell after the two entered into the merger<br />
agreement. In other words, Attachmate's liability under § 14(a) and Rule 14a-9(a) hinged on it<br />
having control over Novell's proxy materials. Since Plaintiffs' theory of liability against<br />
Attachmate was wholly derivative, Attachmate could not be held liable for a primary violation of<br />
§14(a) or Rule 14a-9(a) without Plaintiffs adequately pleading control of Novell by Attachmate.<br />
116
C.2<br />
Bensinger v. Denbury Res. Inc., 2012 U.S. Dist. LEXIS 140801 (E.D.N.Y Sept. 28, 2012).<br />
The U.S. District Court for the Eastern District of New York dismissed Plaintiff’s claim<br />
that Defendants violated Section 14(a) of the Securities Exchange Act of 1934. Plaintiff alleges<br />
that had Defendant used the time period in the proxy statement to value Denbury stock in<br />
connection with the Merger, he would have received a larger number of Denbury shares.<br />
Defendant argues that Plaintiff may not bring his Section 14(a) claim because he was ineligible<br />
to vote on the merger, thus falling outside of the zone of interests 14(a) was designed to protect.<br />
Plaintiff argues that 14(a) protects another voting right that he did have: the right to elect whether<br />
he wanted to receive $50 for each of his Encore shares in all cash, cash and Denbury stock, or all<br />
Denbury stock.<br />
In considering Plaintiff’s Section 14(a) claim, the court stated the kind of voting right the<br />
Plaintiff proposed was not the kind that Congress intended to protect through 14(a). Rather,<br />
Congress aimed to protect corporate suffrage, meaning the right of shareholders to participate in<br />
corporate governance. The proxy statement was not soliciting a proxy with respect to the form of<br />
Plaintiff’s stock payout, and none of the options constituted corporate action. The relevant<br />
corporate action for which proxies were solicited in this case was the proposed merger, and<br />
because Plaintiff lacked a right to vote on the merger, he lacked standing to bring a sec 14(a)<br />
claim. Thus, the 14(a) claim was dismissed.<br />
Shields v. Murdoch, 2012 U.S. LEXIS 133453 (S.D.N.Y. Sept. 18, 2012).<br />
The U.S. District Court for the Southern District of New York denied Defendants’<br />
motion to stay the actions of Plaintiffs Shields, and Iron Workers Mid-South Pension Fund (Iron<br />
Workers) pending resolution of a separate Delaware action also involving Defendants. Plaintiffs<br />
Shields, Stricklin, and Iron Workers filed shareholder derivative actions against the News Corp<br />
Defendants (a group of News Corporation directors and officers), alleging that they violated<br />
Section 14(a) of the Securities Exchange Act of 1934 (among other violations). Another similar<br />
derivative action was filed by other News Corp shareholders, not parties here, in the Delaware<br />
Court of Chancery against the News Corp directors.<br />
In considering Defendants’ motion to stay, the court discussed the Colorado River<br />
Abstention doctrine, stating “the pendency of an action in state court is no bar to proceedings<br />
concerning the same matter in the federal court having jurisdiction…Abstention from exercise of<br />
federal jurisdiction is the exception, not the rule.” The court is required to weigh six factors, with<br />
the balance heavily weighted in favor of the exercise of jurisdiction. The court stated that federal<br />
and state cases are not parallel where the federal action alleges an exclusively federal claim.<br />
Where Plaintiffs alleged that Defendants violated Section 14(a) of the Exchange Act, abstention<br />
would be clearly improper as it is an action exclusively within the jurisdiction of the federal<br />
courts. Application of state law to determine whether the Plaintiffs had adequately shown<br />
demand futility with respect to the 14(a) claims does not require abstention. Federal law supplies<br />
the rule of decision for the elements of the exclusively federal claims, and the futility issue here<br />
117<br />
C.2
is not particularly novel or complex. Neither was it persuasive that the Delaware court’s finding<br />
on the demand futility issue would dispose of the instant litigation. The court went on to state<br />
because federal courts have exclusive jurisdiction over Plaintiff’s Section 14(a) claims, they will<br />
not be resolved in the Delaware action, and staying this action in favor of the Delaware action<br />
would thus be improper. Furthermore, the court stated the Defendants had not demonstrated that<br />
Plaintiff’s 14(a) claims were meritless, and in determining abstention under the Colorado river<br />
doctrine, the Court is not required to evaluate the merits of a Plaintiff’s claims.<br />
Finally, the court went on to state that even if the actions were parallel, a stay would not<br />
be appropriate. With respect specifically to the 14(a) claims, staying the federal action would not<br />
avoid piecemeal litigation, because as the Delaware Court of Chancery did not have broad and<br />
comprehensive concurrent jurisdiction to adjudicate the claims asserted in the federal action,<br />
abstention might only serve to encourage piecemeal adjudication of the issues raised in the<br />
federal suit. The court also stated that the fact that federal law supplied the rule of decision for<br />
Plaintiff’s 14(a) claims weighed heavily against abstention. The only factor in favor of abstention<br />
found by the court was that the Delaware action was more advanced. Thus, the court did not<br />
grant Defendants’ motion to stay the 14(a) claims.<br />
Gardner v. The Major Auto. Co., 2012 U.S. Dist. LEXIS 118191 (E.D.N.Y Aug. 21, 2012).<br />
The U.S. District Court for the Eastern District of New York granted Defendants’ motion<br />
to dismiss with respect to Plaintiffs’ claim that Defendants violated Section 14(a) of the<br />
Securities Exchange Act of 1934, and denied the motion with respect to Plaintiff’s breach of<br />
fiduciary claim. On December 30, 2010, Defendant Major circulated a Notice of Special Meeting<br />
for Shareholders to consider a 1-for-3,000,000 reverse split which would render Defendant<br />
Bendell the sole shareholder. The accompanying proxy statement explained that because Bendell<br />
intended to vote in favor of the transaction, its approval was assured, but that a vote was in<br />
Major’s interest because if a majority of unaffiliated stockholders were to approve the<br />
transaction, the company could, in the event it were judicially challenged, use the vote to show<br />
the fairness of the transaction. The proxy statement acknowledged Bendell’s conflict of interest,<br />
but did not disclose his domination of the Board, which recommended a vote in favor of the<br />
proposal. Plaintiffs alleged that Defendants made false statements regarding the fairness of the<br />
transaction in the proxy statement, in violation of Section 14(a) of the Exchange Act and its<br />
regulations. Plaintiffs complain that Bendell abused his fiduciary authority to obtain and approve<br />
an unfairly low price share, by not giving Empire Valuation Consultants more recent financial<br />
information that it requested in making its “Fairness Opinion,” from which the price share was<br />
based on.<br />
In considering Plaintiff’s Section 14(a) claim, the court stated that the Section only<br />
applied to registered securities. The court was not convinced by Plaintiff’s attempt to come under<br />
the statute by saying that Major’s common stock was registered at the time their shares were<br />
purchased, and that Defendants should therefore be held liable as though the stock had never<br />
been deregistered. The court stated neither the Plaintiffs’ brief, nor the court’s own research<br />
yielded any law in support of that interpretation of 14(a). Furthermore, the court found Plaintiffs’<br />
interpretation contrary to the statute’s plain language, which states that 14(a) only governs<br />
118<br />
C.2
conduct in respect of any security registered, suggesting once a security is deregistered, its<br />
provisions no longer apply. Thus, the court found no liability under the Exchange Act, and<br />
dismissed the claim.<br />
Gardner v. The Major Auto. Cos., 2012 U.S. Dist. LEXIS 51821 (E.D.N.Y Apr. 12, 2012).<br />
The U.S. District Court for the Eastern District of New York granted Defendants’ motion<br />
to stay discovery pending the outcome of their motion for judgment on the pleadings, and<br />
denying Plaintiff’s motion to compel discovery. The Plaintiffs in this case moved for an order to<br />
compel the Defendants to produce documents and respond to interrogatories served by Plaintiffs<br />
in their initial discovery requests. Defendants cross-moved to stay the discovery pending<br />
resolution of their motion seeking judgment on the pleadings pursuant to Rule 12(c), or dismissal<br />
of the complaint pursuant to 12(b)(6) of the same.<br />
Plaintiffs’ complaint charges the Defendants with violations of Section 14(a) of the<br />
Securities Exchange Act of 1934. The Plaintiffs allege that Defendants: 1) offered a misleading<br />
justification for the buyout transaction, which was designed to benefit Major’s principal officer<br />
and majority shareholder (Defendant Bendell) at the expense of its minority public shareholders<br />
2) failed to create a special committee of disinterested or independent members to evaluate the<br />
fairness of the transaction for the benefit of minority shareholders 3) failed to consider<br />
alternatives to the transaction 5) withheld and failed to consider financial information from the<br />
eighteen months preceding the transaction (resulting in an artificially depressed valuation of the<br />
company); and 6) omitted from their proxy material information regarding Major’s performance<br />
and true value, so as to mislead minority shareholders. Additionally, Plaintiffs complain that the<br />
material omissions in Defendant’s proxy materials violated Section 14(c).<br />
In considering Plaintiff’s motion, the court determined that the automatic stay provision<br />
of the PSLRA mandated a stay of discovery pending the resolution of Defendant’s dispositive<br />
motion, and that both the text of the PLSRA and common sense supported staying discovery<br />
with respect to each of Plaintiff’s three claims. Consistent with the language of the discovery<br />
stay provision, Plaintiffs’ federal securities claim clearly “arose under” the Exchange Act of<br />
1934. Contrary to Plaintiff’s assumption, the statutory text did not draw a distinction between<br />
federal securities claims based on fraud and federal securities claims based on negligence. As<br />
such, the court found that the discovery stay would apply at the very least to the federal securities<br />
claim (and also that it applied to state law diversity claims). Thus, the court granted Defendants’<br />
motion to stay discovery pending the outcome of their motion for judgment on the pleadings, and<br />
denied Plaintiffs’ motion to compel discovery.<br />
In re Still Water Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. Apr. 3, 2012).<br />
The U.S. District Court for the Southern District of New York, granted Defendants’<br />
motion to dismiss claims, under Section 14(a) of the Securities Exchange Act of 1934, asserted<br />
by Plaintiffs fund investors. The ten Defendants were Gerova, a “blank check company,”<br />
119<br />
C.2<br />
C.2
Stillwater Capital Partners, LLC, the general partner for two investment funds, Stillwater Capital<br />
Partners, Inc., the investment manager for the funds (“collectively SCP”), and various senior<br />
executives. Plaintiffs brought a number of federal and state law claims, alleging that Defendants<br />
mislead investors when the two companies merged, but failed to furnish many material details in<br />
their proxy statements to investors. These details included nondisclosure of three conflicts of<br />
interests related to SCP’s management fees and the nondisclosure of other related party<br />
transactions in which Gerova acquired interests in investments ran by various Gerova insiders,<br />
including the founding director of Gerova and founding board members.<br />
The Section 14 (a) claims ultimately turned on whether the companies were actually<br />
subject to the mandates of Section 14 (a). Gerova claimed to be a foreign private issuer and the<br />
court agreed. Pursuant to 17 C.F.R. § 240.3b-4(c), a foreign private issuer is exempt unless it<br />
meets certain conditions. The court stated that a plain meaning interpretation of the regulation<br />
requires that all two conditions be met before a foreign private issuer loses its exemption status.<br />
The court noted that “Subsection (1) is not phrased as a threshold condition and the word ‘and’<br />
links it with subsection (2),” thus, as a matter of law, Gerova’s failure to meet any parts of<br />
subsection 2 meant that is was a foreign private issuer and as such not subject to Section 14(a)<br />
liability. Additionally, SCP was also not subject to Section 14(a) because the investments were<br />
not subject to Section 12 of the Exchange Act. Pursuant to Section 14(a)’s mandate that it<br />
govern statements with “respect to any security…registered pursuant to section 12 of this title,”<br />
the court found that the proxy statements sent to Plaintiffs concerned shares in securities that<br />
were not registered under Section 12 and thus were not subject to Section 14(a).<br />
Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., 2012 U.S.<br />
Dist. LEXIS 46202 (S.D.N.Y. Mar. 30, 2012).<br />
The U.S. District Court of the Southern District of New York granted in part and denied<br />
in part Defendants’ motion to dismiss Plaintiffs’ putative class action asserting claims for<br />
violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged<br />
that a joint proxy statement related to a merger between offshore oil contractors GlobalSantaFe<br />
Corp. (“GSF”) and Transocean contained false and misleading statements. These statements<br />
involved Transocean’s potential liabilities under environmental laws, Transocean’s false claims<br />
about extensive training and safety programs, and Transocean’s representation that the exchange<br />
price was fair. Defendants assert that Plaintiffs lack standing to bring suit under Section 14(a)<br />
because they did not plead that they were holders of record or entitled to vote on the merger.<br />
In regards to standing, the court stated that “only shareholders who were entitled to vote<br />
on a transaction have standing under Section 14(a) to challenge the proxy materials issued by a<br />
corporation regarding that transaction.” The court found that Plaintiffs met their burden,<br />
demonstrating by a preponderance of evidence that DeKalb Pension Fund had standing through<br />
proffering a fund representative’s sworn declaration. Plaintiff Bricklayers failed to proffer any<br />
facts showing it was eligible to vote or that it retained Transocean shares after the corrective<br />
disclosure began. Thus, the motion to dismiss was granted with respect to Bricklayers.<br />
C.2<br />
120
In considering Plaintiffs’ Section 14(a)claims, the court found that Plaintiffs were not<br />
subject to the heightened pleading requirements of PLSRA Section 78u-4(b)(2). Plaintiffs’<br />
fraud-type allegations, including Defendants’ knowingly falsifying statements and their policy of<br />
disobeying safety regulations to boost earnings, were sufficient to bring the Defendants under the<br />
Rule 9(b) standard. The court found that the Plaintiffs did not need to plead that Transocean was<br />
in violation of any specific environmental law or regulation at the time of the merger because of<br />
the breadth of the representations made in the proxy statement.<br />
Corre Opportunities Fund, LP v. Emmis Commc’n Corp., 2012 U.S. Dist. LEXIS 124298 (S.D.<br />
Ind. Aug. 31, 2012).<br />
The U.S. District Court for the Southern District of Indiana denied Plaintiffs’ motion for<br />
a preliminary injunction for various violations including Section 14(a) and (e) of the Securities<br />
Exchange Act of 1934. Defendants acquired Preferred Stock through total return swap (TRS)<br />
transactions and reissued Preferred Stock to a Retention Plan Trust.<br />
In considering the alleged violation of Section 14(a) the court noted the exception set<br />
forth in Rule 14(a)(2), which provided that disclosures required in accordance with proxy<br />
solicitations are not required for any solicitation by a person in respect of securities of which he<br />
is the beneficial owner. In those cases disclosure is not required because voting rights follow the<br />
economics of the stock. The court likened this to the instant TRS transactions, where Defendants<br />
acquired both the economic rights as well as the voting rights of the stock. The court thus held<br />
that the Plaintiffs would not be likely to succeed on their 14(a) claim.<br />
In considering the 14(e) violations, the court found only one of the eight factors from<br />
Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y 1979) supported that a tender offer occurred,<br />
thus Plaintiffs failed to show a reasonable likelihood of success in establishing that Defendants<br />
were required to have filed a tender offer statement before undertaking negotiations with<br />
Preferred Shareholders in October and November 2011. Additionally, Plaintiffs fell short in their<br />
attempt to show they would be likely in establishing it was a misrepresentation for Defendants to<br />
have disclosed in the Schedule TO-I and Form 8K filings submitted before March 2012 only that<br />
they “may elect” to make amendments to the Preferred stock. Defendants could have only acted<br />
with Board authorization, and the board had not yet clearly indicated it would actually make<br />
amendments. The court also held that Plaintiffs were not likely to succeed in establishing that the<br />
statements contained in Defendant’s December 2011 and January 2012 Schedule TO-I filing and<br />
amendments regarding the lack of any then-pending plans, proposals, or negotiations were false<br />
or misrepresentations, as Plaintiffs were not likely to be able to prove that the discussions that<br />
occurred between Emmis and Disney Radio Centro were sufficiently advanced to have triggered<br />
a duty to disclose at the time those filings were made.<br />
The court held that Plaintiffs failed to meet any of the threshold requirements for<br />
injunctive relief, as it would not be likely to succeed on the legal merits of their claim, and also<br />
that they were not likely to suffer any irreparable harm, and they could be compensated by an<br />
award of monetary damages. Finding that, the court declined to address the balance of harms or<br />
C.2<br />
121
public interest factors, and found that at this preliminary stage of the litigation, Plaintiffs failed to<br />
show Defendants’ actions contravened the relevant federal securities disclosure laws.<br />
Swanson v. Weil, 2012 US. Dist. LEXIS 138182 (D. Colo. Sept. 26, 2012).<br />
The U.S. District Court for the District of Colorado granted nominal Defendant Janus’s<br />
motion (joined by individual Defendants) to dismiss Plaintiff’s complaint on the basis that<br />
Plaintiff did not make a pre-litigation demand on Janus’ Board of Directors and allegedly failed<br />
to meet the stringent requirements for showing demand futility. The court also granted individual<br />
Defendants’ motion to dismiss Plaintiff’s claims, which included a violation of Section 14(a) of<br />
the Securities Exchange Act of 1934.<br />
In considering Defendants’ motions to dismiss, the court found the Plaintiff did not state<br />
with particularity any effort to obtain the desired action from the directors and the reasons for<br />
obtaining the action or not making the effort. As the Plaintiff did not, the court applied the<br />
demand futility exception defined by the law of the State of incorporation, in this case Delaware.<br />
Specifically related to 14(a), the Plaintiff must plead a material misstatement or omission. The<br />
court found that Plaintiff did not plead facts that created a reasonable doubt that the Committee<br />
violated its policies and metrics in awarding performance. Nor did the Plaintiff raise a reasonable<br />
doubt that the Board applied these metrics in bad faith in awarding the 2010 compensation.<br />
Moreover, the court found that the proxy did not represent that the share price was the sole<br />
measure of performance relevant to executive compensation. The court further stated that<br />
demand is not per se excused for a Section 14(a) claim. Thus, Defendant’s motion to dismiss was<br />
granted by the court.<br />
C.2<br />
Deborah G. Mallow IRA Sep Inv. Plan v. Aubrey K. McClendon, 2012 U.S. Dist. LEXIS 78479<br />
(W.D. Okla. June 6, 2012).<br />
The U.S. District Court for the Western District of Kentucky denied Plaintiffs’ motions<br />
for a preliminary injunction based on alleged violations of Section 14(a) of the Securities<br />
Exchange Act of 1934. The Plaintiffs asserted that Defendants failed to disclose material<br />
information necessary to allow Chesapeake shareholders to cast a fully informed vote of<br />
Chesapeake’s annual meeting of shareholders, and sought to enjoin that meeting.<br />
In considering Plaintiffs’ allegations, the court clarified that despite the Supreme Court’s<br />
recognition that the use of a materially misleading solicitation poses the kind of irreparable<br />
injury to stockholders justifying injunctive relief prior to a shareholder’s meeting, a mere<br />
showing of a materially false solicitation did not prove irreparable harm. In the instant action, the<br />
court found that Plaintiffs did not meet their burden of showing irreparable injury if the<br />
injunction were denied, because Plaintiffs do have an alternate adequate remedy. If the court<br />
were to ultimately conclude that Defendants failed to disclose material information in the 2012<br />
proxy, the court could void the shareholders’ vote on the voting items related to that material<br />
information and order that those voting items be resubmitted to the shareholders. The court also<br />
noted that while SEC action was in no way binding on the court, it did find the SEC’s review and<br />
122<br />
C.2
clearance of the 2012 Proxy persuasive in deciding this matter. Thus, the court denied Plaintiffs’<br />
motions for a preliminary injunction.<br />
Gottlieb v. Willis, 2012 U.S. Dist. LEXIS 159343 (D. Minn. Nov. 7, 2012).<br />
The U.S. District Court for the District of Minnesota denied Plaintiff’s motion for a<br />
preliminary injunction based on allegations that individual members of Defendant Navarre’s<br />
board of directors, along with Defendant Navarre, violated Section 14(a) of the Securities<br />
Exchange Act of 1934. The Plaintiff alleges that the proxy statement failed to disclose material<br />
information necessary for Navarre’s shareholders to make an informed decision about whether to<br />
approve the issuance of shares necessary for the merger. Defendant Navarre filed a Schedule<br />
14A proxy statement with the Securities and Exchange Commission (SEC), in which it sought<br />
the approval of Navarre’s shareholders to issue the shares necessary to acquire SpeedFC in a<br />
merger. Plaintiff alleged the proxy statement was deficient in that it: 1) failed to disclose certain<br />
financial information, including the companies’ financial forecasts, the amount of cost savings<br />
and other synergies expected to be realized from the merger, and details concerning Roth’s<br />
analysis of the transaction; 2) failed to disclose certain details concerning Roth’s conflict of<br />
interest; and 3) failed to disclose the strategic alternatives that Navarre considered.<br />
In considering the Plaintiff’s request for a preliminary injunction, the court found that the<br />
Plaintiff did not cite a single statement in the proxy statement that was false or misleading, but<br />
rather cited various truthful statements made in the proxy statement and argued that the<br />
Defendant should say more about those subjects. The court stated that materiality was distinct<br />
from the element of a false or misleading statement, and because the Plaintiff did not identify<br />
any such statement in the proxy statement, she had not demonstrated a likelihood of success on<br />
her 14(a) claim. The court further found that while she may suffer irreparable harm as a result of<br />
the merger, the court would potentially inflict irreparable harm by enjoining the merger, which<br />
could impose cost on the participants in the form of lost time value of money, as well as even<br />
jeopardize the transaction. The court found that under those circumstances, and the failure to<br />
show a likelihood of success on the merits (applying to the fiduciary claim as well), the public<br />
interest indicated that her motion be denied. Thus, the court denied Plaintiff’s motion for<br />
preliminary injunction.<br />
Smith v. Robbins & Myers, Inc., 2012 U.S. Dist. LEXIS 164868 (S.D. Ohio Nov. 19, 2012).<br />
The United States District Court for the Southern District of Ohio granted Plaintiff’s<br />
motion for leave to file a second amended complaint. In doing so, the court also denied as moot<br />
Defendant’s motion to dismiss. Defendant’s motion to dismiss was based partially on an<br />
argument that Plaintiff’s allegations in its proposed amended complaint are futile under Section<br />
14(a) of the Securities Exchange Act of 1934 because none of the alleged omissions were<br />
material.<br />
C.2<br />
C.2<br />
123
The court noted that a determination of materiality "requires delicate assessments of the<br />
inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of<br />
those inferences to him and these assessments are peculiarly ones for the trier of fact." Thus, the<br />
court declined to engage in a fact-intensive test and found that for purposes of its inquiry at that<br />
stage in the litigation, Defendants had sufficiently alleged material omissions.<br />
For example, the proposed amended complaint alleged that Defendants omitted critical<br />
information about the strategic alternatives pursued and then abandoned by the Board. The<br />
proposed amended complaint explained that this information was material in the context of other<br />
statements made by Defendants in the Proxy regarding the strategic alternatives and "because<br />
shareholders are entitled to be informed of: (i) stand-alone options that may provide greater longterm<br />
value for shareholders than the consideration offered by NOVI, before they are asked to<br />
vote in favor of the Merger; and (ii) the extent of the Board's consideration of the standalone<br />
options in the context of their consideration of the Merger, necessary for the Company's<br />
shareholders to make a meaningful decision on whether they agreed with the Board's<br />
recommendation in favor of the Merger."<br />
Defendants did not provide any authority supporting a finding that the alleged omissions<br />
were immaterial as a matter of law at that stage in the litigation. Accordingly, the court allowed<br />
Plaintiff to amend the complaint to add Section 14(a) allegations. Finally, Defendants argued<br />
that the additional 14(a) allegations in the proposed amended complaint were futile in connection<br />
with the PSLRA requirement that Plaintiff identify statements in the Proxy which are rendered<br />
false or misleading by virtue of the alleged omissions. However, the proposed amended<br />
complaint identified specific statements in the proxy rendered misleading by each alleged<br />
omission and specifically explained how the alleged omissions made these statements<br />
misleading.<br />
Premium of America v. Save POA, 2012 U.S. Dist. LEXIS 139745 (D. Md. Sept. 27, 2012).<br />
Plaintiff sought declaratory and injunctive relief for alleged violations of Section 14 of<br />
the Securities Exchange Act of 1934 on the grounds that Defendant failed to comply with the<br />
SEC’s filing and delivery rules applicable to proxy solicitations. Plaintiff further alleged that<br />
Defendant failed to comply with the SEC rule prohibiting materially false or misleading<br />
statements and omissions in proxy solicitations. Defendant moved to dismiss for lack of<br />
jurisdiction or for failure to state a claim, on the grounds that Plaintiff’s membership interests<br />
were not registered at the time of Defendant’s solicitation.<br />
The District Court of Maryland held that proxy solicitation rules under Section 14 of the<br />
Securities Exchange Act do not apply when the membership interests in question were not<br />
registered with the SEC. The Court found that because the Exchange Act’s proxy solicitation<br />
provisions and implementing rules only apply to securities that are “registered” under the Act,<br />
Section 14 does not apply to securities that “should” or “ought” or “will” be registered. The<br />
Court accordingly granted Defendant’s motion to dismiss.<br />
C.2<br />
124
C.2<br />
In re Wal-Mart Stores, Inc. S'holder Derivative Litig., 2012 U.S. Dist. LEXIS 167923 (W.D.<br />
Ark. Nov. 27, 2012).<br />
The U.S. District Court for the Western District of Arkansas stayed and administratively<br />
terminated a consolidated shareholder derivative action brought by Plaintiffs against current and<br />
former directors and officers of Wal-Mart, pending the resolution of related state court actions in<br />
the Delaware Court of Chancery. Plaintiffs' complaint alleged breaches of fiduciary duty,<br />
violations of Section 14(a) and 29(b) of the Securities Exchange Act of 1934 (“Exchange Act”),<br />
and claims for contribution and indemnification against the Individual Defendants, all related to<br />
the alleged cover-up of bribes involving a Mexican subsidiary.<br />
Plaintiffs' Exchange Act claim stated that Defendants violated section 14(a) by producing<br />
proxies that "materially misrepresented" the effectiveness of the board's supervision and<br />
oversight and its compliance with Wal-Mart's Statement of Ethics.<br />
In staying the Exchange Act claim, the court noted that Plaintiffs' Exchange Act claim<br />
was, in essence, duplicative of the breach of fiduciary duty claims present in the Delaware<br />
action. They recognized that many courts, including one in their circuit, have held that federal<br />
and state actions are parallel under these circumstances due to the likelihood that the state action,<br />
while not exercising jurisdiction over the 14(a) claim, will effectively dispose of the 14(a) claim<br />
by adjudicating duplicative state law claims that have the same elements and carry the same<br />
evidentiary burdens. The court agreed.<br />
The court reasoned that while the Delaware common law claims and the 14(a) claim<br />
"stem from different sources of law, [they] are substantially the same." The court felt that<br />
Plaintiffs were essentially attempting to litigate the same claim under two similar causes of<br />
action and because both the court and the Delaware Chancery Court would be required to<br />
determine whether Wal-Mart officers made material misrepresentations and/or omissions, the<br />
"disposition of the state claims is 'substantially likely' to dispose of the Exchange Act claims" in<br />
this court.<br />
Louisiana Mun. Police Emps. Ret. Sys. v. Cooper Indust. PLC, 2012 U.S. Dist. LEXIS 148542<br />
(N.D. Ohio Oct. 16, 2012).<br />
The court granted Defendants’ motion to dismiss where Plaintiffs, shareholders of<br />
Cooper Industries PLC (“Cooper”), brought a derivative action against Cooper, Eaton<br />
Corporation (“Eaton”), and other officers challenging Eaton’s acquisition of Cooper and ultimate<br />
formation of New Eaton. They claimed the acquisition deprived them of the proper value for<br />
their shares. New Eaton was formed and registered with SEC. Subsequently, Cooper and Eaton<br />
issued a joint proxy statement. This statement was eventually superseded by a second, more<br />
detailed, proxy statement. Plaintiffs alleged that the Defendants failure to include specific factual<br />
valuation information from the companies’ financial advisors was in violation of Section 14(a) of<br />
the Securities Exchange Act of 1934 and amounted to a misleading proxy statement.<br />
125<br />
C.2
The court was clear that “an omission of information from a proxy statement will violate<br />
Section 14(a) and Rule 14a-9 only if either the SEC regulations specifically require disclosure of<br />
the omitted information in a proxy statement, or the omission makes other statements in the<br />
proxy statement materially false or misleading.” Plaintiffs plead no facts to meet either of the<br />
conditions. In fact, much of the detailed valuation information they sought was included in the<br />
second proxy statement. Without facts to show that detailed valuation information was required<br />
or the omission of that information created materially false or misleading statements, the<br />
Plaintiffs had no claim. Indeed, “even though a Plaintiff ‘might want more information,’ a<br />
Plaintiff is only entitled to the information required by Rule 14a-9.”<br />
In Re Diamond Foods, Inc., 2012 U.S. Dist. LEXIS 74129 (N.D. Cal. May 29, 2012).<br />
The U.S. District Court for the Northern District of California granted nominal<br />
Defendant’s motion to dismiss for lack of subject matter jurisdiction for Plaintiff’s claim under<br />
Section 14(a) of the Securities Exchange Act of 1934. Plaintiffs allege that the company’s<br />
directors disseminated materially false and misleading proxy statements in 2010 and 2011 in<br />
violation of Section 14(a). Nominal Defendant argues that Plaintiff’s Section 14(a) claim fails as<br />
to the 2011 proxy because it is moot given that the proposed transaction was not consummated 2)<br />
Plaintiffs cannot establish that the proxy was an essential link in the accomplishment of the<br />
proposed transaction and 3) Plaintiffs cannot establish materiality.<br />
In considering the Defendant’s motion to dismiss with respect to Plaintiff’s claims about<br />
the 2011 proxy statement, the court found that Plaintiffs could not state a claim under Section<br />
14(a) because the completed transaction would have been beneficial rather than detrimental to<br />
the company. The court stated an omission for the purposes of Section 14(a) was material if there<br />
was a substantial likelihood that a reasonable shareholder would consider it important in<br />
deciding how to vote, which was not the case here where the correct financial results would have<br />
made Diamond shareholders more supportive of the deal.. The court further stated the Section<br />
14(a) claim should be allowed to proceed where the underlying transaction did not go forward<br />
because Plaintiff did not incur expenses responding to the misleading proxy, such as resolicitation<br />
of proxies to correct prior misleading statements. Thus, Plaintiffs could not show<br />
materiality and the 14(a) claim to the extent it was based on the 2011 proxy statement failed.<br />
In considering the 2010 proxy statement, the court found there was no specific<br />
transaction subject to this proxy. The court stated a claim that the reelection of directors was an<br />
essential link to loss-generating corporate action because of the directors’ subsequent<br />
mismanagement could not form the basis of liability under Section 14(a). Thus, the court granted<br />
Defendant’s motion to dismiss.<br />
C.2<br />
126
C.2<br />
In re Finisar Corp., 2012 U.S. District LEXIS 97807 (N.D. Cal. July 12, 2012).<br />
The United States District Court for the Northern District of California dismissed<br />
Plaintiff’s claim of Defendants’ violation of Section 14(a) of the Securities Exchange Act of<br />
1934. Plaintiffs alleged that director Defendants used falsified proxy solicitations to maintain<br />
their positions on the board and, by extension, the “continuation of their unlawful stock option<br />
backdating scheme.” Plaintiffs alleged had shareholders known directors were granting<br />
themselves and others backdated options, they would not have voted to keep them on the board.<br />
Plaintiffs also claim that Defendants used the 2005 proxy statement, which promised that stock<br />
options would be granted at fair market value, to gain approval of the 2005 Stock Incentive Plan,<br />
which shareholders would have rejected had they known all the facts.<br />
In considering Plaintiffs’ allegations, the court found that under the statute of repose, the<br />
only proxy statements in play were those between 2004 and 2006. Because Defendants offered<br />
legitimate explanations for the challenged grants issued in 2005, the only questionable grant<br />
issued during that time was the 2004 grant. However, as Plaintiffs made clear, only the 2005 and<br />
2006 proxy solicitations sought the re-election of directors or the approval of stock plans. Thus,<br />
the court dismissed Plaintiffs’ claim under Section 14(a) without prejudice, because it was<br />
possible that Plaintiffs may be able to allege additional facts regarding the 2004 proxy statement<br />
that would sustain a claim.<br />
C.2<br />
Krieger v. Atheros Communs., Inc., 2012 U.S. Dist. LEXIS 74214 (N.D. Cal. May 29, 2012).<br />
The U.S. District Court of the Northern District of California granted Defendant’s motion<br />
to dismiss claims asserted by Plaintiffs in its first amended complaint (“FAC”) for violations of<br />
Section 11 of the Securities Act of 1933 and Section 14(a) and Rule 14a-9 of the Securities<br />
Exchange Act of 1934. The Defendant, Atheros Communications, Inc. (“Atheros”) contended<br />
that the Plaintiff had not stated a claim upon which relief could be granted.<br />
Atheros argued that Plaintiff's FAC failed to sufficiently allege the necessary elements of<br />
a Section 14(a) claim because the FAC did not allege: (1) that any statement in the Proxy was<br />
rendered false or misleading by the alleged omissions; (2) facts that give rise to a strong<br />
inference of negligence; or (3) loss causation.<br />
As the court noted initially, to state a claim that Defendants made material<br />
misrepresentations or omissions in violation of § 14(a) and Rule 14a-9, Plaintiffs must allege<br />
sufficient facts showing: "(1) a proxy statement contained a material misrepresentation or<br />
omission which (2) caused the Plaintiff injury and (3) that the proxy solicitation itself, rather than<br />
the particular defect in the solicitation materials, was an essential link in the accomplishment of<br />
the transaction." Further, a section 14(a) claim must allege "loss causation," which "requires a<br />
showing that the Defendant 'caused the loss for which the Plaintiff seeks to recover damages.'"<br />
"To show loss causation, a Plaintiff must prove both economic loss and proximate causation. In<br />
well-pleaded §14(a) claims, loss causation connects the proxy misstatements with an actual<br />
economic harm." The complaint must "provide the Defendants with notice of what the relevant<br />
127
economic loss might be or of what the causal connection might be between that loss and the<br />
misrepresentation."<br />
The court held that Plaintiff's FAC failed to allege loss causation. First, the court found<br />
that the FAC suggested the reasonable inference that other factors and the timing of the merger,<br />
rather than any misstatement or omission in the proxy statement, caused any alleged loss.<br />
Moreover, the FAC did not connect any proxy misstatements or omissions with an actual<br />
economic harm, noting that "conclusory assertions of loss are insufficient."<br />
Thus, Plaintiff's FAC failed to sufficiently allege "loss causation," a necessary element of<br />
a Section 14(a) claim. Accordingly, Plaintiff's Section 14(a) claim was dismissed. However, this<br />
claim was dismissed without prejudice because it was not apparent that "the pleading could not<br />
possibly be cured by the allegation of other facts." Because of the dismissal on this ground, the<br />
court declined to address the other elements of a Section 14(a), though it strongly hinted that<br />
those allegations were similarly deficient.<br />
Anderson v. McGrath, 2012 U.S. Dist. LEXIS 156625 (D. Ariz. Nov. 1, 2012).<br />
The U. S. District Court for the District of Arizona granted Defendants McGrath, Labine<br />
and Ensigns’ motions in full and granted the D&O Defendants’ (a group of Director and Officer<br />
Defendants) motion in part dismissing Plaintiffs’ claims alleging a violation of Section 14(e) of<br />
the Securities Exchange Act of 1934. Plaintiffs claim that Directors, Officers, and others who<br />
sold securities in Domin-8 (a software company in which Plaintiffs invested) misled investors by<br />
failing to disclose material information and by continuing to sell securities after Domin-8 began<br />
contemplating bankruptcy.<br />
The court found that with respect to the 14(e) claim alleged against the 2006 Board and<br />
Defendant McGrath, an adequate pleading required allegations of misstatements or omissions of<br />
material facts in connection with a tender offer. The court found Plaintiffs did not allege facts<br />
showing any misstatements or omissions were made by the Defendant Directors. Because they<br />
pled no misstatements or omissions, the Court dismissed the claim with respect to the 2006<br />
Board.<br />
St. Louis Police Retirement System v. Clinton H. Severson, 2012 U.S. Dist. LEXIS 152392 (N.D.<br />
Cal., Oct. 23, 2012).<br />
The Northern District of California granted, in part, the motion for preliminary injunction<br />
for a derivative action brought by shareholders, St. Louis Police Retirement System, against<br />
Defendants, Abaxis, Inc. and various officers in their individual capacities for violations of<br />
Section 14(a) of the Securities Exchange Act of 1934. The controversy surrounded the<br />
company’s equity incentive plan, approved by the shareholders, that set the full value award limit<br />
at 500,000 shares. Although Abaxis had exceeded the full value award limit, it filed with the<br />
C.2<br />
C.2<br />
128
SEC and issued to its shareholder a proxy statement that, among other things, sought to eliminate<br />
the full value award limit.<br />
The court used a four prong test for determining whether to issue the preliminary<br />
injunction: “(1) likely success on the merits; (2) likely irreparable harm in the absence of<br />
preliminary relief; (3) that the balance of equities tips in the Plaintiffs favor; and (4) that an<br />
injunction is in the public interest.” Under the test, the court found that the current status of the<br />
shares issued was material and the shareholders needed to provide all materials facts that would<br />
shed light on the purposes or effects of the vote. The fact that this information was contained in<br />
the Company’s 8-K was not relevant; the information should have been presented to the<br />
shareholders in the statement. It held that as a general rule, disclosure deficiencies cannot be<br />
retroactively remedied effectively, thus, there was irreparable harm. In regards to the final to<br />
prongs, the court found no concrete evidence of hardships, such as being delisted by the<br />
NASDAQ, and thus felt the balance favored enjoining. Indeed, “[a] fully informed shareholder<br />
vote in compliance with Section 14(a) of the Securities Exchange Act…is in the best interests of<br />
shareholders and the shareholding public generally.”<br />
In re HP Derivative Litig., 2012 U.S. Dist. LEXIS 137640 (N.D. Cal. Sept. 25, 2012).<br />
The United States District Court for the Northern District of California granted the<br />
Defendants’ motion to dismiss where HP’s former CEO, Hurd, and its board members were the<br />
subject of a shareholders derivative suit related to Hurd’s misconduct while in office and<br />
eventual termination. In 2010, Hurd was accused of sexual harassment by an independent<br />
contractor and HP eventually discovered inappropriate expenses intended to conceal the personal<br />
relationship. Prior to this discovery and Hurd’s eventual release, Hurd’s employment contract<br />
had expired yet the HP board falsely represented in proxy statements that his contract was still in<br />
effect and valid. These representations were then used to re-elect Hurd for another term and<br />
make the final decisions on the Stock Incentive Plan for officers, directors and employees. The<br />
Plaintiffs argued that these misrepresentations on the proxy statement, along with the Board<br />
providing unreasonable compensation and benefits to Hurd in his separation agreement, harmed<br />
the company. They brought multiple claims for waste, breach of fiduciary duty, unjust<br />
enrichment, and misleading proxy statements under Section 14(a) of the Securities Exchange Act<br />
of 1934.<br />
Under Section 14(a), the Plaintiffs were not challenging the affirmative board decision.<br />
“Where a Plaintiff does not challenge an affirmative board decision…the analysis is whether<br />
Plaintiff has pleaded ‘particularized fact[s that] create a reasonable doubt that, as of the time the<br />
complaint is filed, the board of directors could have properly exercised its independent and<br />
disinterested business judgment in responding to a demand.” Furthermore, the court defined<br />
three prongs the Plaintiffs had to allege to state a claim: “(1) Defendants made a material<br />
misrepresentation or omission in a proxy statement; (2) with the requisite state of mind; and (3)<br />
that the proxy statement was the transactional cause of harm which Plaintiff complains.”<br />
Plaintiffs failed to meet prongs (1) and (2) of this three part test. Plaintiff’s alleged that<br />
Hurd’s lack of a contract relieved him of certain obligations under that contract and this fact<br />
129<br />
C.2
could have been material in the shareholders’ reelection vote and in their stock plan approval.<br />
The court held that Plaintiffs did not plead sufficient facts to show that the misrepresentation was<br />
material since they did not identify the specific obligations nor did they allege facts to show that<br />
a shareholder’s vote would have been affected by knowledge of these obligations. Additionally,<br />
the Plaintiffs alleged no facts to illustrate that a reasonable shareholder would have considered<br />
the contract an important factor in his or her vote. In regards to the stock options, the court<br />
rejected Plaintiffs’ argument that the lack of limitation on the amount of stock options Hurd<br />
could receive, normally limited by the contract, constituted a material misrepresentation. The<br />
Plaintiffs needed to show that the stock options difference would have affected the shareholders’<br />
vote on the stock option plan.<br />
Finally, the court held that Plaintiffs failed to provide any link between the<br />
misrepresentation and the harm. The court rejected the Plaintiffs’ argument that the harm was<br />
the reelection of the Board members, finding that in instances like this one, the financial lose was<br />
a result of mismanagement, not the misleading statement. Indeed, but for the reelection caused<br />
by the misleading proxy statement, the Board members would not have been in office and thus<br />
able to agree to the damaging separation agreement.<br />
In re Wells Real Estate Inv. Trust Sec. Litig., 2012 U.S. Dist. LEXIS 156173 (N.D. Ga. Sept. 26,<br />
2012).<br />
The U.S. District Court for the Northern District of Georgia granted Defendants’<br />
summary judgment motion to dismiss claims asserted by Plaintiff for violations of §14(a) and<br />
Rule 14a-9 of the Securities Exchange Act of 1934. Plaintiff claimed that in connection with an<br />
issuance of shares, the Defendants failed to disclose in their proxy and supplemental proxy that<br />
another company, Lexington, sent letters inquiring about purchasing shares of Wells REIT.<br />
The Defendants moved for summary judgment arguing that the undisputed facts established that<br />
the Plaintiff could not show economic loss and therefore, could not establish loss causation, an<br />
essential element of a § 14(a) claim. Additionally, the Defendants argued that the Lexington<br />
inquiry was immaterial and the Plaintiff could not demonstrate the requisite level of culpability.<br />
The Plaintiff contended that the issuance of shares to the Wells Defendants harmed the<br />
shareholders who were entitled to vote prior to the issuance, and that harm may be valued as the<br />
reduction in those shareholders' equity value resulting from the issuance of $175 million in<br />
shares in return for little or no consideration. The Defendants contended that this injury is one to<br />
the REIT, not the shareholders. The court noted that it had dismissed the derivative claims in this<br />
action due to the Plaintiff's failure to make a pre-suit demand on the REIT board. Therefore, if<br />
the court found that the economic loss alleged by the Plaintiff was really harm to the REIT, as<br />
opposed to a direct harm to individual shareholders, the Defendant would be entitled to summary<br />
judgment on the economic loss issue.<br />
The Plaintiff argued that a federal proxy claim was both a direct and a derivative claim.<br />
The court did not disagree. However, the precise inquiry was whether the economic loss alleged<br />
by the Plaintiff—payment of $175 million in REIT stock for an entity worth nothing—is direct<br />
harm to the shareholders or is derivative in nature, which is, harm to the corporate entity.<br />
Applying Maryland law, the court analyzed whether the shareholders' injury is distinct from that<br />
130<br />
C.2
suffered by the corporation. The court found the economic loss alleged—the difference between<br />
what was paid for the issuance and its value at that time—was suffered by the company itself and<br />
not directly by individual shareholders. Therefore, the Plaintiff had not met its burden of<br />
pointing to evidence of economic loss. Therefore, the Defendants were entitled to summary<br />
judgment as to a claim for monetary damages.<br />
As to materiality, the court held it was undisputed that the two-tiered pricing contained in<br />
the Lexington letters was not the result of a valuation of the issuance. Instead, it was a<br />
mathematical calculation to reflect the dilutive impact of the issuance of 19,546,302 new shares<br />
— a fact that was specifically told to shareholders in the proxy. Therefore, the court concluded<br />
as a matter of law that disclosure of the Lexington offers would not have altered the "total mix"<br />
of information available to shareholders. Accordingly, the Defendants were entitled to summary<br />
judgment as to materiality of the Lexington Letters.<br />
3. Section 15(c)<br />
C.3<br />
SEC v. Goble, 682 F.3d 934 (11th Cir. May 29, 2012).<br />
The Securities and Exchange Commission (the “Commission”) brought a civil<br />
enforcement action against Richard L. Goble alleging that he directed one of his employees to<br />
record a sham purchase of a money market fund on the company books to manipulate the amount<br />
of reserves his company (the “Firm”) was required to set aside to safeguard consumer assets.<br />
The Commission alleged that Goble violated Section 10(b) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 and aided and abetted violations of Sections 15(c)(3) and 17(a) of the<br />
Securities Exchange Act of 1934.<br />
The United States District Court for the Middle District of Florida (the “District Court”)<br />
found Goble liable on all counts of the complaint. This District Court permanently enjoined<br />
Goble from obtaining a securities license or engaging in the securities business and from<br />
violating Sections 10(b), 15(c)(3), 17(a) of the Exchange Act.<br />
On appeal, the United States Court of Appeals for the Eleventh Circuit (“the Eleventh<br />
Circuit”) reversed the District Court’s finding that Goble had violated Section 10(b) of the<br />
Exchange Act, holding that Goble’s misrepresentation was neither material nor made in<br />
connection with the purchase or sale of securities. Accordingly, the Eleventh Circuit vacated the<br />
portion of the injunction prohibiting Goble from acquiring a securities license or engaging in the<br />
securities business, which was based on the finding of a Section 10(b) of the Exchange Act<br />
violation. The Eleventh Circuit remanded to allow the District Court to whether such an<br />
injunction was appropriate for the aiding and abetting violations.<br />
The Eleven Circuit rejected Goble’s argument that he could not be liable for aiding and<br />
abetting violations of Sections 15(c)(3) and 17(a) of the Exchange Act if he was not liable for<br />
violation of Section 10(b) of the Exchange Act. The Eleven Circuit held that, because there was<br />
no question that the Firm committed the underlying primary violations and that Goble knew of<br />
131
and assisted those violations, the District Court did not err in finding Goble liable on the aiding<br />
and abetting counts.<br />
In examining the propriety of the portion of the injunction prohibiting Goble from<br />
violating Sections 15(c)(3) and 17(a) of the Exchange Act, the Eleventh Circuit held that an<br />
injunction using language from those sections was appropriate and would meet the requirements<br />
of Fed. R. Civ. P. 65(d). However, because the injunction issued by the District Court only<br />
references Sections 15(c)(3) and 17(a) of the Exchange Act without setting forth the specific<br />
prohibited conduct, the Eleventh Circuit vacated those portions of the injunction. The Eleventh<br />
Circuit remanded to the District Court for it to draft an injunction such that Goble could identify<br />
from the four corners of the injunction what conduct is prohibited.<br />
SEC v. Morgan Keegan & Co., 678 F.3d 1233, 2012 U.S. App. LEXIS 8966 (11th Cir. 2012).<br />
The SEC alleged that defendant committed securities fraud in violation of the Securities<br />
Exchange Act of 1934, including Section 15(c)(1). The lower court granted defendant’s motion<br />
for summary judgment on the basis that the SEC had failed to show that any of the<br />
misrepresentations or omissions were “material,” as required for liability under Section 15(c)(1).<br />
On appeal, the Eleventh Circuit analyzed the proper test for “materiality,” explaining that “a<br />
misstatement or omission is material if there is a ‘substantial likelihood that the disclosure of the<br />
omitted fact would have been viewed by the reasonable investor as having significantly altered<br />
the ‘total mix’ of information made available.’” Applying the “total mix” rule to the facts of the<br />
case, the court rejected the defendant’s argument that the materiality of a misrepresentation<br />
should be evaluated in the context of disclosures to the public as a whole – rather, the court<br />
concluded, the materiality standard “analyzes the ‘total mix’ of information available to a<br />
hypothetical reasonable investor, not just to the public at large.” Thus, the defendant could not<br />
show that its misrepresentations were immaterial merely by showing that they were not made<br />
publicly. Similarly, the court set aside defendant’s argument that a threshold number of<br />
investors must be misled for a misrepresentation to be material. Finally, the court concluded that<br />
it was a highly fact-specific inquiry whether written disclosures rendered oral misrepresentations<br />
immaterial – thus, the question was one for the trier of fact. Upon this reasoning, the court<br />
overturned the grant of summary judgment for the defendant.<br />
SEC v. Madoff, <strong>Litigation</strong> Release No. 22407, 2012 SEC LEXIS 2040 (S.D.N.Y. June 29, 2012).<br />
The Securities and Exchange Commission (the “Commission”) filed a complaint in Civil<br />
Action No. 12-cv-05100 in the United States District Court for the Southern District of New<br />
York against Peter Madoff, the brother of Bernie Madoff. The Commission charges Peter<br />
Madoff with violating and aiding and abetted violations of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934 and Section 207 of the Investment Advisers Act of 1940. The<br />
Commission also charges Peter Madoff with aiding and abetting violations of Sections 15(b)(1),<br />
15(c) and 17(a) and Rules 10b-3, 15b3-1 and 17a-3 of the Securities Exchange Act of 1934 and<br />
Sections 204, 206(1), 206(2), 206(4) and 207 and Rules 204-2 and 206(4)-7 of the Investment<br />
132<br />
C.3<br />
C.3
Advisers Act of 1940. The U.S. Attorney’s Office has filed parallel criminal charges against<br />
Peter Madoff.<br />
The Commission alleges that Peter Madoff, who served as Chief Compliance Officer and<br />
Senior Managing Director at Bernard L. Madoff Investment Securities LLC (the “Firm”) from<br />
1969 to December 2008, created false compliance manuals, written supervisory procedures,<br />
reports of annual compliance reviews, and compliance certifications. The Commission further<br />
alleges that, after Bernie Madoff realized in late 2008 that his scheme was on the verge of<br />
collapse, Peter Madoff assisted his brother in identifying the family, friends, and employees to<br />
investor money would be distributed, including withdrawing $ 200,000 account for himself. The<br />
Commission’s complaint seeks, inter alia, permanent injunctions, financial penalties, and a court<br />
order requiring Peter Madoff to disgorge his ill-gotten gains.<br />
SEC v. Ehrenkrantz King Nussbaum, Inc., 05 CV 4643 (DRH) (GRB), 2012 U.S. Dist. LEXIS<br />
35228 (E.D.N.Y. Mar. 15, 2012).<br />
The Securities and Exchange Commission (the “Commission”) commenced an<br />
enforcement action against, inter alia, Brendan E. Murray alleging that he violated Section 17(a)<br />
of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act<br />
of 1934. The Commission also charges Murray with aided and abetted violations of Section<br />
15(c)(1) and 15(b)(7) and Rule 15b7-1 of the Securities Exchange Act of 1934. The<br />
Commission moved for summary judgment on it claims.<br />
The United States District Court for the Eastern District of New York (the “District<br />
Court”) granted the Commission summary judgment on most of its claims. The District Court<br />
found that Murray was the chief executive, sole owner, and only employee of a corporation<br />
formed for the purpose of “becom[ing] involved in the mutual fund industry.” Murray intended<br />
that his company would serve as a conduit for investment advisors engaged in market timing.<br />
Murray created a scheme whereby he used multiple accounts and mirror accounts to shield the<br />
investor identities with the intent of subverting protections that mutual fund families put in place<br />
to prevent market timing. The Court held that this conduct violated Section 17(a) of the<br />
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.<br />
The District Court also held that the Commission “overwhelmingly established” that<br />
Murray had actual knowledge that his brokerage client violated Section 15(c)(1) of the Exchange<br />
Act by using “manipulative, deceptive, or other fraudulent device[s] or contrivance[s]” in<br />
connection with securities transactions. The District Court also found that Murray “provided<br />
‘substantial assistance’ in carrying out that violation.” It, therefore, held that Murray aided and<br />
abetted the violation of Section 15(c)(1) of the Exchange Act.<br />
The District Court, however, found that with respect to the allegation that Murray aided<br />
and abetted violation of Section 15(b)(7) and Rule 15b7-1 of the Exchange Act, Murray<br />
proffered sufficient evidence to create a jury question concerning whether he had actual<br />
knowledge of the primary violation. The District Court, therefore, denied the Commission’s<br />
request for summary judgment on that count.<br />
C.3<br />
133
C.3<br />
Bamert v. Pulte Home Corp., Case No. 6:08-cv-2120-Orl-22GJK, 2012 U.S. Dist. LEXIS<br />
112638 (M.D. Fla. Aug. 10, 2012).<br />
Plaintiffs sued Defendants in connection with the purchase of condominium units and<br />
related management agreements for short-term rentals of their units. Plaintiffs assert federal<br />
claims for sale of unregistered securities, sale of securities by unlicensed persons, and securities<br />
fraud. The United States District Court for the Middle District of Florida (the “District Court”)<br />
accepted the Magistrate’s Report and Recommendation, Bamert v. Pulte Home Corp., Case No:<br />
6:08-cv-2120-Orl-22GJK, 2012 U.S. Dist. LEXIS 112688 (M.D. Fla. Jun. 11, 2012), that the<br />
counts for sale of unregistered securities and securities fraud be dismissed with leave to amend.<br />
The District Court also accepted the Magistrate’s recommendation that the count for sale of<br />
securities by unlicensed persons be dismissed with prejudice because there is no private right of<br />
action under Sections 15(a) or 15(c)(1) of the Securities Exchange Act of 1934.<br />
In re Adams, Securities Exchange Act of 1934 Release No. 67019, 2012 SEC LEXIS 1564<br />
(May 18, 2012).<br />
The Commission issued an order barring Respondent Alan Berkun from association with<br />
a broker-dealer and from participating in an offering of penny stock. The Commission also<br />
ordered him to cease and desist from violations of the antifraud and other provisions of the<br />
securities laws. The Commission instituted proceedings against Respondent on October 18,<br />
2001, alleging that Respondent, while associated with a broker deal, used a variety of fraudulent<br />
tactics to artificially inflate the demand for, and market price of, certain securities. Respondent<br />
defaulted, having failed to answer the Commission’s charges, respond to a dispositive motion<br />
within the time provided, or otherwise defend the proceeding. The Commission, therefore, found<br />
the allegation against him to be true. The Commission ordered Respondent to cease and desist<br />
from committing or causing any violations of Sections 5(a), 5(c), and 17(a) of the Securities Act<br />
of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The<br />
Commission also ordered Respondent to cease and desist from aiding and abetting and causing<br />
violations of Section 15(c)(1) and Rules 15c1-2 and 15c1-8 of the Securities Exchange Act of<br />
1934. Respondent will be barred from association with a broker or dealer and from participating<br />
in an offering of penny stock.<br />
In re Bogar, Securities Exchange Act of 1934 Release No. 67769, 2012 SEC LEXIS 2786<br />
(Aug. 31, 2012).<br />
The Securities and Exchange Commission (the “Commission”) instituted administrative<br />
and cease-and-desist proceedings against Respondents Daniel Bogar, Bernerd E. Young, and<br />
Jason T. Green. Bogar was President, Young was Managing Director of Compliance and Chief<br />
Compliance Officer, and Green was an employee of the same registered broker-dealer and<br />
investment advisor (the “Firm.”) The Commission alleges that the Firm recommended<br />
certificates of deposit issued by its parent company (the “Parent”) to investors as safe and secure<br />
134<br />
C.3<br />
C.3
investments. Specifically, the Firm emphasized that investor funds would be pooled and<br />
invested in a well-diversified portfolio of highly marketable and liquid securities; that the Parent<br />
maintained a comprehensive insurance program; and that the Parent would generate returns to<br />
pay promised yields. In fact, these investments were a Ponzi scheme run by the sole shareholder<br />
of the Parent, who was convicted of numerous criminal charges arising out of this securities<br />
fraud. The Commission alleges that Respondents knew that the Firm’s representations were<br />
untrue when they repeated them in oral and written materials.<br />
The Commission charges Respondents with violation of Section 17(a) of the Securities<br />
Act of 1933; violation of and aiding and abetting violation of Section 10(b) and Rule 10b-5 of<br />
the Securities Exchange Act of 1934; violation of Section 15(c)(1) of the Securities Exchange<br />
Act of 1934; and aiding and abetting and causing violations of Sections 206(1) and (2) of the<br />
Investment Advisers Act of 1940.<br />
In re Ferrer, Securities Exchange Act of 1934 Release No. 66892, 2012 SEC LEXIS 1403<br />
(May 1, 2012).<br />
The Securities and Exchange Commission (the “Commission”) instituted administrative<br />
and cease-and-desist proceedings against Respondents Michael A. Ferrer and Carlos J. Ortiz,<br />
alleging that Respondents misled customers of UBS Financial Services Inc. of Puerto Rico (the<br />
“Firm”) into buying and holding hundreds of millions of dollars in affiliated, non-exchangetraded<br />
closed-end funds (“CEFs”) in 2008 and 2009. Ferrer was the Firm’s Chairman and CEO<br />
from 2003 until October 2009. Subsequently, Ferrer became the Firm’s Vice Chairman. Ortiz<br />
was the Firm’s Managing Director of Capital Markets, supervising, among other things, the<br />
Firm’s CEF trading desk.<br />
The Commission alleges that Respondents falsely misrepresented to customers that CEF<br />
prices were based on market forces such as supply and demand. The Commission also alleges<br />
that Respondents misrepresented the CEF’s liquidity, and failed to disclose that the Firm<br />
controlled the CEF secondary market. Additionally, with Ferrer’s knowledge and Ortiz’s<br />
supervision, the Firm orchestrated a scheme in which it dumped about $35 million<br />
(approximately 75%) of the Firm’s CEF shares, undercutting customer sell orders and enriching<br />
the Firm at its customers’ expense.<br />
The Commission charges Respondents with violation of Sections 17(a)(1), (2), and (3) of<br />
the Securities Act of 1933; Section 10(b) and Rule 10b-5(a), (b), and (c)of the Securities<br />
Exchange Act of 1934; and aiding and abetting violations of Section 17(a) of the Securities Act<br />
and Sections 10(b) and 15(c) and Rule 10b-5 of the Exchange Act.<br />
SEC v. ICP Asset Mgmt., LLC, <strong>Litigation</strong> Release No. 22477, 2012 SEC LEXIS 2848 (S.D.N.Y.<br />
Sept. 10, 2012).<br />
In June 2010, the Securities and Exchange Commission (the “Commission”) filed a<br />
complaint in Civil Action No. 10-cv-04791 in the United States District Court for the Southern<br />
135<br />
C.3<br />
C.3
District of New York against Defendants ICP Asset Management (the “Firm”), its founder and<br />
president Thomas C. Priore, and several related entities. The Commission alleges that<br />
Defendants engaged in fraudulent practices and misrepresentations that caused the collateralized<br />
debt obligations (CDOs) they managed to overpay for securities and lose millions of dollars.<br />
The Commission also alleges that Defendants improperly obtained fees and undisclosed profits<br />
at the expense of the CDOs and their investors.<br />
On September 6, 2012, the court approved a settlement between the Commission and<br />
Defendants. The final judgment orders Priore to pay disgorgement of $97,337, prejudgment<br />
interest of $215,045, and a penalty of $487,618. The Firm and its holding company are ordered,<br />
on a joint and several basis, to pay disgorgement of $13,916,005 and prejudgment interest of<br />
$3,709,028. The Firm also is ordered to pay a penalty of $650,000. An affiliated broker-dealer<br />
is ordered to pay disgorgement of $1,637,581, prejudgment interest of $ 301,893, and a penalty<br />
of $1,939,474.<br />
Priore also agreed to settle an administrative proceeding against him by being barred<br />
from association with a broker-dealer and from participating in an offering of penny stock. He<br />
has a right to reapply for association or participation after five years.<br />
Defendants also consented, without admitting or denying liability, to permanent<br />
injunctions enjoining them from future violations of the securities laws that they are alleged to<br />
have violated, which include Section 17(a) of the Securities Act of 1933, Sections 10(b) and<br />
15(c)(1)(A) and Rules 10b-3 and 10b-5 of the Securities Exchange Act of 1934, and Sections<br />
206(1), (2), (3), and (4) and Rules 204-2, 206(4)-7 and 206(4)-8 of the Investment Advisers Act<br />
of 1940.<br />
In re Luna, Securities Exchange Act of 1934 Release No. 67864, 2012 SEC LEXIS 2948<br />
(Sept. 14, 2012).<br />
The Securities and Exchange Commission (the “Commission”) instituted administrative<br />
proceedings against Respondent Jose Luis Luna, who held a Series 7 license and was an<br />
operations manager at a registered broker-dealer. The Commission alleges that Respondent<br />
knowingly or recklessly assisted in a scheme to defraud customers by excessively marking up or<br />
marking down structured notes and providing term sheets containing altered prices for the notes.<br />
Respondent has submitted an Offer of Settlement, which the Commission has determined to<br />
accept. On September 4, 2012, the United States District Court for the Southern District of<br />
Florida entered a consent judgment against Respondent in the civil action Securities and<br />
Exchange Commission v. Jose Luis Luna, Case No. 1:12-cv-23131-UU (S.D. FL), permanently<br />
enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section<br />
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aiding and abetting violations<br />
of Section 15(c) of the Securities Exchange Act of 1934. The Commission also barred<br />
Respondent from association with any broker, dealer, investment adviser, municipal securities<br />
dealer, or transfer agent and from participating in any offering of a penny stock. He may reapply<br />
for association.<br />
C.3<br />
136
SEC v. Neves, <strong>Litigation</strong> Release No. 22462, 2012 SEC LEXIS 2759 (S.D. Fla. Aug. 29, 2012).<br />
On August 29, 2013, the Securities and Exchange Commission (the “Commission”) filed<br />
a complaint in Civil Action No. 1:12-cv-23131 in the United States District Court for the<br />
Southern District of Florida against former Miami broker Fabrizio Neves for overcharging<br />
customers approximately $36 million by using hidden markup fees on structured note<br />
transactions. The Commission charges Defendant with violating Section 17(a) of the Securities<br />
Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided<br />
and abetted violations of Section 15(c) of the Securities Exchange Act of 1934. The<br />
Commission seeks disgorgement, financial penalties, and injunctive relief enjoining Defendant<br />
from future violations of the federal securities laws.<br />
The Commission alleges that, from 2006 to 2009, Defendant conducted a scheme to<br />
defraud customers by excessively marking up or marking down structured notes. The<br />
Commission further alleges that Defendant directed another broker to alter the structured note<br />
term sheets by either whiting out or electronically cutting and pasting the markup amounts over<br />
the actual price and trade information, and then sending the forged documents to customers.<br />
Defendant has agreed to the entry of a judgment ordering him to pay disgorgement of<br />
$923,704.85, prejudgment interest of $241,643.51, and a penalty amount to be determined. The<br />
judgment permanently enjoins him from violations of the antifraud provisions of the federal<br />
securities laws.<br />
In re UBS Fin. Svcs. Inc. of P.R., Securities Exchange Act of 1934 Release No. 66893, 2012<br />
SEC LEXIS 1394 (May 1, 2012).<br />
The Securities and Exchange Commission (the “Commission”) instituted administrative<br />
and cease-and-desist proceedings against Respondent UBS Financial Services Inc. of Puerto<br />
Rico, alleging that its former CEO and its Head of Capital Markets made misrepresentations and<br />
omissions of material facts to retail customers regarding the secondary market liquidity and<br />
pricing of affiliated non-exchange-traded closed-end funds (“CEFs”). The Commission alleges<br />
that Respondent falsely represented that CEF prices were based on market forces such as supply<br />
and demand. Respondent also failed to disclose adequately that it was the dominant CEF brokerdealer<br />
and controlled the secondary market. The Commission alleges that, between March and<br />
September 2009, Respondent dumped about $35 million (approximately 75%) of its CEF shares,<br />
undercutting customer sell orders.<br />
The Commission charges Respondent with violation of Section 17(a) of the Securities<br />
Act of 1933; Sections 10(b) and 15(c) and Rule 10b-5 of the Securities Exchange Act of 1934.<br />
Respondent has submitted an Offer of Settlement, which the Commission has determined to<br />
accept. Without admitting or denying the Commission’s allegations, Respondent agreed to cease<br />
and desist from committing or causing any violations of Sections 17(a) of the Securities Act,<br />
Sections 10(b) or 15(c) and Rule 10b-5 of the Exchange Act. Respondent also agreed to pay<br />
C.3<br />
C.3<br />
137
disgorgement of $11,500,000.00, prejudgment interest of $1,109,739.94, and a civil money<br />
penalty of $14,000,000.00 to the Commission. Respondent also agreed to an independent review<br />
of its policies, procedures, and practices, and to adopt and implement the recommendations of<br />
the independent reviewer.<br />
In re MidSouth Capital, Inc., Securities Exchange Act of 1934 Release No. 66828, 2012 SEC<br />
LEXIS 1254 (Apr. 18, 2012).<br />
The Securities and Exchange Commission (the “Commission”) instituted administrative<br />
and cease-and-desist proceedings against Respondents MidSouth Capital, Inc. (the “Firm”) and<br />
Mark D. Hill. The Commission alleges that the Firm willfully violated Sections 15(c)(3) and<br />
17(a)(1) and Rules 15c3-1, 17a-11, and 17a-3 of the Securities Exchange Act of 1934. The Firm<br />
is a registered broker-dealer and a registered investment advisor. At all relevant times, Hill was<br />
the Firm’s Chairman, largest shareholder, and CEO. Hill also served as the Firm’s Financial<br />
Operations Principal.<br />
The Commission alleges that, between 2008 and August 2011, the Firm effected<br />
securities transactions on multiple occasions when it did not have the net capital required under<br />
Section 15(c)(3) and Rule 15c3-1 of the Exchange Act. The Firm continued to effect such<br />
transactions even after being notified by both the Financial Industry Regulatory Authority<br />
(“FINRA”) and the Commission that it should cease effecting all such transactions. The Firm<br />
also failed to timely notify the Commission of its net capital deficiencies and failed to create and<br />
maintain accurate books and records as required under Section 17(a)(1) and Rules 17a-11 and<br />
17a-3 of the Exchange Act. The Commission alleges that Hill willfully aided and abetted the<br />
Firm’s violations.<br />
The Firm and Hill have submitted an Offer of Settlement, which the Commission has<br />
determined to accept. The Commission ordered that the Firm be censured, and that Respondents<br />
cease and desist from committing or causing any violation of Section 15(c)(3) and 17(a)(1) and<br />
Rules 15c-1, 17a-11, and 17a-3 of the Exchange Act. The Commission suspended Hill from<br />
associating with any broker, dealer, or investment advisor and from serving or acting as an<br />
employee, officer, or director of a registered investment company for a period of six months.<br />
Hill is also required to pay a civil penalty of $15,000.<br />
C.3<br />
4. Section 16(b)<br />
C.4<br />
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).<br />
The Supreme Court addressed the question of whether the statute of limitations for<br />
Section 16(b) claims is tolled until the insider files a Section 16(a) disclosure statement in a<br />
situation where the plaintiff knew or should have known of the insider trading through other<br />
means. Section 16(a) requires that insider disclose any changes to their ownership interests, thus<br />
conclusively providing information from which investors can seek to recover short-swing profits<br />
138
under Section 16(b). The Supreme Court vacated the Ninth Circuit’s opinion that whether the<br />
plaintiff knew or should have known of the insider’s trading is irrelevant, and that the statute of<br />
limitations was tolled until the insider files the required disclosure statement. After first<br />
observing that the Court was equally divided on the question of whether the two-year statute of<br />
limitations period could be extended in the first place, the Court nevertheless held that the test of<br />
Rule 16(b), under which the limitations period begins with "the date such profit was realized," is<br />
inconsistent with a rule that would toll the period until the disclosure statement was filed. Such a<br />
rule, the Court explained, is also not supported by the background rule of equitable tolling for<br />
fraudulent concealment. Moreover, under the Ninth Circuit’s rule, alleged insiders who for<br />
whatever reason fail to file a disclosure statement would face Section 16(b) liability forever,<br />
which Congress did not intend. The Court reaffirmed the application of ordinary rules of<br />
equitable tolling in evaluating the timeliness of Section 16(b) claims.<br />
Chechele v. Scheetz, 466 Fed. Appx 39 (2nd Cir. 2012).<br />
The district court had dismissed Plaintiff’s complaint as conclusory, in that it failed to<br />
adequately allege that Defendant was part of an ownership group to render him an insider liable<br />
for short-swing profits under Section 16(b). On appeal, Plaintiff argued that the district court<br />
erred in not considering SEC filings to establish Defendant’s insider status. The Second Circuit<br />
noted that the SEC filings were not incorporated into the Complaint and that the district court did<br />
not err in failing to consider them for the truth of their contents. Absent the SEC filings, the<br />
court agreed that the complaint’s allegations regarding the Defendant’s status were conclusory<br />
and could not survive a motion to dismiss. The court also held that it was within the district<br />
court’s discretion to deny Plaintiff leave to amend the complaint where Plaintiff failed to amend<br />
or move to amend within 21 days of the filing of the motion to dismiss, but rather made an<br />
informal request in his opposition to the motion.<br />
Huppe v. WCPS Int'l, Inc., 670 F.3d 214 (2nd Cir. 2012).<br />
The Second Circuit held that a beneficial owner's acquisition of securities directly from<br />
an issuer should not be exempt from the definition of a "purchase" under Section 16(b), under<br />
the “borderline transaction” theory, i.e., that the transaction lacks the "potential for speculative<br />
abuse" that Congress intended to cure through Section 16(b), unless such transactions were<br />
involuntary and the owners lacked access to inside information about the issuer. The court also<br />
held that limited partnerships are beneficial owners for the purposes of Section 16(b) liability,<br />
even though they may have delegated voting and investment control over their securities<br />
portfolios to their general partners' agents.<br />
C.4<br />
C.4<br />
139
C.4<br />
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2nd Cir. 2012).<br />
Defendants appealed a judgment against it for short-swing insider trading prohibited by<br />
Section 16(b). Defendants argued that the transactions at issues were not "purchases" of<br />
securities for purposes of Section 16(b), but rather that the transactions fell within the scope of<br />
the "debt" and "borderline transaction" exceptions to Section 16(b). Defendants also argued that<br />
to the extent the transactions were purchases, the limited partnership defendant should not be<br />
subject to disgorgement, but rather any liability should be limited to only the individual<br />
defendant’s pecuniary interest in the profits at issue. The “debt” exception refers to Section<br />
16(b)’s prescription that its prohibition against short-swing profits does not apply to transactions<br />
involving a security that "was acquired in good faith in connection with a debt previously<br />
contracted." The “borderline transaction” exception refers to a limited exception created by the<br />
Supreme Court and applies to transactions that do not "serve as a 'vehicle for the evil which<br />
Congress sought to prevent -- the realization of short-swing profits based upon access to inside<br />
information.'"<br />
The Court rejected reliance on the “debt” exception, agreeing with the district court’s<br />
finding that the previous debt had not matured at the time the security was acquired, and<br />
therefore could not have formed the basis for the subsequent acquisition. The Court also rejected<br />
reliance on the “borderline transaction” exception, explaining that the exception in the Second<br />
Circuit is narrowly applied to involuntary acquisitions of securities by individuals who do not<br />
have access to inside information. Because Defendants had access to inside information, the<br />
exception did not apply. Finally, the court held that both the limited partnership defendant and<br />
the individual defendant, who held a 99.9% ownership interest in the limited partnership, were<br />
beneficial owners subject to disgorgement.<br />
Donoghue v. Bulldog Investors G.P., 696 F.3d 170 (2nd Cir. 2012).<br />
Defendant argued that the judgment against it for liability for short-swing profits under<br />
Section 16(b) should be vacated for lack of standing because plaintiff failed to demonstrate that<br />
the proscribed short-swing trading caused actual injury to the issuer, which Defendant argued<br />
was necessary to satisfy the case-or-controversy requirement of Article III of the Constitution.<br />
Defendant conceded that it was the beneficial owner of more than 10% of the issuer’s common<br />
stock, and thus was prohibited under Section 16(b) from engaging in any short-swing trading, but<br />
it argued that without evidence of further wrongdoing, the Plaintiff cannot claim any cognizable<br />
injury resulting from that trading. The Second Circuit rejected the Defendants’ arguments,<br />
reasoning that through the enactment of Section 16(b) Congress “created legal rights that<br />
clarified the injury that would support standing, specifically, the breach by a statutory insider of<br />
a fiduciary duty owed to the issuer not to engage in and profit from any short-swing trading of its<br />
stock.” As such, given the derivative nature of a Section 16(b) claim, the short-swing trading by<br />
Defendant caused injury to the issuer that the court held was sufficient for constitutional<br />
standing.<br />
C.4<br />
140
C.4<br />
Chechele v. Elstain, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).<br />
Plaintiff sought disgorgement of alleged short-swing profits from Defendants under<br />
Section 16(b). Defendants moved to dismiss, arguing that their purchase of the issuer’s stock<br />
was exempted from the prohibition on short swing insider profits because it was authorized by<br />
the issuers’ board and thus permissible under Rule 16b-3. The court, however, found that<br />
Defendants' purchase was not covered by the terms of Rule 16b-3, which as applied to these<br />
facts, exempts only "acquisitions from the issuer" and not acquisitions from intermediaries such<br />
as underwriters, and denied the motion. The court justified its ruling with four reasons. First,<br />
although the underwriting agreement may have been based on the assumption that the<br />
underwriters would sell the shares to the defendants, it did not bind the underwriters to do so.<br />
Second, the court equated the transaction to a “market transaction.” Third, the court rejected<br />
defendant’s analogy between the transactions at issue and a “friends and family” allocation, as to<br />
which the SEC has issued guidance indicating that such acquisitions would not be subject to<br />
Section 16(b) disgorgement. Here, however, the court noted that “the reasoning behind the<br />
SEC's interpretation does not apply here, because the issuer dictated the quantity, price, and date<br />
terms to both the underwriter and the defendants.” Fourth, the court found no reason to depart<br />
from the plain language of the statute and the rules.<br />
Chechele v. Sperling, 2012 WL 1038653 (S.D.N.Y. Mar. 29, 2012).<br />
Plaintiff filed an action pursuant Section 16(b) seeking disgorgement of alleged shortswing<br />
profits realized by Defendants in connection with five prepaid forward sale agreements<br />
(“PFSAs”) for stock of a particular issuer. Defendants had not filed reports to disclose their sale<br />
of such stock during the six months after they purchased those securities. Defendants moved to<br />
dismiss, on the grounds their rights "became fixed and irrevocable" at the time they entered into<br />
the PFSAs, the repurchases of the Defendants' retained shares on the settlement date did not<br />
constitute a "purchase" under Section 16(b). The court agreed with Defendants’ analysis and<br />
ruled that Defendants were not liable under Section 16(b) for disgorgement of their alleged shortswing<br />
profits.<br />
Roth v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524 (S.D.N.Y. 2012).<br />
The court granted Defendants’ motions to dismiss Plaintiff’s shareholder derivative<br />
complaint for recovery of short-swing profits under Section 16(b). Although Defendants<br />
generally owned greater than 10% of the shares of a particular class of issuer’s common stock,<br />
and were therefore subjected to the reporting and disgorgement requirements of Section 16, the<br />
motion to dismiss turned on expiration of “short call options” would be considered a purchase of<br />
the security, since Defendants were no longer statutory insiders at the time the options expired.<br />
The court explained that the equivalent of the sale was the writing of the short call options, and<br />
that the equivalent of the purchase (to be matched with the sale for Section 16(b) purposes) was<br />
141<br />
C.4<br />
C.4
the expiration of the options. Because Goldman was no longer a 10% owner on the date of<br />
expiry, the court found they could not be liable under the plain language of the statute.<br />
Mercer v. Gupta, 880 F. Supp. 2d 486 (S.D.N.Y. 2012).<br />
Plaintiff filed a "short-swing" profits action under Section 16(b) against defendant Rajat<br />
Gupta, a former director of Goldman Sachs, on behalf of nominal plaintiff Goldman Sachs.,<br />
seeking to recover the profits Gupta allegedly realized from passing inside information regarding<br />
Goldman Sachs to Raj Rajaratnam, manager of the Galleon family of hedge funds. The court<br />
granted Gupta’s motion to dismiss, concluding that Plaintiff failed to plausibly allege that Gupta<br />
himself realized profits subject to disgorgement from Rajaratnam's short-swing trades of<br />
Goldman Sachs stock. Further, although Gupta had an interest in the Galleon funds that profited<br />
from the Goldman Sachs trades, Rule 16a-1 creates a "safe harbor" defense for an insider whose<br />
profits come from the portfolio securities held by another entity (like Galleon Voyager in this<br />
case), and the court ruled that Gupta can invoke the safe harbor on the face of the pleadings.<br />
Because Plaintiffs had failed to alleged facts sufficient to establish that Gupta had any actionable<br />
pecuniary interest in Galleon's short-swing trading, the court dismissed the case.<br />
Chechele v. Morgan Stanley, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012).<br />
Defendants moved to dismiss Plaintiff’s complaint, arguing that Plaintiff should have<br />
been aware of the facts underlying her Section 16(b) claim more than two years prior to the filing<br />
of the action. Plaintiff argued that the doctrine of equitable tolling rendered the action timely<br />
filed and that the question of equitable tolling could not be resolved in a motion to dismiss<br />
because it involved a factual dispute that was better resolved after discovery. The court,<br />
however, found that the complaint failed to alleged facts making it plausible to believe that<br />
equitable tolling could apply in the case, and therefore dismissed the cause of action on statute of<br />
limitations grounds. The court noted the Second Circuit’s “stringent standard” for equitable<br />
tolling. Plaintiff’s case relied on information contained in a Schedule 13D -- and in the<br />
Stockholders and Registration Rights Agreements attached as exhibits to the Schedule 13D –<br />
which were publicly filed by the issuer more than three and a half years before Plaintiff filed her<br />
complaint. In addition, the last sale that was alleged to have formed the basis for the short-swing<br />
profits occurred more than two years prior to the filing of the complaint. The court considered<br />
the fact that Plaintiff was represented by attorneys “well-versed in the requirements for a Section<br />
16(b) cause of action” and noted that such attorneys had filed at least fifteen Section 16(b) cases<br />
on behalf of the Plaintiff alone.<br />
C.4<br />
C.4<br />
142
5. Section 17<br />
C.5<br />
SEC v. Goble, 682 F.3d 934 (11th Cir. 2012).<br />
The Securities and Exchange Commission (the “Commission”) brought a civil<br />
enforcement action against Richard L. Goble alleging that he directed one of his employees to<br />
record a sham purchase of a money market fund on the company books to manipulate the amount<br />
of reserves his company (the “Firm”) was required to set aside to safeguard consumer assets.<br />
The primary thrust of the Commission’s action was the allegation that the Goble and his firm<br />
violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and aided and<br />
abetted violations of Sections 15(c)(3) of the Securities Exchange Act of 1934. Specifically,<br />
however, the Complaint also alleged that the firm violated the Exchange Act's books and records<br />
requirements at § 17(a) and Rule 17a-3 thereunder, and that Goble and other officials aided and<br />
abetted these violations. The Eleventh Circuit rejected Goble’s argument that he could not be<br />
liable for aiding and abetting violations of Sections 15(c)(3) and 17(a) of the Exchange Act if he<br />
was not liable for violation of Section 10(b) of the Exchange Act. The Eleventh Circuit held<br />
that, because there was no question that the Firm committed the underlying primary violations<br />
and that Goble knew of and assisted those violations, the District Court did not err in finding<br />
Goble liable on the aiding and abetting counts. In examining the propriety of the portion of the<br />
injunction prohibiting Goble from violating Sections 15(c)(3) and 17(a) of the Exchange Act, the<br />
Eleventh Circuit held that an injunction using language from those sections was appropriate and<br />
would meet the requirements of Fed. R. Civ. P. 65(d). However, because the injunction issued<br />
by the District Court only references Sections 15(c)(3) and 17(a) of the Exchange Act without<br />
setting forth the specific prohibited conduct, the Eleventh Circuit vacated those portions of the<br />
injunction. The Eleventh Circuit remanded to the District Court for it to draft an injunction such<br />
that Goble could identify from the four corners of the injunction what conduct is prohibited.<br />
NASDAQ OMX PHLX, Inc. v. Pennmont Securities, 52 A.3d 296 (Pa. 2012).<br />
The NASDAQ OMX PHLX stock exchange filed suit against Pennmont Securities in<br />
state court to collect disciplinary fines that it imposed under its Exchange Rule 651, which is a<br />
rule enacted pursuant to authority granted under Section 17 of the Securities Exchange Act of<br />
1934. The court held that the exchange had no authority to initiate a private right of action and<br />
even if the exchange did have such authority, the court lacked subject matter jurisdiction on the<br />
grounds of conflict preemption.<br />
C.5<br />
143
6. Section 18<br />
C.6<br />
Gould v. Winstar Communs., Inc., 692 F.3d 148, 2012 U.S. App. LEXIS 18426 (2d Cir. July 19,<br />
2012).<br />
Plaintiffs alleged that defendants violated Sections 10(b) and 18 of the Securities<br />
Exchange Act of 1934 by making misrepresentations in an audit opinion letter and quarterly<br />
financial statements. In reviewing the district court’s grant of summary judgment for defendants,<br />
the Second Circuit considered whether there was proof of actual reliance sufficient to establish a<br />
question of fact on the Section 18 claim. On the issue of reliance, plaintiff offered the testimony<br />
of a stock purchase advisor who stated that she “probably flipped through every single page” of<br />
the critical Form 10-K report, based on her usual practice. The witness had also testified, “ I<br />
can’t imagine any reason why I would not have looked at this, . . . given our position in the stock<br />
and given what I would normally do.” The court determined that, even assuming that “‘eyeball’<br />
evidence is the sort of actual reliance required by our precedents,” a jury reasonably could infer<br />
that the witness actually reviewed the relevant documents. Accordingly, the court concluded<br />
there was sufficient evidence of actual reliance and reversed the grant of summary judgment on<br />
the Section 18 claim.<br />
7. Section 19(b)<br />
Lickiss v. Financial Industry Regulatory Authority, 208 Cal. App. 4th 1125 (2012).<br />
A broker sued FINRA in an equitable action seeking to expunge his record held within<br />
the Central Registration Depository. The trial court sustained a demurrer filed by FINRA,<br />
without leave to amend, and dismissed the case. On appeal, the broker argued that the trial court<br />
had jurisdiction under FINRA Rule 2080(a), as well as the trial court's equitable and inherent<br />
power to effect the remedy of expungement. The broker argued that the material requested to be<br />
expunged was “ancient,” that it had resulted from the failure of one investment security over<br />
which he had no control or influence, and that his regulatory record otherwise had remained<br />
clean. The appellate court held that the trial court erred by ruling on the demurrer without<br />
addressing the broker's equitable claim. It observed that FINRA Rule 2080(b)(1) was a<br />
procedural rule and did not provide any substantive criteria as to when expungement would be<br />
appropriate; thus, equity did not permit the trial court to rely exclusively on the rule. The broker<br />
stated a valid cause of action by calling upon the trial court's inherent equitable powers to weigh<br />
the equities favoring expungement against the detriment to the public should expungement be<br />
granted.<br />
C.7<br />
144
8. Margin Violations<br />
C.8<br />
Merrill, Lynch, Fenner, Pierce & Smith Inc., FINRA Case No. 2009018601702 (Aug. 29, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Merrill, Lynch,<br />
Fenner, Pierce & Smith Inc. (“ML”), through one of its brokers, made unsuitable investment<br />
recommendations to elderly and unsophisticated customers, including recommending the use of<br />
margin. As a result of these unsuitable recommendations and the resulting transactions and its<br />
failure to supervise its broker, ML violated NASD Rules 2110, 2310, and 3010(a) and FINRA<br />
Rule 2010.<br />
ML, while neither admitting nor denying the findings, submitted a Letter of Acceptance,<br />
Waiver, and Consent. FINRA censured ML, and assessed a fine of $400,000, which included<br />
disgorgement of commissions received from the violating conduct.<br />
Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Case No. 2008014187701 (June 28, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Merrill Lynch,<br />
Pierce, Fenner & Smith, Inc. (“ML”) had failed to send margin risk disclosure statements to<br />
customers who opened certain accounts in which margin trading was permitted. The failure to<br />
send these disclosure statements resulted from a coding issue that stopped the delivery of ML’s<br />
welcome kits to these customers when they opened the accounts. This failure constituted a<br />
violation of NASD Rules 2110, 2341, and 3010 and FINRA Rules 2010 and 2264.<br />
For these and other violations, ML, while neither admitting nor denying the findings,<br />
entered into a Letter of Acceptance, Waiver, and Consent. FINRA censured ML and assessed a<br />
$2,800,000 fine.<br />
Biremis Corp. and Peter Beck, FINRA Case No. 2010021162202 (June 20, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that the Biremis<br />
Corporation (“Biremis”) permitted day trading to occur in cash accounts instead of margin<br />
accounts. Further, Biremis failed to establish a margin system or a supervisory system to<br />
monitor compliance with margin maintenance rules applicable to firms dealing with day trading<br />
activities, resulting in a failure to calculate intraday margin requirements and to issue margin<br />
calls for day trading accounts. This conduct violated NASD Rules 2520(f)(8)(B), 3010, and<br />
2110, and FINRA Rule 2010. Peter Beck (“Beck”), the CEO of Biremis during the relevant time<br />
period, violated NASD Rules 2110 and 3010(a) and FINRA Rule 2010 by his failure to supervise<br />
Biremis and ensure its compliance with margin requirements.<br />
In response to these and other violations, Biremis and Beck, while neither admitting nor<br />
denying the findings, submitted a Letter of Acceptance, Waiver, and Consent. Biremis<br />
145<br />
C.8<br />
C.8
consented to expulsion from FINRA membership, and Beck consented to a bar from association<br />
with any FINRA member firm.<br />
FINRA Dep’t of Enforcement v. Brookstone Secs., Inc., Antony Lee Turbeville, Christopher Dean<br />
Kline, and David William Locy, FINRA Disciplinary Proceeding No. 2007011413501 (May 31,<br />
2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Antony Lee<br />
Turbeville (“Turbeville”), who was the majority owner and CEO of Brookstone Securities, sold<br />
complex collateralized mortgage obligations (“CMOs”) to unsophisticated investors on margin,<br />
without explaining the risks of such an investment strategy. FINRA found that to the contrary,<br />
Turbeville assured his customers that their investments were safe, and would grow regardless of<br />
changes in interest rates, even though the use of margin with these investments would only be<br />
appropriate for a sophisticated investor who wished to speculate. Dean Kline (“Kline”) also<br />
worked at Brookstone Securities, and FINRA found that he too had sold CMOs to<br />
unsophisticated customers on margin, without explaining the risks of doing so.<br />
David Locy (“Locy”) was Brookstone Securities’ compliance manager. FINRA found<br />
that he had failed to properly supervise Turbeville and Kline’s CMO-trading activities.<br />
Based on these and other findings, a FINRA Extended Hearing Panel determined that<br />
Brookstone Securities, Turbeville, and Klein violated Section 10(b) of the Securities Exchange<br />
Act, SEC Rule 10b-5, and NASD Rules 2110, 2120, and 2310(a). The panel also determined<br />
that Brookstone and Locy violated NASD Rules 2510(c) and 2110, based on failure to review<br />
discretionary accounts, and that Brookstone, Turbeville, and Locy violated NASD Rules 3010(b)<br />
and 2110 by failing to supervise customer CMO accounts and transactions.<br />
For these and other violations, Brookstone Securities was censured, fined a total of<br />
$1,000,000, and ordered to pay approximately $1,600,000 in restitution; Turbeville and Klein<br />
were banned from associating with any FINRA-regulated firm in any capacity, and held jointly<br />
and severally liable for Brookstone Securities’ restitution to their respective customers; and Locy<br />
was banned from acting in any supervisory or principal capacity for any FINRA-regulated firm<br />
and from acting in any capacity for such a firm for two years, and fined $25,000.<br />
Citigroup Global Markets, Inc., FINRA Case No. 2008012808101 (May 15, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Citigroup Global<br />
Markets, Inc. (“CGMI”) permitted traders to re-price mortgage-backed securities held in<br />
customer accounts, without establishing any supervisory procedures to oversee the re-pricing or<br />
to ensure that the margin requirements in those accounts were properly changed to reflect the repricing.<br />
While CGMI had guidance for applying margin haircuts to collateral in these accounts,<br />
CGMI did not establish supervisory policies and procedures to implement that guidance, and did<br />
not document any supervision of those margin haircuts. CGMI also failed to show that it had<br />
C.8<br />
C.8<br />
146
issued appropriate margin calls or collected the required margin for customer accounts. This<br />
conduct constituted a violation of SEC Rules 17a-3(a)(8) and 17a-4, and NASD Rules 3010,<br />
3110, and 2110.<br />
For these and other violations, CGMI, while neither admitting nor denying the findings,<br />
submitted a Letter of Acceptance, Waiver, and Consent. CGMI consented to censure and<br />
imposition of a fine of $3,500,000.<br />
FINRA Dep’t of Enforcement v. Genesis Securities, LLC and William C. Yeh, FINRA<br />
Disciplinary Proceeding No. 2009021082501 (May 15, 2012)<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Genesis Securities,<br />
LLC and its CEO and majority owner, William Yeh (“Yeh”), established master account<br />
arrangements to permit customers to act as unregistered broker-dealers. Among the conduct<br />
FINRA found Genesis Securities and Yeh had engaged in was that they had permitted<br />
subaccounts—that is, their unregistered broker-dealer customers’ customers—to trade as pattern<br />
day traders without maintaining minimum equity amounts and while exceeding the accounts’<br />
maintenance margin excess. This conduct constituted violations of NASD Rules 2520 and 2110<br />
and FINRA Rule 2010.<br />
In an Order Accepting Offer of Settlement stemming from the above and many additional<br />
violations, Genesis Securities was expelled from FINRA and Yeh was banned from associating<br />
with a FINRA member in any capacity.<br />
Scottrade, Inc., FINRA Case No. 2010021776501 (May 11, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Scottrade, Inc. had<br />
used a software platform for its customers’ accounts that improperly assessed the price of<br />
securities for the purposes of calculating pattern day traders’ buying power and margin<br />
requirements. Instead of using the execution price of a security in a transaction to calculate the<br />
reduction in a an account’s buying power, Scottrade’s software used the security’s price at the<br />
close of the previous trading day. This conduct constituted a violation of NASD Rules<br />
2520(f)(8)(B)(iv) and 3010.<br />
For these and other violations, Scottrade, while neither admitting nor denying the<br />
findings, submitted a Letter of Acceptance, Waiver, and Consent. FINRA censured Scottrade,<br />
and fined Scottrade $250,000.<br />
Michael Douglas Venable, FINRA Case No. 2010021688101 (Mar. 14, 2012).<br />
The Financial Industry Regulatory Authority (“FINRA”) found that Michael Venable<br />
(“Venable”) had recommended unsuitably speculative investments to unsophisticated customers<br />
147<br />
C.8<br />
C.8<br />
C.8
with conservative risk tolerances, and compounded the risk to the customers by investing on<br />
margin without informing them he would do so. This conduct constituted a violation of NASD<br />
Rule 2310, NASD IM-2310-2, and FINRA Rule 2010.<br />
Venable, while neither admitting nor denying the findings, submitted a Letter of<br />
Acceptance, Waiver, and Consent. For these and other violations, Venable was barred from<br />
employment or association with any FINRA-regulated firm, in any capacity.<br />
FINRA Dep’t of Enforcement v. Richard J. Buswell and Herbert S. Fouke, FINRA Disciplinary<br />
Proceeding No. 2009017275301 (Jan. 4, 2012).<br />
A hearing officer for the Financial Industry Regulatory Association (“FINRA”) found, in<br />
a Default Decision, that Richard Buswell (“Buswell”) had made unsuitable investment<br />
recommendations to his customers, using a strategy that employed excessive trading, use of<br />
margin, and concentration of investments. This strategy was inconsistent with the objectives and<br />
financial conditions of Buswell’s customers. This conduct constituted a violation of NASD<br />
Rules 2110 and 2310, and FINRA Rule 2010.<br />
For these and other violations, a FINRA Hearing Officer determined in a Default<br />
Decision that Buswell should be banned from associating with any FINRA member firm.<br />
C.8<br />
D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995<br />
1. Pleading<br />
In re L & L Energy, Inc. Securities <strong>Litigation</strong>, 2012 WL 6012787 (W.D.Wash.,2012 December<br />
03, 2012).<br />
Shareholder brought securities-fraud class action against mining corporation and its<br />
officers and directors, alleging defendants intentionally misled the investing public by<br />
overstating the corporation's consolidated revenues and falsely claiming ownership of certain<br />
mining interests. Defendants moved to dismiss. Court held that Shareholder's allegations failed<br />
to raise strong inference of falsity with respect to revenue and income statements in corporation's<br />
federal securities filings, as required under PSLRA. In order to satisfy the PSLRA's scienter<br />
pleading requirement, plaintiff must allege that defendants engaged in knowing or intentional<br />
conduct, but simply alleging that statements were knowingly false or that defendants were<br />
deliberately reckless is not enough, rather, such allegations must be supported with references to<br />
specific facts, events, documents, and/or reports. The court further stated that in order to have a<br />
securities-fraud claim under the PSLRA, plaintiff must allege a causal connection between<br />
defendants' material misrepresentations or omissions and plaintiff's loss, and although no special<br />
pleading standard applies, the allegations of the complaint must give rise to an inference that,<br />
once the truth became known, the value of plaintiff's shares dropped significantly.<br />
148<br />
D.1
Ouwinga v. Benistar 419 Plan Services, Inc., 694 F.3d 783 (6th Cir., 2012).<br />
D.1<br />
Court held that the district court erred in relying on a document whose validity was in<br />
question in dismissing a claim brought pursuant to PSLRA, alleging that insurance companies,<br />
attorneys, and insurance agents conspired to defraud employers into adopting purported taxdeductible<br />
welfare benefit plan that purchased variable life insurance policies that qualified as<br />
securities. The Court explained that while documents integral to the complaint may be relied<br />
upon on a motion to dismiss for failure to state a claim, even if the documents are not attached or<br />
incorporated by reference, it must be clear that there exist no material disputed issues of fact<br />
regarding the relevance of the documents.<br />
D.1<br />
In re Rigel Pharmaceuticals, Inc. Securities <strong>Litigation</strong>, 697 F.3d 869 (9th Cir. September 06,<br />
2012).<br />
Affirming the District Court’s dismissal where an investors failed to adequately plead<br />
that drug development company's allegedly false statements regarding efficacy, safety of its new<br />
rheumatoid arthritis drug and company's future partnership prospects were made with scienter<br />
required under PSLRA; the safety information that defendants chose to disclose in their initial,<br />
allegedly fraudulent, reports, was the most severe adverse events, and because none of the<br />
defendants sold stock during the period between the allegedly fraudulent statements and the<br />
subsequent public disclosure of the detailed data, which was the period during which they would<br />
have benefited from any allegedly fraudulent statements, the value of the stock and stock options<br />
did not support an inference of scienter.<br />
Boca Raton Firefighters and Police Pension Fund v. Bahash, 2012 WL 6621391 (9th Cir.<br />
December 20, 2012).<br />
D.1<br />
Following a de novo review of the pleadings, the court affirmed the district court’s<br />
dismissal for failure to state a claim with particularity in accordance with the rules set forth in the<br />
PSLRA. The court held that Plaintiff’s complaint fell far short of this standard, basically leaving<br />
the District Court to search the long quotations in the complaint for particular false statements,<br />
and then determine on its own initiative how and why the statements were false and how other<br />
facts might show a strong inference of scienter. It concluded that asking the Court to assess the<br />
truth of the statements does not comport with its exhortation that plaintiffs “must demonstrate<br />
with specificity why and how” each statement is materially false or misleading.<br />
149
In re VeriFone Holdings, Inc. Securities <strong>Litigation</strong>, 2012 WL 6634351 (9th Cir. December 21,<br />
2012).<br />
The court partially reversed the lower court’s decision to grant defendant’s motion to<br />
dismiss for failure to state claims, finding that under the PSLRA, in determining whether the<br />
pleaded facts give rise to a strong inference of scienter required for a securities fraud claim under<br />
§ 10(b) and Rule 10b–5, the court must take into account plausible opposing inferences; thus, the<br />
strength of an inference cannot be decided in a vacuum, and a court must consider plausible,<br />
nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.<br />
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012).<br />
Investors in a company which bought residential mortgage-backed securities on margin<br />
failed to adequately plead loss causation, as required under the PSLRA to state a claim under §<br />
10(b) and Rule 10b–5 regarding allegedly deficient disclosures in an offering memorandum;<br />
while allegations of the complaint traced the decline in value of the company's stock, they did<br />
not make the necessary connection that it was the disclosure of previously undisclosed<br />
information that caused a price drop, and while other allegations suggested that loss resulted<br />
from the poor performance of the company's business model, including ongoing margin calls,<br />
haircuts, and liquidity issues, all of those were fully disclosed in the offering memorandum. Price<br />
inflation theory of loss causation is no longer a viable means of satisfying the loss causation<br />
requirements of the PSLRA.<br />
D.1<br />
D.1<br />
In re Genzyme Corp., 2012 WL 1076124 (D. Mass. March 30, 2012).<br />
D.1<br />
Class of investors brought securities fraud action against company and several individual<br />
executives, alleging that defendants failed to disclose material facts relating to the health of the<br />
company. Defendants moved 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<br />
that the complaint failed to adequately allege the element of scienter, noting that plaintiffs’<br />
theory, while plausible, and perhaps even reasonable, was not sufficient to support a strong<br />
inference of fraudulent intent.<br />
Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167 (D.Mass.,2012. July 26, 2012)<br />
In an action brought on behalf of two groups of purchasers of common stock against<br />
issuer, officers and directors individually, Defendants moved to dismiss. The court held that<br />
general allusions to unspecified internal corporate information are insufficient to withstand a<br />
motion to dismiss securities fraud claims; further, general inferences that defendants, by virtue of<br />
their position within company, must have known about company's problems inadequate to<br />
150<br />
D.1
withstand special pleading requirements in securities fraud cases. PSLRA imposes scienter<br />
pleading standards even more rigorous than requirements of federal civil rule imposing<br />
heightened pleading requirements for fraud claims; complaint alleging securities fraud must set<br />
forth each statement alleged to have been misleading, reason or reasons why statement is<br />
misleading, and, if allegation regarding the statement or omission is made on information and<br />
belief, complaint must state with particularity all facts on which that belief is formed. When<br />
making allegations on “information and belief,” PSLRA requires complainant to state with<br />
particularity all facts on which that belief is formed; this requirement holds true even when fraud<br />
relates to matters peculiarly within knowledge of the opposing party. While unusual or<br />
suspicious insider trading can support strong inference of scienter, lead plaintiff in purported<br />
securities class action bears burden of showing that insider sales were in fact unusual or<br />
suspicious in timing or amount.<br />
Acosta-Castillo v. Guzman-Lora, 2012 WL 3963019 (D. Puerto Rico Sept. 11, 2012).<br />
The court denied plaintiff’s request for default judgment based on allegations made upon<br />
“information and belief” which failed to plead sufficiently or with particularity the<br />
misrepresentations or omissions by the defendants. Plaintiff also failed to plead sufficient facts<br />
that defendants acted with requisite scienter regarding company’s offering.<br />
D.1<br />
D.1<br />
Warchol v. Green Mountain Coffee Roasters, Inc., 2012 WL 256099 (D.Vt.,2012. January 27,<br />
2012)<br />
Plaintiffs are a putative class of purchasers of GMCR stock who charge Defendants with<br />
making misrepresentations that led them to purchase shares at inflated prices during the Class<br />
Period. Defendant moved to dismiss and the Court granted the motion without prejudice, with<br />
leave to amend, concluding that Plaintiffs did not allege material misstatements attributable to<br />
the individually named CEO, nor do they allege facts that collectively give rise to a “strong<br />
inference” of scienter on the part of any of the other Defendants, as required by PSLRA. As a<br />
result, the complaint does not adequately plead the CEO's role in the alleged securities fraud,<br />
failing to attribute a material misstatement or omission to him. The additional grounds for<br />
scienter offered were also insufficient to demonstrate an inference of scienter under the PSLRA.<br />
In re Wilmington Trust Securities <strong>Litigation</strong>, 852 F.Supp.2d 477 (D.Del.,2012 March 29, 2012)<br />
In an action brought by institutional investors against a bank and its officers alleging<br />
defendants exaggerated value of their commercial mortgage portfolio, the Court granted<br />
defendants’ motion to dismiss, holding that until plaintiffs specifically identify the statements on<br />
which they would like to proceed and the reasons why these statements are false or misleading,<br />
neither the defendants nor the court can address these allegations with the degree of particularity<br />
151<br />
D.1
equired by the PSLRA. Specifically, defendants and the court cannot adequately address issues<br />
regarding materiality, scienter and the forward-looking nature of the statements. PSLRA<br />
provides two distinct pleading requirements, both of which must be met in order for a securities<br />
fraud complaint to survive a motion to dismiss: first, under the falsity requirement, the complaint<br />
must specify each allegedly misleading statement, the reason or reasons why the statement is<br />
misleading, and, if an allegation is made on information and belief, all facts supporting that<br />
belief with particularity; and second, under the scienter requirement, with respect to each act or<br />
omission alleged to violate the Securities Exchange Act, a plaintiff is required to state with<br />
particularity facts giving rise to a strong inference that the defendant acted with the required state<br />
of mind. PSLRA's heightened pleading standard requires plaintiffs to address the way in which<br />
each individual statement is false or misleading.<br />
In re Merck & Co., Inc. Securities, Derivative & “ERISA” <strong>Litigation</strong>, 2012 WL 3779309 (D.N.J.<br />
Aug. 29, 2012).<br />
Drug company defendant’s motion to dismiss was granted based on plaintiffs’ reliance on<br />
three categories of non-actionable statements under Section 10b: (i) actual recitations of past<br />
earnings; (ii) optimism concerning financial growth; and (iii) forward-looking statements. The<br />
court found that: defendant’s statements regarding past earnings amounted to nothing more than<br />
a report on its previous success and confidence in prospects for future growth; defendant’s<br />
optimism regarding financial growth equated to puffery; and defendant’s forward looking<br />
statements qualified for safe harbor immunity because plaintiffs failed to allege the individual<br />
making the statements did so with requisite scienter. The court also granted individual<br />
defendants’ motion to dismiss as to control person liability for culpable participation claims<br />
because plaintiffs failed to plead with particularity facts giving rise to a strong inference that the<br />
individuals deliberately or recklessly acted to deceive investors about the safety profile of their<br />
new drug. Plaintiff’s reliance on the individual’s job titles and general oversight responsibilities<br />
was insufficient to meet PSLRA’s standards.<br />
Security Police and Fire Professionals of America Retirement Fund v. Pfizer, Inc.,2012 WL<br />
6771941 (D.N.J.,2012. December 06, 2012)<br />
Lead Plaintiffs in a class action move to amend their claim to add specific information in<br />
accordance with PSLRA’s pleading requirement. The Court granted the motion, holding that<br />
Plaintiffs now have sufficiently alleged specific affirmative statements of falsity to satisfy the<br />
first element in stating a claim for violation of section 10(b) and Rule 10b–5. Court held that by<br />
referring to specific statement in defendant’s release, plaintiffs have now done more than merely<br />
allude to the misleading nature of the press release based on Defendants' earlier affirmative<br />
statements. The Court further held that this allegedly false statement complies with the PSLRA's<br />
heightened pleading requirement of specifying each statement alleged to be misleading.<br />
D.1<br />
D.1<br />
152
D.1<br />
Oklahoma Firefighters Pension and Retirement System v. Capella Educ. Co., 873 F.Supp.2d<br />
1070 (D. Minn., 2012).<br />
Investor brought an action against a college and several of its officers, alleging securities<br />
fraud and control person liability under the Exchange Act. Defendants moved to dismiss for<br />
failure to state a claim. The court granted Defendant’s Motion to Dismiss holding that investor<br />
failed to sufficiently articulate a plausible claim of securities fraud because (1) to survive a<br />
motion to dismiss, under PSLRA a securities fraud complaint must point to contemporaneous<br />
reports, witness statements, or any other information that had actually been provided to<br />
defendants at the time they were alleged to have misrepresented material facts; and (2) to<br />
sufficiently plead falsity under PSLRA, a complaint must not only indicate that false statements<br />
were made, but must indicate why the alleged misstatements were false when made.<br />
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 282 F.R.D. 216 (D.<br />
Ariz. 2012).<br />
Where previous judgment dismissed securities fraud class action with prejudice on the<br />
basis that it did not plead falsity with the requisite degree of particularity, plaintiffs’ motion to<br />
alter or amend judgment was denied on the grounds that there was no intervening controlling<br />
change in law regarding analysis of whether complaint sufficiently alleged backdating of stock<br />
options under PSLRA so as to warrant alteration or amendment of judgment.<br />
Smilovits v. First Solar, Inc., 2012 WL 6574410 (D.Ariz.,2012).<br />
Plaintiff alleges that Defendants violated securities laws by disseminating and approving<br />
false or misleading statements during the class period by manipulating their financial metrics to<br />
artificially inflate the company's stock price. Plaintiff also alleges that Defendants concealed a<br />
known defect in Defendants' design as well as in the manufacturing process and, once the<br />
excursion became known, hid the extent of the problem. The Court found that Plaintiff pled<br />
enough specific facts to create an inference of scienter at least as compelling as any counter<br />
inference, satisfying PSLRA’s pleading requirements, holding that while Defendants dispute the<br />
veracity of many of the allegations, factual disputes about specific, plausible allegations are not<br />
sufficient to dismiss a claim. Factual allegations and their reasonable inferences are accepted as<br />
true at the motion to dismiss stage.<br />
RS-ANB Fund, LP v. KMS SPE LLC, 2012 WL 1288762 (D. Idaho April 16, 2012).<br />
Plaintiff who purchased a 25% interest in a failed bank’s commercial construction loan<br />
portfolio brought federal and state securities fraud claims against seller entities and their<br />
153<br />
D.1<br />
D.1<br />
D.1
controlling shareholder, claiming that defendants fraudulently concealed the controlling<br />
shareholder’s insolvency so as to induce plaintiff’s investment. Defendants moved to dismiss<br />
amended complaint for failure to state a claim as required under the heightened pleading<br />
standards of the PSLRA. The court dismissed the federal securities fraud claims with prejudice,<br />
finding that plaintiff failed to remedy the deficiencies in the initial complaint and failed to plead<br />
adequate factual matter to support a strong inference of scienter on the part of any of defendants,<br />
and stating that the court “perceive[d] no means by which a further round of amendments could<br />
salvage the claim.”<br />
DesyaFosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D.Nev. 2012. July 11, 2012).<br />
D.1<br />
Defendant moved to dismiss a class action for securities fraud related to forward looking<br />
statements, alleging that Defendants knew of their impending financial disaster with sufficient<br />
clarity in 2007 that their public statements constituted fraud. The court granted the motion with<br />
leave to amend the claim, stating that Congress drafted the PSLRA to require plaintiffs seeking<br />
redress for security fraud to meet a higher pleading standard than plaintiffs in other types of<br />
actions. The PSLRA requires that “[i]n any private action arising under this chapter in which the<br />
plaintiff may recover money damages only on proof that the defendant acted with a particular<br />
state of mind, the complaint shall, with respect to each act or omission alleged ... state with<br />
particularity facts giving rise to a strong inference that the defendant acted with the required state<br />
of mind.” The court held that Plaintiff’s general allegations of scienter, without documentation<br />
or other detail, are insufficient and that the allegations regarding 2007 statements fail to give rise<br />
to a strong inference that Defendant acted with the requisite scienter. Accordingly, as Plaintiff's<br />
allegations regarding statements from 2007 are insufficiently particularized, they are dismissed<br />
with leave to amend in accordance with the requisite level of particularity, including the<br />
identification of internal sources for the information, reviewing officers, etc.<br />
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., 2012 WL 6645097<br />
(D.Colo. 2012).<br />
D.1<br />
Shareholders brought securities-fraud class action arising from alleged misstatements<br />
regarding corporation's collateralized mortgage obligations and mortgage-backed securities.The<br />
District Court, held that shareholders failed to allege that defendants' opinions regarding the<br />
product were subjectively false, noting that in order to defeat a motion to dismiss, pursuant to<br />
PSLRA pleading requirements, a complaint must “specify each statement alleged to have been<br />
misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding<br />
the statement or omission is made on information and belief, the complaint shall state with<br />
particularity all facts on which that belief is formed.<br />
Touchtone Group, LLC v. Rink, 2012 WL 6652850 (D.Colo. 2012).<br />
Investment group brought putative class action against officers for corporation involved<br />
in Ponzi scheme. The court held that agency allegations are not subject to the heightened<br />
154<br />
D.1
pleading requirements of PSLRA or rule requiring fraud be pled with particularity, even when<br />
they are used to assert a claim for vicarious liability for violations of the Securities Exchange<br />
Act. Heightened pleading standard under rule requiring fraud be pled with particularity does not<br />
apply where alleged transferor is operating a Ponzi scheme in violation of Colorado Uniform<br />
Fraudulent Transfer Act (CUFTA) or the Pennsylvania Uniform Fraudulent Transfer Act<br />
(PUFTA); a fraudulent transfer claim under CUFTA and PUFTA requires only that the transferor<br />
possess intent to defraud a creditor-plaintiff, and it may be inferred that a transferor operating a<br />
Ponzi scheme possesses such intent by virtue of the transferor's insolvency as a matter of law.<br />
Nova Leasing, LLC v. Sun River Energy, Inc., 2012 WL 3778332 (D. Colo. Aug. 31, 2012).<br />
The court denied defendants’ motion to partially dismiss the complaint based, in part, on<br />
plaintiff sufficiently pleading that defendants engaged in aiding and abetting securities fraud<br />
under Colorado securities law and the PSLRA. In reaching this decision, the court cited to an<br />
earlier court order not fully explained in this decision. In addition, the court found plaintiff’s<br />
allegations of liability based on agency and independent financial motives for each defendant to<br />
be well-pled.<br />
Wolfe v. Aspenbio Pharma, Inc., 2012 WL 4040344 (D. Colo. Sept. 13, 2012).<br />
The court granted defendant’s motion to dismiss due to plaintiff’s failure to allege facts to<br />
plausibly suggest defendant made false or misleading representations of material fact regarding<br />
its medical diagnostic test in which plaintiff invested. Specifically, the court looked at<br />
defendant’s statements regarding its clinical test results, clinical trials and statements regarding<br />
the uniqueness and stand alone capabilities of the medical diagnostic test. The court ruled that<br />
plaintiff’s reliance on pure speculation, fraud-by-hindsight, and puffery was insufficient to meet<br />
the heightened pleading requirements under the PLSRA.<br />
D.1<br />
D.1<br />
Chipman v. Aspenbio Pharma, Inc., 2012 WL 4069353 (D. Colo. Sept. 17, 2012)<br />
D.1<br />
The court granted defendant’s motion to dismiss due to plaintiff’s failure to allege<br />
adequate facts to plausibly assert misrepresentation or omission of material fact and found<br />
allegedly omitted information regarding defendant’s medical diagnostic test, in which plaintiff<br />
invested, was in fact disclosed on defendant’s website, in its prospectus supplement, and other<br />
publicly available documents.<br />
Boulware v. Baldwin, 2012 WL 1412698 (D. Utah April 23, 2012).<br />
Trust brought securities fraud claims against entities and individual manager who<br />
managed company in which trust invested that was formed to purchase loans secured by real<br />
155<br />
D.1
property, alleging that individual defendant misrepresented that the borrower made a payoff bid<br />
which would result in a fast profit, and that the corporate defendants and individual defendant<br />
concealed the existence or the terms of a certain loan. Defendants moved to dismiss these counts<br />
for failure to state a claim as required under the heightened pleading standards of the PSLRA.<br />
The court found that plaintiff’s contention that the corporate defendants failed to disclose<br />
material information could not support a 10(b) claim because “entities do not make statements”<br />
(or omissions), but rather the plaintiff must identify the party who made or failed to make the<br />
misleading statement. However, as to the individual defendant’s statements and omissions, the<br />
court found that plaintiff’s allegations were sufficient to satisfy the pleading requirements of<br />
PSLRA and denied defendants’ motion to dismiss.<br />
In re American Apparel, Inc. Shareholder <strong>Litigation</strong>, 855 F.Supp.2d 1043 (C.D.Cal.,2012.<br />
January 13, 2012 ).<br />
Garment manufacturer and its officers and directors moved to dismiss consolidated<br />
putative securities fraud class action based on allegedly false and misleading statements<br />
regarding manufacturer's labor policies, workforce, and its financial health. The Court granted<br />
the motion finding that plaintiffs sufficiently alleged under PSLRA that garment manufacturer<br />
and its executives made materially false statements regarding company's compliance with the<br />
immigration laws, but did not adequately allege that statements concerning the impact of the<br />
work force reduction that followed Bureau of Immigration and Customs Enforcement's<br />
investigation and company's accounting practices and internal controls were false when made.<br />
However, plaintiffs did not sufficiently allege that company's and individual defendants' false<br />
statements were made with requisite scienter.<br />
Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 6644397 (C.D.Cal.,2012).<br />
Conclusory allegations of investors in bank's stock, that bank's outside auditor knew its<br />
opinions for bank's audited year-end financial statements for three calendar years were false and<br />
would deceive the investing public, without any substantive allegation demonstrating that auditor<br />
did not genuinely believe its opinions to be accurate when they were issued, failed to allege<br />
subjective falsity, as required for the misrepresentation element of securities fraud claims under §<br />
10(b) and Rule 10b–5 pursuant to PSLRA. At the pleading stage of a securities fraud action<br />
against an outside auditor, with respect to scienter, allegations of violations of generally accepted<br />
accounting principles (GAAP), coupled with allegations that significant red flags were ignored,<br />
can suffice to withstand a motion to dismiss. However, in this case allegations of investors in<br />
bank's stock did not create a strong inference of scienter, as required to plead securities fraud<br />
against bank's outside auditor; majority of purported red flags were not red flags at all because<br />
they suggested poor decision-making rather than fraud, and the strong inference from the<br />
allegations was that the auditor did not ignore or disregard the purported red flags but rather<br />
examined the bank's financial condition, recognized weaknesses, and provided recommendations<br />
to the bank and its management regarding its concerns. To meet the pleading requirements in the<br />
D.1<br />
D.1<br />
156
PSLRA for a securities fraud action, plaintiffs are required to plead in great detail facts that<br />
constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.<br />
City of Royal Oak Retirement System v. Itron, Inc., 2012 WL 3966310 (E.D. Wash. Sept. 11,<br />
2012).<br />
The court granted defendants’ motion to dismiss based on plaintiff’s failure to satisfy the<br />
PSLRA’ heightened pleading requirements. Specifically, the court found that plaintiff’s<br />
allegations that defendants’ misstatement of the extended warranty revenue for three quarters and<br />
subsequent restatement correcting that misstatement did not rise to the level of extreme departure<br />
from the standards of ordinary care. In addition, the court ruled that the retirement of a corporate<br />
officer, alone, is not enough to raise inference of scienter. Plaintiff’s pleadings regarding what<br />
defendants “must have known” or “should have know” were not sufficient to survive defendants’<br />
motion to dismiss.<br />
Desyatnikov v. Credit Suisse Group, Inc., 2012 WL 1019990 (E.D.N.Y.,2012. March 26, 2012)<br />
In an action against defendants arising out of the purchase of a foreign security, the court held<br />
that plaintiff failed to satisfy the heightened pleading standards for asserting Section 10(b)/Rule<br />
10b–5 claims against defendants. First, the only allegation against Credit Suisse is that it is the<br />
parent corporation to Clariden Leu. The complaint is void of any allegations of fraudulent<br />
statements or material omissions made by Credit Suisse or that it was aware of any such<br />
statements or omissions. Second, with respect to scienter, the lumping of allegations against<br />
“defendants” does not meet the particularity requirements for pleading scienter as set forth under<br />
Rule 9(b) of the Federal Rules of Civil Procedure or the PSLRA.<br />
Hutchins v. NBTY, Inc., 2012 WL 1078823 (E.D.N.Y. March 30, 2012).<br />
Investor brought putative securities fraud class action against company and certain<br />
directors/ and officers, alleging that defendants issued press releases making positive statements<br />
about the company’s business, gross margins, and future operating performance, but never told<br />
investors that its largest customer was soliciting competing bids for products that company had<br />
been supplying and that, as a result, company’s gross margins would be decreasing. Defendants<br />
moved to dismiss for failure to state a claim as required under the heightened pleading standards<br />
of the PSLRA. The court denied defendants’ motion, finding that plaintiff sufficiently pled with<br />
particularity material misstatements or omissions by defendants because the information relating<br />
to the bidding initiative of the company’s largest customer was not “so obviously unimportant to<br />
a reasonable investor that reasonable minds could not differ on the question of their importance,”<br />
and finding that plaintiff pled sufficient facts to give rise to a strong inference that defendants<br />
acted with the required state of mind to satisfy the scienter requirement.<br />
D.1<br />
D.1<br />
D.1<br />
157
D.1<br />
Carlucci v. Han, 2012 WL 3242618 (E.D.Va.,2012. August 07, 2012)<br />
Investor sued technology corporation and its owner for securities fraud, in violation of §<br />
10(b) and Rule 10b–5 and Virginia Securities Act, by alleged misrepresentations and omissions.<br />
Defendants moved to dismiss for failure to state claim and pursuant to heightened pleading rule<br />
and PSLRA. The court dismissed the case, holding that under the PSLRA, a securities fraud<br />
complaint will survive only if a reasonable person would deem the inference of scienter cogent<br />
and at least as compelling as any opposing inference one could draw from the facts alleged.<br />
Investor's allegations failed to raise strong inference of scienter, as required under PSLRA's<br />
heightened pleading requirements for investor's securities fraud claims since investor did not<br />
sufficiently allege misleading statement or omission, so technology company's owner could not<br />
have made misrepresentations or omissions intentionally or with sufficient recklessness, and<br />
allegation that owner misappropriated investor's $20 million investment by buying $3.5 million<br />
house in Florida did not raise inference that money spent on house was money received from<br />
investor. Under the PSLRA, a plaintiff cannot merely plead facts from which a reasonable person<br />
could infer that the defendant acted with scienter; rather, the plaintiff must plead with<br />
particularity facts that give rise to a strong, in other words, a powerful or cogent, inference.<br />
In re Computer Sciences Corporation Securities <strong>Litigation</strong>, 2012 WL 3779349 (E.D.Va. Aug.<br />
29, 2012).<br />
The court granted in part and denied in part motion to dismiss brought by technology<br />
services company and its officers. The court dismissed claims against certain defendants based<br />
on plaintiffs’ failure to plead facts warranting a strong inference that these defendants acted with<br />
the requisite scienter regarding public statements as to the company’s earnings, internal controls,<br />
and ability to satisfy performance obligations under a major contract.<br />
Grant v. Houser, 2012 WL 519120 (E.D.La.,2012. February 15, 2012).<br />
In a dispute arising from an investment in a Louisiana film studio, the court held that<br />
based on the specific allegations in the Complaint, plaintiff has made out a proper claim for<br />
detrimental reliance and unjust enrichment under the heightened pleading standard of Rule 9(b)<br />
and the PSLRA. The court found that Plaintiff has has pled with a sufficient level of particularity<br />
with respect to the $250,000 investment to allow the Defendants to adequately respond to<br />
Berger's claims. Plaintiff also sufficiently plead with respect to the time, place, and contents of<br />
the false representations and who made those representations with sufficient particularity to<br />
allow the Defendants to adequately respond to Plaintiff's claims.<br />
D.1<br />
D.1<br />
158
D.1<br />
In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Sec. Act ,<br />
2012 WL 6644623 (S.D.N.Y. 2012).<br />
Plaintiffs are investors in hedge funds controlled by an asset management firm; a portion<br />
of the funds' assets was invested in another fund which, in turn, paid its assets over to Madoff<br />
and his investment firm. The court held that PLSRA’s pleading requirement is not satisfied by a<br />
few conclusory statements and the use of the devices described in the complaint. The court<br />
further noted that Securities <strong>Litigation</strong> Uniform Standards (“SLUSA”) ensures that plaintiffs<br />
cannot avoid the heightened pleading standards of the PSLRA by finding state law vehicles for<br />
their securities fraud claims.<br />
Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean, Ltd., 866 F.<br />
Supp. 2d 223 (S.D.N.Y. 2012).<br />
Acquired company’s shareholders brought putative securities fraud class action against<br />
acquiring company and both companies’ CEO’s, alleging that joint proxy statement distributed<br />
in connection with merger between offshore oil contractors contained false and misleading<br />
statements. Defendants moved to dismiss for failure to state a claim as required under the<br />
heightened pleading standards of the PSLRA. The court denied defendants’ motion, finding that<br />
plaintiffs sufficiently pled material misrepresentations concerning acquiring company’s<br />
compliance with environmental laws, its training and safety programs, and the fairness of its<br />
exchange price, and that plaintiff sufficiently pled loss causation, which element is governed by<br />
notice pleading standards even under the PSLRA.<br />
D.1<br />
CAMOFI Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y., 2012).<br />
D.1<br />
In determining whether to grant Plaintiffs’ motion for default judgement, the court<br />
considered the PSLRA’s pleading requirements noting that (1) the PSLRA codified the Rule 9(b)<br />
standard previously adopted by the Second Circuit, and requires that a private securities fraud<br />
plaintiff state with particularity facts giving rise to a strong inference that the defendant acted<br />
with the required state of mind; (2) the Supreme Court has interpreted “strong inference” of<br />
fraudulent intent to mean an inference of scienter that is more than merely plausible or<br />
reasonable, but that is cogent and at least as compelling as any opposing inference of<br />
nonfraudulent intent; and (3) the PSLRA also requires that to allege control person liability under<br />
§ 20(a), Plaintiffs must allege some level of culpable participation at least approximating<br />
recklessness in the section 10(b) context.<br />
159
D.1<br />
In re ITT Educational Services, Inc. and Securities and Shareholder Derivatives Litig., 859 F.<br />
Supp. 2d 572 (S.D.N.Y. 2012).<br />
Investors brought putative securities fraud class action against private for-profit college<br />
and its officers alleging defendants had misled investors through a series of calculated statements<br />
attributing college’s positive financial performance to legitimate business practices when,<br />
instead, success was a result of school’s predatory business model. Plaintiffs alleged that the<br />
individual defendants were aware of the college’s fraudulent scheme by virtue of their positions<br />
as officers at the college and that, therefore, they were also aware that the public documents and<br />
statements they issued on behalf of the college were materially false and misleading. Defendants<br />
moved 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, finding that the complaint’s 76<br />
pages of block quotes of nearly every public statement made by the college during the period at<br />
issue, with vague and disorganized allegations as to how and why those statements were<br />
misleading, did not contain any well-plead actionable misstatements under PSLRA’s pleading<br />
requirements. The court noted that plaintiffs did not challenge the college’s reported revenue or<br />
enrollment numbers during the class period, and that, despite the plaintiffs’ allegation that the<br />
college “stretched” its reported graduate employment placement rates, plaintiffs failed to allege<br />
how this stretch actually impacted the college’s reported overall placement rate. The court also<br />
noted that the college’s statements relating to its business focus amounted to typical corporate<br />
puffery and were not actionable under the securities laws.<br />
In re JP Morgan Auction Rate Securities (ARS) Marketing <strong>Litigation</strong>, 867 F. Supp. 407<br />
(S.D.N.Y. 2012).<br />
Purchaser of auction rate securities (ARS) brought putative class action against auction<br />
dealer and others, asserting Exchange Act claims for market manipulation, misrepresentations<br />
and omissions, and control person liability, alleging that defendants sought to conceal the risks of<br />
ARS from investors. Defendants moved to dismiss for failure to state a claim as required under<br />
the heightened pleading standards of the PSLRA. The court granted defendants’ motion as to all<br />
claims, finding that plaintiff failed to plead scienter, as plaintiff failed to plead facts<br />
demonstrating that auction dealer reached a decision to dispose of its ARS inventory in order to<br />
reduce exposure to rising liquidity risks. Further, with regard to plaintiff’s claims of<br />
misrepresentations and omissions, the court found that plaintiff failed to plead with particularity<br />
the misrepresentations that formed the basis of his claims, nor did plaintiff establish that auction<br />
dealer had a duty to disclose such that its omissions could give rise to a claim for fraud.<br />
D.1<br />
160
D.1<br />
In re Lehman Bros. Securities and ERISA <strong>Litigation</strong>, 2012 WL 6603321 (S.D.N.Y.,2012).<br />
In an action brought against Lehman Bros. in the wake of its collapse, the court dismissed<br />
plaintiff’s claim on the grounds that they were precluded from being brought in state court<br />
pursuant to SLUSA. The court held that the overriding purpose of SLUSA was to prevent<br />
plaintiffs in securities cases from sidestepping the PSLRA's heightened pleading requirements by<br />
filing in state rather than federal court by foreclosing state law claims with respect to covered<br />
securities where, as here, those claims find themselves in groups of lawsuits that seek damages<br />
on behalf of substantial numbers of persons.<br />
Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. March 30, 2012).<br />
Investors brought securities fraud class action against company and its executives,<br />
alleging that defendants made false or misleading statements, and failed to disclose material<br />
adverse information, about the company’s business, operations, and prospects with respect to<br />
sales to certain customers, returns of certain goods made after the end of the quarter, that certain<br />
goods failed to satisfy quality control standards and therefore were not certified for sale, that<br />
financial results were overstated, and that internal and financial controls were inadequate.<br />
Defendants moved to dismiss for failure to state a claim as required under the heightened<br />
pleading standards of the PSLRA. The court granted defendants’ motion, finding that plaintiffs<br />
failed to plead specific facts explaining why each alleged misstatement was false at the time it<br />
was made and failed to plead scienter adequately.<br />
In re Bank of America Corp. Securities, Derivative, and Employment Retirement Income Security<br />
Act (ERISA) <strong>Litigation</strong>, 2012 WL 1353523 (S.D.N.Y. April 12, 2012).<br />
Shareholder brought securities fraud claims against Bank of America and certain officers<br />
alleging that defendants omitted or misstated material facts concerning Bank of America’s<br />
acquisition of two financial services companies. Defendants moved to dismiss second amended<br />
complaint for failure to state a claim as required under the heightened pleading standards of the<br />
PSLRA. The court granted defendants’ motion, and denied plaintiff’s request for leave to<br />
amend, finding that plaintiff’s claim cited broad, opinion-based statements, including several that<br />
were made in light of then-contingent litigation risks, which were insufficient to state an<br />
actionable claim under PSLRA’s pleading requirements.<br />
In re General Electric Co. Securities <strong>Litigation</strong>, 856 F. Supp. 645 (S.D.N.Y. April 18, 2012).<br />
Investors brought putative securities fraud class action against issuer and various<br />
executives, alleging that issuer failed to disclose information regarding its health and the health<br />
161<br />
D.1<br />
D.1<br />
D.1
of its wholly-owned subsidiary. Defendants moved to dismiss for failure to state a claim as<br />
required under the heightened pleading standards of the PSLRA. The court granted defendants’<br />
motion in part, and denied it in part, finding that plaintiffs had stated plausible securities fraud<br />
cases against the company and its chief financial officer based on the CFO’s statements about the<br />
quality of the company’s loan portfolio.<br />
Ho v. Duoyuan Global Water, Inc. 2012 WL 3627043 (S.D.N.Y. Aug. 24, 2012)<br />
Stockholders’ claims based on statements from defendant corporate officers regarding<br />
compliance with audit satisfied PSLRA heightened pleading requirements, including giving<br />
strong inferences that corporate officers acted with requisite scienter. However, court granted<br />
other defendants’ motions to dismiss on basis that those entities were not the parties that actually<br />
made or had ultimate authority over the alleged misstatements of material fact.<br />
In re Advanced Battery Technologies, Inc. Securities <strong>Litigation</strong>, 2012 WL 3758085 (S.D.N.Y.<br />
Aug. 29, 2012).<br />
The court found that plaintiffs satisfied the PSLRA heightened requirements and denied<br />
defendants’ motion to dismiss. The court ruled that plaintiffs’ citations to public records and<br />
filings with China’s Administration of Industry and Commerce provided plaintiffs’ accusations<br />
of falsity with plausibility and weight. The court ruled that plaintiff properly plead a strong<br />
inference of scienter by arguing defendants overstated the company’s revenue and profits in<br />
order to raise money from shareholders and then divert that money to its insiders through<br />
undisclosed related party transactions. Finally, plaintiffs’ satisfied the pleading requirement for<br />
loss causation by arguing that the publication of a report concluding that defendants’ earnings<br />
reports were inflated was immediately followed by a steep decrease in defendants’ stock prices.<br />
In re Fannie Mae 2008 Securities <strong>Litigation</strong>, 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012).<br />
Plaintiff stock purchasers brought putative class action and several individual actions<br />
(transferred and consolidated for multidistrict litigation) against Fannie Mae, its officers, and<br />
certain underwriters, alleging defendants made material misstatements in Fannie Mae’s filings<br />
with the SEC and various securities offerings. The court ruled plaintiffs’ section 10b claims<br />
regarding mortgage lender’s subprime and Alt-A exposure disclosures and risk management<br />
disclosures satisfied the heightened PSLRA pleading requirements, but granted defendants’<br />
motion to dismiss claims premised on Fannie Mae’s core capital financials.<br />
D.1<br />
D.1<br />
D.1<br />
162
D.1<br />
Lewy v. SkyPeople Fruit Juice, Inc., 2012 WL 3957916 (S.D.N.Y. Sept. 10, 2012)<br />
The court granted in part and denied in part defendants’ motion to dismiss in a putative<br />
class action case based on allegations involving the filing of false financial statements by<br />
corporate officers. The court also provided analysis of plaintiff’s loss causation allegations<br />
under the PSLRA.<br />
In Re China Valves Technology Securities <strong>Litigation</strong>, 2012 WL 4039852 (S.D.N.Y. Sept. 12,<br />
2012).<br />
The court granted defendant’s motion to dismiss due to plaintiff’s failure to adequately<br />
allege falsity under the PSLRA. The court ruled that when a securities fraud claim is based on<br />
discrepancies between AIC and SEC filings, the plaintiff must allege at least some facts to<br />
support that: (i) the SEC figures, and not the AIC filings, are false, and (ii) any variation is not<br />
attributable to variations in reporting rules and accounting standards. Plaintiff failed to make<br />
any allegations regarding what accounting standards, if any, were required for AIC filings, the<br />
similarities or differences between those standards and U.S. GAAP, and any basis for concluding<br />
that the SEC filings -- an not the AIC filings were inaccurate.<br />
Meridian Horizon Fund, L.P. v. Tremont Group Holdings, Inc., 2012 WL 4049953 (S.D.N.Y<br />
Sept. 14, 2012).<br />
The court denied defendants’ motion to dismiss finding that, considering both the<br />
inferences urged by plaintiffs and competing inferences rationally drawn from all the facts, the<br />
complaint contained sufficient allegations to satisfy the PSLRA heightened scienter pleading<br />
requirements. While the complaint lacked specific claims regarding defendants’ actions,<br />
plaintiffs did allege that defendants represented they had a close relationship with Bernie Madoff<br />
and that they delved into details of Madoff’s operation to assure plaintiffs of the safety of their<br />
investments.<br />
In Re MELA Sciences, Inc. Securities <strong>Litigation</strong>, 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012).<br />
Investor group plaintiff failed to plead the required scienter by not alleging direct, or in<br />
the alternative circumstantial, evidence of defendants’ conscious misbehavior or recklessness.<br />
Plaintiff’s claims related to defendants’ public statements were also dismissed based on PSLRA<br />
safe harbor provisions and plaintiff’s failure to sufficiently allege statements were materially<br />
misleading.<br />
D.1<br />
D.1<br />
D.1<br />
163
D.1<br />
In re BP p.l.c. Securities <strong>Litigation</strong>, 843 F.Supp.2d 712 (S.D.Tex.,2012. February 13, 2012).<br />
Investors filed seven putative class action lawsuits in different districts against oil<br />
company, its affiliates, and a number of its present and former officers and directors, alleging<br />
various claims arising from oil spill in Gulf of Mexico. Court found that Plaintiffs have<br />
adequately plead section 10(b) violations and demonstrated requisite scienter for some<br />
defendants and failed to do so against others. The court held that what constitutes particularity,<br />
for purposes of pleading fraud claim under Federal Rule of Civil Procedure and PSLRA, will<br />
necessarily differ with the facts of each case, outlining a three step approach to reviewing<br />
scienter allegations in a motion to dismiss a federal securities fraud case pursuant to the PSLRA:<br />
(1) the allegations must, as in federal pleadings generally, be taken as true; (2) courts may<br />
consider documents incorporated in the complaint by reference and matters subject to judicial<br />
notice, and facts must be evaluated collectively, not in isolation, to determine whether a strong<br />
inference of scienter has been pleaded; and (3) a court must take into account plausible<br />
inferences opposing as well as supporting a strong inference of scienter.<br />
Wade v. WellPoint, Inc., 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012)<br />
The court denied plaintiff’s leave to file a second amended complaint due to her failure to<br />
cure the deficiencies previously criticized in her earlier pleadings. In particular, plaintiff still did<br />
not meet the heightened PSLRA pleading standards. The court noted plaintiff needed to<br />
distinguish her situation from that of many others who have been negatively impacted by<br />
business reversals. Plaintiff’s general allegations and insistence on group pleading provided<br />
boiler plate allegations none of which could support the required strong inference of scienter. In<br />
addition, plaintiff’s vague pronouncements regarding CWs and alleged violations of GAAP and<br />
MD & A disclosures lacked the required materiality to sustain a private securities fraud claim.<br />
In re Jiangbo Pharmaceuticals, Inc., Securities <strong>Litigation</strong>, 2012 WL 3150085 (S.D.Fla. 2012.).<br />
Investors brought action against holding company, its former Chief Financial Officer<br />
(CFO), and its external auditor, alleging securities fraud and control person liability under<br />
Securities Exchange Act. The court granted Defendant’s Motion to Dismiss without prejudice,<br />
holding that PSLRA imposes two extra requirements on plaintiffs pleading securities fraud. First,<br />
a plaintiff must specify each statement alleged to have been misleading, the reason or reasons<br />
why the statement is misleading, and, if an allegation regarding the statement or omission is<br />
made on information and belief, the complaint shall state with particularity all facts on which<br />
that belief is formed. Second, the PSLRA raises the standard for pleading scienter by requiring<br />
that, for each alleged act or omission, the plaintiff state with particularity facts giving rise to a<br />
strong inference that the defendant acted with the required state of mind and the complaint must<br />
allege facts supporting a strong inference of scienter for each defendant with respect to each<br />
violation.” The “strong inference” of scienter required under the PSLRA is an inference that is<br />
164<br />
D.1<br />
D.1
“cogent and at least as compelling as any opposing inference one could draw from the facts<br />
alleged.” In making this determination, a court must consider the complaint in its entirety, not<br />
any particular allegation in isolation.<br />
City of Pontiac General Employees’ Retirement System v. Stryker Corp., 865 Fl. Supp. 2d 811<br />
(W.D. Mich. 2012).<br />
Investors brought securities fraud action against medical equipment manufacturer, who<br />
moved to dismiss for failure to state a claim as required under the heightened pleading standards<br />
of the PSLRA. The court granted defendant’s motion to dismiss, finding that defendant’s failure<br />
to inform investors of its regulatory noncompliance did not render its financial results<br />
misleading, that investors failed to allege that defendant knew that its statement that it believed it<br />
was in compliance with applicable laws and regulations was false when made, that PSLRA’s<br />
safe-harbor provision applied to defendant’s forward-looking statements, and that investors<br />
failed to sufficiently allege scienter.<br />
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. April 19, 2012).<br />
Investors of common stock in energy company brought putative securities fraud class<br />
action against company, its officers and directors, and its primary shareholder, alleging that<br />
defendants failed to adequately disclose existing events, uncertainties and trends (specifically,<br />
the extent and impact of demand cuts by two of the company’s largest customers), which<br />
rendered certain statements made to investors false or misleading, and that defendants materially<br />
overstated the value of the company’s goodwill and intangible assets or materially understated<br />
net losses through fraudulent delay of impairment testing. 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 in part, finding that the plaintiffs improperly attempted to<br />
proceed under the group pleading doctrine as to several defendants, and that plaintiffs failed to<br />
adequately plead scienter as to their claims that defendants failed to disclose existing events,<br />
uncertainties and trends. However, the court found that plaintiffs cleared the first PSLRA hurdle<br />
by pleading with particularity misleading statements and deceptive practices in connection with<br />
the timing of impairment testing and write-downs of goodwill and other intangible assets.<br />
Kyung Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D.Cal. Aug. 29, 2012).<br />
The court granted certain defendants’ motion to dismiss based on plaintiff’s failure to<br />
satisfy the heightened pleading requirements requiring a strong inference of scienter under the<br />
PSLRA. Specifically, plaintiff failed to identify these defendants as engaging in the concealment<br />
of a bank’s deteriorating financial condition. In addition, the court ruled that: (i) allegations<br />
from other complaints or documents that were unproved and contested; (ii) consented entries of<br />
final judgment that did not contain admissions or denials; and (iii) invocations of the 5 th<br />
165<br />
D.1<br />
D.1<br />
D.1
Amendment during an SEC investigation could not be used to establish facts to demonstrate<br />
scienter.<br />
Washtenaw County Employees Retirement System v. Celera Corporation, 2012 WL 3835078<br />
(N.D. Cal. Sept. 4, 2012).<br />
The court denied defendants’ motion to dismiss relying on allegations in the complaint,<br />
attributed to confidential witnesses, regarding defendants’ reimbursement issues and related<br />
target-based executive compensation. The court found plaintiff’s allegations regarding<br />
defendants’ statement on earnings calls, the magnitude of the problem, and the narrow margin by<br />
which earnings exceeded amount necessary to trigger executive bonuses, were sufficient to<br />
create inference of scienter required under the PSLRA. The court found that collectively each<br />
plead component gave rise to a cogent and compelling inference that defendants knowingly<br />
misled the public.<br />
In Re Carter’s Inc. Securities <strong>Litigation</strong>, 2012 WL 3715241 (N.D. Ga. Aug. 28, 2012).<br />
The court denied accounting firm defendant’s motion to dismiss plaintiff’s second<br />
amended complaint finding that defendant’s alleged pattern of willful blindness to GAAP and<br />
GAAS violations, disregard of red flags sufficient to alert a reasonable auditor to fraud, and<br />
manifest failure to undertake the active independent examination role required of an independent<br />
public accountant supported a strong inference of scienter satisfying the PSLRA requirement.<br />
D.1<br />
D.1<br />
Purser v. Coralli, 2012 WL 5875600 (N.D.Tex.,2012. November 21, 2012).<br />
D.1<br />
Defendant moved to dismiss Plaintiff's claims pursuant to Rule 12(b)(6), contending that<br />
the complaint failed to allege facts as required by the PSLRA and the Federal Rules of Civil<br />
Procedure. The court concluded that Plaintiff's allegations are insufficient to support a federal<br />
securities claim. Specifically, Plaintiff's conclusory allegations regarding Defendants' conduct<br />
and motives, based on “irresistible inferences” and “subterfuge,” are not sufficient to support a<br />
federal securities claim and withstand dismissal under Rule 12(b)(6). Further, it is not clear from<br />
Plaintiff's pleadings, who made the representations, guarantees, and promises at issue, and to<br />
whom they were made. The court, taking a liberal view of Plaintiff's allegations in the Amended<br />
Complaint, determines that, at best, Plaintiff raises the mere possibility of wrongdoing by<br />
Defendants; however, when the allegations of the pleadings do not permit the court to infer more<br />
than the mere possibility of wrongdoing, they fall short of showing that he is entitled to relief.<br />
166
City of St. Clair Shores General Employees’ Retirement System v. Lender Processing Services,<br />
Inc., 2012 WL 1080953 (M.D. Fla. March 30, 2012).<br />
Granting defendants’ motion to dismiss securities fraud claims brought by putative class<br />
of company’s shareholders against company and certain directors and officers on the grounds<br />
that the complaint, which lumped together the actions of the defendants, failed to allege scienter<br />
with respect to each individual defendant and with respect to each alleged violation.<br />
Hemenway v. Bartoletta, 2012 WL 1252691 (M.D. Fla. April 13, 2012).<br />
Denying defendants’ motion to dismiss on the grounds that defendants could not rely on a<br />
non-reliance clause, such as the one in the subscription agreements, to dismiss the plaintiffs’<br />
securities fraud claims, and thus, plaintiff’s complaint passed muster under the PSLRA pleading<br />
requirements.<br />
In re Boston Scientific Corp. Securities <strong>Litigation</strong>, 686 F.3d 21 (C.A.1 Mass., 2012).<br />
Shareholders brought a putative securities fraud class action against corporation alleging<br />
that defendants made several misrepresentations or omitted to disclose information regarding<br />
unlawful sales practices and subsequent dismissals, thereby leading to artificial inflation of the<br />
corporation's stock. Defendants moved to dismiss the complaint. The Court affirmed the distict<br />
court’s decision to grant Defendant’s motion to dismiss finding that shareholders failed to<br />
adequately allege strong inference of scienter required under PSLRA to state securities fraud<br />
claim. In affirming the decision, the court noted that inherent in the PLSRA is the risk that<br />
dismissal on the complaint will leave without remedy some wrongs that discovery or trial might<br />
have disclosed, albeit a risk Congress thought necessary.<br />
Automotive Industries Pension Trust Fund v. Textron Inc., 682 F.3d 34 (C.A.1 R.I., 2012).<br />
Investors filed a securities fraud class action alleging that company and senior officers<br />
made a series of statements about its financial condition that were actionably misleading because<br />
they omitted important qualifying information. Defendants motion to dismiss was granted and<br />
plaintiff appealed. The court affirmed, holding that section 10(b)'s anti-fraud language, together<br />
with the PSLRA, requires that for each misstatement or omission the complaint state with<br />
particularity facts creating a strong inference that defendant acted with scienter, an intent to<br />
deceive, manipulate, or defraud, or a high degree of recklessness suggesting an indifference to<br />
deceit; nothing in the complaint supported such positions. The court also noted that Congress—<br />
concerned about the cost and disruption—deliberately raised the entry bar to discovery both<br />
D.1<br />
D.1<br />
D.1<br />
D.1<br />
167
through the PSLRA's heightened pleading standards and by other measures, stating that such<br />
trade offs based on real-world experience are what legislative judgment is all about.<br />
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (C.A.2 N.Y., 2012).<br />
In an action brought by shareholders for offerings of auction rate securities, and against<br />
agencies that assigned credit ratings to the ARS, the court affirmed the district court’s dismissal<br />
for failure to state a claim with particularity in accordance with the Federal Rule of Civil<br />
Procedure 9(b) and the PSLRA. To satisfy Rule 9(b) the plaintiff must (1) specify the statements<br />
that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the<br />
statements were made, and (4) explain why the statements were fraudulent. The PSLRA<br />
expanded on the Rule 9(b) standard, requiring that securities fraud complaints specify each<br />
misleading statement; that they set forth the facts on which a belief that a statement is misleading<br />
was formed; and that they state with particularity facts giving rise to a strong inference that the<br />
defendant acted with the required state of mind.<br />
Frederick v. Mechel OAO, 475 Fed.Appx. 353 (C.A.2 N.Y.,2012).<br />
Retirement system brought putative securities class action against Russian mining and<br />
metals company and three of its officers, alleging that company's American Depository Receipts<br />
(ADRs) were artificially inflated as a result of misrepresentations regarding the reasons for a<br />
recent period of extremely high profits. The district court dismissed the complaint. The Court of<br />
Appeals affirmed, holding that plaintiff failed to allege strong inference of scienter as required<br />
by PSLRA and further stating that the risk of investment loss common to all shareholders is<br />
insufficient to create a legally cognizable motive to commit fraud.<br />
Ipcon Collections LLC v. Costco Wholesale Corp., 698 F.3d 58 (C.A.2 N.Y., 2012).<br />
In an action brought by Plaintiff seeking sanctions against Plaintiff for violation of Rule<br />
11, the court held that such sanctions are discretionary, not mandatory. The court noted that<br />
while the PSLRA mandates that mandates the imposition of sanctions if the court determines that<br />
Rule 11 has been violated, securities cases not brought under PSLRA are not governed by such a<br />
mandate.<br />
Meridian Horizon Fund, LP v. KPMG, 487 Fed.Appx. 636 (C.A.2 N.Y., 2012).<br />
Hedge funds brought securities fraud action against auditors, seeking to recover assets<br />
they lost in a Ponzi scheme, and alleging that auditors failed to conduct their audits in<br />
accordance with Generally Accepted Auditing Standards. Auditors moved to dismiss. The<br />
168<br />
D.1<br />
D.1<br />
D.1<br />
D.1
United States District Court for the Southern District of New York, Thomas P. Griesa, J., 747<br />
F.Supp.2d 406, granted motions. Funds appealed. The Court of Appeals held that the funds<br />
failed to allege strong inference of scienter, as required under PSLRA to state securities fraud<br />
claims. The hedge funds' allegations that auditors ignored “red flags” of fraud and conducted<br />
inadequate audits were insufficient to support strong inference of scienter, as required under<br />
PSLRA to state securities fraud claims seeking recovery for assets lost in a Ponzi scheme.<br />
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (C.A.2 N.Y.,<br />
2012).<br />
The court reversed the district court’s decision to dismiss a putative class action brought<br />
by holders of mortgage-backed certificates alleging that registration statement for the certificates<br />
contained false or misleading information. The court found that the district court erred in<br />
requiring plaintiff to plead an out-of-pocket loss in order to allege a cognizable diminution in the<br />
value of an illiquid security under § 11, explaining that the heightened pleading standards of the<br />
PSLRA do not apply to non-fraud Securities Act claims to impose liability for material<br />
misstatements or omissions in a registration statement or prospectus for a registered securities<br />
offering.<br />
Saltz v. First Frontier, L.P. 485 Fed.Appx. 46 (C.A.2 N.Y., 2012).<br />
Investors in sub-feeder fund that indirectly invested in annb investment company<br />
engaged in multi-billion dollar Ponzi scheme failed to state with particularity facts giving rise to<br />
strong inference of scienter, as required under the PSLRA to state securities. The only relevant<br />
allegation as to motive and opportunity, that defendants collected an annual management fee of<br />
0.125%, was insufficiently concrete and personal, and investor made no allegation supporting<br />
conclusion that defendants were aware of purported red flags. The district court’s decision to<br />
dismiss the case was affirmed by court on the grounds that investors failed to state with<br />
particularity facts giving rise to strong inference of scienter, and investors failed to state a<br />
securities fraud claim.<br />
Pipefitters Local No. 636 Defined Ben. Plan v. Zale Corp., 2012 WL 5985075 (C.A.5 Tex.,<br />
2012).<br />
Investors alleged that defendants knew the statements made in their SEC filings, press<br />
releases, and investor calls were materially false, or acted in severely reckless disregard of their<br />
falsity. The district court concluded that plaintiff’s theory under the was “plausible” but failed to<br />
satisfy the heightened pleading standard for fraud claims pursuant to PSLRA. Where plaintiff did<br />
not raise a strong inference that any of the three individual defendants, or any other official<br />
responsible for the allegedly fraudulent financial statements, acted with scienter, the court<br />
affirmed the lower court’s decision to grant defendant’s motion to dismiss.<br />
169<br />
D.1<br />
D.1<br />
D.1
D.1<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (C.A.6 Ky., 2012).<br />
The court affirmed the district court’s decision to dismiss Plaintiff’s claims that broker<br />
made false representations that certificates were reasonably safe investment products, holding<br />
that Plaintiff’s claims were not sufficiently particular and therefore failed to adequately plead<br />
actionable misrepresentations or omissions of fact. The court noted that the heightened pleading<br />
standard that Congress imposed on securities-fraud actions in the PSLRA applies to claims<br />
brought pursuant to Kentucky's Blue Sky Law § 292.320.<br />
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 679 F.3d 952<br />
(C.A.7 Ind., 2012).<br />
Shareholders brought putative securities fraud class action against medical device<br />
manufacturer and its officers, alleging that defendants omitted from public statements material<br />
information relating to two of manufacturer's revenue sources which led to stock-price decline.<br />
Manufacturer moved to dismiss and district court granted the motion, and denied shareholder's<br />
motion to amend their complaint. The Court of Appeals held that allegations that defendants<br />
downplayed the significance of high failure rate one surgeon reported for one of manufacturers's<br />
devices failed to raise strong inference of scienter required to state securities fraud claim under<br />
PSLRA.<br />
Fulton County Employees Retirement System v. MGIC Inv. Corp., 675 F.3d 1047 (C.A.7 (Wis.,<br />
2012).<br />
Investors brought securities fraud class actions against a mortgage loan insurer. After<br />
actions were consolidated by the district court, which then dismissed the complaintand denied<br />
investors' motion for leave to amend complaint. Investor appealed. The Court of Appeals Tellabs<br />
held that the complaint flunked the PSLRA's requirement for pleading scienter. The court further<br />
explained that a complaint must contain facts rendering an inference of scienter at least as likely<br />
as any plausible opposing inference.<br />
McCrary v. Stifel, Nicolaus & Co., Inc., 687 F.3d 1052 (C.A.8 Mo., 2012).<br />
Investors brought suit in state court alleging that brokerage and investment banking firm<br />
and two of its employees violated federal securities law. Defendants removed action and moved<br />
to dismiss. The district court granted motion and investors appealed. Plaintiffs point out that the<br />
district court only analyzed the complaint under Rule 23 and expressly declined to address the<br />
sufficiency of the allegations under the PSLRA. Plaintiffs contend that the district court could<br />
not dismiss their individual claims without first reviewing the substance of those claims under<br />
170<br />
D.1<br />
D.1<br />
D.1
the PSLRA. The Court of Appeals held that the district court was required to either stay<br />
individual securities fraud claims pending arbitration or undertake analysis of claims under<br />
PSLRA.<br />
Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972 (C.A.8 Mo., 2012).<br />
Allegations in complaint that pharmaceutical company made ten specific statements in<br />
10-Ks it filed with SEC about its compliance with FDA regulations which were false or<br />
misleading, that there was lengthy history of company manufacturing adulterated, unapproved,<br />
and misbranded drugs in violation of FDA regulations due to manufacturing irregularities, that<br />
company failed to address or correct serious manufacturing problems during class period, and<br />
that company's operations were ultimately shut down as result of its failure to comply with<br />
regulations, and stock market reacted to news of shutdown with significant drop in price of<br />
company's stock, pled fraud with sufficient particularity, as required by PSLRA. Based on these<br />
specific pleadings, the court concluded that the investors satisfied the PSLRA's pleading standard<br />
with respect to the time, place, and contents of the allegedly false or misleading representations<br />
and remanded the matter to the district court.<br />
D.1<br />
Karpov v. Insight Enterprises, Inc., 471 Fed.Appx. 607 (C.A.9 Ariz., 2012).<br />
D.1<br />
Plaintiff-appellant, a union pension fund, appealed the district court's dismissal of its<br />
securities fraud class action complaint with prejudice, for failing to adequately plead scienter. In<br />
particular, the district court found, and the Court of Appeals affirmed, that none of the<br />
allegations from confidential witnesses could support an inference of scienter because the<br />
reliability and personal knowledge of the witnesses themselves were not properly pleaded.<br />
Further, the court concluded that the other allegations could not, standing alone or taken<br />
together, satisfy the more stringent pleading requirements for scienter contained in the PSLRA.<br />
In re American Funds Securities <strong>Litigation</strong>, 479 Fed.Appx. 782 (C.A.9 Cal., 2012).<br />
Investors in the American Funds, appeal the dismissal with prejudice of their claims that<br />
defendants committed securities fraud in violation of §§ 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934. The district court held that plaintiffs' action was untimely because it was<br />
filed more than two years after a reasonably diligent plaintiff could have discovered the facts<br />
constituting the violation. Plaintiffs appealed and the court held that the district court erred in<br />
dismissing the action as time-barred; however, because plaintiffs' complaint failed to allege<br />
scienter with the requisite particularity, affirmed the dismissal and remanded for the limited<br />
purpose of granting plaintiffs leave to amend, holding that because there was the possibility that<br />
an amendment could cure this defect, plaintiffs must be given the chance to amend their<br />
complaint to satisfy the heightened pleading standards established by Congress in the PSLRA.<br />
D.1<br />
171
D.1<br />
Gammel v. Hewlett-Packard Company, 2012 WL 5945089 (C.D.Cal. Aug. 29, 2012)<br />
Motions to dismiss brought by computer company and its officers were granted based on<br />
the court’s findings that plaintiffs failed to meet the PSLRA pleading standards for the<br />
allegations of falsity and scienter. In addition, the court ruled that some of defendants’ public<br />
statements were protected by the PSLRA’s safe harbor provisions and constituted in-actionable<br />
puffery. The court summarily dismissed plaintiffs’ section 20(a) claim based on its dismissal of<br />
the section 10(b) and Rule 10b-5 claims.<br />
In re Level 3 Communications, Inc. Securities <strong>Litigation</strong>, 667 F.3d 1331 (C.A.10 Colo. 2012).<br />
Investors failed to establish strong inference that telecommunications company officials'<br />
made materially false statements about company's progress in integrating acquired entities with<br />
scienter required to plead securities fraud claims under § 10(b), where critical terms at issue were<br />
open to multiple interpretations. Pursuant to PSLRA, Inference of scienter required to plead<br />
securities fraud claim need not be irrefutable, but court will draw strong inference of<br />
recklessness only if, based on plaintiff's allegations, where a reasonable person would deem an<br />
inference of scienter to be cogent and at least as compelling as any opposing inference one could<br />
draw from the facts alleged.<br />
D.1<br />
2. Appointment of Lead Plaintiff/Class Counsel<br />
D.2<br />
City of Bristol Pension Fund v. Vertex Pharm., 2012 WL 6681907 (D. Mass. Dec. 21, 2012).<br />
In a putative securities fraud class action, a pension plan moved for appointment as lead<br />
plaintiff and defendant challenged the appointment contending that the pension plan lacked<br />
standing. The district court found that the pension plan had the largest financial interest and met<br />
the typicality and adequacy requirements of Fed. R. Civ. P. 23. The court further held that it was<br />
not an appropriate stage in the hearing to consider defendant’s argument of lack of standing,<br />
noting that numerous courts have interpreted the language of the Reform Act to mean that only a<br />
member of the putative class may challenge a petition for lead plaintiff status. Accordingly, the<br />
court appointed the pension plan as lead plaintiff and approved its selection of lead counsel.<br />
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 332 (S.D.N.Y.<br />
2012).<br />
In a mortgage-backed securities class action, the court granted the previously-appointed<br />
lead plaintiff’s motion to withdraw and considered its motion to appoint a substitute lead<br />
plaintiff. Defendants argued that it was procedurally improper to allow the substitution without<br />
172<br />
D.2
e-opening the lead plaintiff appointment process as set forth in the Reform Act. The court<br />
approved a modified version of the lead plaintiff appointment process and determined that any<br />
motion for appointment as lead plaintiff would be considered timely if the movant either:<br />
(a) filed the complaint; (b) moved to be appointed lead plaintiff in response to the initial notice<br />
of pendency; or (c) moved to be appointed lead plaintiff within thirty days of the withdrawal of<br />
the previous lead plaintiff. As guidance for potential new movants, the court responded to<br />
defendants’ argument that the original lead plaintiff’s proposed substitute lacked standing<br />
because they purchased certificates from different tranches of the same offering. The court<br />
concluded that because it was possible to trace the injury of the purchasers to the same<br />
underlying conduct on the part of defendants, the certificates did not constitute different<br />
securities. The court denied the original plaintiff’s motion to appoint its choice of substitute lead<br />
plaintiff at this point in time, but noted that this decision did not preclude potential lead plaintiffs<br />
relying on similar claims from ultimately being selected.<br />
City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 844 F. Supp. 2d 498 (S.D.N.Y.<br />
2012).<br />
In a securities fraud class action, the district court reaffirmed a prior order granting an<br />
unopposed motion for appointment as lead plaintiff filed by a retirement system. Because no<br />
other plaintiff in the class moved to be appointed as lead plaintiff, the retirement system was<br />
presumed to be the most adequate plaintiff. However, defendants filed post-hearing papers<br />
opposing the appointment of the retirement system as lead plaintiff based on the disclosure of a<br />
“monitoring agreement” between the retirement system and its counsel. Specifically, counsel<br />
had agreed to monitor investments made by the retirement system and alert them to potential<br />
lawsuits on the condition that the law firm would be the presumptive choice of counsel if the<br />
retirement system chose to take action. The court noted that “lawyer driven litigation creates the<br />
potential for abusive lawsuits” and found that the monitoring arrangement “may further foster<br />
such tendencies.” However, despite these reservations, the court was satisfied that the<br />
representative and trustees of the retirement system had the ability to properly exercise their role<br />
as lead plaintiff and, after instruction by the court, recognized their duty to do so. The court also<br />
noted that plaintiff asserted highly specific and detailed allegations, was not subject to any<br />
unique defenses that would make it atypical or inadequate, and only a preliminary showing of<br />
adequacy was required at that point. Therefore, the court reaffirmed its order appointing the<br />
retirement system as lead plaintiff and approving lead counsel.<br />
In re Gentiva Sec. Litig., 281 F.R.D. 108 (E.D.N.Y. 2012).<br />
In a securities fraud class action, the district court reopened the lead plaintiff selection<br />
process and considered four competing motions following the withdrawal of the originally<br />
appointed lead plaintiff and consolidation of the case with four other federal class actions. The<br />
court initially determined that two of the movants could immediately be excluded as clearly not<br />
having the largest losses. However, one of these movants argued that it held the largest number<br />
of shares through the end of the class period due to the fact that the two remaining movants sold<br />
173<br />
D.2<br />
D.2
most of their shares prior to the final corrective disclosure. The court dismissed this “in-and-out”<br />
argument as inapplicable in this case because there were several plausible and legitimate partial<br />
disclosures prior to the final disclosure. Therefore, it was not clear that the other movants had<br />
improperly included trading losses from earlier stock sales. Of the two remaining movants, the<br />
court dismissed one because there was no pre-existing relationship between the two institutional<br />
investors that comprised the group and, taken individually, their losses were minimal in<br />
comparison with the remaining movant, a retirement system. After determining that the<br />
retirement system met the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court<br />
appointed it as lead plaintiff and approved its choice of counsel.<br />
Stone v. Agnico-Eagle Mines Ltd., 280 F.R.D. 142 (S.D.N.Y. 2012).<br />
Following consolidation of two related securities fraud class actions, the district court<br />
considered competing motions for appointment as lead plaintiff filed by a Swedish pension fund<br />
and an individual investor. The pension fund alleged the largest loss and was presumptively the<br />
most adequate plaintiff. However, the individual sought to rebut the presumption on several<br />
grounds. First, the individual argued that the pension fund lacked standing on the basis that its<br />
asserted losses might be losses of the fund’s clients rather than losses of the fund itself. The<br />
court rejected this argument on the basis of a declaration submitted by the fund that it owned its<br />
investments, it maintained exclusive control of the investments, and the fund had authority to sue<br />
on behalf of its clients. The individual also argued that the fund’s purchases of the securities at<br />
issue on the Toronto Stock Exchange in addition to its U.S. purchases might make the fund<br />
vulnerable to unique defenses. However, the court accepted the fund’s response that it did not<br />
intend to pursue claims based on its losses from the Toronto Stock Exchange and that movants<br />
who purchase the securities of a company on multiple exchanges are suitable as lead plaintiffs.<br />
Finally, the individual argued that Swedish courts might not enforce the ruling, which would<br />
make the fund atypical of the purported class. The fund noted that courts have rejected res<br />
judicata concerns when foreign lead plaintiff movants are suing as a result of purchases made on<br />
a domestic securities exchange. The court agreed that the risk of Swedish courts denying res<br />
judicata effect to a ruling did not make the fund inadequate to serve as lead plaintiff. The court<br />
denied the individual’s request to serve as co-lead plaintiff, appointed the pension fund as lead<br />
plaintiff, and approved its selection of lead counsel.<br />
In re Facebook, Inc., IPO Sec. & Deriv. Litig., 2012 WL 6061862 (S.D.N.Y. Dec. 6, 2012).<br />
Faced with numerous class actions arising from the IPO of Facebook, the district court<br />
evaluated motions for consolidation and lead plaintiff status. With respect to securities fraud<br />
class actions against Facebook and certain of its officers and directors, the court consolidated<br />
these actions, appointed an institutional investor group as lead plaintiff, and approved its<br />
selection of co-lead counsel. The court determined that the investor group had the largest<br />
financial interest utilizing a four-factor test which considers: (1) the number of shares purchased<br />
during the class period; (2) the number of net shares purchased during the class period (i.e., the<br />
number of shares retained during the period); (3) the total net funds expended during the class<br />
174<br />
D.2<br />
D.2
period; and (4) the approximate loss suffered during the class period. The court rejected a<br />
competing movant’s argument that the investor group was atypical due to the timing of its<br />
purchases, noting that “[c]ourts have consistently rejected the argument that post-disclosure<br />
purchases preclude a proposed class representative from meeting Rule 23(a) requirements.” The<br />
court also rejected contentions that the investor group was atypical due to potential conflicts of<br />
interest arising from business relationships by persons within the group with some of the<br />
companies connected to the allegations. The court held that “[r]elationships, between movants<br />
and individual defendants, even when close, do not necessarily raise a conflict of interest<br />
sufficient to rebut the lead plaintiff presumption.” The court further held that securities fraud<br />
and negligence actions against NASDAQ-related entities would be consolidated separately, and a<br />
group with the largest financial interest which “easily satisfie[d] Rule 23’s adequacy and<br />
typicality requirements” was appointed as lead plaintiff. In addition, the court appointed a colead<br />
plaintiff “whose losses focus on the alleged negligent failure of NASDAQ to maintain a<br />
properly functioning trading platform for the Facebook IPO,” along with co-lead counsel on an<br />
interim basis.<br />
Casper v. Jinan, 2012 WL 3865267 (S.D.N.Y. Sept. 6, 2012).<br />
In a shareholder class action, the court considered two competing motions for<br />
appointment as lead plaintiff filed by an individual investor and a group of investors. The court<br />
noted that although the individual acquired more shares during the class period, the group’s net<br />
shares and net expenditures exceeded those of the individual and, therefore, the group had a<br />
larger financial interest. The court further held that the investor group satisfied the typicality and<br />
adequacy requirements of Fed. R. Civ. P. 23 and rejected a challenge to the adequacy of the<br />
group’s selection of counsel. The court noted that the individual failed to offer specific evidence<br />
that the firm lacked the necessary experience and resources to protect the interests of the class<br />
and simply resorted to speculation. Accordingly, the court appointed the investor group as lead<br />
plaintiff and approved its selection of lead counsel.<br />
George v. China Auto. Sys., Inc., 2012 WL 3205062 (S.D.N.Y. Aug. 8, 2012).<br />
Following the appointment of an investor group as lead plaintiff and selection of lead<br />
counsel, the lead plaintiff sought appointment of co-lead counsel. The court rejected defendants’<br />
opposition to the motion, noting that “courts typically do not credit objections to appointment of<br />
(co-)lead counsel by a defendant.” The court conditionally granted the request for co-lead<br />
counsel pending submission and review of an affidavit setting forth how the two firms<br />
implemented procedures to limit legal fees and costs, required approval for significant expenses,<br />
and negotiated a competitive fee arrangement with plaintiffs.<br />
D.2<br />
D.2<br />
175
D.2<br />
Bo Young Cha v. Kinross Gold Corp., 2012 WL 2025850 (S.D.N.Y. May 31, 2012).<br />
In a putative securities fraud class action, the district court considered four competing<br />
motions for appointment as lead plaintiff filed by: (i) pension, retirement, and annuity funds of a<br />
union (“Union Funds”); (ii) a city’s retirement system (“Retirement System”); (iii) a city’s<br />
pension plan investment trust (“Investment Trust”); and (iv) two individual investors. The<br />
Investment Trust and individual investors conceded that they lacked the largest financial interest<br />
in the case. The court used the Last-In-First-Out (“LIFO”) methodology to determine that the<br />
Retirement System had the largest losses and was presumptively the most adequate plaintiff.<br />
The Union Funds attempted to rebut the presumption by arguing that other loss calculation<br />
methods were more appropriate. The court rejected the Union Funds’ attempt to use the First-In-<br />
First-Out (“FIFO”) methodology on the basis that “the overwhelming trend both in this district<br />
and nationwide has been to use LIFO to calculate such losses.” The Union Funds also proposed<br />
the “Economic Reality” method, in which losses are evaluated by excising pre-class-period<br />
shares from the tabulation of plaintiff’s total losses by pairing pre-class period purchases with<br />
shares sold during the class period. The court rejected this methodology, noting that the Union<br />
Funds’ purchases and sales were made at a variety of times at different prices, making the<br />
pairing process “subjective and judgmental.” After determining that the Retirement System<br />
satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court appointed it as<br />
lead plaintiff and approved its choice of lead counsel.<br />
Gordon v. Sonar Capital Mgmt. LLC, 2012 WL 1193844 (S.D.N.Y. Apr. 9, 2012).<br />
In a securities fraud class action, the court appointed two individuals as co-lead plaintiffs.<br />
Initially, each had filed separate motions for appointment as lead plaintiff and then amended<br />
their motions to seek appointment as co-lead plaintiffs. The court initially determined that one of<br />
the individuals, a retired judge, had the greatest financial stake and significant legal credentials.<br />
However, the court also found that both movants had limited experience with overseeing<br />
securities litigation and the combined business and legal experience of the two individuals would<br />
be advantageous. Moreover, a potential challenge relating to the typicality requirement under<br />
Fed. R. Civ. P. 23 would be mooted by the appointment of both individuals as co-lead plaintiffs.<br />
Accordingly, the court appointed the two individuals as co-lead plaintiffs and approved their<br />
request for two firms to serve as co-lead counsel.<br />
Wallace v. IntraLinks Holdings, Inc., 2012 WL 1108572 (S.D.N.Y. Apr. 3, 2012).<br />
Following consolidation of two related securities fraud class actions, the court considered<br />
four competing motions for appointment as lead plaintiff. The court appointed a pension fund as<br />
lead plaintiff, noting that its loss was exponentially larger than any other plaintiff that had come<br />
forward and its losses exceeded the combined losses of all three other movants. The court<br />
further held that the pension fund satisfied the typicality and adequacy requirements of Fed. R.<br />
Civ. P. 23 and no party had set forth any evidence or arguments rebutting the argument that the<br />
176<br />
D.2<br />
D.2
pension fund was the most appropriate lead plaintiff. The court also approved the pension fund’s<br />
selection of lead counsel, noting that the firm was highly experienced in complex securities class<br />
actions.<br />
In re CMED Sec. Litig., 2012 WL 1118302 (S.D.N.Y. Apr. 2, 2012).<br />
The district court considered three competing motions for appointment as lead plaintiff<br />
filed by two individuals and a group consisting of a company and two individuals, one of whom<br />
was the company’s sole shareholder and managing director. One of the individual movants was<br />
eliminated from consideration as he had the smallest financial interest and did not oppose the<br />
motions by the other two movants. The three-member group had the largest financial interest in<br />
the case, but the remaining individual movant argued that the group was a lawyer-driven creation<br />
with only two of three members having a pre-litigation relationship. The court agreed that the<br />
group was lawyer-driven, but rejected the individual movant’s contention that seeking lead<br />
plaintiff appointment as a group foreclosed the group’s ability to be considered individually or in<br />
some combination for lead plaintiff status. The court then compared the losses of each member<br />
of the group with the individual movant and found that by aggregating the losses of two<br />
members of the group on the basis of their pre-litigation relationship, their collective losses were<br />
greater than those of the individual movant. The individual movant then claimed that the group’s<br />
use of “the retained shares methodology” as an alternative method for calculation of losses<br />
indicated that the group would not seek relief on behalf of investors who suffered losses in<br />
connection with partial corrective disclosures. The court rejected this argument, finding that<br />
there was no indication that the any of the group members abandoned the partial corrective<br />
disclosures merely by showing an alternative method of calculating losses. Accordingly, the<br />
court disaggregated the original group and appointed the related pair as lead plaintiff and<br />
approved their choice of lead counsel.<br />
Peters v. JinkoSolar Holding Co., 2012 WL 946875 (S.D.N.Y. Mar. 19, 2012).<br />
In a securities class action, the court considered five competing motions for appointment<br />
as lead plaintiff, as well as an amended motion for appointment as lead plaintiff filed by a group<br />
comprised of two of the original movants. Based on financial interest alone, the combined group<br />
was the presumptive lead plaintiff. However, another movant argued that: (1) the combined<br />
group provided no explanation for the formation of the group or how it would act cohesively;<br />
and (2) the group’s motion for appointment as lead plaintiff was untimely under the Reform Act.<br />
In dealing with lead plaintiff groups of unrelated investors, the court stated that three basic<br />
factors are relevant to the inquiry: “(1) the size of the group; (2) the relationship between the<br />
parties; and (3) any evidence that the group was formed in bad faith.” With respect to the first<br />
factor, the court noted that it is generally agreed that a group comprised of five or fewer<br />
members is appropriate. The court also found that the combined group’s explanation for its<br />
formation and declaration concerning cohesiveness met the standards outlined by case law.<br />
Because the combined group was comprised of the class members with “far and away the largest<br />
financial interest,” the court determined that policy was not disserved by allowing the individuals<br />
177<br />
D.2<br />
D.2
to join together. With respect to the timeliness argument, the court noted that courts have<br />
allowed amended motions by groups after the sixty-day deadline where each member of the<br />
newly-formed group had previously filed a timely motion. After finding that the combined<br />
group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court<br />
appointed the group as lead plaintiff and approved its choice of co-lead counsel. Finally, the<br />
court denied a competing movant’s motion for reconsideration and request for certification for<br />
interlocutory appeal under § 1292(b).<br />
Beckman v. Ener1, Inc., 2012 WL 512651 (S.D.N.Y. Feb. 15, 2012).<br />
Following consolidation of three securities fraud class actions, the district court<br />
considered three competing motions for appointment as lead plaintiff. Each motion was filed by<br />
a group, one of which consisted of a husband and wife, a second consisting of three unrelated<br />
individuals, and the third consisting of two brothers and three additional unrelated individuals.<br />
Although the court found that the third group had the largest collective financial loss, it<br />
concluded that there was “a real threat of lawyer-driven litigation.” Specifically, the court noted<br />
that the group had requested three different firms as lead-counsel, which demonstrated a lack of<br />
cohesion. Accordingly, the court disaggregated the group, and considered the two brothers as a<br />
group and the remaining three as individual contenders. Since the husband and wife group had<br />
larger losses than the other groups or individuals, the husband and wife group was the<br />
presumptive lead plaintiff. After finding that the husband and wife met the typicality and<br />
adequacy requirements of Fed. R. Civ. P. 23, the court appointed them as lead plaintiff and<br />
approved their selection of lead counsel.<br />
Prefontaine v. Research In Motion Ltd., 2012 WL 104770 (S.D.N.Y. Jan. 5, 2012).<br />
After consolidating three related putative securities fraud class actions, the district court<br />
considered three competing motions for appointment as lead plaintiff filed by an investor group,<br />
a pension trust, and an individual investor. The individual investor had the largest losses and,<br />
thus, was presumptively the most adequate plaintiff. Other movants attempted to rebut the<br />
presumption by arguing that: (i) the individual investor would not adequately represent the<br />
plaintiff class because he profited from options transactions that took place during the class<br />
period; (ii) he lacked standing to bring claims on behalf of the class because the losses were not<br />
his, but rather were losses of his clients; and (iii) as a day trader, he was subject to a unique<br />
defense because he may not have relied on the integrity of the market in making trades. The<br />
court noted that the accuracy of the first claim was disputed and, furthermore, conclusory<br />
statements are not adequate to demonstrate a conflict of interest sufficient to overcome a<br />
preliminary showing of adequacy. The second claim was supported only by speculative<br />
statements and was contradicted by the individual investor in a sworn declaration. Finally, the<br />
court rejected the argument that the individual should be prohibited from serving as lead plaintiff<br />
because he engaged in day-trading. The court noted that “the prevailing view in this Circuit is<br />
that ‘day and momentum traders have the same incentives to prove defendants’ liability as all<br />
other class members, and their presence in a securities class does not create intra-class<br />
178<br />
D.2<br />
D.2
conflicts.’” Accordingly, the court found that the individual investor satisfied the adequacy and<br />
typicality requirements of Fed. R. Civ. P. 23, appointed him as lead plaintiff, and approved his<br />
selection of lead counsel.<br />
Grodko v. Central European Dist. Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012).<br />
Following de-consolidation of two shareholder class actions, the district court appointed a<br />
pension system as lead plaintiff. Although another institutional investor group alleged the<br />
greatest loss, the court found that it was subject to unique defenses concerning loss causation<br />
which arose from the timing of stock sales. The pension system had the next largest loss, but had<br />
not submitted a timely application for appointment as lead plaintiff. Nevertheless, the court held<br />
that the filing of a complaint by the pension fund was adequate for it to be considered as lead<br />
plaintiff under the Reform Act. The court also rejected the competing movant’s argument that<br />
counsel for the pension system had engaged in unethical gamesmanship and forum shopping<br />
arising from representation of multiple plaintiffs. The court determined that counsel’s actions<br />
were not necessarily unethical and were not grounds for denying lead plaintiff status to the<br />
pension fund, noting that the proper remedy would be the selection of other counsel. After<br />
finding that the firm selected by the pension system had extensive experience with complex<br />
litigation and a successful track record, the court appointed the pension system as lead plaintiff<br />
and approved its choice of lead counsel.<br />
In re Central European Dist. Corp. Sec. Litig., 2012 WL 5511711 (D.N.J. Nov. 14, 2012).<br />
Where a lead plaintiff had been appointed in a securities class action, a rejected movant<br />
for lead plaintiff filed a motion for interlocutory appeal concerning the determination. The<br />
district court denied the motion, restating that the moving party was subject to unique defenses<br />
regarding standing that could prejudice the class. Specifically, several members of the group had<br />
an investment advisor bring their claims, even though the advisor had no ownership interest in<br />
the claims. Moreover, the court held that none of the questions proposed for certification would<br />
have materially advanced the termination of the litigation, but rather would likely cause delay.<br />
Finally, several of the questions were not previously opined on by the court and, thus, could not<br />
be certified for review. Accordingly, the court denied the motion for interlocutory appeal.<br />
Steamfitters Local 449 Pension Fund v. Cent. European Dist. Corp., 2012 WL 3638629 (D.N.J.<br />
Aug. 22, 2012).<br />
In a securities fraud class action, the district court addressed the Report and<br />
Recommendation filed by the Magistrate Judge regarding consolidation and appointment of the<br />
lead plaintiff. The court considered two competing motions for appointment of lead plaintiff<br />
filed by a group of foreign investment entities and a group of retirement systems. First, the court<br />
identified the group of foreign entities as the presumptive lead plaintiff due to the fact that it<br />
suffered ten times the losses of the group of retirement systems. However, the court found that<br />
179<br />
D.2<br />
D.2<br />
D.2
the foreign entities group was subject to unique defenses regarding standing. Specifically, the<br />
group had neither the authority to bring lawsuits, nor title to the claims because the injury was<br />
suffered by subsidiaries of the group, and not by the group itself. Further, the court held that the<br />
subsidiaries were subject to unique defenses regarding timely filing. After finding that the group<br />
of retirement systems satisfied the requirements of Fed. R. Civ. P. 23, the court appointed it as<br />
lead plaintiff and approved its selection of counsel. In addition, consolidation was unopposed<br />
and granted.<br />
Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 2012 WL 3597179 (M.D. Pa. Aug. 20, 2012).<br />
In a securities fraud class action, the district court granted an unopposed motion for<br />
appointment as lead plaintiff filed by Southeastern Pennsylvania Transportation Authority<br />
(“SEPTA”). The court noted that SEPTA was the only investor to have filed a complaint arising<br />
from the allegations and no party questioned that SEPTA had the largest financial interest in the<br />
relief sought by the class. Since there were no other movants, SEPTA was presumptively the<br />
most adequate plaintiff. After finding that SEPTA satisfied the typicality and adequacy<br />
requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved its<br />
selection of lead counsel.<br />
Shah v. GenVec, Inc., 2012 WL 1478792 (D. Md. Apr. 26, 2012).<br />
In a shareholder class action, the district court granted an unopposed motion for<br />
appointment as lead plaintiff filed by a group of five investors. The court held that the group had<br />
the largest known financial interest, their claims were typical of the class, and the adequacy<br />
requirement was satisfied based upon their declarations that they are a “small cohesive,<br />
manageable group that all will work together and direct the activities of … counsel.”<br />
Accordingly, the court appointed the group as lead plaintiff and approved its selection of lead<br />
counsel.<br />
Miraglia v. Human Genome Science Inc., 2012 WL 987502 (D. Md. Mar. 22, 2012).<br />
Following consolidation of two substantially similar class actions, the district court<br />
granted an unopposed motion for appointment as lead plaintiff filed by an individual. The<br />
individual was the only putative class member that timely sought appointment as lead plaintiff,<br />
he had the largest financial interest in the relief sought, and otherwise met the requirements of<br />
Fed. R. Civ. P. 23. Accordingly, the court appointed the individual as lead plaintiff, approved<br />
his selection of lead counsel, and also appointed liaison counsel.<br />
D.2<br />
D.2<br />
D.2<br />
180
D.2<br />
McIntyre v. Chelsea Therapeutics Int’l, Ltd., 2012 WL 3962522 (W.D.N.C. Aug. 16, 2012).<br />
On five competing motions for appointment as lead plaintiff, the district court appointed<br />
an individual as lead plaintiff and approved his selection of lead counsel. The court held that the<br />
individual had the largest financial interest “by far” and satisfied the typicality and adequacy<br />
requirements of Fed. R. Civ. P. 23. Specifically, the individual purchased the defendant’s<br />
common stock, suffered damages purportedly due to defendant’s actions, and possessed claims<br />
against the defendant and its officers and/or directors. The court rejected a competing movant’s<br />
argument that the individual was subject to a unique defense because of the timing of his<br />
purchases. The competing movant, a group of two individuals, was also challenged because of<br />
the lack of a previous relationship prior to the class action. Accordingly, the court appointed the<br />
individual as lead plaintiff and approved his selection of lead counsel.<br />
Hohenstein v. Behringer Harvard REIT I, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20, 2012).<br />
In a shareholder class action, the district court granted an unopposed for motion for<br />
appointment as lead plaintiff filed by a group of investors. The group purchased the securities at<br />
issue during the relevant time period, asserted the largest financial interest, and alleged that it<br />
was subjected to false and misleading statements by defendants in regulatory filings. After<br />
finding that the group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23,<br />
the court appointed the investor group as lead plaintiff and approved its selection of lead counsel<br />
and liaison counsel.<br />
Blitz v. AgFeed Indus., Inc., 2012 WL 1192814 (M.D. Tenn. Apr. 10, 2012).<br />
In a securities fraud class action formed from the consolidation of five cases, the court<br />
considered four competing motions for appointment as lead plaintiff. The court determined that<br />
a group comprised of five investors alleged the largest losses, rejecting arguments relating to the<br />
method of calculating loss and the assertion that some of the losses should not be considered<br />
because they were losses from shares that were sold prior to any corrective disclosure. The court<br />
also disagreed that the investor group was “cobbled together” by lawyers and would not<br />
adequately represent the interests of the class. After determining that the investor group alleged<br />
the largest loss and satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the<br />
court appointed the group as lead plaintiff and approved its choice of co-lead and liaison counsel.<br />
Bristol County Ret. Sys. v. Allscripts Healthcare Solutions, Inc., 2012 WL 5471110 (N.D. Ill.<br />
Nov. 9, 2012).<br />
In a securities fraud class action, two institutional groups filed competing motions for<br />
appointment as lead plaintiff. One group advocated using a “last-in-first-out” method of<br />
181<br />
D.2<br />
D.2<br />
D.2
determining losses, whereas the other group proffered “first-in-first-out” calculations. The court<br />
held that under either method, a group of pension plans suffered the largest losses, in addition to<br />
having purchased the largest amount of shares during the class period. Accordingly, the group of<br />
pension plans was presumptively the most adequate plaintiff. The court further held that the<br />
pension fund group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23 and<br />
rejected the other movant’s rebuttal argument that the group was merely a “convenient grouping<br />
of plaintiffs.” Accordingly, the court appointed the pension plan group as lead plaintiff and<br />
approved its selection of lead counsel.<br />
In re Groupon, Inc. Sec. Litig., 2012 WL 3779311 (N.D. Ill. Aug. 28, 2012).<br />
On three competing motions for appointment as lead plaintiff, the district court appointed<br />
an individual as lead plaintiff and rejected challenges based upon his personal background.<br />
Specifically, the court initially determined that it was undisputed that the individual had the<br />
largest financial interest in the relief sought. However, a competing movant argued that the<br />
individual was an inadequate lead plaintiff because he had “a history of poor decision-making”<br />
as evidenced by DUI convictions and a personal bankruptcy. The court found it significant that<br />
the DUI convictions had occurred over twenty-five years ago when the individual was struggling<br />
with an alcohol addiction and the individual had affirmed that he had not consumed alcohol in<br />
twenty-five years. In addition, the bankruptcy had occurred twelve years ago and the individual<br />
affirmed that in the years that followed, his financial condition had materially improved. The<br />
court concluded that the combination of a “two-decade-old DUI convictions and a personal<br />
bankruptcy filing does not call into question [the individual’s] adequacy to serve as lead<br />
plaintiff.” The court also rejected a pension trust’s argument that it should be appointed as lead<br />
plaintiff based upon its status as the lone institutional investor. The court held that status as an<br />
institutional investor “does not trump the explicit language of the PSLRA.” Since the individual<br />
had significantly larger losses and satisfied the requirements of Fed. R. Civ. P. 23, the court<br />
appointed him as lead plaintiff and approved his choice of lead counsel.<br />
Chester County Emps.’ Ret. Fund v. White, 2012 WL 1245724 (N.D. Ill. Apr. 13, 2012).<br />
In a shareholder derivative suit, the court considered two competing motions for<br />
appointment as lead plaintiff filed by a retirement fund and a pension fund. A second pension<br />
fund argued that the decision to appoint a lead plaintiff was improperly premised on the Reform<br />
Act and was premature and, in the alternative, moved for appointment itself. The court agreed<br />
that the Act did not apply and that the standard for appointment of lead plaintiff in a shareholder<br />
derivative suit is that the plaintiff must “fairly and adequately represent the interests of the<br />
shareholders.” In some cases, courts have appointed solely lead counsel, and the second pension<br />
fund urged the court to adopt this course of action. However, the court declined to do so, noting<br />
that courts within the Northern District of Illinois have chosen to appoint a lead plaintiff<br />
simultaneously with lead counsel. The court applied five factors to determine the most adequate<br />
plaintiff: (1) preference for institutional investors; (2) financial stake; (3) capabilities of counsel;<br />
(4) vigorousness of prosecution; and (5) quality of pleadings. All movants were institutional<br />
182<br />
D.2<br />
D.2
investors with equally capable counsel. The court found that the first pension fund had the<br />
greatest financial stake and held a slight advantage in terms of the vigorousness of prosecution<br />
and quality of pleading. In particular, the court noted that the fund filed FOIA requests which<br />
yielded substantial document productions, demonstrated a commitment to cooperation and<br />
streamlining the consolidation process, and had gained support from three other cases that had<br />
been consolidated in this action. Accordingly, the court appointed the first pension fund lead as<br />
plaintiff and approved its choice of counsel.<br />
City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Hospira, Inc., 2012 WL 1339678 (N.D. Ill. Apr.<br />
18, 2012).<br />
In a securities class action, the court considered four competing motions for appointment<br />
of lead plaintiff filed by four groups of institutional investors. After the conclusion of the sixtyday<br />
filing period, two of the original groups combined their proposals and moved for joint<br />
appointment as lead plaintiff. The court found the amended proposal timely, noting that courts<br />
have permitted amended motions by groups that were combined after the deadline as long as<br />
each member of the amended group previously filed a timely motion for appointment. This<br />
“combined group” suffered the greatest losses using either a FIFO or LIFO methodology. Of the<br />
remaining two movants, the court eliminated one as clearly having the smallest financial losses.<br />
The court disagreed with allegations that the combined group was improperly cobbled together,<br />
nothing that the combined group had submitted sworn declarations expressing their request to<br />
work jointly and outlining their initial plans for cooperation. Furthermore, they were a small and<br />
presumptively cohesive group of sophisticated and knowledgeable investors with aligned<br />
interests. Therefore, the court found that the combined group was presumptively the most<br />
adequate plaintiff because they had the largest financial interest and were small enough to<br />
adequately control and monitor the litigation. The court further noted that the combined group<br />
was the most diverse. After determining that the combined group satisfied the typicality and<br />
adequacy requirements of Fed. R. Civ. P. 23, the court appointed them as lead plaintiff and<br />
approved their choice of lead counsel.<br />
In re K-V Pharm. Co. Sec. Litig., 2012 WL 1570118 (E.D.Mo. May 3, 2012).<br />
In a consolidated securities fraud putative class action, the court considered two<br />
competing motions for appointment as lead plaintiff. One movant, a group consisting of two<br />
family members, alleged the largest losses. The other movant, an individual, argued that the<br />
family was a “net gainer” because it profited by selling artificially inflated shares during the<br />
class period. In addition, the individual contended that the family purchased shares after a<br />
partially corrective disclosure, subjecting them to unique defenses that would undermine their<br />
ability to rely on the fraud-on-the-market doctrine. The family contended that the calculations<br />
showing a net gain on their part were wrong because the calculation failed to adequately match<br />
purchases and sales. The court agreed, and was not persuaded by the argument that trading<br />
activity after the partial first disclosure rendered the family incapable of adequately representing<br />
the class, noting that “[c]ourts have consistently rejected the argument that post-disclosure<br />
183<br />
D.2<br />
D.2
purchases preclude a proposed class representative from meeting the requirements of Rule 23(a)<br />
requirements in a fraud-on-the-market suit.” The competing movant further argued that one<br />
member of the family was inadequate to represent the class because of his young age and<br />
questionable trading history. The court found that he traded under the direction and control of<br />
another member of the group and that she was better suited to represent the class. After<br />
determining that this family member alone had the largest losses and satisfied the typicality and<br />
adequacy requirements of Fed. R. Civ. P. 23, the court appointed her as lead plaintiff and<br />
approved her choice of lead and liaison counsel.<br />
Smilovits v. First Solar, Inc., 2012 WL 3002513 (D. Ariz. July 23, 2012).<br />
In a securities fraud class action, the district court considered seven competing motions to<br />
be appointed as lead plaintiff. Five of the proposed lead plaintiffs conceded that they did not<br />
have the largest financial interest in the case, leaving a group comprised of two pension funds<br />
(the “Pension Group”) and a domestic teachers’ retirement system (the “Retirement System”).<br />
The Retirement System argued that the Pension Group’s losses should not be aggregated, that<br />
loss should be calculated by net shares purchased, and that the members of the Pension Group<br />
would not be able to work together effectively. The court noted that the Reform Act makes clear<br />
that the losses of a group may be considered in determining the largest financial interest, and<br />
further noted that the two funds comprising the group were closely coordinated and managed by<br />
the same entity, making it impossible for the court to conclude that the two funds would be<br />
incapable of working together. The court disputed the factual basis of several of the Retirement<br />
System’s allegations, including claims regarding the Pension Group’s fee agreement and an<br />
allegation that the United Kingdom’s Department of Energy and Climate Change controlled the<br />
Pension Group’s investment strategy and had certified the reliability of the product in question in<br />
the lawsuit. The court dismissed the Retirement System’s other arguments as not amounting to<br />
the required level of proof, including the Retirement System’s claims about the Pension Group’s<br />
reliance on non-market information that challenged their typicality, and a claim of divergent<br />
interests based on a trustee’s remark concerning the ethical basis for securities class action<br />
lawsuits. Finally, the court rejected a series of comparative arguments that focused on the<br />
Retirement System’s superior ability to serve as lead plaintiff. The court noted that once the<br />
“most adequate” presumption is triggered, the question is not whether another movant might do a<br />
better job of protecting the interest of the class, but rather whether anyone can prove that the<br />
presumptive lead plaintiff will not do a fair and adequate job. Concluding that the Retirement<br />
System did not present proof adequate to overcome this presumption, the court found that the<br />
Pension Group met the requirements of Fed. R. Civ. P. 23 and, accordingly, appointed it as lead<br />
plaintiff and approved its choice of counsel.<br />
In re Diamond Foods, Inc., Sec. Litig., 281 F.R.D. 405 (N.D Cal. 2012).<br />
After consolidating six related putative securities fraud class actions, the district court<br />
considered competing motions for appointment as lead plaintiff. All but two movants withdrew<br />
their motions or did not oppose the motions by other candidates. The two remaining candidates<br />
184<br />
D.2<br />
D.2
were a retirement system and a pension fund. The retirement system undisputedly had the<br />
greatest losses and was therefore presumptively the most adequate plaintiff. However, the<br />
pension fund contended that the retirement system should be barred from serving as lead plaintiff<br />
under the “professional plaintiff” provision of the Reform Act because it had already been<br />
appointed as lead plaintiff in more than five securities class actions in the last three years. The<br />
retirement system argued that the professional plaintiff bar does not apply to institutional<br />
investors. The court noted that the majority of judges in the district that have addressed the issue<br />
have concluded that the “professional plaintiff” bar was not intended to apply to institutional<br />
investors. In addition, the statute clearly provides courts with the authority to lift the bar. The<br />
court chose to do so in this case because the retirement system’s losses were seven times greater<br />
than those of the pension fund. The pension fund further argued that: (1) the retirement system<br />
did not disclose a seventh case in which it had been appointed lead plaintiff in the last three<br />
years; (2) no special circumstances existed which required lifting the bar; and (3) the retirement<br />
system was involved in too many cases and wouldn’t be able to manage the litigation. The court<br />
found persuasive the retirement system’s explanation that the seventh case was not disclosed<br />
since it had been consolidated with an earlier filed case, moving it outside the relevant time<br />
period. The court also noted that no special circumstances were necessary to justify raising the<br />
professional plaintiff bar. Finally, the court found the concern about the retirement system’s<br />
ability to manage the case unwarranted since the Mississippi Attorney General’s Office had<br />
primary responsibility for the case and had sufficient resources and experience to effectively<br />
manage the litigation. After finding that the retirement system met the requirements of Fed. R.<br />
Civ. P. 23, the court appointed it as lead plaintiff and instructed it to select class counsel and<br />
submit its choice to the court for approval.<br />
Bruce v. Suntech Power Holdings Co., 2012 WL 5927985 (N.D. Cal. Nov. 13, 2012).<br />
The district court considered two competing motions for appointment as lead plaintiff<br />
after two other movants withdrew their motions. A group comprised of three investors had the<br />
largest financial interest, but the competing movant argued that the group had been “‘cobble[d]<br />
together’ to ‘artificially construct the largest losses.’” The court rejected this argument, noting<br />
that a single member of the group had the largest stake on his own and the group was small and<br />
cohesive. The court further held that the group satisfied the typicality and adequacy<br />
requirements of Fed. R. Civ. P. 23. Accordingly, the court appointed the investor group as lead<br />
plaintiff and approved its selection of two law firms as co-lead counsel.<br />
Puente v. ChinaCast Educ. Corp., 2012 WL 3731822 (C.D. Cal. Aug. 22, 2012).<br />
After consolidating two related putative securities fraud class actions, the district court<br />
considered two motions for appointment as lead plaintiff filed by a group of funds and an<br />
individual investor. The individual investor acknowledged that the group of funds had a larger<br />
financial interest in the outcome of the case and, therefore, was presumptively the most adequate<br />
plaintiff. After finding that the group of funds satisfied the typicality and adequacy requirements<br />
D.2<br />
D.2<br />
185
of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved its selection of lead<br />
counsel.<br />
In re Diamond Foods, Inc., Sec. Litig., 2012 WL 2146315 (N.D. Cal. June 13, 2012).<br />
Following the appointment of a retirement system as lead plaintiff, the district court<br />
addressed the selection of lead counsel. Based on the recommendation of lead plaintiff and the<br />
court’s review of declarations explaining the due diligence undertaken in the selection of<br />
counsel, the court appointed two firms as class counsel and specified an individual attorney to<br />
serve as lead counsel. The court declined to appoint three law firms “due to the risk of wasteful<br />
duplicative effort.”<br />
In re Netflix, Inc., Sec. Litig., 2012 WL 1496171 (N.D. Cal. Apr. 27, 2012).<br />
After consolidating related putative securities class actions, the court considered six<br />
competing motions for appointment as lead plaintiff. Three movants filed statements of nonopposition<br />
to the appointment of another movant, and one movant failed to make any filings after<br />
his initial motion and did not appear at oral argument. The remaining two movants were: (1) a<br />
group consisting of two institutional investors who had a pre-existing relationship based on<br />
serving together as lead plaintiffs in another case; and (2) a group of three individual investors<br />
with no relationship to each other pre-dating the litigation. The group of institutional investors<br />
had the largest financial losses. Moreover, the court found that it was appropriate to aggregate<br />
their losses, as the group had shown a pre-existing relationship indicating their cohesion and<br />
ability to adequately control and oversee the litigation. By contrast, the court noted that courts in<br />
the Ninth Circuit “uniformly refuse to aggregate the losses of individual investors with no<br />
apparent connection to each other aside from their counsel.” Furthermore, one member of the<br />
group of individuals was subject to unique defenses in that she was not the legal entity who held<br />
the account on which her loss calculation was based. The court also rejected the argument that<br />
losses should be calculated as a percentage relative to the investor’s overall portfolio, as this<br />
would result in individual investors nearly always having the largest financial stake and “defeat<br />
the [Reform Act’s] aim of putting institutional investors at the helm of more private securities<br />
class actions.” Finally, the court found that the group of institutional investors was not barred by<br />
the professional plaintiff bar, as this bar is discretionary and the PSLRA was intended in part to<br />
encourage institutional investors to take the lead in private securities class actions. After finding<br />
that the group of institutional investors satisfied the requirements of Fed. R. Civ. P. 23, the court<br />
appointed the institutional group as lead plaintiff and approved its choice of lead counsel.<br />
Feyko v. Yuhe Int’l Inc., 2012 WL 682882 (C.D. Cal. Mar. 2, 2012).<br />
In a shareholder class action, the district court appointed a hedge fund as lead plaintiff. A<br />
competing movant conceded that the hedge fund had the greatest losses, but argued that a hedge<br />
fund is not a typical or ideal plaintiff. The court noted that hedge funds are routinely appointed<br />
186<br />
D.2<br />
D.2<br />
D.2
as lead plaintiffs and “[a]rguments that hedge funds are per se inappropriate candidates for<br />
appointment as lead plaintiff are unsupported by statute or case law.” The court further held that<br />
the typicality and adequacy requirements of Fed. R. Civ. P. 23 had been satisfied. Accordingly,<br />
the court appointed the hedge fund as lead plaintiff and approved its selection of class counsel.<br />
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 WL 78780 (N.D. Cal. Jan. 9, 2012).<br />
In a shareholder securities fraud class action, the district court appointed a group<br />
comprised of two public retirement systems as lead plaintiff and approved its selection of lead<br />
counsel. Although two competing motions were filed by pension funds, neither opposed the<br />
motion filed by the public retirement systems. Utilizing the “last-in, first-out” method for<br />
calculation of losses, the district court found that the retirement system group suffered the<br />
greatest loss and neither of the competing movants argued that they suffered a larger loss under a<br />
different calculation method. The court further held that the claims asserted by the retirement<br />
system group alleging the purchase of stock at prices artificially inflated by defendants’ alleged<br />
misrepresentations during the class period satisfied the typicality requirement of Fed. R. Civ. P.<br />
23. Finally, the court found that the retirement system group had demonstrated that it would<br />
vigorously prosecute the action on behalf of the class and, thus, satisfied the adequacy<br />
requirement of Fed. R. Civ. P. 23. Accordingly, the court appointed the group of public<br />
retirement systems as lead plaintiff and approved its selection of lead counsel.<br />
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D. Id. Jul. 12,<br />
2012).<br />
After consolidating two related securities fraud class actions, the district court considered<br />
competing motions for appointment as lead plaintiff filed by five groups of investors. The court<br />
narrowed the field to the two groups with the highest financial interests: a retirement system and<br />
a group of institutional investors. The issue at stake in determining losses was the valuation of<br />
call options versus shares of common stock. The retirement system placed the value of a call<br />
option at the entire price of the option, whereas the institutional investors used the Black-Scholes<br />
Option Pricing Model (“BSOPM”), a model intended for calculation of damages for option<br />
holders. Noting that it did not adopt either party’s valuation as establishing damages, the court<br />
was persuaded that the retirement system’s loss estimate was likely too high and “not<br />
realistically related to what the movant is likely to be able to recover.” Therefore, the court<br />
concluded that the group of institutional investors had the most to gain from the lawsuit and was<br />
presumptively the most adequate plaintiff. The retirement system attempted to rebut the<br />
presumption by challenging the institutional investor group’s typicality on the basis that the<br />
losses reported by one member were those of clients, and not of the organization itself.<br />
However, because this member was the only interested party legally able to seek damages, the<br />
court rejected this challenge. Additionally, the court rejected the argument that because the<br />
institutional investors substituted a lower valuation for call options, they would harm the<br />
proposed class by getting a lower recovery for option holders. The court found that this<br />
reasoning would disqualify any movant that argued that a competing movant had overstated its<br />
187<br />
D.2<br />
D.2
potential recovery. Next, the court found that although counsel for the institutional investors also<br />
represented one of the other original five movants, this fact did not overcome the institutional<br />
investor group’s preliminary showing of typicality and adequacy. Finally, the court concluded<br />
that the institutional investors could be a proper, cohesive group despite having no preexisting<br />
relationship. Accordingly, the court appointed the institutional investor group as lead plaintiff<br />
and approved its choice of lead counsel.<br />
Darwin v. Taylor, 2012 WL 5250400 (D. Colo. Oct. 23, 2012).<br />
In a consolidated putative securities fraud class action, the district court considered three<br />
competing motions for appointment as lead plaintiff. After one movant conceded that it did not<br />
have the largest financial interest, the court considered whether to accept a revised loss<br />
calculation by one of the other movants. Noting that his previous calculations suffered from<br />
various errors, the court also observed that the corrected filing incorporated additional<br />
transactions that were not previously disclosed. Observing that it was unaware of “any cases in<br />
which a lead plaintiff has been appointed based on trading information and corresponding losses<br />
introduced for the first time after the PSLRA’s 60-day deadline expired,” the court rejected the<br />
corrected damages figure and concluded that the remaining movant had the largest financial<br />
interest. After determining that this individual satisfied the typicality and adequacy of Fed. R.<br />
Civ. P. 23, the court appointed him as lead plaintiff and approved his selection of counsel.<br />
Weinstein v. McClendon, 2012 WL 2994291 (W.D. Okla. July 20, 2012).<br />
The district court denied as moot motions to consolidate this case with a second action<br />
after the second action was voluntarily dismissed. The court then considered four competing<br />
motions for appointment as lead plaintiff filed by: (1) a pension plan; (2) a group of institutional<br />
investors; (3) a retirement system; and (4) an individual investor. The individual investor and the<br />
group of institutional investors withdrew their motions and/or did not oppose the appointment of<br />
the pension plan as lead plaintiff. Additionally, the retirement system conceded that the pension<br />
plan had suffered the greatest losses. After confirming that the pension plan had the largest<br />
financial interest in the outcome of the case and that the group satisfied the typicality and<br />
adequacy requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved<br />
its selection of lead and local counsel.<br />
Deborah G. Mallow IRA Sep Inv. Plan v. McClendon, 2012 WL 2886677 (W.D. Okla. July 13,<br />
2012).<br />
In a consolidated shareholder derivative action, the district court considered a motion for<br />
appointment as lead plaintiff and four competing motions for appointment of lead counsel. The<br />
district court declined to appoint a lead plaintiff, noting that there is no statutory authority that<br />
requires a lead plaintiff in a derivative action and the court found it to be unnecessary in this<br />
case. The court then considered the four competing motions for appointment of lead counsel and<br />
188<br />
D.2<br />
D.2<br />
D.2
determined that the proposed appointment of three law firms to serve as co-lead counsel was<br />
“ripe for wasteful, duplicative work-product, excessive billing and internal conflicts.” The court<br />
also noted the apparent inability of certain proposed counsel to work together in an efficient way.<br />
As such, the court appointed one firm as lead counsel and another as local counsel.<br />
3. Safe Harbor/Bespeaks Caution Defense<br />
D.3<br />
In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012).<br />
The First Circuit affirmed the district court’s order granting summary judgment for<br />
defendants on the basis that plaintiffs failed to establish actionable misrepresentations with<br />
respect to defendants’ statements about product demand. In what the First Circuit described as a<br />
“thorough and thoughtful” decision on a motion to dismiss, the district court differentiated<br />
between forward-looking statements that made up the majority of plaintiffs’ complaint and<br />
which qualified for protection under the Reform Act’s safe harbor, and the “sufficient, albeit<br />
thin, allegations” of intentionally false statements of present or historical fact. Specifically, the<br />
defendant company’s projections regarding future earnings were accompanied by clearly labeled<br />
“safe harbor statements” identifying the statements as forward-looking and listing factors that<br />
could cause actual results to differ materially from those reflected in the statements. The case<br />
proceeded to discovery with respect to the allegedly false statements of present or historical fact,<br />
and the district court granted summary judgment for defendants on the basis that plaintiffs failed<br />
to show misrepresentation or scienter with respect to those statements. On appeal, the court<br />
reaffirmed the district court’s separation of forward-looking statements and statements of present<br />
or historical fact, and concluded that plaintiffs failed to establish “anything close to fraud.”<br />
Accordingly, the First Circuit held that dismissal was appropriate.<br />
Sawant v. Ramsey, 2012 WL 3265020 (D. Conn. Aug. 9, 2012).<br />
Following adverse verdicts at trial, defendants filed renewed motions for judgment as a<br />
matter of law and motions for a new trial. The district court upheld the jury’s verdict in favor of<br />
plaintiff’s Rule 10b-5 claims arising from defendants’ issuance of a false and misleading press<br />
release. To support their motions, defendants claimed that the jury’s verdict was against the<br />
weight of the evidence and that the lower court improperly instructed the jury. Of the five<br />
allegedly improper instructions, the court agreed with defendants that the lower court improperly<br />
instructed the jury regarding the standard under the Reform Act’s safe harbor for forwardlooking<br />
statements. However, the court held that a new trial was not warranted based on this<br />
error because the statements at issue in the press release were not forward-looking statements<br />
and the safe harbor did not apply.<br />
D.3<br />
189
City of Pontiac Gen. Emps. Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359 (S.D.N.Y.<br />
2012).<br />
An institutional investor brought a securities fraud class action alleging that defendants<br />
made misrepresentations and omissions regarding the performance and growth of a division of<br />
the defendant corporation. The district court granted in part and denied in part defendants’<br />
motion to dismiss. In response to defendants’ argument that alleged misstatements were not<br />
actionable because they fell within the Reform Act’s safe harbor provision and the judiciallycreated<br />
bespeaks caution doctrine, the court held that there was no such protection. The court<br />
found that the alleged misstatements concerning the division’s backlog were not forwardlooking,<br />
defendants “went well beyond mere ‘rosy predictions,’” and disclaimers in press<br />
releases containing boilerplate cautionary language were not sufficiently meaningful. Moreover,<br />
the court also rejected defendants’ arguments concerning the materiality of the statements at<br />
issue and the existence of scienter, finding that the allegations were sufficient to find that named<br />
individuals possessed the requisite state of mind. Consequently, the motion to dismiss was<br />
denied on these grounds, but granted as to control person liability.<br />
Fed. Housing Fin. Agency v. JP Morgan Chase & Co., 2012 WL 5395646 (S.D.N.Y. Nov. 5,<br />
2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss claims<br />
brought by the conservator of Fannie Mae and Freddie Mac against financial institutions<br />
involved in the packaging, marketing, and sale of residential mortgage-backed securities<br />
(“RMBS”) between 2005 and 2007. The conservator alleged that defendants marketed the<br />
RMBS using offering documents that contained false and misleading statements regarding the<br />
loans underlying the securities, including the loans’ compliance with underwriting standards, the<br />
borrowers’ ability to repay the loans, and inflated owner-occupancy and loan-to-value rates.<br />
Defendants moved to dismiss on several grounds, including that the conservator could not<br />
establish justifiable reliance because Fannie Mae and Freddie Mac were highly-sophisticated<br />
players in the mortgage-backed securities market and the offering documents contained<br />
extensive cautionary language regarding the risks associated with RMBS. The court rejected<br />
defendants’ argument because defendants could not establish as a matter of law that Fannie Mae<br />
and Freddie Mac should have discovered defendants’ alleged misstatements through reasonable<br />
diligence. The court further held that defendants could not rely upon the protection of the<br />
bespeaks caution doctrine because the doctrine only applies to forward-looking statements, not<br />
statements regarding ascertainable facts like those at issue. Accordingly, the court denied<br />
defendants’ motion to the extent they sought to rely upon the bespeaks caution doctrine to shield<br />
them from liability.<br />
D.3<br />
D.3<br />
190
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.<br />
Sept. 27, 2012).<br />
The district court granted defendants’ motion to dismiss plaintiffs’ complaint against a<br />
casino gaming technology company and individual officers and directors. With respect to many<br />
of the alleged misstatements, the court held that they were sheltered by the Reform Act’s safe<br />
harbor provision for forward-looking statements. Specifically, the statements at issue were<br />
related to: (1) the average net-win rate for defendants’ gaming machines; (2) projected<br />
EBITDA; and (3) the number of machines defendants had placed in casinos. Plaintiffs argued<br />
that defendants’ statements regarding the net-win rate of their machines were not protected by<br />
the safe harbor because defendants knew the statements were false when made, based on weekly<br />
reports from two underperforming casinos. The court determined that plaintiffs could not use<br />
knowledge of these limited, specific cases to argue that defendants knew an average would be<br />
inaccurate. Similarly, the court determined that defendants’ statements regarding projected<br />
EBITDA were clearly forward-looking and sheltered by the safe harbor because plaintiffs did not<br />
allege that the particular defendants making the statements knew they were false when made.<br />
Finally, the court found that plaintiffs failed to adequately plead falsity with regard to the<br />
statements about the number of machines placed in casinos. Plaintiffs cited a difference in<br />
number between placed machines and operational machines, but the court found this method of<br />
reasoning to be “fraud by hindsight.” The court further held that plaintiffs did not adequately<br />
plead loss causation and dismissed plaintiffs’ claims for fraud and control person liability. After<br />
determining that plaintiffs also failed to sufficiently plead the requisite elements of the common<br />
law claims, the court dismissed plaintiffs’ complaint in its entirety.<br />
Kuriakose v. Fed. Home Loan Mortg. Corp., 2012 WL 4364344 (S.D.N.Y. Sept. 24, 2012).<br />
The district court granted defendants’ motion to dismiss a putative securities fraud class<br />
action against Freddie Mac and former executives related to misrepresentations concerning<br />
exposure to risky “subprime” mortgage products, the sufficiency of capital, and accuracy of<br />
financial reporting. The court previously dismissed plaintiffs’ first amended complaint for<br />
failure to plead materiality, scienter, and loss causation. In their second and third amended<br />
complaints, plaintiffs argued that statements about Freddie Mac’s capital base and liquidity did<br />
not warrant safe harbor protection under the Reform Act. The court disagreed with plaintiffs and<br />
found that Freddie Mac adequately disclosed relevant information as to potential risks in its<br />
widely distributed 2007 Annual Report. Additionally, to the extent that plaintiffs pointed to<br />
vague and indefinite statements of general optimism, the court found that these statements were<br />
inactionable puffery. The court rejected plaintiffs’ arguments that such puffery should be<br />
actionable by virtue of the fact that Freddie Mac’s mission was to facilitate liquidity in the home<br />
mortgage market and, therefore, they should have been uniquely equipped to deal with a housing<br />
crisis. Furthermore, the court found that plaintiffs failed to plead any specific facts to support an<br />
inference that defendants knew the statements were false when made. Accordingly, the court<br />
determined that defendants’ statements were protected by the safe harbor and granted<br />
defendants’ motion to dismiss.<br />
191<br />
D.3<br />
D.3
D.3<br />
In re MELA Sciences, Inc. Sec. Litig., 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012).<br />
In a securities fraud class action, the district court denied plaintiffs’ motion to amend the<br />
complaint for a second time, finding that plaintiffs’ claims were barred by the Reform Act’s safe<br />
harbor for forward-looking statements. Plaintiffs alleged that defendants made a series of<br />
materially false and misleading statements regarding the safety and efficacy of a proposed<br />
medical device and the status of ongoing clinical studies. Specifically, plaintiffs alleged three<br />
types of misrepresentations or omissions: (1) misrepresentations regarding the device’s potential<br />
user market; (2) misrepresentations regarding the timing of FDA approval; and<br />
(3) misrepresentations and omissions regarding the results of the clinical trial. Defendants<br />
argued that the safe harbor sheltered statements in the first two categories. The court found that<br />
statements about the device’s potential user market were inactionable expressions of corporate<br />
optimism. Additionally, because the complaint alleged no facts indicating that defendants knew<br />
the statements about the potential user market were false when made, these statements<br />
constituted forward-looking statements that were protected by the safe harbor. Plaintiffs further<br />
argued that defendants had a duty to update previous representations about the user market upon<br />
receipt of an FDA letter indicating that FDA approval would be far more limited in scope than<br />
previously described by defendants to the market. The court explained that there is no duty to<br />
update expressions of opinion, nor is there a duty to update forward-looking statements “merely<br />
because changing circumstances have proved them wrong.” The court found that plaintiffs’<br />
claims based on defendants’ statements regarding the timeliness of FDA approval failed on<br />
similar grounds. Accordingly, the plaintiffs’ motion to amend for a second time was denied as<br />
futile.<br />
Ho v. Duoyuan Global Water, 2012 WL 3647043 (S.D.N.Y. Aug. 24, 2012).<br />
In connection with public offerings, plaintiffs brought a securities fraud class action<br />
against the defendant corporation, individual officers and directors, underwriters, and auditors.<br />
Faced with various motions to dismiss, the court granted certain motions and denied others.<br />
Specifically, plaintiffs alleged that defendants made various material misrepresentations or<br />
omissions in conference calls, press releases and SEC filings, including a statement by the CFO<br />
regarding expected cash flows for the next two quarters. The court held that this statement was<br />
protected by the Reform Act’s safe harbor as it was forward-looking and accompanied by the<br />
cautionary statement that forward-looking statements would be made in the call and were subject<br />
to change without being updated. The court further held that plaintiffs did not sufficiently allege<br />
that the statement was made with actual knowledge of its falsity. Although this statement was<br />
not actionable, the court held that other allegations supported plaintiffs’ fraud claims and denied<br />
defendants’ motion to dismiss with respect to such claims.<br />
D.3<br />
192
Pa. Public School Emps.’ Ret. Sys. v. Bank of Am. Corp., 2012 WL 2847732 (S.D.N.Y. July 11,<br />
2012).<br />
In a putative securities fraud class action against a bank, individual officers and directors,<br />
underwriters, and an accounting firm, the district court granted in part and denied in part<br />
defendants’ motion to dismiss. Plaintiffs alleged that defendants purposefully concealed the<br />
bank’s reliance on a mortgage electronic registration system that exposed it to billions of dollars<br />
of loan repurchase claims arising from the sale of mortgage-backed securities. Defendants<br />
argued that statements regarding the bank’s vulnerability to repurchase claims were protected by<br />
the Reform Act’s safe harbor for forward-looking statements based upon a bank executive’s<br />
disclosure to analysts that future predictions could change depending on a variety of factors.<br />
However, the court held that this did not constitute adequate cautionary language because<br />
defendants failed to identify important factors that could realistically cause results to materially<br />
differ. As a result, the court found that the cautionary language was not meaningful and the safe<br />
harbor did not apply. Since plaintiffs adequately pled that defendants made material<br />
misstatements and omissions, the court then considered the issue of scienter. The court found<br />
that plaintiffs’ allegations failed to raise strong circumstantial evidence of conscious misbehavior<br />
or recklessness as to the individual executive defendants, but did raise a strong inference of<br />
scienter as to the defendant bank. Therefore, the court granted the individual defendants’ motion<br />
to dismiss, but denied the motion to dismiss with respect to § 10(b) and Rule 10b-5 claims<br />
against the defendant bank.<br />
Hutchins v. NBTY, Inc., 2012 WL 1078823 (E.D.N.Y. Mar. 30, 2012).<br />
The district court denied defendants’ motion to dismiss securities fraud claims based on<br />
allegedly false and misleading statements regarding the defendant company’s business, gross<br />
margins and future operating performance. Specifically, plaintiffs alleged that defendants made<br />
overly optimistic statements about the defendant company’s prospects without disclosing a new<br />
competitive bidding practice adopted by its largest customer, Wal-Mart. Defendants asserted<br />
that certain allegedly misleading statements were shielded from liability by the bespeaks caution<br />
doctrine and the Reform Act’s safe harbor for forward-looking statements. The court disagreed<br />
because although the company’s 10-K included cautionary language warning that the loss of<br />
Wal-Mart or any other major customer would have a material adverse impact, the company did<br />
not mention Wal-Mart’s new competitive bidding initiative. Thus, the court determined that the<br />
forward-looking statements at issue were not accompanied by meaningful cautionary language.<br />
After determining that plaintiffs had adequately pled facts establishing a strong inference of<br />
scienter, the court denied defendants’ motion to dismiss with respect to the challenged forwardlooking<br />
statements.<br />
D.3<br />
D.3<br />
193
D.3<br />
Stichting Pensioenfonds ABP v. Merck & Co., 2012 WL 3235783 (D.N.J. Aug. 1, 2012).<br />
In one of eight individual securities fraud actions arising from alleged misrepresentations<br />
and omissions concerning the safety profile of the drug Vioxx, the court granted in part and<br />
denied in part defendants’ motion to dismiss. Relying in part on various facts and rulings set<br />
forth in an order in a related case, the court held that various statements were inactionable<br />
puffery or forward-looking statements that were protected under the Reform Act’s safe harbor.<br />
Specifically, the court held that plaintiffs failed to show that the statements at issue were made<br />
with actual knowledge of their falsity and, thus, they were protected by the safe harbor. As a<br />
result, Rule 10b-5(b) claims based upon these statements were dismissed. In addition, plaintiff<br />
failed to adequately plead scheme liability under 10b-5(a) and (c), since in essence these claims<br />
were premised upon the same misrepresentations comprising the Rule 10b-5(b) claim, and<br />
specific control person claims were dismissed as well. Addressing state law claims, the court<br />
held that they must be dismissed pursuant to the Standards Act.<br />
Bonomo v. NOVA Fin. Holdings, Inc., 2012 WL 2196305 (E.D. Pa. June 15, 2012).<br />
The district court dismissed without prejudice plaintiffs’ securities and common law<br />
fraud claims relating to a private stock offering in NOVA. Plaintiffs alleged that a June 2009<br />
Private Placement Memorandum (“PPM”) for NOVA contained statements that were misleading<br />
in light of representations made by their broker – the former Chairman of NOVA, who plaintiffs<br />
alleged still controlled the company. Specifically, plaintiffs alleged that the former Chairman of<br />
NOVA told them that the company’s undercapitalization problem would soon be addressed, that<br />
the company would be making two imminent acquisitions, and that another investor would soon<br />
make a substantial investment in the company. The investment never happened, allegedly due to<br />
the discovery that NOVA’s Chairman was running a Ponzi scheme. Defendants moved to<br />
dismiss asserting that, among other things, plaintiffs failed to allege that defendants had any duty<br />
to update forward-looking statements made in the June 2009 PPM. The court agreed, and found<br />
that plaintiffs’ complaint was premised almost entirely upon an alleged failure to update<br />
forward-looking statements after subsequent adverse developments. The court further found that<br />
the allegedly false and misleading forward-looking statements at issue were accompanied by<br />
adequate cautionary language and, thus, shielded from liability by the Reform Act’s safe harbor.<br />
In that regard, the court found that the June 2009 PPM specifically warned that the anticipated<br />
acquisitions might not happen. The PPM also advised potential investors that they may the only<br />
investors participating in the offering, thus specifically disclaiming other potential investors.<br />
Accordingly, the court granted defendants’ motion to dismiss.<br />
In re Computer Sciences Corp. Sec. Litig., 2012 WL 3779349 (E.D. Va. Aug. 29, 2012).<br />
In a securities fraud class action, defendants’ motion to dismiss was granted in part and<br />
denied in part, with leave to amend. Plaintiffs brought § 10(b) and Rule 10b-5 claims alleging<br />
194<br />
D.3<br />
D.3
that defendants made false or misleading statements of material fact in connection with revenue<br />
figures, the soundness of internal accounting controls, and one of the corporation’s most<br />
substantial contracts. Certain statements were found to be non-actionable puffing and others<br />
were found to be protected under the Reform Act’s safe harbor due to their predictive nature.<br />
Specifically, the statement that “the company expects to recover its investment” on a particular<br />
contract and projections regarding the timetable for deployment of a software program were<br />
protected as predictions of future events rather than declarations of present expectations.<br />
Although other statements contained a forward-looking component, the court determined that<br />
they were statements of present fact and therefore actionable, as “a mixed present/future<br />
statement is not entitled to the safe harbor with respect to the part of the statement that refers to<br />
the present.” As such, defendants’ motion to dismiss was granted in part and denied in part.<br />
In re BP P.L.C. Sec. Litig., 852 F. Supp. 2d 767 (S.D. Tex. 2012).<br />
Following the Deepwater Horizon explosion and oil spill, plaintiffs brought a<br />
consolidated securities fraud class action alleging that BP made material misrepresentations and<br />
omissions calculated to conceal the true state of BP’s safety programs and the company’s risk<br />
exposure. Plaintiffs argued that these misstatements resulted in artificially inflated stock prices<br />
until the true state of BP’s safety management was revealed in the explosion. Defendants argued<br />
that seven of the thirty-five alleged misstatements identified by plaintiffs were forward-looking<br />
statements protected by the Reform Act’s safe harbor. The court found that of the seven<br />
statements at issue, six were not actionable for failure to plead falsity. The remaining statement,<br />
found in BP’s 2008 Annual Report, indicated that eight of the company’s oil production sites had<br />
already completed the transition to BP’s new and much-advertised safety plan. The court<br />
determined that these statements were not forward-looking, because they served as<br />
representations of BP’s past achievements. Therefore, the statements at issue were not shielded<br />
by the Reform Act’s safe harbor provision. Nevertheless, because plaintiffs failed to adequately<br />
plead scienter with respect to any defendant named in this action, the court granted defendants’<br />
motion to dismiss, with leave to amend.<br />
City of Pontiac Gen. Emps.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).<br />
In a securities fraud class action against a medical technology company, the district court<br />
granted defendants’ motion to dismiss claims related to allegedly false and misleading financial<br />
projections made during three investor conference calls. Plaintiffs alleged that the defendant<br />
company fraudulently maintained a scheme of achieving 20% earnings per share growth by<br />
cutting corners on quality control and thereby exposing the company to unnecessary risks due to<br />
product recalls. Plaintiffs argued that cautionary statements accompanying the financial<br />
projections at issue were merely “boilerplate” and insufficient to invoke the protection of the<br />
Reform Act’s safe harbor for forward-looking statements. The court, however, found that<br />
several of the risk factors mentioned in the company’s cautionary language were the precise<br />
factors that caused the company to miss its 2008 earnings projection, including the risk<br />
associated with increased FDA scrutiny. Thus, the court found that the cautionary language was<br />
195<br />
D.3<br />
D.3
sufficiently meaningful and substantive to warrant safe harbor protection and granted<br />
defendants’ motion to dismiss with respect to the challenged forward-looking statements.<br />
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. Apr. 19, 2012).<br />
The district court granted defendants’ motion to dismiss securities fraud claims relating to<br />
allegedly false statements and non-disclosures regarding the extent and impact of reduced<br />
demand by customers of the defendant company. The court found that forward-looking<br />
statements made by defendants in SEC filings and press releases about the expected recovery of<br />
demand were protected from liability by the Reform Act’s safe harbor. Although challenged<br />
statements in press releases were not accompanied by specific factors that could cause results to<br />
differ, the court found that plaintiffs had failed to plead adequate facts suggesting that defendants<br />
believed their forward-looking statements regarding demand to be false at the time the<br />
statements were made. The court noted that the statements at issue were made “during the<br />
biggest global economic recession in 75 years” and “[n]obody in late 2008 or 2009 knew how<br />
deep markets would plunge or how long it would take them to recover.” Accordingly, the court<br />
granted defendants’ motion to dismiss with respect to the challenged forward-looking statements.<br />
Rabbani v. DryShips Inc., 2012 WL 5395787 (E.D. Mo. Nov. 6, 2012).<br />
In a securities fraud class action, plaintiffs alleged that defendants made false or<br />
misleading statements about: (1) a planned spin-off of a subsidiary; (2) the ability of the<br />
company to comply with existing loan covenants: and (3) the company’s general financial<br />
condition. Defendants moved to dismiss, in part, on the grounds that the challenged statements<br />
fell within the Reform Act’s safe harbor for forward-looking statements. With regard to<br />
plaintiffs’ Securities Act claims, the court analyzed defendants’ alleged statements regarding the<br />
spin-off and planned distribution ratio. Plaintiffs alleged that accompanying cautionary<br />
statements were insufficient because they did not directly address changes in the distribution<br />
ratio. The court found that the total mix of information indicated that the spin-off was<br />
speculative at best, and no reasonable investor could have been misled into believing that the<br />
spin-off was anything but a risky prospect. Therefore, the court found that the statements were<br />
immaterial and were appropriate for dismissal under the bespeaks caution doctrine.<br />
Alternatively, the court found that the statements were accompanied by sufficient cautionary<br />
language that identified risks specific to the company’s business and, thus, were sheltered by the<br />
statutory safe harbor. With regard to plaintiffs’ Exchange Act claims, the court similarly found<br />
that statements about the proposed spin-off were forward-looking statements protected by the<br />
safe harbor. The court rejected plaintiffs’ argument that the statements were not protected<br />
because they indicated present determinations by the company, noting that all forward-looking<br />
statements implicitly reflect current decisions by management, and that plaintiffs’ reasoning<br />
would eviscerate the safe harbor. The court found that other allegedly false and misleading<br />
statements were immaterial puffery, omitted facts that were not required to be disclosed, or were<br />
not adequately pled to be false. Accordingly, after finding that the inference of scienter was not<br />
D.3<br />
D.3<br />
196
adequately compelling, the court granted defendants’ motion to dismiss plaintiffs’ Securities Act<br />
and Exchange Act claims.<br />
Rochester Laborers Pension Fund v. Monsanto Co., 2012 WL 3143914 (E.D. Mo. Aug. 1,<br />
2012).<br />
The district court granted defendants’ motion to dismiss plaintiff’s securities fraud class<br />
action premised upon defendants’ alleged misstatements concerning the state of the defendant<br />
company’s glyphosate business, new seed products, and earnings outlooks and projections. The<br />
court found that alleged misstatements concerning profits, earnings, and performance were<br />
“quintessential” forward-looking statements and were accompanied by meaningful cautionary<br />
language which set forth specific, detailed risks. The court further noted that statements<br />
regarding generating sustainable profits were not inconsistent with decreasing sales and, thus,<br />
were not actionable misstatements. The court further held that various statements at issue were<br />
not false or misleading, and that scienter had not been adequately alleged. Accordingly,<br />
plaintiff’s class action complaint was dismissed with prejudice.<br />
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).<br />
The district court granted defendants’ motion to dismiss a putative securities class action<br />
against a publicly traded spinal implant company. Plaintiff-shareholders alleged that defendants<br />
made material misstatements or omissions concerning the defendant company’s projected<br />
revenues and integration of a newly acquired rival company. Defendants argued that the<br />
statements at issue were not actionable because they were protected by the Reform Act’s safe<br />
harbor for forward-looking statements. However, the court disagreed and found that the<br />
statements in question were either not forward-looking statements or also contained implications<br />
about historical and current fact which were not protected by the safe harbor. Specifically, the<br />
court found that safe harbor did not apply to the statement “we anticipate that revenues will<br />
continue to grow” because it assumed that revenues were already growing and, thus, could be<br />
viewed as a misrepresentation of the company’s current business conditions. To the extent that<br />
plaintiffs challenged defendants’ alleged omission of present facts, the court found that the safe<br />
harbor did not apply. Other statements such as being “pleased with the company’s progress” or<br />
“in a unique position” were determined to be inactionable statements of corporate optimism.<br />
The court further explained that a failure to disclose delays while stating that the “company<br />
remained on track” was not inherently inconsistent and, therefore, plaintiffs failed to allege<br />
sufficient facts to show that such statements amounted to material misrepresentations or<br />
omissions. Furthermore, the court found that plaintiffs failed to adequately plead scienter.<br />
Accordingly, the court granted defendants’ motion to dismiss with leave to amend.<br />
D.3<br />
D.3<br />
197
D.3<br />
Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).<br />
In a putative securities fraud class action, the court granted defendants’ motion to dismiss<br />
plaintiff’s second amended complaint, finding that defendants’ statements were sheltered by the<br />
Reform Act’s safe harbor for forward-looking statements. Plaintiff alleged that defendants made<br />
false and misleading statements and omissions regarding the company’s growth prospects,<br />
business, and new software product. Specifically, plaintiff argued that defendants should have<br />
disclosed the significant backlog of cases that arose out of a settlement agreement requiring the<br />
company to make treatment available to certain patients free of charge. The court previously<br />
found that defendants’ statements about projected revenues fell under the safe harbor. In defense<br />
of the second amended complaint, plaintiff argued that the court failed to consider whether the<br />
cautionary statements were misleading. The court disagreed, noting that it considered all aspects<br />
of the cautionary statements in its prior order and found that defendants identified the risk that<br />
ultimately materialized – namely, a backlog created by the settlement. Plaintiff further argued<br />
that the company should have disclosed the fact that their new software product was not<br />
improving revenue or meeting projected sales. The court found that forward-looking statements<br />
describing the new software’s expected benefits were at all times accompanied by meaningful<br />
cautionary language identifying the risks that plaintiff alleged to have ultimately materialized.<br />
Furthermore, plaintiff failed to allege facts showing that the statements at issue were made with<br />
actual knowledge of falsity. Accordingly, the court found that defendants’ statements fell within<br />
the ambit of the safe harbor.<br />
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL 6044787 (N.D. Cal.<br />
Dec. 5, 2012).<br />
In a putative securities class action, the court granted defendants’ motion to dismiss<br />
plaintiffs’ second amended complaint against a public corporation that provides data centers and<br />
internet exchanges. Plaintiffs asserted that the defendant company’s stock price was artificially<br />
inflated due to false and misleading statements made by defendants concerning pricing strategy<br />
and the integration of the sales force of a recently acquired company. Defendants argued that<br />
statements regarding integration and pricing strategy were insulated by the Reform Act’s safe<br />
harbor because they constituted assumptions underlying or relating to financial projections.<br />
Plaintiffs argued that descriptions of the present are not forward-looking and, therefore, are<br />
ineligible for safe harbor protection. The court agreed with plaintiffs and found that descriptions<br />
of the present such as “the sales force have been completely integrated” or “we’re maintaining<br />
the discipline on the floors and ceilings we have on our pricing” were not simply assumptions<br />
underlying or relating to financial projections. Accordingly, they were not protected by the safe<br />
harbor. Nevertheless, the court further determined that plaintiffs failed to adequately allege the<br />
falsity and scienter of statements regarding sales force integration and pricing strategy and,<br />
therefore, granted defendants’ motion to dismiss.<br />
D.3<br />
198
D.3<br />
Kovtun v. Vivus, Inc., 2012 WL 4477647 (N.D. Cal. Sept. 27, 2012).<br />
The district court granted defendants’ motion to dismiss claims based on allegedly false<br />
and misleading statements regarding the safety and FDA approval of a developmental obesity<br />
drug. Specifically, plaintiffs alleged that defendants “heralded” the drug but failed to disclose<br />
serious risks revealed by study data and the inadequacy of clinical data until after the drug failed<br />
to be approved by the FDA. Defendants argued that their statements about the obesity drug’s<br />
prospects were forward-looking statements shielded from liability by the Reform Act’s safe<br />
harbor and/or the bespeaks caution doctrine. The court rejected plaintiffs’ argument that<br />
cautionary language accompanying the statements at issue was “generic” and therefore<br />
insufficient to invoke the protections of the safe harbor. Rather, the court found that defendants<br />
had specifically warned that the drug might not be approved by the FDA and that problems could<br />
arise during clinical trials, and plaintiffs’ entire theory of the case was premised on alleged<br />
misrepresentations about the likelihood of FDA approval. The court concluded that defendants’<br />
projections about FDA approval could best be characterized as a “bad guess” and were protected<br />
by the safe harbor. The court further held that defendants’ statements relating to the expected<br />
success of the drug, the drug’s “excellent” or “compelling” risk/benefit profile, and statements<br />
that trials had shown “remarkable” safety and efficacy were vague assertions of corporate<br />
optimism. Since plaintiff could not establish actionable fraud, the court dismissed plaintiffs’<br />
claim with prejudice.<br />
Westley v. Oclaro, Inc., 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012).<br />
In a putative securities fraud class action against a supplier to telecom equipment<br />
manufacturers, the district court granted defendants’ motion to dismiss with leave to amend on<br />
the basis that plaintiffs failed to sufficiently allege a strong inference of scienter. Plaintiffs<br />
charged defendants with making false and misleading statements about the defendant company’s<br />
customer demand and projected revenues and earnings. The statements in question included<br />
representations that customer demand was returning and increasing, that financial forecasts were<br />
“accelerated and increasing,” and that financial forecasts would be met because 90% of the<br />
orders needed to do so were already secured. Defendants argued that the Reform Act’s safe<br />
harbor provision was applicable to statements of current or present demand, since that present<br />
demand was being used to make predictions about the future. The court disagreed, noting that<br />
“observed facts are not assumptions.” The court therefore rejected defendants’ contention that<br />
the statements were protected by either the safe harbor provision or the bespeaks caution<br />
doctrine. The court next examined the issue of whether there was sufficient cautionary language<br />
accompanying defendants’ financial projections in their press release. The court found that<br />
reasonable minds could differ on the question of whether the cautionary language was sufficient,<br />
since the warnings were arguably not enough to counter the company’s professed visibility into<br />
customer demand resulting from its close relationships with customers. Although dismissal is<br />
not warranted when there exists a legitimate factual dispute about sufficient cautionary language,<br />
the court additionally found that plaintiffs failed to adequately plead a strong inference of<br />
scienter. Accordingly, the court granted defendants’ motion to dismiss with leave to amend.<br />
199<br />
D.3
Washtenaw Cnty. Emps. Ret. Sys. v. Celera Corp., 2012 WL 3835078 (N.D. Cal. Sept. 4, 2012).<br />
In a securities fraud class action, the district court denied defendants’ motion to dismiss,<br />
finding that defendants’ forward-looking statements were not protected by the Reform Act safe<br />
harbor. Plaintiffs alleged that defendants made misleading statements concerning problems with<br />
reimbursement and debt collection. Defendants did not contest falsity, connection with the<br />
purchase or sale of a security, or economic loss, but disputed scienter and loss causation. The<br />
court found that the magnitude of declining collections supported a strong inference that<br />
defendants knew about the collections problems. Therefore, the court determined that the<br />
statutory safe harbor did not apply because plaintiffs adequately alleged that defendants knew of<br />
problems which they represented to be merely risks or uncertainties. The court further noted that<br />
the safe harbor “cannot protect cautionary statements made with superior knowledge that some<br />
of the potential perils identified have in fact been realized.” Therefore, after finding that the<br />
inference of scienter was at least as compelling as opposing inferences and that defendants’<br />
eventual disclosures were plausibly partially responsible for plaintiffs’ losses, the court denied<br />
defendants’ motion to dismiss.<br />
Gammel v. Hewlett-Packard Co., 2012 WL 5945089 (C.D. Cal. Aug. 29, 2012).<br />
Where a shareholder class action alleged violations of the federal securities laws in<br />
connection with the defendant company’s strategy to develop an integrated system of mobile<br />
computing devices running on an operating system known as “webOS,” the court granted<br />
defendants’ motion to dismiss. The court evaluated two broad categories of misrepresentations:<br />
(1) statements involving the timing and function of webOS devices; and (2) statements<br />
concerning the defendant company’s commitment to the system and the market-readiness of the<br />
flagship product. The court found that the majority of the statements at issue were forwardlooking<br />
statements accompanied by meaningful cautionary language and, thus, were protected<br />
from liability under the Reform Act’s safe harbor. The court noted that because the cautionary<br />
language was adequate, the state of mind of defendants was not relevant. In addition, the<br />
remaining statements were determined to be inactionable puffery, insufficiently pled as to falsity,<br />
or both. Finally, plaintiffs failed to adequately allege any basis for scienter. Accordingly, the<br />
court dismissed plaintiffs’ complaint with leave to amend.<br />
Curry v. Hansen Med., Inc., 2012 WL 3242447 (N.D. Cal. Aug. 10, 2012).<br />
In a consolidated securities fraud class action, the district court granted defendants’<br />
motion to dismiss in part, with leave to amend. Plaintiff-shareholders alleged that they were<br />
fraudulently induced to acquire stock at artificially inflated prices based upon defendants’<br />
misrepresentations regarding revenue recognition and sales performance. Defendants argued<br />
that certain forward-looking statements were protected under the Reform Act’s safe harbor and<br />
the court agreed. Specifically, the court held that plaintiffs could not assert actionable claims<br />
200<br />
D.3<br />
D.3<br />
D.3
ased on: (1) the failure to predict the extent to which the 2008 economic recession would affect<br />
sales; (2) an optimistic statement regarding enthusiasm for products despite the declining<br />
economy; (3) and vague predictions of “stair-step” growth. However, the safe harbor did not<br />
protect statements of historical or present facts and plaintiffs sufficiently alleged scienter and<br />
loss causation. Accordingly, the court declined to dismiss the action in its entirety.<br />
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 WL 3010992 (N.D. Cal. July 23,<br />
2012).<br />
In a securities fraud class action arising from the defendant company’s allegedly<br />
misleading statements concerning future growth prospects and insufficient disclosures regarding<br />
the adoption of new accounting practices, the court granted defendants’ motions to dismiss. The<br />
court held that the company’s “revenue guidance and sales forecast[s] are prototypical examples<br />
of ‘forward-looking statements.’” In addition, the statements were accompanied by meaningful<br />
cautionary language, and even assuming the language was insufficient, plaintiffs had not shown<br />
that the statements were made with actual knowledge of falsity. Hence the statements were<br />
protected under the Reform Act’s safe harbor. The court found additional alleged misstatements<br />
to be inactionable puffery or lacking in falsity. Moreover, scienter was not sufficiently alleged.<br />
As a result, the court granted defendants’ motions to dismiss.<br />
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2012 WL 1868874 (N.D. Cal. May 22,<br />
2012).<br />
In a securities class action, the court granted defendants’ motion to dismiss plaintiffs’<br />
second amended complaint, finding that defendants’ statements were shielded by the Reform<br />
Act’s safe harbor. Plaintiffs filed suit against a medical device manufacturer and several officers<br />
and directors, alleging that defendants made false and misleading statements in connection with<br />
the strength and source of demand for the defendant company’s products. The court previously<br />
held that ten of the plaintiffs’ challenged statements were not actionable because they were<br />
“prototypical examples of ‘forward-looking’ statements” accompanied by meaningful cautionary<br />
statements. Plaintiffs argued that the statements were not protected by the safe harbor because:<br />
(1) the statement was not believed by the speaker; (2) there was no reasonable basis for the<br />
belief; or (3) the speaker was aware of undisclosed facts tending to seriously undermine the<br />
statement’s accuracy. Plaintiffs further argued that the cautionary language was not meaningful<br />
because defendants knew that the economic crisis was already impacting the company. Plaintiffs<br />
relied on Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 2011 (2011) for the proposition that<br />
statements made with actual knowledge of falsity are not shielded, even if they are forwardlooking<br />
and accompanied by cautionary language. The court noted that the relevant passage of<br />
Matrixx Initiatives cites 15 U.S.C. §78u-5(c)(1)(B), which provides that proof of “actual<br />
knowledge” removes a forward-looking statement from the safe harbor’s provision. However,<br />
the court noted that the passage does not discuss §78u-5(c)(1)(A), which immunizes forwardlooking<br />
statements identified as such and accompanied by adequate cautionary language.<br />
Accordingly, in the absence of specific Supreme Court guidance, the court followed In re Cutera<br />
201<br />
D.3<br />
D.3
Sec. Litig., 610 F.3d 1103 (9th Cir. 2010), as the most recent Ninth Circuit decision discussing<br />
the absence of a scienter requirement under § 78u-5(c)(1)(A). The court noted that the<br />
defendants’ cautionary warnings were virtually identical to those held sufficient by the Ninth<br />
Circuit in In re Cutera. Therefore, the court concluded that the cautionary language was<br />
sufficient to insulate defendants’ forward-looking statements from liability under the Reform Act<br />
regardless of defendants’ state of mind. After finding that other statements were not false or<br />
were inactionable expression of optimism and that plaintiffs failed to sufficiently plead scienter,<br />
the court granted defendants’ motion to dismiss with prejudice.<br />
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL 685344 (N.D. Cal.<br />
Mar. 2, 2012).<br />
The district court granted defendants’ motion to dismiss securities fraud claims based on<br />
allegedly false and misleading statements concerning: (1) the defendant company’s financial<br />
forecasts; (2) pricing strategy; (3) integration of a new acquisition; and (4) ability to provide<br />
accurate financial forecasts. Defendants asserted that allegedly false and misleading financial<br />
forecasts were forward-looking statements, shielded from liability by the Reform Act’s safe<br />
harbor. The court found that cautionary language accompanying the financial forecasts was<br />
adequate because, taken together, defendants had made a variety of statements warning investors<br />
of risks similar to those that had actually been realized. The court noted that the defendant<br />
company was not required to warn of the exact risk that caused it to miss its forecast.<br />
Furthermore, plaintiffs failed to adequately establish that defendants had knowledge that the<br />
company’s forecasts could not be achieved at the time they were made. The court rejected<br />
plaintiffs’ argument that defendants were under a duty to update their prior financial forecasts<br />
and violated that duty by waiting to provide new financial guidance. The court noted that the<br />
PSLRA does not impose a duty to update forward-looking statements and, even if it did, it would<br />
be unreasonable to find a violation of that duty where the financial forecasts at issue differed<br />
from reality by only a few percentage points. Accordingly, the court dismissed plaintiffs’<br />
complaint with leave to amend.<br />
Fosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D. Nev. Jul. 11, 2012).<br />
The district court reaffirmed and clarified a prior order granting in part and denying in<br />
part defendants’ motion to dismiss. The court first noted a split in authority with respect to<br />
whether forward-looking statements combined with elements of current or historical fact are<br />
shielded from liability under the Reform Act’s safe harbor. The court declined to find that such<br />
statements, as a matter of law, were entitled to safe harbor protection and held that such<br />
statements would survive defendants’ motion to dismiss. The court reiterated its prior finding<br />
that defendants had provided investors with meaningful cautionary language, adequately warning<br />
of “what kind of misfortune could befall the company and what the effect could be,” in various<br />
press releases and regulatory filings. The court further held that if forward-looking statements<br />
are identified as such and accompanied by meaningful cautionary statements, then the state of<br />
mind of the individual making the statement is irrelevant. The court then conducted a line-by-<br />
202<br />
D.3<br />
D.3
line analysis of plaintiffs’ complaint, granting defendants’ motion to dismiss with respect to<br />
particular statements.<br />
Boulware v. Baldwin, 2012 WL 1412698 (D. Utah Apr. 23, 2012).<br />
The district court denied defendants’ motion to dismiss securities fraud claims related to<br />
investments in entities formed to purchase loans secured by real estate. Plaintiffs asserted that<br />
defendants made false and misleading statements regarding the prospects for generating a quick<br />
profit on the resale of a particular loan, and failed to disclose distributions made to other<br />
participants and entities without plaintiffs’ knowledge. Defendants argued that the bespeaks<br />
caution doctrine shielded them from liability because they had advised plaintiffs of the risks of<br />
the investments. The court found that defendants’ alleged misrepresentations related to thenexisting<br />
facts, non-disclosures, or implied background factual assumptions that a reasonable<br />
investor would regard the speaker as believing to be true and, therefore, the bespeaks caution<br />
doctrine did not apply. Accordingly, the court denied defendants’ motion to dismiss.<br />
SEC v. Bankatlantic Bancorp, Inc., 2012 WL 1936112 (S.D. Fla. May 29, 2012).<br />
In an SEC enforcement action arising from the collapse of the Florida residential real<br />
estate market, the district court granted in part and denied in part defendants’ motion to dismiss.<br />
The SEC alleged that the defendant bank and individual executives made material<br />
misrepresentations and omissions about the defendant bank’s assets, liabilities and financial<br />
position in earnings calls and SEC filings. Defendants argued that the statements at issue were<br />
rendered immaterial as a matter of law under the bespeaks caution doctrine. However, the court<br />
held that the bespeaks caution doctrine did not apply because the alleged misrepresentations and<br />
omissions related to “allegedly known and existing fact,” and not forward-looking projections.<br />
Accordingly, the court denied defendants’ motion to dismiss as to all counts except the SEC’s<br />
claims under § 13(b)(2)(B) of the Exchange Act.<br />
D.3<br />
D.3<br />
E. Liabilities under the Securities <strong>Litigation</strong> Uniform Standards Act of 1999<br />
E.<br />
Brockway v. Evergreen Int’l Trust, 2012 WL 5458464 (4th Cir. Nov. 9, 2012).<br />
The Fourth Circuit affirmed an order by the district court overseeing a multi-district<br />
litigation (“MDL”), which granted defendants’ motion to administratively close and terminate an<br />
action originally brought in Illinois state court on behalf of investors who claimed that their<br />
mutual fund advisors had charged excessive fees. The underlying case, Kircher v. Putnam<br />
Funds Trust, had been the subject of numerous removal and remand proceedings in Illinois, as<br />
plaintiffs attempted to avoid removal and preclusion under the Standards Act. Most recently, the<br />
Illinois Appellate Court found that plaintiffs’ action was covered by SLUSA and mandated that<br />
the Illinois Circuit Court dismiss the case. After the Illinois Circuit Court dismissed plaintiffs’<br />
203
action with prejudice, plaintiffs moved to modify the order so that dismissal would be without<br />
prejudice and for leave to file an amended complaint. In the meantime, defendants removed the<br />
action to federal court in Illinois and plaintiffs again moved to remand. While those motions<br />
were pending, the MDL panel transferred the case to the federal court in Maryland to be<br />
considered as part of the ongoing Mutual Funds MDL. The Fourth Circuit determined that the<br />
original complaint remained the operative complaint, the case was removable, the claims were<br />
precluded by SLUSA, and the district court possessed subject matter jurisdiction at the time of<br />
final judgment. Accordingly, the Fourth Circuit affirmed the district court’s denial of remand<br />
and granted defendants’ motion to close the action.<br />
Roland v. Green, 675 F.3d 503 (5th Cir. 2012).<br />
In a consolidated appeal arising out of an alleged multi-billion dollar Ponzi scheme, the<br />
Fifth Circuit reversed the district court’s decision and held that the Standards Act did not<br />
preclude appellants’ claims. The case originated when investors brought two class actions in<br />
Louisiana court against an investment company, asserting contract and other claims arising from<br />
sales of certificates of deposit (“CDs”) that were purportedly backed by a portfolio of “highly<br />
marketable securities.” The district court found that the CDs themselves were not “covered<br />
securities” under SLUSA, but because plaintiffs’ purchases of the CDs were induced by the<br />
misrepresentation that the bank invested in a portfolio containing covered securities, the<br />
fraudulent scheme was sufficiently tied to a transaction in covered securities to mandate removal.<br />
The Fifth Circuit disagreed, noting that almost every bank or company owns some covered<br />
securities in its portfolio, and every debt instrument issued by such banks and companies is<br />
backed by such a portfolio in some sense. The court found that precluding any group claim<br />
against any such debt issue merely because the issuer advertises that it owns covered securities in<br />
its portfolio would be a major change in the scope of SLUSA. The Fifth Circuit used the Ninth<br />
Circuit’s test in which fraudulent schemes must be “more than tangentially related to real or<br />
purported transactions in covered securities.” In this case, misrepresentations about covered<br />
securities were only one of a host of misrepresentations made to lure defendants into buying the<br />
CDs, and were therefore merely tangential. The CDs were not “ghost entities” or “cursory passthrough<br />
vehicles” to invest in covered securities, and plaintiffs could not claim that they<br />
deposited money in the bank for the purpose of purchasing covered securities. Accordingly, the<br />
court reversed the district court decision and remanded to state court.<br />
Daniels v. Morgan Asset Mgmt., Inc., 2012 WL 3799150 (6th Cir. Aug. 31, 2012).<br />
The Sixth Circuit affirmed the dismissal of plaintiffs’ amended complaint pursuant to the<br />
Standards Act. Plaintiffs, a group of trust funds and trustee ad litum, brought a state law class<br />
action alleging breach of contract and negligence. Following removal, the district court<br />
dismissed plaintiffs’ amended complaint, concluding that plaintiffs’ claims were precluded by<br />
SLUSA because they amounted to allegations that defendants misrepresented how investments<br />
would be determined and failed to disclose a material conflict of interest. Plaintiffs appealed,<br />
arguing that the fourth element of SLUSA preclusion – requiring “allegation of an untrue<br />
204<br />
E.<br />
E.
statement or omission of material fact” – had not been satisfied. The Sixth Circuit noted that<br />
there is a circuit split on the role an untrue statement or omission of material fact must play in the<br />
complaint in order to find SLUSA preclusion. The court further stated that it follows the<br />
“literalist approach” to SLUSA preclusion which allows the court to read the Act expansively<br />
and requires an analysis of the substance of the complaint. Moreover, “removing covered words<br />
from the complaint or disclaiming their presence is ineffective to elude SLUSA’s prohibitions.”<br />
Here, the court found that the substance of plaintiffs’ claim was that the defendant asset<br />
management company had made an untrue statement at the time it contracted with plaintiffs and<br />
failed to disclose a material conflict of interest during the contractual period. Thus, the Sixth<br />
Circuit concluded that all of plaintiffs’ claims were grounded in fraud and dismissal pursuant to<br />
SLUSA was appropriate.<br />
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012).<br />
Plaintiff brought a putative class action asserting breach of contract and unjust<br />
enrichment against a brokerage firm arising from fees charged for handling, postage and<br />
insurance related to the delivery of trade confirmations. Plaintiff sought reimbursement of the<br />
fees, claiming that the fees were grossly disproportionate to the actual transaction costs and were<br />
in breach of a client agreement. Defendant removed the action to federal court and the district<br />
court granted defendant’s motion to dismiss pursuant to the Standards Act. On appeal, the<br />
Seventh Circuit held that the action was not properly removed because defendant could not show<br />
that the claim involved a misstatement or omission of a material fact. The Seventh Circuit<br />
agreed with a Second Circuit holding that alleged misrepresentations or omissions regarding<br />
these types of fees do not constitute the type of misrepresentations or omissions categorized as<br />
“material” under SLUSA. Nevertheless, the Seventh Circuit found that there was federal<br />
jurisdiction under the Class Action Fairness Act and affirmed the district court’s dismissal of<br />
plaintiff’s amended complaint. The court found that the customers had notice of the fees before<br />
doing business with defendant, were apprised of increases in the fees, and the fees need not<br />
reflect actual costs. Accordingly, the defendant firm did not breach the client agreement and<br />
dismissal was appropriate.<br />
Hidalgo-Velez v. San Juan Asset Mgmt., Inc., 2012 WL 4427077 (D.P.R. Sept. 24, 2012).<br />
Following removal of a shareholder class action, the district court denied plaintiffs’<br />
motion to remand pursuant to the Standards Act. Plaintiffs conceded that their case was a<br />
“covered class action” that alleged misrepresentations and omissions about the investment<br />
objectives, level of diversification, and anticipated investments of the fund at issue. However,<br />
plaintiffs argued that the fund was not a “covered security” and, therefore, removal was<br />
improper. The court noted that a majority of courts have held that SLUSA applies to cases<br />
“brought by investors of a fund that invests, or represents that it will invest, in a covered security,<br />
even when the shares of the fund in which the class invested are not covered securities.” The<br />
court further held that the prospectus of the fund indicated that the fund’s anticipated investments<br />
included various “covered securities” and the fund had actually invested in securities that were<br />
205<br />
E.<br />
E.
publicly traded on NASDAQ. Accordingly, since plaintiffs’ complaint alleged<br />
misrepresentations and omissions in connection with anticipated and actual investments in<br />
publicly traded securities, removal was proper.<br />
In re Refco Inc. Sec. Litig., 859 F. Supp. 2d 644 (S.D.N.Y. 2012).<br />
The district court adopted the report and recommendation of the special master and<br />
denied defendants’ motion to dismiss plaintiffs’ claims as precluded by the Standards Act. As<br />
liquidators of a family of hedge funds and trustees of a trust formed for purposes of litigation,<br />
plaintiffs sought to recover cash that the hedge funds had diverted from customer accounts to<br />
unprotected offshore accounts, where the assets were ultimately lost. The court held that<br />
plaintiffs’ action did not qualify as a “covered class action” and, thus, was not precluded by<br />
SLUSA. The court agreed with the special master’s reasoning in holding that plaintiffs were<br />
entitled to entity treatment under SLUSA because their positions as Joint Official Liquidators<br />
(“JOLs”) were roughly equivalent to bankruptcy trustees, which receive entity treatment under<br />
SLUSA. The court rejected defendants’ argument that the special master should have counted<br />
the ultimate beneficiaries of any recovery by the trust (i.e., the creditors) rather than the stated<br />
beneficiaries, the JOLs. The court then considered the question of whether this action could be<br />
grouped with other similar suits in a multidistrict litigation. The court agreed with the special<br />
master’s recommendation that the number of plaintiffs could not be aggregated with plaintiffs in<br />
related actions because the claims were not sufficiently related to warrant grouping under the<br />
“common question of law or fact” standard. The court cited the Supreme Court’s opinion in<br />
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), explaining that “common questions of<br />
fact or law” means “the capacity to generate common answers apt to drive the resolution of the<br />
litigation.” Finally, the court rejected defendants’ efforts to consolidate this action with cases<br />
filed in different courts or settled or dismissed cases, noting that SLUSA’s grouping provision<br />
allows the court to group only cases that are “filed in or pending in the same court.”<br />
Accordingly, the court found that this action did not qualify as a “covered class action” and<br />
denied defendants’ motion to dismiss under SLUSA.<br />
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).<br />
A putative class of investors brought state and federal law claims against ten corporate<br />
and individual defendants in connection with a merger, and defendants moved to dismiss. With<br />
respect to plaintiffs’ claim for aiding and abetting breach of fiduciary duty, plaintiffs conceded<br />
that the elements of Standards Act preclusion were met, but argued that the “Delaware carveout”<br />
exception applied to preserve the claim. The court disagreed, finding that the corporation at<br />
issue was not incorporated under the laws of any U.S. state, and the “Delaware carve-out”<br />
applies only to claims “based upon the law of the State in which the issuer is incorporated.” The<br />
court further held that: (1) service was adequately made on the objecting individual defendants;<br />
(2) the two corporate defendants were foreign private issuers and, therefore, not subject to<br />
§ 14(a) liability; (3) plaintiffs’ §§ 10(b) and 20(a) claims survived defendants’ motion to dismiss;<br />
(4) plaintiffs lacked standing to bring a direct breach of fiduciary duty claim against one of the<br />
206<br />
E.<br />
E.
corporations and its principals; and (5) plaintiffs’ claims for the breach of duty of loyalty and<br />
breach of duty of candor survived defendants’ motion to dismiss. Accordingly, the district court<br />
granted in part and denied in part defendants’ motion to dismiss.<br />
In re Stillwater Capital Partners Inc. Litig., 851 F. Supp. 2d 556 (S.D.N.Y. 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss state<br />
law claims brought by a putative class of investors arising from a merger. In their amended<br />
complaint, plaintiffs included a statement that they “expressly exclude and disclaim any<br />
allegation that could be construed as alleging or sounding in fraud.” Notwithstanding this<br />
disclaimer, the court held that fraud was a “necessary component” of plaintiffs’ breach of<br />
fiduciary duty claim and, thus, the claim was precluded by SLUSA. The court further held that<br />
plaintiffs’ attempt to hold individual defendants liable through an aiding and abetting claim was<br />
similarly precluded by SLUSA. However, the court found that plaintiffs’ breach of contract<br />
claim regarding a post merger share allocation agreement was not precluded. The court noted<br />
that contract claims are generally outside the scope of securities laws and although certain<br />
contract claims may allege misrepresentations or omissions that would support SLUSA<br />
preclusion, the present case did not. Accordingly, the court concluded that plaintiffs’ breach of<br />
fiduciary and aiding and abetting fiduciary duty claims were precluded by SLUSA, but the<br />
breach of contract claim was not precluded.<br />
Liberty Media Corp., LMC v. Vivendi Universal, S.A., 842 F. Supp. 2d 587 (S.D.N.Y. 2012).<br />
In a securities fraud action, the district court denied defendants’ motion to dismiss state<br />
law claims pursuant to the Standards Act. Plaintiffs’ state law claims had been consolidated with<br />
a pending securities fraud class action in 2002. Six years later, defendants moved to dismiss<br />
plaintiffs’ state law claims as precluded by SLUSA. Plaintiffs argued that their claims were not<br />
part of any “covered class action” because their claims did not share common questions of law or<br />
fact with the class claims. Plaintiffs also argued that defendants were precluded by waiver or<br />
estoppel from raising SLUSA preemption. The court ruled in favor of plaintiffs, but did not<br />
adopt either of plaintiffs’ arguments. Rather, the court found that consolidation of plaintiffs’<br />
claims with the class was “improvidently granted” because the issue of SLUSA preclusion was<br />
never considered in connection with defendants’ motion for consolidation. Given the prejudice<br />
caused to plaintiffs by the consolidation, the court de-consolidated plaintiffs’ claims from the<br />
class action. The court then held that because plaintiffs’ claims were not part of a “covered class<br />
action,” defendants’ SLUSA preclusion argument necessarily failed. The court flatly rejected<br />
defendants’ argument that it was creating an “exception” to SLUSA preclusion not found in the<br />
statute. Rather, the court reasoned that its ruling was based on the limited and uncontested fact<br />
that plaintiffs’ suit – severed from the class action – no longer qualified as a “covered class<br />
action” under SLUSA. Accordingly, the court denied defendants’ motion to dismiss.<br />
E.<br />
E.<br />
207
E.<br />
In re Austin Capital Mgmt., Ltd., Sec. & ERISA Litig., 2012 WL 6644623 (S.D.N.Y. Dec. 21,<br />
2012).<br />
In a putative class action arising out of the Madoff Ponzi scheme, the district court<br />
granted defendants’ motion to dismiss with regard to plaintiffs’ state law claims on the basis that<br />
they were precluded by the Standards Act. Plaintiffs were investors in hedge funds managed by<br />
the defendant asset management company and asserted federal and state law claims alleging that<br />
defendants knowingly invested with Madoff, but failed to conduct meaningful due diligence.<br />
Defendants contended that plaintiffs’ state law claims were precluded by the Standards Act and<br />
plaintiffs disputed the applicability of each of SLUSA’s requirements. Specifically, plaintiffs<br />
argued that because the named plaintiffs in the state law class actions were state pension plans,<br />
the action should be allowed under the “state action” exception that permits otherwise precluded<br />
class actions if brought by a state pension plan as a member of a class comprised solely of other<br />
states, political subdivisions or state pension plans. The court noted that plaintiffs’ action did not<br />
meet this requirement, as only some, and not all, of the named plaintiffs were state pension plans.<br />
Plaintiffs also claimed that misrepresentation was not a necessary element of their state law<br />
causes of action. The court noted that preclusion under SLUSA requires only that the action<br />
allege misrepresentation, not that misrepresentation be a necessary component of each claim.<br />
Finally, plaintiffs claimed that the alleged misrepresentations were not “in connection with” the<br />
sale of covered securities. However, the court found that plaintiffs’ allegation that defendants<br />
caused them to invest through a fraudulent scheme to misrepresent the due diligence being<br />
conducted was sufficient to meet the “in connection with” standard. Therefore, the court found<br />
that plaintiffs’ state law claims were barred by SLUSA and granted defendants’ motion to<br />
dismiss with respect to these claims.<br />
In re Lehman Bros. Sec. and ERISA Litig., 2012 WL 6603321 (S.D.N.Y. Dec. 17, 2012).<br />
In a securities case commenced on behalf of a single plaintiff and subsequently<br />
transferred to the district by the Multidistrict Panel pursuant to 28 U.S.C. § 1407, the district<br />
court found that plaintiff’s state law claims were barred by the Standards Act because the case<br />
constituted a “covered class action” within the meaning of the Act. Plaintiff did not dispute that<br />
the claims were based on state law and alleged misrepresentations or omissions of material fact<br />
involving covered securities. Rather, plaintiff argued that an individual action does not become<br />
part of a “covered class action” by virtue of a § 1407 consolidation or coordination by the<br />
Multidistrict Panel. The court disagreed, finding that because plaintiff’s case was pending in the<br />
same court as a large number of others, all of which related to Lehman Brothers and all of which<br />
involved common questions of law or fact, and because the other cases sought damages on<br />
behalf of thousands of persons, plaintiff’s case was a “covered class action” within the plain<br />
terms of the statutory definition. The court further noted that even if a § 1407 transfer was<br />
insufficient to trigger SLUSA, the Lehman Brothers equity/debt actions were also consolidated<br />
for pre-trial purposes, clearly satisfying the SLUSA requirement that an action be “consolidated<br />
… for any purpose” with another action or group of actions. Accordingly, the court found that<br />
E.<br />
208
plaintiff’s state law claims were precluded by SLUSA and granted defendants’ motion to dismiss<br />
with respect to these claims.<br />
Lakeview Inv., LP v. Schulman, 2012 WL 4461762 (S.D.N.Y. Sept. 27, 2012)..<br />
The district court granted defendants’ motion to dismiss on the basis that plaintiffs’<br />
securities fraud class action was precluded by the Standards Act. Plaintiffs alleged that<br />
defendants violated state securities laws by making untrue statements in connection with the sale<br />
of limited partnership interests in two hedge funds that were then invested in Madoff’s Ponzi<br />
scheme. Although plaintiffs argued that neither of the hedge funds traded in “covered<br />
securities,” the court determined that Madoff’s purported trading in “covered securities” was<br />
central to the complaint and, therefore, the “in connection with” requirement was satisfied. The<br />
court further held that the entire action should be dismissed because there were no “individual”<br />
claims that could be severed from “class” claims.<br />
In re Fannie Mae 2008 Sec. Litig., 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012).<br />
Independently from an ongoing securities fraud class action, three plaintiffs pursued<br />
individual actions against the Federal National Mortgage Association, various executives, and<br />
certain underwriters. The district court granted a motion to dismiss brought by certain<br />
defendants in two of the individual actions with respect to state law claims, finding that the<br />
claims were precluded under the Standards Act. The issue at hand was whether the lawsuits<br />
constituted a “covered class action.” The two individual lawsuits raised almost identical<br />
questions of fact as the class action pending in the same court and had been consolidated with the<br />
class action for pre-trial purposes. The court found that the lawsuits therefore constituted a<br />
“covered class action” and dismissed the state law claims pursuant to SLUSA. All three<br />
individual actions also pursued claims against defendants who were not defendants in the class<br />
action. The court determined that there were not more than fifty persons seeking damages<br />
against these defendants and, therefore, SLUSA did not bar plaintiffs’ claims.<br />
People v. <strong>Greenberg</strong>, 2012 WL 1582779 (N.Y. App. Div. May 8, 2012).<br />
The appellate court affirmed the denial of defendants’ motion for summary judgment,<br />
finding that the Standards Act did not preclude a civil enforcement action brought by the New<br />
York Attorney General. Specifically, the Attorney General brought the action pursuant to the<br />
Martin Act and the Executive Law, asserting that defendants orchestrated fraudulent transactions<br />
designed to portray an unduly positive picture of AIG’s loss reserves and underwriting<br />
performance. Defendants argued that the action was preempted by SLUSA because the Attorney<br />
General was seeking, in a de facto representative capacity, to litigate claims on behalf of a<br />
“covered class” of AIG investors to recover for their financial losses. After examining the<br />
Reform Act, SLUSA, and other federal statutes, the court rejected defendants’ argument and<br />
209<br />
E.<br />
E.<br />
E.
found no evidence that Congress intended to preempt the Attorney General’s state law power to<br />
bring enforcement actions seeking money damages. Instead, the relevant federal legislative<br />
history expressed the importance of the state’s role in policing securities fraud. Accordingly, the<br />
court affirmed the denial of defendants’ motion for summary judgment based on SLUSA<br />
preclusion.<br />
Wilson v. Wells Fargo Advisors, LLC, 2012 WL 5240815 (D. Del. Sept. 25, 2012).<br />
In a putative class action removed to federal court, the magistrate recommended that the<br />
district court grant defendants’ motion to dismiss state law claims arising from the collapse of<br />
the market for auction-rate securities (“ARS”). Plaintiffs asserted breach of fiduciary duty and<br />
breach of a settlement agreement based on defendants’ failure to buy back ARS and the charging<br />
of trust account management fees based on the par value of plaintiffs’ ARS, rather than fair<br />
market value. Defendants moved to dismiss plaintiffs’ state law claims as precluded by the<br />
Standards Act. Plaintiffs contended that their state law claims were not precluded because they<br />
had not asserted any misrepresentations or omissions “in connection with” the purchase or sale<br />
of covered securities. Specifically, plaintiffs argued that defendants’ failure to buy back the ARS<br />
and assessment of excess fees took place after the ARS were sold and, thus, the sale of ARS was<br />
only “background” for their claims. The magistrate rejected plaintiffs’ argument and held that<br />
SLUSA preclusion does not turn on whether the allegations are characterized as facts or as<br />
essential elements of a claim. The court further held that the nature of the relief requested by<br />
plaintiffs was relevant in “connecting” the allegations of the complaint to the purchase or sale of<br />
securities. Here, plaintiffs sought recovery of excess trust management fees and investment<br />
losses and, thus, there could be no doubt that plaintiffs’ claims were “in connection with” the<br />
purchase or sale of a covered security. Accordingly, the magistrate recommended that the court<br />
grant defendants’ motion to dismiss the action as precluded by SLUSA. The magistrate also<br />
recommended that the court deny plaintiffs’ motion to amend to remove claims precluded by<br />
SLUSA, as SLUSA preclusion pertains to actions as a whole, and not to individual claims.<br />
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012).<br />
In a putative class action removed to federal court, the district court granted plaintiffs’<br />
motion to remand on the grounds that the action was not subject to removal pursuant to the<br />
Standards Act. Plaintiffs were purchasers of variable annuities who alleged that their investment<br />
advisors negligently failed to attach guaranteed income benefit riders to their policies. Following<br />
a prior removal and remand to state court, plaintiffs filed second and third amended complaints,<br />
defendants again removed the case to federal court, and plaintiffs sought remand. Defendants<br />
acknowledged that none of the amended complaints set forth a claim of fraud on their face, but<br />
pointed to various deposition testimony by plaintiffs in which they stated that their claims were<br />
based on “lies” and “intentional misstatements” made by defendants. The court rejected this<br />
argument, noting that it was “unaware of any support for the conclusion that deposition<br />
testimony from a layman, even if he is a putative class representative, drawn out by leading<br />
questions from opposing counsel, regarding legal theories of the case and grounds for relief can<br />
210<br />
E.<br />
E.
alter the allegations of the case.” The court concluded that any testimony by plaintiffs as to<br />
misrepresentations were the sort of “background details that need not have been alleged, and<br />
need not be proved, which the Third Circuit has determined cannot serve as a basis for SLUSA<br />
removal.” Finally, the court noted that the motion for removal was also untimely and remanded<br />
the case to state court.<br />
Stichting Pensioenfonds ABP v. Merck & Co., 2012 WL 3235783 (D.N.J. Aug. 1, 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss<br />
plaintiff’s complaint alleging securities fraud relating to the prescription drug Vioxx. Although<br />
this case was an individual action brought by a pension fund, the court held that it fit within the<br />
definition of a “covered class action” under the Standards Act because it was based on the same<br />
subject matter as a pending class action and other individual actions, and plaintiff agreed to both<br />
coordinated proceedings and coordinated discovery with the other actions. Although the case at<br />
issue was not consolidated with the class action and other individual actions, the court held that<br />
SLUSA was applicable based upon the existence of common questions of law and fact between<br />
the actions, and the involvement of more than fifty parties across the various actions. The court<br />
noted that the Third Circuit had not previously expressed a view on the topic, but the court was<br />
persuaded by cases from other jurisdictions, and by the commonality of facts and substantial<br />
coordination of proceedings, both procedurally and substantively. As such, the court found that<br />
plaintiff’s action was precluded by SLUSA and dismissed plaintiff’s state law claims. The court<br />
further held that several of the alleged misstatements were inactionable under 10b-5(b),<br />
dismissed plaintiff’s claim for scheme liability, and dismissed claims for control person liability<br />
against five of the six individually named defendants.<br />
Niitsoo v. Alpha Natural Res. Inc., 2012 WL 5395812 (S.D.W.V. Nov. 5, 2012).<br />
In a federal securities class action removed under the Standards Act, the district court<br />
granted plaintiffs’ motion to remand on the theory that the Act only permits removal of class<br />
actions alleging state law fraud violations. Plaintiffs alleged only violations of federal law in a<br />
case concerning the merger of two major producers and sellers of coal. The court noted that<br />
courts are divided on the question of whether a securities class action filed in state court can be<br />
removed to federal court if it alleges only violations of federal law. Many courts have found that<br />
SLUSA only prevents plaintiffs from filing under state law, while others have found that it also<br />
prevents plaintiffs from filing under federal law in state court. The court conducted a thorough<br />
review of the statutory language and legislative history, ultimately relying on the Supreme<br />
Court’s dicta in Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006), to conclude that only<br />
covered securities class actions asserting state law fraud claims can be removed to federal court,<br />
where they will be dismissed. Accordingly, because plaintiffs’ federal claims did not constitute a<br />
covered class action under this interpretation of 15 U.S.C. 77p subsection (b), the court found<br />
that the action was not removable to federal court and granted plaintiffs’ motion to remand.<br />
E.<br />
E.<br />
211
E.<br />
In re BP P.L.C. Sec. Litig., 843 F. Supp. 2d 712 (S.D. Tex. 2012).<br />
The district court granted in part and denied in part defendants’ motion to dismiss several<br />
putative class action lawsuits arising from an oil spill in the Gulf of Mexico. With respect to<br />
plaintiffs’ common law fraud claims, defendants argued that the claims were precluded by the<br />
Standards Act. Plaintiffs argued that “covered securities” under the Act must be listed and<br />
traded on a national exchange and that although BP ordinary shares are listed on the New York<br />
Stock Exchange, the shares are only traded on the London Stock Exchange. The court disagreed<br />
with plaintiffs’ argument, relying on decisions by other courts that have refused to read a trading<br />
requirement into the definition of “covered securities” under SLUSA. The court further<br />
determined that plaintiffs’ claims were founded on allegations of misrepresentations and<br />
omissions in connection with the purchase of BP ordinary shares. Accordingly, the court held<br />
that the elements of SLUSA were satisfied and plaintiffs’ common law fraud claims were<br />
precluded.<br />
Brady v. Kosmos Energy Ltd., 2012 WL 6204247 (N.D. Tex. July 10, 2012).<br />
The district court addressed the issue of whether class actions brought in state court<br />
asserting only federal claims under the Securities Act of 1933 are removable to federal court.<br />
The court noted a split among courts on this issue and sided with the authorities that have held<br />
that removal is proper. The court concluded that this interpretation of SLUSA is consistent with<br />
“Congress’s broad goal of making federal court the ‘exclusive venue’ for the bulk of securities<br />
class actions.” Accordingly, the court held that removal was proper and denied plaintiffs’<br />
motions to remand.<br />
Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong> <strong>LLP</strong>, 2012 WL 1021071 (D. Ariz. Mar. 20, 2012).<br />
In a putative securities fraud class action related to an alleged Ponzi scheme involving<br />
mortgage “pass-through” investments, the district court granted plaintiffs’ motion for class<br />
certification. Defendants argued that the court should deny plaintiffs’ motion and dismiss their<br />
claims because their claims were precluded by the Standards Act. The court found that SLUSA<br />
preclusion did not apply because the alleged fraud did not stem from the sale of securities on a<br />
national exchange or securities issued by a registered investment company. The court rejected<br />
defendants’ argument that SLUSA precluded the action simply because some of the putative<br />
class members may have sold covered securities in order to purchase the securities at issue.<br />
Accordingly, the court granted plaintiffs’ motion for class certificate and denied defendants’<br />
motion to dismiss based on SLUSA preclusion.<br />
E.<br />
E.<br />
212
E.<br />
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012).<br />
In a group of seven putative securities class actions brought exclusively under the<br />
Securities Act of 1933, the court denied plaintiffs’ motion to remand after denying defendants’<br />
motion for a stay of proceedings pending a decision by the Judicial Panel on Multidistrict<br />
<strong>Litigation</strong> to transfer the actions to the Southern District of New York. The district court<br />
addressed whether the passage of the Standards Act affected the non-removal provision of<br />
15 U.S.C. §77v to allow removal of class actions arising under the 1933 Act and noted that<br />
courts in other districts have reached different conclusions. Here, the court denied plaintiffs’<br />
motion to remand, finding that SLUSA amended §77v to exempt covered class actions from<br />
§77v’s concurrent jurisdiction provision, with the result that “federal courts alone have<br />
jurisdiction to hear covered class actions raising 1933 Act claims.”<br />
Stoody-Broser v. Bank of Am., 2012 WL 1657187 (N.D. Cal. May 10, 2012).<br />
Following remand from the Ninth Circuit, the district court denied defendants’ motion to<br />
dismiss plaintiff’s amended complaint relating to investment of trust assets. Defendants argued<br />
that plaintiff’s claims were precluded by the Standards Act. The court held that an amended<br />
complaint filed by plaintiff changed the substance of plaintiff’s allegations, as it disavowed<br />
claims for misrepresentation and instead alleged breach of fiduciary duty. As plaintiff’s claims<br />
were no longer predicated on material misrepresentations in connection with the sale of<br />
securities, the district court found that they were no longer precluded. Accordingly, the court<br />
denied defendants’ motion to dismiss.<br />
Brown v. China Integrated Energy, Inc., 2012 WL 1129909 (C.D. Cal. April 2, 2012).<br />
In a putative securities fraud class action, the district court denied defendant’s motion to<br />
stay discovery pursuant to the Standards Act in three state court actions pending the court’s<br />
decision on defendant’s motion to dismiss the class complaint. With respect to one of the state<br />
court actions, the court found defendant’s motion to be moot because defendant had already<br />
produced the documents being sought in that case and the case had concluded. With respect to<br />
the remaining state court cases, defendant argued that allowing discovery to proceed in the state<br />
court actions would create “an unacceptable risk” that the federal class action plaintiffs would<br />
obtain discovery before the court determined the sufficiency of the class complaint. The court,<br />
however, noted that the named plaintiffs in the federal action were different from those in the<br />
state action. Moreover, the court explained that a confidentiality order would ensure that<br />
discovery would not be shared with the federal plaintiffs. While there was significant factual<br />
overlap between the federal action and the state action, the court held that such overlap was only<br />
one factor to be considered in deciding whether to stay discovery pursuant to SLUSA.<br />
Accordingly, the court denied the motion to stay because there was little risk that discovery<br />
E.<br />
E.<br />
213
would be shared between the state and federal actions and relief short of a stay could protect<br />
defendant’s interests.<br />
F. Liabilities under State Statutory and Common Law<br />
1. Blue Sky Laws<br />
F.1<br />
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (2nd Cir. N.Y. 2012).<br />
Defendant, a securities broker-dealer, underwrote auction rate securities ("ARS"),<br />
including two ARS offerings purchased by plaintiff. When defendant discontinued its practice of<br />
submitting support bids in the auctions, the auctions for plaintiff's ARS failed and the market for<br />
plaintiff's ARS evaporated. Plaintiff argued it was unable to sell its ARS and was left holding<br />
$18.95 million of illiquid and impaired securities. Plaintiff claimed that defendant violated the<br />
California Corporations Code by making misrepresentations in connection with its ARS<br />
purchases. The court dismissed the claim, holding that defendant's disclosures regarding its<br />
support bidding practices were sufficient to preclude a misrepresentation claim and that plaintiff<br />
had failed to allege any material misrepresentations made by defendant in relation to the ARS.<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. Ky. 2012).<br />
Plaintiff bought more than $50 million worth of residential-mortgage-backed securities<br />
from defendants, a brokerage and its employee, without reading the relevant offering documents<br />
before investing. When the national economy entered into recession in 2007 and 2008, the value<br />
of plaintiff's investments plummeted. Plaintiff sued defendant, alleging that defendant<br />
fraudulently induced it to buy and retain the securities by omitting to state the risk involved in<br />
the investment and that prudent underwriting standards were not followed in making a<br />
substantial number of the mortgage loans that backed the securities. Specifically, plaintiff<br />
claimed that defendants violated § 292.320 of Kentucky's Blue Sky Law. The court determined<br />
that the elements of a § 292.320 claim are identical to the elements of a claim under Rule 10b-5<br />
of the Securities and Exchange Act of 1934, and a heightened pleading standard applies to<br />
§ 292.320 claims. The court dismissed plaintiff's § 292.320 claims, holding that plaintiff's<br />
claims based on alleged misrepresentations and omissions concerning the securities' safety and<br />
underwriting standards used failed because they were not plead with sufficient particularity.<br />
Furthermore, plaintiff could not establish that it relied on statements concerning borrowers'<br />
creditworthiness, predatory lending, property valuation, and deviant underwriting practices<br />
because the offering documents disclosed those risks.<br />
F.1<br />
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012).<br />
In 2007, plaintiff hired defendant to create and implement a financial investment plan on<br />
her behalf with full discretionary authority. After a preliminary meeting with defendant, plaintiff<br />
214<br />
F.1
filled out a Personal Financial Information Questionnaire in which she indicated that her<br />
investment time horizon was 5–10 years and that she was a risk-averse investor, willing to forego<br />
growth in order to avoid losses and preserve principal. By the end of 2008, plaintiff had suffered<br />
approximately $2,000,000 in investment losses. She claimed that but for following defendant’s<br />
investment recommendations and engaging its services, she would have avoided the losses she<br />
suffered. Plaintiff alleged that defendant made material misrepresentations in (1) negligently<br />
supplying plaintiff with a false probability of success rate for its 50-percent equity allocation<br />
scenario, (2) fraudulently or negligently providing plaintiff with misleading performance history<br />
numbers in its Investment Performance Worksheet, and (3) fraudulently failing to inform her that<br />
the SEC had found the Worksheet figures misleading. Plaintiff claimed that such<br />
misrepresentations constituted violations of the Connecticut Uniform Securities Act ("CUSA"),<br />
and defendant moved for summary judgment, claiming that plaintiff's allegations were not<br />
sufficient to sustain a claim under CUSA. The court denied defendant's motion, holding that an<br />
action brought under CUSA may survive insofar as a plaintiff has adequately alleged claims<br />
under either negligent misrepresentation or fraud, and that plaintiff had, in fact, adequately<br />
alleged such claims. Plaintiff’s evidence, including expert opinion as to the inaccuracy of the<br />
figures in the Performance Worksheet, and the SEC communications demonstrating defendant’s<br />
prior awareness of the false and misleading nature of the figures, presented evidence that was<br />
probative of fraud.<br />
F.1<br />
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012).<br />
Plaintiff, an individual investor, filed a complaint alleging that defendant's investment<br />
professionals made fraudulent misstatements to him, or omitted material information, about the<br />
value and expected performance of his investments in silver and gold and executed various<br />
unauthorized trades and transfers on his behalf. The court dismissed plaintiff's fraud claim,<br />
brought under Florida's Blue Sky Law, because the Account Agreement between plaintiff and<br />
defendant explicitly explained the risk of loss associated with investing in precious metals. The<br />
court held that the unequivocal disclosure directly contradicted the alleged misrepresentations<br />
and omissions, and that no consumer could have reasonably believed their investment in silver to<br />
be safe upon reading the disclosure. Plaintiff also alleged that defendant committed fraud under<br />
the statute with omissions related to lack of success in business and prohibition from the futures<br />
industry. The court dismissed plaintiff's fraud-by-omission claim because plaintiff failed to<br />
show how the omissions were a direct and proximate cause of the loss he suffered.<br />
F.1<br />
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).<br />
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The<br />
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as<br />
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter<br />
and placement agent discontinued its practice of submitting support bids in such auctions, the<br />
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff<br />
alleged that defendant made material misstatements and omissions in relation to the ARS under<br />
California's Blue Sky Law by misrepresenting the liquidity risks associated with its ARS and<br />
claimed that had it known the true nature of the securities, it never would have purchased them.<br />
215
The court dismissed plaintiff's claim, holding that plaintiff failed to plead the alleged material<br />
misstatements and omissions with sufficient particularity to survive a motion to dismiss because<br />
plaintiff was on notice of both an SEC order and Web site disclosure regarding the underwriter<br />
and placement agent's ARS practices prior to purchasing the ARS at issue. Furthermore,<br />
plaintiff failed to specify what precise misstatements or misrepresentations occurred with respect<br />
to the specific ARS at issue; a securities fraud complaint must specify each misleading statement<br />
that a defendant is alleged to have made.<br />
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).<br />
Defendants, who served as brokers for plaintiffs, recommended that plaintiffs invest in<br />
funds, which were in turn invested into Bernard Madoff's Ponzi scheme. Plaintiffs alleged that<br />
defendants committed securities fraud in violation of Florida's Blue Sky Law in connection with<br />
their investments. In order to state a securities claim under Florida's statute, a plaintiff must<br />
allege justifiable reliance on a misrepresentation or omission of material fact and scienter. The<br />
court dismissed plaintiffs' claim, holding that plaintiffs failed to plead scienter with requisite<br />
particularity because, while plaintiffs claimed that defendants should have known Madoff's<br />
practices were suspect and involved substantial risk, plaintiffs failed to explain the basis for such<br />
knowledge.<br />
M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).<br />
Defendant, a broker-dealer, purchased certain notes comprised of a series of<br />
collateralized debt obligations for resale to investors. Plaintiff purchased these notes from<br />
defendant for $50 million. Plaintiff then entered into an Indenture with LaSalle Bank National<br />
Association ("LaSalle") as trustee. LaSalle was responsible for administering the collateral<br />
underlying the notes and making principal and interest distributions to note holders in<br />
accordance with the Indenture. LaSalle later notified plaintiff of an occurrence of default<br />
pursuant to the Indenture and placed available interest proceeds earned from the collateral<br />
underlying the notes in a reserve account for defendant's benefit rather than paying interest on<br />
the notes. Plaintiff claimed that defendant aided and abetted LaSalle in a breach of its fiduciary<br />
duty by demanding LaSalle apply an incorrect interpretation of the Indenture and wrongfully<br />
diverted available interest proceeds for defendant's benefit, made material misrepresentations and<br />
false statements in its Preliminary Offering Memorandum ("POM"), and violated New York's<br />
Blue Sky Law, the Martin Act, by issuing a materially misleading POM. Defendants claimed<br />
that plaintiff's common law, negligent representation claim was preempted by the Martin Act.<br />
The court explained that while a number of decisions conclude that the Martin Act vests the<br />
attorney general with exclusive enforcement powers and therefore does not provide a right of<br />
action to private litigants such as plaintiff, state law had since evolved. The court held that an<br />
injured investor may bring a common law claim that is not entirely dependent on the Martin Act<br />
for its viability and denied dismissal on the basis of preemption.<br />
F.1<br />
F.1<br />
216
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).<br />
Plaintiff, a limited partnership that makes private equity investments for its limited<br />
partner investors, bought $12 million worth of National Century Financial Enterprises, Inc.<br />
("National Century") preferred stock through defendant, a co-placement agent for the offering.<br />
The stock fully lost its value when National Century filed for bankruptcy in 2002. Incidentally,<br />
it is now well established that National Century committed a massive fraud with regard to its<br />
stock offerings. Plaintiff brought suit against defendant, alleging that defendant failed to<br />
disclose that National Century was not operating its business in a manner consistent with what<br />
was represented to plaintiff, committing fraud in violation of Ohio's Blue Sky Law. Defendant<br />
moved for summary judgment on plaintiff's fraud claim, and the court found for defendant. A<br />
successful fraud claim under Ohio's Blue Sky Law requires a showing of justifiable reliance.<br />
Plaintiff was a sophisticated investor that considered itself skilled in due diligence. Furthermore,<br />
plaintiff had adverse information about National Century because Goldman Sachs, which had<br />
considered serving as lead investor on the offering, gave plaintiff a lengthy document outlining<br />
some of the areas of concern that it had about the offering, and plaintiff did not find any of<br />
Goldman Sachs' concerns to be material. Finally, the letter agreement between plaintiff and<br />
defendant stated that plaintiff was a sophisticated institutional investor relying exclusively on its<br />
own due-diligence investigation, sources of material, and credit analysis in deciding to invest in<br />
National Century preferred stock. The court held that the language of the credit agreement and<br />
surrounding factors rendered any claimed reliance by plaintiff unjustifiable.<br />
State v. Marsh & McLennan Companies, Inc., 2012 WL 6212518 (Or. Dec. 13, 2012).<br />
Plaintiff, the state, brought an action against defendant, a brokerage firm, alleging that<br />
defendant engaged in a scheme perpetrated by false and misleading statements in violation of<br />
Oregon's Blue Sky Law that caused plaintiff to lose approximately $10 million on investments in<br />
defendant's stock. Defendant asserted that plaintiff's claims must fail because Oregon's Blue Sky<br />
Law requires a showing of reliance by a plaintiff, and plaintiff failed to establish any direct<br />
reliance by state actors on any of defendant's actions. Furthermore, defendant argued that the<br />
state could not show reliance by means of a presumption of reliance based on the "fraud-on-themarket"<br />
doctrine. The court held that Oregon's Blue Sky Law does require a stock purchaser to<br />
establish reliance; however, a stock purchaser who purchases stock on an efficient, open market<br />
may establish reliance by means of the "fraud-on-the-market" presumption.<br />
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012).<br />
Plaintiffs were customers of Fifth Third Bank and Fifth Third Securities, separate<br />
corporations operating together informally as Fifth Third Financial Advisors ("defendant"). In<br />
2006, a private banker working for defendant introduced plaintiffs to Hughes, an investment<br />
advisor employed by defendant. Plaintiffs met with Hughes and decided to invest their funds in<br />
217<br />
F.1<br />
F.1<br />
F.1
options trading with him, making substantial returns on their investments. In 2007, Hughes left<br />
defendant and began working at a new firm. Plaintiffs voluntarily transferred their investment<br />
accounts to Hughes' new firm, where they suffered substantial losses. Plaintiffs sued defendant,<br />
claiming that defendant violated Ohio and Kentucky Blue Sky Laws by committing fraud and<br />
fraudulent disclosure. The court ruled that defendant met its initial burden to show that it did not<br />
commit fraud under Ohio's law because it specifically warned plaintiffs of the inherent risks of<br />
options trading, and plaintiffs failed to show that they justifiably relied on any misrepresentation<br />
by defendant or that any such misrepresentation caused them injury. According to the court, the<br />
bottom line was that plaintiffs earned money on their accounts while Hughes was working for<br />
defendant, and it was not until after Hughes left to join another firm that plaintiffs suffered<br />
losses; plaintiffs did not suffer injury at the hands of defendant. As to plaintiffs' claim of<br />
fraudulent nondisclosure, once Hughes left defendant and plaintiffs were no longer defendant's<br />
clients, defendant no longer had a duty to disclose. Because Kentucky's Blue Sky Law is similar<br />
to Ohio's in that it requires a showing of a material misrepresentation or omission that causes<br />
economic loss, the court reached the same result on plaintiffs' claims under Kentucky law.<br />
Joseph v. Mieka Corp., 282 P.3d 509 (Colo. App. 2012).<br />
Defendants participated in a joint venture to acquire a working interest in two oil and gas<br />
wells. Defendants engaged and authorized a third party to act as a sales representative and<br />
contact potential investors to solicit their interest in the joint venture. Following a hearing, the<br />
Colorado Securities Commissioner concluded that defendants violated the Colorado Securities<br />
Act by acting as unlicensed broker-dealers. Defendants appealed the Commissioner's order, and<br />
the court affirmed the decision. The court held that a broker-dealer may be construed as<br />
engaging in the business of buying or selling securities by authorizing or employing a sales<br />
representative on his or her behalf. Defendants employed a third party as a sales representative<br />
on their behalf by giving him a call list and managing him in qualifying investors; therefore, they<br />
qualified as broker-dealers within the meaning of the Colorado Securities Act.<br />
Cambridge Place Inv. Mgmt. Inc. v. Morgan Stanley & Co., Inc., 2012 WL 5351233 (Mass. Sup.<br />
Ct. Sept. 28, 2012).<br />
Plaintiffs bought residential mortgage-backed securities from defendants, who prepared<br />
offering documents for the securities and then dealt and deposited the securities. Beginning in<br />
the fall of 2006, housing prices began to decline and delinquencies began to increase. As home<br />
prices continued to drop and foreclosures rose, the value of the securities suffered<br />
commensurately, and plaintiffs suffered substantial losses as a result. Plaintiffs sued defendants,<br />
claiming that defendants made false and misleading statements in their offers to sell the<br />
securities in violation of Massachusetts' Blue Sky Law. Defendants moved to dismiss the<br />
claims, arguing that plaintiffs could not allege that defendants made false or misleading<br />
statements when the offering documents for the securities disclosed all the information that<br />
plaintiffs asserted was misrepresented or omitted—that the securities were backed by high-risk<br />
loans originated by flexible underwriting guidelines. The court refused to dismiss the claims,<br />
218<br />
F.1<br />
F.1
arguing that cautionary statements in offering documents only protect a defendant from a<br />
misrepresentation claim when a plaintiff alleges that the defendant made misleading statements<br />
about the possibility that future, unforeseen events could undermine an investment's value<br />
(versus cases where a plaintiff alleges misrepresentations or omissions of historical fact).<br />
Because plaintiffs did not claim that the offering documents failed to warn investors of the risks<br />
of loss associated with the loans, but instead alleged a misrepresentation of historical fact—that<br />
the offering documents failed to disclose that the originators jettisoned altogether the<br />
underwriting guidelines that they professed to follow—plaintiffs' claims survived defendant's<br />
motion to dismiss.<br />
2. Consumer Protection and Other Statutes<br />
F.2<br />
M&T Bank Corp. v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).<br />
Defendant, a broker-dealer, purchased certain notes comprised of a series of<br />
collateralized debt obligations ("CDOs") for resale to investors. Plaintiff purchased these notes<br />
from defendant for $50 million. Plaintiff then entered into an indenture with LaSalle Bank<br />
National Association ("LaSalle") as trustee. LaSalle was responsible for administering the<br />
collateral underlying the notes and making principal and interest distributions to note holders in<br />
accordance with the indenture. LaSalle later notified plaintiff of an occurrence of default<br />
pursuant to the indenture and placed available interest proceeds earned from the collateral<br />
underlying the notes in a reserve account for defendant's benefit rather than paying interest on<br />
the notes. Plaintiff alleged violations of New York's consumer protection law against defendant.<br />
The court dismissed plaintiff's claims because defendant's sale of securities was not a consumeroriented<br />
transaction and, therefore, did not fall within the scope of the law.<br />
3. Common Law Fraud<br />
F.3<br />
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012).<br />
Plaintiffs were investors in defendant, a company whose sole business consisted of<br />
buying residential mortgage-backed securities on margin. Defendant's shares were made<br />
available only to a restricted group of wealthy investors, and they were marketed with ominous<br />
warnings about the high degree of risk associated with purchasing the shares. When the real<br />
estate market and global economy deteriorated in 2008, the shares lost much of their value and<br />
plaintiffs sued defendant for common law fraud and misrepresentation, claiming that defendant’s<br />
offering memorandum was materially false and misleading because while it disclosed liquidity<br />
issues that would threaten defendant could occur, it omitted information that would have alerted<br />
investors to the fact that those events were already occurring. The court dismissed the claim,<br />
holding that plaintiffs failed to plead fraud with sufficient particularity because the offering<br />
memorandum specifically placed buyers on notice of what the company was doing and the fact<br />
219
that it had recently experienced the reversals plaintiffs claim should have been disclosed. In<br />
other words, plaintiffs failed to allege a falsehood.<br />
Berman v. Morgan Keegan & Co., Inc., 455 F. App'x. 92 (2nd Cir. 2012).<br />
Plaintiffs were victims of an allegedly wide-ranging fraudulent scheme involving taxdeferral<br />
transactions. Under the guise of a tax-deferral transaction, Derivium Capital, LLC took<br />
plaintiffs’ securities and purported to loan back to plaintiffs 90 percent of the value of those<br />
securities. Moreover, Derivium represented to plaintiffs that their securities portfolio continued<br />
to receive interest payments. In theory, this allowed plaintiffs to monetize 90 percent of their<br />
securities’ value while deferring payment of capital gains taxes. In reality, however, plaintiffs<br />
allege that Derivium sold their securities at the outset, conveyed 90 percent of the proceeds from<br />
that sale back to plaintiffs in the form of a sham loan, and funneled the remaining 10 percent of<br />
the money into a Derivium principal's personal business ventures. As a result, plaintiffs owed<br />
the Internal Revenue Service over $1 million in back taxes and penalties. Plaintiffs sought to<br />
recover their loss from defendant, one of Derivium’s broker-dealers, for allegedly aiding and<br />
abetting Derivium’s fraud, among other things. The court dismissed plaintiffs' fraud claim,<br />
holding that plaintiffs failed to plead facts sufficient to support the assertion that defendant had<br />
actual knowledge of Derivium's fraudulent scheme. Plaintiffs' allegation that defendant had<br />
knowledge as to how Derivium sold and marketed its 90 percent loan program had no bearing on<br />
defendant's knowledge of the scheme's fraudulence. Additionally, the court determined that<br />
plaintiffs' further allegation that defendant should have been on notice of Derivium's fraud based<br />
on the fact that Derivium sold its customers’ securities outside of the loan term was insufficient<br />
to support a strong inference that defendant was actually aware of Derivium’s fraud. The court<br />
went on to say that even if plaintiffs had pled fraud with sufficient particularity, it would still<br />
dismiss plaintiffs' complaint for failure to allege that defendant provided substantial assistance to<br />
Derivium’s fraudulent scheme when defendant merely executed securities transactions on<br />
Derivium's behalf and at Derivium's direction.<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. 2012).<br />
Plaintiff bought more than $50 million worth of residential-mortgage-backed securities<br />
from defendants, a brokerage and its employee, without reading the relevant offering documents<br />
before investing. When the national economy entered into recession in 2007 and 2008, the value<br />
of plaintiff's investments plummeted. Plaintiff sued defendants, alleging that defendants<br />
fraudulently induced it to buy and retain the securities by omitting to state the risk involved in<br />
the investment and that prudent underwriting standards were not followed in making a<br />
substantial number of the mortgage loans that backed the securities. The court dismissed<br />
plaintiff's claim for fraud by omission because plaintiff failed to plead fraud with sufficient<br />
particularity, and defendants' offering documents expressly warned plaintiff about the risks at<br />
issue and the alleged non-disclosures.<br />
F.3<br />
F.3<br />
220
F.3<br />
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).<br />
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The<br />
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as<br />
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter<br />
and placement agent discontinued its practice of submitting support bids in such auctions, the<br />
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff sued<br />
defendant for common law fraud, claiming that defendant made material misstatements and<br />
omissions in relation to the ARS. The court dismissed this claim, stating that because the<br />
elements of common law fraud are virtually identical to those required to make a claim under<br />
Section 10(b) of the Securities and Exchange Act of 1934, plaintiff must allege the same<br />
elements as required under Section 10(b). The court found that many of defendant's supposed<br />
misstatements and omissions were not actionable because plaintiff was adequately apprised of<br />
the underwriter and placement agent's ARS practices via website disclosure. In effect, plaintiff<br />
was on notice of all information that a diligent inquiry would have disclosed. Furthermore,<br />
plaintiff failed to allege that defendant acted with adequate scienter because plaintiff's scienter<br />
allegations amounted to nothing more than a general business motive to make a profit.<br />
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).<br />
Defendants, who served as brokers for plaintiffs, recommended that plaintiffs invest in<br />
funds which were in turn invested into Bernard Madoff's Ponzi scheme. Plaintiffs sued<br />
defendants for fraud in connection with their investments, and defendants moved to dismiss the<br />
claims. The court ultimately determined that plaintiffs failed to plead fraud with sufficient<br />
particularity. Plaintiffs identified one of the defendants' employees who allegedly made a<br />
misrepresentation to them, an estimated timeframe for the misrepresentation, and the name of the<br />
city where the alleged misrepresentation was made. The court held that the allegations were only<br />
approximate and generalized; thus, they did not meet the level of detail necessary to put<br />
defendants on notice of the claims against them. Furthermore, plaintiffs failed to plead scienter<br />
with requisite particularity because, while plaintiffs claimed that the defendants should have<br />
known Madoff's practices were suspect and involved substantial risk, plaintiffs failed to explain<br />
the basis for such knowledge.<br />
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).<br />
Plaintiff, a limited partnership that makes private equity investments for its limited<br />
partner investors, bought $12 million worth of National Century Financial Enterprises, Inc.<br />
("National Century") preferred stock through defendant, a co-placement agent for the offering.<br />
The stock fully lost its value when National Century filed for bankruptcy in 2002. Incidentally,<br />
it is now well established that National Century committed a massive fraud with regard to its<br />
F.3<br />
F.3<br />
221
stock offerings. Plaintiff brought suit against defendant, alleging that defendant failed to<br />
disclose that National Century was not operating its business in a manner consistent with what<br />
was represented to plaintiff, committing fraud. Defendant moved for summary judgment on<br />
plaintiff's fraud claim, and the court found for defendant. Fraud requires a showing of justifiable<br />
reliance. Plaintiff was a sophisticated investor that considered itself skilled in due diligence.<br />
Furthermore, plaintiff had adverse information about National Century because Goldman Sachs,<br />
which had considered serving as lead investor on the offering, gave plaintiff a lengthy document<br />
outlining some of the areas of concern that it had about the offering, and plaintiff did not find<br />
any of Goldman Sachs' concerns to be material. Finally, the letter agreement between plaintiff<br />
and defendant stated that plaintiff was a sophisticated institutional investor relying exclusively<br />
on its own due-diligence investigation, sources of material, and credit analysis in deciding to<br />
invest in National Century preferred stock. The court held that the language of the credit<br />
agreement and surrounding factors rendered any claimed reliance by plaintiff unjustifiable.<br />
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL 3916652<br />
(N.D. Ind. Sept. 7, 2012).<br />
In 2006, defendants, an investment bank and its vice president, advised plaintiff to enter<br />
into two interest-rate swaps with Lehman Brothers Special Financing, Inc. ("Lehman"). After<br />
Lehman filed for bankruptcy in September 2008, defendants advised plaintiff to terminate the<br />
swaps and provided instructions on how to do so. Among other things, defendants specifically<br />
instructed plaintiff to send default and termination notices to Lehman by fax. Plaintiffs relied on<br />
defendants' superior knowledge and followed the instructions, which turned out to be ineffective.<br />
Plaintiffs claimed that defendants committed fraud by intentionally misrepresenting the<br />
effectiveness of faxing the termination notices. The court dismissed plaintiffs' fraud claim,<br />
holding that plaintiffs failed to plead facts sufficient to support a plausible claim for fraud<br />
because plaintiffs' allegations showed, at most, that defendants negligently advised them<br />
regarding termination of the swaps, and there was no allegation of misrepresentation of a past or<br />
existing fact; rather, the alleged misrepresentation that termination was effective was an<br />
expression of opinion regarding legal effect of an instrument. Plaintiffs also argued that<br />
defendants breached their fiduciary duties by providing incorrect advice regarding the<br />
effectiveness of its termination instructions. The court dismissed the claim, holding that it was<br />
nothing more than reformulation of the statutory negligence claim plaintiffs brought in the same<br />
action. Claims that assert the same facts and same alleged breaches of the same duty of care are<br />
redundant, and a court may strike redundant matter from a pleading.<br />
F.3<br />
4. Breach of Fiduciary Duty and Other Common Law Claims<br />
F.4<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. Ky. 2012).<br />
Plaintiff bought more than $50 million worth of residential mortgage-backed securities<br />
from defendants, a brokerage, and its employee, without reading the relevant offering documents<br />
222
efore investing. When the national economy entered into recession in 2007 and 2008, the value<br />
of plaintiff's investments plummeted. Plaintiff sued defendant, alleging that defendant<br />
fraudulently induced it to buy and retain the securities. Specifically, plaintiff brought common<br />
law claims for fraud and negligent misrepresentation. Plaintiff made three fraudulent<br />
misrepresentation claims against defendant, and the court dismissed each of them. Plaintiff's<br />
claim that defendants' statement that the securities were reasonably safe investments backed by<br />
mortgage loans made according to reasonably prudent investment standards (when, in fact, no<br />
underwriting standards were used) was actionable in theory because it was a misstatement of<br />
present fact concerning the structural integrity of securities. However, the claim failed because it<br />
lacked the particularity required to withstand a motion to dismiss—plaintiff did not indicate<br />
where, when, or to whom the alleged misstatement was made. The court dismissed plaintiff's<br />
remaining fraudulent misrepresentation claims because the express language of the offering<br />
documents warned plaintiff of the risks at issue. Similarly, the court dismissed plaintiff's claims<br />
for fraud by omission because plaintiff failed to plead fraud with sufficient particularity, and<br />
defendants' offering documents expressly warned plaintiffs about the alleged non-disclosures.<br />
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012).<br />
In 2007, plaintiff hired defendant to create and implement a financial investment plan on<br />
her behalf with full discretionary authority. After a preliminary meeting with defendant, plaintiff<br />
filled out a Personal Financial Information Questionnaire in which she indicated that her<br />
investment time horizon was five to ten years and that she was a risk-averse investor, willing to<br />
forego growth in order to avoid losses and preserve principal. By the end of 2008, plaintiff had<br />
suffered approximately $2,000,000 in investment losses. She claimed that but for following<br />
defendant’s investment recommendations and engaging its services, she would have avoided the<br />
losses she suffered. Plaintiff claimed defendant breached his fiduciary duties as her investment<br />
advisor by providing her with false information in connection with his Investment Performance<br />
Worksheet and by failing to inform plaintiff that he had revised his Investment Performance<br />
Worksheet to comply with an SEC audit while defendant was employed by plaintiff. Defendant<br />
moved for summary judgment on the claim, asserting that he did not breach his fiduciary duty.<br />
The court considered plaintiff’s evidence, including expert opinion as to the inaccuracy of the<br />
figures in the Performance Worksheet and the SEC communications demonstrating defendant’s<br />
prior awareness of the false and misleading nature of the figures, and determined that plaintiff's<br />
allegations raised a question of material fact regarding breach. The court denied defendant's<br />
motion for summary judgment on the claim. Plaintiff also claimed that defendant made<br />
negligent representations to her that she relied upon to her detriment, when he (1) advised her<br />
that allocating 50 percent of her assets to equities was the Retirement Plan strategy most likely to<br />
meet her investment goals and (2) supplied her with misleading evidence of “the superior past<br />
returns achieved in its clients’ accounts” in his Investment Performance Worksheet. Defendant<br />
moved for summary judgment on plaintiff's negligent representation claim, arguing that plaintiff<br />
failed to establish that defendant made a false statement of fact, and thus could not sustain her<br />
claim. The court denied summary judgment, holding that the applicable standard for negligent<br />
representation is not a false statement of fact; rather, a plaintiff must only show that the<br />
F.4<br />
223
defendant failed to exercise reasonable care or competence in obtaining or communicating<br />
information.<br />
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012).<br />
Plaintiff, an individual investor, filed a complaint alleging that defendant's investment<br />
professionals made fraudulent misstatements to him, or omitted material information, about the<br />
value and expected performance of his investments in silver and gold and executed various<br />
unauthorized trades and transfers on his behalf. Specifically, plaintiff claimed that defendant<br />
owed him, and breached, a fiduciary duty by intentionally misleading him regarding the activity<br />
and value in his account, concealing the unauthorized trading that occurred in his account, and<br />
failing to disclose all fees associated with trading, thus giving him a false sense of security about<br />
his investments by representing that it would recoup plaintiff's losses. The court determined that<br />
plaintiff's account was non-discretionary, and that plaintiff alone was responsible for all<br />
decisions based on representations or recommendations made by defendant's brokers. Because<br />
Florida law requires some degree of undertaking on the other side to advise, counsel, and protect<br />
the weaker party in order to establish a fiduciary relationship, the court held that a fiduciary<br />
relationship never existed between plaintiff and defendant. Furthermore, even if a fiduciary<br />
relationship did exist, plaintiff's allegations failed to state a claim for breach with sufficient<br />
particularity because they lacked specifics as to what unauthorized trading occurred, what trades<br />
were unauthorized trades, which fees were charged that were inappropriate, and how the plaintiff<br />
was misled about the activity and value of his account.<br />
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).<br />
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The<br />
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as<br />
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter<br />
and placement agent discontinued its practice of submitting support bids in such auctions, the<br />
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff sued<br />
defendant for common law negligent misrepresentation. The court dismissed the claim, holding<br />
that because plaintiff was a sophisticated and long-time institutional investor with access to the<br />
underwriter and placement agent's disclosure materials, plaintiff could not allege a justifiable<br />
reliance on defendant's highly general statements regarding the ARS.<br />
BNP Paribas Mortg. Corp. v. Bank of America, N.A., 866 F. Supp. 2d 257 (S.D.N.Y. 2012).<br />
This case arose out of the collapse of Taylor, Bean & Whitaker Mortgage Corp. ("TBW")<br />
and Ocala Funding, its subsidiary (Ocala). Plaintiffs alleged that they had invested over<br />
$1.6 billion in short-term notes issued by Ocala, and that Ocala's assets were supposed to have<br />
F.4<br />
F.4<br />
F.4<br />
224
served as collateral for the repayment of the notes; however, due to a massive fraud by TBW,<br />
Ocala's assets were diverted or stolen by TBW. Plaintiffs brought a breach of fiduciary duty<br />
claim against third-party defendants ("defendants"), who were the registered brokers and dealers<br />
of the securities at issue, claiming that defendants undertook the duty to conduct a reasonable<br />
investigation of the notes and to ensure that the notes were suitable for purchase by an investor.<br />
The court dismissed plaintiffs' claim because plaintiffs explicitly disclaimed any fiduciary duty<br />
owed to them by the defendants in their respective contracts. The court indicated that even<br />
without the disclaimer, it still would have dismissed the claim, finding that there is no general<br />
fiduciary duty inherent in an ordinary broker-dealer relationship. In this case, defendants did not<br />
have discretionary trading authority over plaintiffs' accounts, and the relationship between<br />
plaintiffs and defendants lacked the requisite high degree of dominance by the defendants that<br />
was necessary to give rise to a fiduciary relationship. Defendants' only duty as brokers was to<br />
give honest and complete information when recommending a purchase or sale.<br />
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).<br />
Plaintiffs brought suit against their brokers (the defendants) for recommending that<br />
plaintiffs invest in funds that were in turn invested into Bernard Madoff's Ponzi scheme.<br />
Plaintiffs claimed that defendants breached fiduciary duties owed to plaintiffs, including the duty<br />
to monitor investments. Defendants moved to dismiss the claim, and the court denied the<br />
motion. Under Florida law, ongoing duties, such as a duty to monitor, may be triggered when a<br />
broker undertakes a substantial and comprehensive advisory role with respect to<br />
nondiscretionary accounts. The court held that plaintiffs stated a claim for breach of the<br />
fiduciary duty to monitor investments by alleging that multiple times a year they met personally<br />
with defendants' account managers, placed trust and confidence in the account managers, and the<br />
account managers knew their investment objectives and needs and made continuing<br />
recommendations and representations regarding the funds. Plaintiffs further alleged that<br />
defendants breached their duty to ensure that their investments were adequately diversified. The<br />
court dismissed this claim, holding that while brokers have a duty to make investments in a<br />
manner suited to their customers' interests, this duty did not extend to a duty on the broker's part<br />
to diversify investments. Finally, plaintiffs claimed that defendants were negligent in failing to<br />
conduct adequate due diligence of the funds. The court dismissed plaintiffs' negligence claim,<br />
holding that Florida's economic loss rule bars such claims when they are based on an allegation<br />
of failure to conduct due diligence.<br />
M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).<br />
Defendant, a broker-dealer, purchased certain notes comprised of a series of<br />
collateralized debt obligations for resale to investors. Plaintiff purchased these notes from<br />
defendant for $50 million. Plaintiff then entered into an Indenture with LaSalle Bank National<br />
Association ("LaSalle") as trustee. LaSalle was responsible for administering the collateral<br />
underlying the notes and making principal and interest distributions to note holders in<br />
F.4<br />
F.4<br />
225
accordance with the Indenture. LaSalle later notified plaintiff of an occurrence of default<br />
pursuant to the Indenture and placed available interest proceeds earned from the collateral<br />
underlying the notes in a reserve account for defendant's benefit rather than paying interest on<br />
the notes. Plaintiff claimed that defendant aided and abetted LaSalle in a breach of its fiduciary<br />
duty by demanding LaSalle apply an incorrect interpretation of the Indenture and wrongfully<br />
diverted available interest proceeds for defendant's benefit and made material misrepresentations<br />
and false statements in its Preliminary Offering Memorandum. The court dismissed plaintiff's<br />
claim against defendant for aiding and abetting in a breach of fiduciary duty because LaSalle's<br />
alleged conduct did not constitute a breach of its fiduciary duties as trustee. The court also<br />
dismissed plaintiff's negligent misrepresentation claim. A plaintiff may only recover for<br />
negligent misrepresentation where a special relationship of trust or confidence creates a duty for<br />
one party to impart correct information to the other. The court found that defendant's purported<br />
mortgage expertise was not unique enough in the financial industry to engender the requisite<br />
high degree of dominance and reliance in a complex transaction among sophisticated parties<br />
required for a special relationship to exist. The court also held that plaintiff's reliance on offering<br />
memorandum was unreasonable as a matter of law, and any alleged misrepresentation was akin<br />
to an opinion and not a material fact.<br />
F.4<br />
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL 3916652<br />
(N.D. Ind. Sept. 7, 2012).<br />
In 2006, defendants, an investment bank and its vice president, advised plaintiff to enter<br />
into two interest-rate swaps with Lehman Brothers Special Financing, Inc. ("Lehman"). After<br />
Lehman filed for bankruptcy in September 2008, defendants advised plaintiff to terminate the<br />
swaps and provided instructions on how to do so. Among other things, defendants specifically<br />
instructed plaintiff to send default and termination notices to Lehman by fax. Plaintiff relied on<br />
defendants' superior knowledge and followed the instructions, which turned out to be ineffective.<br />
Plaintiff claimed that defendants committed fraud by intentionally misrepresenting the<br />
effectiveness of faxing the termination notices. The court dismissed plaintiff's fraud claim,<br />
holding that plaintiff failed to plead facts sufficient to support a plausible claim for fraud because<br />
plaintiff's allegations showed, at most, that defendants negligently advised it regarding<br />
termination of the swaps, and there was no allegation of misrepresentation of a past or existing<br />
fact; rather, the alleged misrepresentation that termination was effective was an expression of<br />
opinion regarding legal effect of an instrument. Plaintiff also argued that defendants breached<br />
their fiduciary duties by providing incorrect advice regarding the effectiveness of its termination<br />
instructions. The court dismissed the claim, holding that it was nothing more than reformulation<br />
of the statutory negligence claim plaintiff brought in the same action. Claims that assert the<br />
same facts and same alleged breaches of the same duty of care are redundant, and a court may<br />
strike redundant matter from a pleading.<br />
226
F.4<br />
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012).<br />
Plaintiffs were customers of Fifth Third Bank and Fifth Third Securities, separate<br />
corporations operating together informally as Fifth Third Financial Advisors ("defendant"). In<br />
2006, a private banker working for defendant introduced plaintiffs to Hughes, an investment<br />
advisor employed by defendant. Plaintiffs met with Hughes and decided to invest their funds in<br />
options trading with him, making substantial returns on their investments. In 2007, Hughes left<br />
defendant and began working at a new firm. Plaintiffs voluntarily transferred their investment<br />
accounts to Hughes' new firm, where they suffered substantial losses. Plaintiffs then raised<br />
several tort claims against defendant, including negligence in the giving of investment advice,<br />
negligent supervision, and negligent misrepresentation. The court ruled that because defendant<br />
warned plaintiffs that options trading was risky in general, defendant offered to help plaintiffs<br />
with alternative investment strategies that involved less risk and less return, and plaintiffs did not<br />
suffer any losses while Hughes was employed with defendant, defendant had met its initial<br />
burden to affirmatively demonstrate that its conduct did not cause harm to plaintiffs. Because<br />
plaintiffs could not show harm, an essential negligence element, plaintiffs failed to prove their<br />
claim for negligence. Plaintiffs also set forth claims against defendant for breach of fiduciary<br />
duty. The court held that once Hughes left defendant and plaintiffs transferred their investments,<br />
defendant no longer owed them a duty because as principal, defendant could not be liable for its<br />
agent's (Hughes) actions that were not within the scope of his employment. Therefore, as a<br />
matter of law, defendant could not be held liable for breach of fiduciary duty for Hughes'<br />
conduct after he had left defendant's employment.<br />
G. Liabilities Involving Clearing <strong>Broker</strong>s<br />
G.<br />
Katz v. Pershing, LLC, 672 F.3d 64 (1st Cir. 2012).<br />
Plaintiff appealed the district court’s dismissal of a putative class action against a<br />
corporation that sold brokerage execution, clearance, and investment products to financial<br />
organizations. Defendant supplied a product that allowed financial organizations to manage<br />
brokerage accounts over the Internet. When introducing firms used the product, investment<br />
consultants at the firms could access non-public, personal information about consumer accounts.<br />
Plaintiff maintained an account at one of the firms using the product. The firm and defendant<br />
were parties to a clearing agreement that governed their responsibilities regarding the product<br />
and its data. Plaintiff believed that her personal information was inadequately protected by<br />
defendant’s service. Plaintiff alleged breach of contract, breach of implied contract, and<br />
violations of consumer protection laws. The court held that plaintiff had no contract with<br />
defendant because the clearing agreement contained a provision stating that it was not intended<br />
to confer benefits on third parties. Plaintiff argued that when defendant sent customers the<br />
disclosure statement regarding the clearing agreement to comply with NYSE Conduct<br />
Rule 4311, it superseded the disclaimer of third-party beneficiary claims. The court rejected this<br />
argument because modifications to the agreement were forbidden without being signed by the<br />
227
parties. Plaintiff argued that the disclosure statement created an implied contract, but there was<br />
no consideration to support her claim. In alleging misrepresentation, the court held that plaintiff<br />
failed to establish causation because the injury she alleged—overpaying for the firm’s services—<br />
was the result of third-party actions. In alleging violation of privacy laws, the court held that<br />
plaintiff failed to prove injury in fact because she had not shown that any of her personal<br />
information had been accessed by unauthorized users. Because plaintiff failed to show causation<br />
and injury, plaintiff lacked constitutional standing under Article III, § 2, clause 1 of the<br />
Constitution. The dismissal was affirmed.<br />
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Bayou Grp., LLC, 2012 U.S.<br />
App. LEXIS 13531 (2d Cir. July 3, 2012).<br />
Appellant, the sole clearing and prime broker for a hedge fund operated as a Ponzi<br />
scheme, appealed the denial of a petition to vacate an arbitration award. After the fund<br />
collapsed, the bankruptcy trustees appointed appellee as the official unsecured creditors<br />
committee of the fund. The committee pursued claims against appellant in a FINRA arbitration<br />
proceeding and was awarded a judgment of over $20 million. The arbitration panel held that<br />
defendant was liable as an “initial transferee” under 11 U.S.C. § 550(a). The Southern District of<br />
New York denied appellant’s petition to vacate. The Court of Appeals for the Second Circuit<br />
affirmed the district court’s decision and found that there was no manifest disregard of the law<br />
by the arbitration panel. Although defendant argued it was only a “mere conduit” of funds, the<br />
court found that the account agreements gave appellant broad discretion such as allowing<br />
appellant to use the funds to “protect itself.” Specifically, the agreement allowed appellant to<br />
require cash or collateral deposits, to require that appellee maintain certain positions and<br />
margins, to lend to itself the securities held, and to liquidate securities without notice. Thus, the<br />
court held that the panel did not manifestly disregard the law when it held that appellant was<br />
liable as a transferee.<br />
G.<br />
GMO Trust v. ICAP Plc, 2012 U.S. Dist. LEXIS 150074 (D. Mass. Oct. 18, 2012).<br />
Plaintiff, a trust, brought a claim for breach of contract against defendant, a broker-dealer<br />
that provided clearing services to an introducing firm, who was also a defendant. Defendant<br />
moved to dismiss for failure to state a claim under Rule 12(b)(6). Defendant argued that it was<br />
acting merely as a clearing broker under an agreement with the introducing firm. Without<br />
determining whether the defendant was acting only as a clearing broker, the court denied in part<br />
the motion to dismiss. The court held that under English law, which governed the contract, the<br />
defendant may still have an independent obligation to the plaintiff as a third-party beneficiary to<br />
the clearing agreement. However, the court noted that authority cited by the defendant was<br />
unclear as to whether the plaintiff may be recognized as a third-party beneficiary to the clearing<br />
contract under English law. Since liability may exist under English law, the court denied the<br />
defendant’s motion to dismiss based on its alleged role as merely a clearing broker.<br />
G.<br />
228
G.<br />
In re Nat’l Century Fin. Enters., 846 F. Supp. 2d 828 (S.D. Ohio 2012).<br />
Defendants, an investment bank and a broker-dealer, brought a motion for summary<br />
judgment after being sued for, inter alia, aiding and abetting by institutional investors who<br />
purchased $2 billion in notes issued by a finance firm. Defendants served as initial purchaser<br />
and placement agents for the firm. It was undisputed that the firm had committed a massive<br />
fraud. Defendants had agreed to structure, market, and place the firm’s note offerings with<br />
institutional investors. Defendants argued that they did not substantially assist the fraud because<br />
they performed routine banking functions for the firm. The court explained that substantial<br />
assistance exists when a defendant affirmatively assists, helps conceal, or fails to act when<br />
required to, enables the fraud to proceed and when the defendants’ actions proximately cause the<br />
harm giving rise to primary liability. Defendants cited cases in which courts held that defendants<br />
do not provide substantial assistance by merely following routine instructions in executing wire<br />
transfers of investor funds or by performing ordinary clearing services to an introducing brokerdealer.<br />
Defendants also cited a case in which it was held that there is a clearing firm exception to<br />
aiding and abetting liability. The court held that defendants’ assistance went well beyond<br />
clearing sales transactions because they served as the primary marketer and solicitor of the firm’s<br />
notes. Defendants also made short-term loans to avert defaults that would have revealed the<br />
fraud and made misrepresentations regarding reserve levels to hide the fraud. The court held that<br />
the investors submitted sufficient evidence from which a jury could conclude that defendants’<br />
assistance was critical to the success of the introducing firm’s fraudulent scheme.<br />
Lumen v. Anderson, 280 F.R.D. 451 (W.D. Mo. 2012).<br />
Plaintiffs filed a motion to certify a class action for violations of the Securities Exchange<br />
Act of 1934 on the part of a clearing broker and its directors and officers. Plaintiffs alleged that<br />
defendants made a material misrepresentation by willfully minimizing the bad debt situation of<br />
an account in November 2008. Plaintiffs’ allegations regarding the November 2008 statements<br />
understating defendants’ exposure on the account satisfied the pleading requirements under the<br />
Private Securities <strong>Litigation</strong> Reform Act (“PSLRA”), which requires plaintiffs to identify<br />
misleading statements or omissions, why they were misleading, and plead with particularity facts<br />
giving rise to a strong inference that the defendants acted with scienter. The court found that the<br />
class period commenced in November 2008 when the first false statement about the account was<br />
made, and that defendants made statements to correct the misstatement in February 2009. The<br />
only plaintiffs who could be part of the class were those who purchased stock after the false<br />
statement in November 2008 and who still held their stocks after the truth was revealed in<br />
February 2009. After finding that the other elements of Rule 23 of the Federal Rules of Civil<br />
Procedure had been met, the court focused on the predominance test, which requires that<br />
questions of law or fact predominate over individual questions. Plaintiffs satisfied this element<br />
by relying on the fraud on the market theory because publicly available information was<br />
reflected in the market price and investors’ reliance on public material misrepresentations could<br />
be presumed. The only question was whether the market rapidly assimilated public information<br />
and defendants failed to prove that it did not. The court granted the motion to certify class as to<br />
229<br />
G.
investors who bought their stock after the fraud occurred and held it after the truth had been<br />
revealed, and denied the motion as to those who sold their stock before the truth was revealed.<br />
Carter v. Holdman, 95 So. 3d 560 (La. Ct. App. 2012).<br />
Defendants, a clearing broker and a registered representative, appealed the confirmation<br />
of an arbitration award in favor of plaintiff investor. Plaintiff set up an IRA following the advice<br />
of the registered representative and invested in two hedge funds managed by the registered<br />
representative. The clearing broker served as custodian of plaintiff’s IRA. Defendants became<br />
affiliated with another securities firm, but both continued to manage plaintiff’s investments and<br />
sent plaintiff monthly statements, which indicated that plaintiff’s investments were stable. In<br />
October 2008, defendants informed plaintiff that the value of his investments had plummeted.<br />
Plaintiff filed a statement of claim with FINRA alleging breach of contract, breach of fiduciary<br />
duty, negligence, fraud, and violations of state securities laws. Under the terms of the customer<br />
service agreement, Texas law governed the contract. The three-member arbitration panel<br />
rendered a 2-to-1 decision holding defendants liable for nearly $900,000. Defendants filed a<br />
motion to vacate the award, arguing that Texas Civil Practice and Remedies Code Section 33.013<br />
bars joint and several liability unless a party is more than 50% responsible for damages. The<br />
court held that parties agreeing to arbitration accept the risk of mistakes of fact or law unless<br />
statutory grounds exist for vacating the award. Louisiana Revised Statute 9:4210 set forth the<br />
only grounds for vacating arbitration awards: (1) the award is obtained by corruption, fraud, or<br />
undue means; (2) there is evidence of arbitrator partiality or corruption; (3) the arbitrators were<br />
guilty of misconduct by refusing to postpone the hearing where there was sufficient cause or by<br />
refusing to hear material evidence or any other misconduct prejudicing one of the parties; (4) the<br />
arbitrators exceeded their powers or failed to make a final, mutual, and definite award. The fact<br />
that one dissenting arbitrator would have reduced damages due to market decline was also not a<br />
basis for vacating the award.<br />
G.<br />
H. Secondary Liability<br />
1. Respondeat Superior<br />
SEC v. Morgan Keegan & Co., 678 F.3d 1233 (11th Cir. 2012).<br />
In an action by the Securities and Exchange Commission against defendant investment<br />
bank, the SEC alleged defendant violated Section 17(a) of the Securities Act of 1933 and<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Eleventh Circuit<br />
vacated a previous decision granting summary judgment to defendant and remanded for further<br />
proceedings, holding that four instances of private misrepresentations by registered<br />
representatives was enough to satisfy the element of materiality in both actions and subjected<br />
defendant to liability through the doctrine of respondeat superior. The SEC claimed defendant<br />
misrepresented auction rate securities (ARS) to be safe investments with no liquidity risk and<br />
continued to recommend ARS even when defendant knew of such a risk. The SEC cited to four<br />
230<br />
H.1
customers of defendant who stated that defendant’s registered representatives misled them<br />
regarding the risk associated with ARS. Defendant provided information on its Web site and in<br />
its manual to warn of liquidity risks. The SEC conceded that these sources adequately warned<br />
and described the liquidity risk. However, these materials were not given directly to customers<br />
nor were customers informed directly about the location of this information. In its summary<br />
judgment motion, defendant challenged the SEC’s failure to meet the element of “materiality” in<br />
each claim for fraud. Defendant argued that four instances of misrepresentations to investors<br />
was not enough to make these statements material. The court rejected this reasoning. It clarified<br />
that the standard for materiality is based upon the total mix of information available to a<br />
hypothetical reasonable investor, not necessarily the public at large, and would include any<br />
private communications. The misrepresentations of four registered representatives could subject<br />
defendant to liability under the theory of respondeat superior for violation of the securities laws<br />
so long as these registered representatives were acting within the scope of their authority.<br />
Further, the court held that the mere existence of written disclosures on defendant’s Web site and<br />
in their manual, without evidence that the investors actually received notice or delivery of such<br />
information, would not change this finding of materiality.<br />
Sgaliordich v. Lloyd’s Asset Mgmt., 2012 U.S. Dist. LEXIS 135045 (E.D.N.Y. Sept. 20, 2012).<br />
Plaintiff, an investor, filed suit against defendants, a wealth management firm and<br />
individual registered representatives, alleging violations of various state securities laws related to<br />
misrepresentations concerning the sale of commodities. The broker-dealer moved to dismiss on<br />
the ground that they were not liable for the misrepresentations as the individual brokers were<br />
acting as independent contractors. The account agreement expressly acknowledged this<br />
relationship. In denying the motion to dismiss, the court noted that the agreement alone did not<br />
establish as a matter of law that the registered representatives were not employees. Rather, the<br />
doctrine of respondeat superior may apply based on the amount of control exercised by the<br />
broker-dealer over the registered representatives.<br />
H.1<br />
Ho v. Duoyuan Global Water, Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).<br />
Plaintiffs, individual investors, filed suit against defendant, a private investment<br />
company, based on material misstatements and omissions related to an initial public offering.<br />
The claim was based on the actions of defendant’s managing director who signed the registration<br />
documents. Defendant filed a motion to dismiss, alleging that respondeat superior did not apply<br />
since the managing director was not acting on behalf of the defendant. The court noted that the<br />
managing director had “dual roles” and was acting on behalf of another organization when he<br />
signed the registration statements. As the plaintiff failed to show how the defendant controlled<br />
the managing director’s actions, the motion to dismiss was granted.<br />
H.1<br />
231
H.1<br />
Lewy v. Skypeople Fruit Juice, Inc., 2012 U.S. Dist. LEXIS 128416 (S.D.N.Y. Sept. 7, 2012).<br />
Plaintiffs, individual investors, filed a putative class action for violation of federal<br />
securities laws. Defendants include a U.S.-based corporation doing business in China, the<br />
corporation’s officers, directors, controlling shareholder, and an underwriter of securities offered<br />
by the company. Plaintiffs alleged that defendants made false statements in required reporting<br />
documents. The corporation, certain officers and directors, and the underwriter moved to<br />
dismiss certain claims alleged by plaintiffs. In particular, plaintiffs alleged that defendant<br />
corporation violated Section 10(b) of the Securities Exchange Act of 1934 by knowingly or<br />
recklessly making false financial statements regarding its 2009 performance and business<br />
structure in its U.S. filings. The court held that plaintiffs pled falsity with particularity and raised<br />
a strong inference of scienter in regards to these filings. In finding scienter, the court held that<br />
plaintiffs adequately alleged that the corporation was vicariously liable for the alleged violations<br />
of the chief financial officer under a theory of respondeat superior. The court held that an<br />
employer is liable under respondeat superior if the employee, in committing the act complained<br />
of, was acting within the scope of his or her employment. The court held that plaintiffs alleged<br />
non-conclusory facts plausibly establishing that the CFO acted within the scope of her<br />
employment when making the allegedly false statements in the U.S. filings. Although the court<br />
held that defendant corporation may be held vicariously liable under a theory of respondeat<br />
superior, the court found that plaintiff failed to sufficiently allege a violation of Section 10(b).<br />
Defendants’ motion to dismiss was granted in part, and denied in part.<br />
Rahman v. Kid Brands, Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012).<br />
Investors who purchased a common stock of defendant company filed a class action<br />
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5. Plaintiff alleged that defendant, a children’s furniture manufacturer, avoided import<br />
duties on its subsidiaries’ products by misidentifying manufacturer and shipper countries of<br />
origin in violation of U.S. anti-dumping laws and further engaged in illegal staffing practices.<br />
Plaintiff also alleged that defendant simultaneously made statements to the public and in filings<br />
with the Securities and Exchange Commission that their internal controls were effective and<br />
accurate, thereby downplaying their liabilities for this misconduct. When this wrongdoing was<br />
later made public, defendant’s stock price decreased dramatically. Plaintiff claimed that all<br />
elements of fraud had been met. Defendant moved to dismiss arguing that in light of the<br />
pleading requirements under the Private Securities <strong>Litigation</strong> Reform Act of 1995 (PSLRA),<br />
plaintiff failed to meet her burden of proof as to the element of scienter, as she had not set forth<br />
facts that pled with particularity that individual corporate employees had the requisite scienter.<br />
Therefore, according to defendant, there was no basis to impute liability to the corporation<br />
through the doctrine of respondeat superior. The court agreed with defendant’s reasoning,<br />
reiterating that the PSLRA required heightened pleading requirements for securities fraud<br />
allegations. Although it conceded that it may be possible to plead scienter as to a corporation<br />
generally without pleading scienter as to an individual, the court determined that plaintiff failed<br />
232<br />
H.1
even to plead sufficiently particular facts as to a corporate or collective theory of scienter.<br />
Therefore, the motion to dismiss was granted since the defendant corporation could not be held<br />
liable on the theory of respondeat superior.<br />
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa. Jan. 5,<br />
2012).<br />
Plaintiffs sued defendants to recover investments they made in a limited partnership sold<br />
by defendant, a registered representative. The partnership was not offered or sold through his<br />
employer, a Registered Investment Advisor (RIA). The limited partnership was formed in 1995<br />
and had one partner, whose sole principal was the registered representative. The registered<br />
representative solicited millions of dollars of funds for the limited partnership under false<br />
pretenses. He failed to invest the funds as promised and misappropriated and converted funds<br />
for his own benefit. The registered representative was arrested in February 2009 and later pled<br />
guilty to violating the securities laws by creating a scheme to defraud investors, including<br />
plaintiffs. He further admitted to diverting money from investors for his own personal use and<br />
operating a Ponzi scheme. The registered representative was working for the defendant RIA<br />
during his operation of the scheme, where he served as the managing director, vice president,<br />
secretary, and treasurer. Plaintiffs claimed that the RIA violated Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5, both primarily and under the doctrine of respondeat<br />
superior for the actions of the registered representative. The RIA moved for summary judgment.<br />
The court granted the motion, finding that it could not be held liable for the actions of an<br />
employee acting in the scope of his employment for a wholly separate entity. The court reasoned<br />
that plaintiffs brought suit against the registered representative for his fraudulent conduct<br />
involving an entity completely unrelated to the defendant RIA. The court further noted that “the<br />
doctrine of respondeat superior, though applicable in [some cases] has not been and should not<br />
be widely expanded in the area of federal securities regulation.”<br />
Stout St. Funding LLC v. Johnson, 873 F. Supp. 2d 632 (E.D. Pa. 2012).<br />
Plaintiff, a provider of commercial loans to real estate investors, filed suit against<br />
defendant insurance underwriter and others, alleging negligent supervision. The claim related to<br />
misappropriation of funds by defendant’s agent, who performed title insurance and closing<br />
services. Defendant moved for summary judgment, arguing that plaintiff’s vicarious<br />
liability/respondeat superior claim must fail because plaintiff never alleged that the agent was<br />
actually an employee of defendant. The court dismissed this argument, holding that additional<br />
discovery was required to determine if implied authority existed. However, the court dismissed<br />
the claim for negligent supervision because the misappropriation of funds occurred after the<br />
contract with defendant was terminated. The court noted that the end of the relationship<br />
terminates liability, and thus no claim for negligent supervision could exist.<br />
H.1<br />
H.1<br />
233
H.1<br />
Thorpe v. Ameritas Inv. Corp., 2012 U.S. Dist. LEXIS 134049 (E.D.N.C. Sept. 19, 2012).<br />
Plaintiff, a 61-year-old trustee of a revocable trust, sued defendant life insurance<br />
corporation and its financial advisor for recommending the sale of annuities. Plaintiff alleged<br />
violations of a variety of state and federal securities laws, as well as breach of implied covenant<br />
of good faith and fair dealing, breach of fiduciary duty, and fraud. Plaintiff also accused the<br />
defendant financial advisor of being negligent in selling the annuities. Plaintiff sought recovery<br />
from defendant life insurance corporation on the basis of respondeat superior. Defendant<br />
brought a motion to dismiss, alleging that the economic loss rule bars a plaintiff’s negligence and<br />
respondeat superior claims where a contract allocates the risk between the parties. However, no<br />
contract was identified. The court denied the motion relating to the negligence and respondeat<br />
superior claims, holding that the defendant failed to identify a contract that allocated the risk<br />
between the parties.<br />
Grant v. Houser, 2012 U.S. Dist. LEXIS 18539 (E.D. La. Feb. 15, 2012).<br />
In this portion of the litigation, the court denied defendants registered representative,<br />
broker-dealer, and insurance company’s motion to dismiss claims of plaintiff, an investor.<br />
Plaintiff alleged both state and federal causes of action against defendants based upon a<br />
$250,000 investment he made in an LLC. The investment was made upon the recommendation<br />
of defendant registered representative. The investment was described to plaintiff as potentially<br />
earning him two to three percent each month, with his money returned within three to six<br />
months, but with no explanation as to the interest he would hold in the LLC, if any, or any<br />
documentation evidencing the investment. The court found that the plaintiff had sufficiently<br />
pled the time, place, and contents of the false representations. The allegations also raised a<br />
strong inference of scienter, in that, if true, they established “severe recklessness” in defendant<br />
registered representative’s behavior. Reliance and loss causation—two remaining elements of a<br />
Rule 10b-5 claim—were also satisfied. All of the elements for a breach of contract claim had<br />
been pled, and for pleading purposes, the court found the existence of a special relationship of<br />
trust and confidence constituting a fiduciary relationship between defendant registered<br />
representative and plaintiff. The court held that while this appeared to be a “selling away”<br />
investment, the facts pled established respondeat superior liability as to the defendant brokerdealer.<br />
The court noted that for respondeat superior to exist there must be an employeremployee<br />
relationship, a negligent tort or tortious act on the part of an employee, and the act<br />
complained of must be committed in the course and scope of employment. Plaintiff’s complaint<br />
met these requirements in that it alleged the registered representative managed plaintiff’s<br />
investment account, the account was held with defendant broker-dealer, and that defendant<br />
broker-dealer approved of the registered representative’s selling of investments and receipt of<br />
commissions. The court noted that these allegations constitute a sufficient claim for respondeat<br />
superior.<br />
H.1<br />
234
H.1<br />
In re BP P.L.C., Sec. Litig., 843 F. Supp. 2d 712 (S.D. Tex. 2012).<br />
Investors filed a class action alleging violations of Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 against the corporate defendants and four individual<br />
defendants and violations of Section 20(a) of the Exchange Act against all individual defendants,<br />
which included nine present and former officers and directors. Defendants moved to dismiss.<br />
Plaintiffs claimed they purchased their shares in reliance on the corporate defendants’<br />
representation that it had implemented appropriate safety mechanisms to prevent catastrophic<br />
incidents in the company’s deep water drilling operations. On April 20, 2010, defendant’s oil rig<br />
exploded, causing the company share prices to drop by over half of their previous value in the<br />
two months following the incident. Plaintiffs claim that the corporate defendants made<br />
representations about their commitment to safety throughout the class period despite later<br />
evidence revealing those representations to be grossly inaccurate. To meet the element of<br />
scienter regarding the Rule 10b-5 violation, plaintiffs pointed to several disclosures made to the<br />
public regarding the corporate defendants’ progress in safety operations. Plaintiffs claimed there<br />
were such blatant errors in these disclosures that the corporate defendants should be deemed to<br />
have had reckless indifference to the truth. The court recognized the problem with pleading<br />
collective intent for scienter in a corporate setting could be the result of a series of acts is that<br />
none of those acts may have been completed with the requisite scienter, and thus were not<br />
imputable to the corporation through the doctrine of respondeat superior. The court noted that<br />
although they had not pled specific scienter on the part of individual corporate officials,<br />
plaintiffs had presented very specific instances of the corporate defendants’ disclosures, which<br />
were so blatantly inaccurate as to be deemed reckless. This recklessness satisfied the element of<br />
scienter for liability under Rule 10b-5. The court denied the motion to dismiss.<br />
Levin v. Barry Kaye & Assoc., 858 F. Supp. 2d 914 (S.D. Ohio 2012).<br />
Plaintiff brought suit against defendant insurance agents to void a sale of an insurance<br />
policy he alleged was sold in violation of Ohio’s Blue Sky Laws and Ohio common law.<br />
Plaintiff also brought an action against defendant insurance company, the issuer of the policy,<br />
under theories of vicarious liability claiming that defendant insurance company was vicariously<br />
liable for defendant insurance agents’ actions. Plaintiff bought the life insurance policy for the<br />
purpose of reselling it later for a profit. He purchased the policy through defendant insurance<br />
agents, but was not able to later resell it, contrary to what he claimed defendant insurance agents<br />
had represented. Defendant insurance company was the issuer of the policy that plaintiff<br />
purchased, but claimed it was not liable for the actions of defendant insurance agents. Plaintiff<br />
argued that an insurance company could be held liable for the actions of its agents under the<br />
doctrine of respondeat superior. Defendant insurance company conceded that one of the<br />
defendant insurance agents was an authorized insurance agent of theirs, but claimed that he was<br />
acting as an insurance broker in the relevant transaction, not their insurance agent, when he sold<br />
the policy to plaintiff. Thus, it claimed it could not be held liable for any defendant insurance<br />
agents’ actions in selling the policy. The court agreed with defendant insurance company. It<br />
cited Damon’s Missouri, Inc. v. Davis, 590 N.E.2d 254 (Ohio 1992), which distinguished an<br />
insurance agent from an insurance broker and held that an insurance broker is customarily not<br />
235<br />
H.1
held out as an agent of one particular insurance company. In denying plaintiff’s motion for<br />
partial summary judgment, the court held that there was a genuine issue of material fact as to the<br />
liability of defendant insurance company for actions involving the defendant insurance agents.<br />
Curry v. Hansen Med., Inc., 2012 U.S. Dist. LEXIS 112449 (N.D. Cal. Aug. 10, 2012).<br />
Defendants, medical company and former employees, moved to dismiss a putative class<br />
action brought by plaintiff shareholders. Plaintiffs alleged that defendants induced them to<br />
acquire stock at artificially inflated prices by making knowing and intentional misstatements<br />
regarding defendant company’s revenue recognition and sales performance in violation of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court noted that to plead a<br />
valid Rule 10b-5 violation, a complaint must allege that the defendant engaged in deceptive<br />
conduct with scienter. To meet this requirement against defendant medical company, plaintiffs<br />
alleged scienter under the doctrine of respondeat superior. The plaintiffs claimed that a former<br />
senior vice president of commercial operations of defendant medical company manipulated<br />
financial results to increase revenue. The court noted that so long as scienter is appropriately<br />
alleged for the officers and directors of a company, then it is appropriately alleged for the<br />
company itself. The court found that the plaintiffs adequately alleged the officers’ scienter in<br />
regard to the scheme to recognize revenue prematurely and that the officer undertook this<br />
scheme in the scope of his employment, to benefit his employer, and that his scienter was<br />
imputed to defendant medical company through vicarious liability. The court recognized that<br />
although defendant medical company may not be primarily liable for securities fraud, it is<br />
secondarily liable under the theory of respondeat superior. Thus, the court found that the<br />
Rule 10b-5 claim against the defendant corporation was sufficiently alleged.<br />
H.1<br />
Cho v. UCBH Holdings, Inc., 2012 U.S. Dist. LEXIS 123234 (N.D. Cal. Aug. 29, 2012).<br />
Plaintiffs filed putative securities class actions against defendants commercial bank and<br />
its officers, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and<br />
violations of Section 20(a) of the Exchange Act. Defendants filed motions to dismiss for failure<br />
to timely serve and failure to prosecute. The court first reviewed the sufficiency of the<br />
Section 10(b) violation allegations. The court had previously dismissed the amended complaint,<br />
finding that plaintiffs had failed to allege with particularity facts that demonstrate a strong<br />
inference of scienter as to any defendant. At issue was whether plaintiffs’ amended complaint<br />
was sufficient to cure these defects. The court noted that to adequately plead scienter, the<br />
complaint must state with particularity facts giving rise to a strong inference that the defendant<br />
acted with the required state of mind. In finding this scienter requirement was met, the court<br />
relied on admissions and a guilty plea by defendant bank’s vice president and manager of credit<br />
policy. Imputing these admissions to defendant bank based on respondeat superior, the court<br />
found that the scienter requirement was met. In support, the court referenced the employee’s<br />
fraudulent overvaluing of collateral and attempts to falsify the bank’s books and records in an<br />
effort to conceal the extent to which the collateral securing impaired loans had been overvalued.<br />
H.1<br />
236
As such, the court held there was a sufficient showing for scienter under a respondeat superior<br />
theory and denied the motion to dismiss the Section 10(b) violations.<br />
Fid. First Home Mortg. Co. v. Williams, 2012 Md. App. LEXIS 135 (Md. Ct. Spec. App.<br />
Nov. 27, 2012).<br />
Defendant, a mortgage broker, appealed a verdict awarding damages to plaintiff, an<br />
individual, based on claims for fraud, breach of fiduciary duty, and violations of the Protection of<br />
Homeowners in Foreclosure Act. Liability of the broker was based on actions by its employees<br />
under a theory of respondeat superior and failure to supervise. The trial court found that the<br />
employees had engaged in a scheme where they would convince distressed homeowners that<br />
they could avoid losing their homes to foreclosure by selling the homes to the employees, but<br />
remaining in the properties as tenants. Plaintiff sold her home to an employee of defendant<br />
broker after receiving a solicitation for mortgage services. The employee failed to make<br />
mortgage payments and the property was eventually foreclosed. Defendant appealed, alleging<br />
that it was not liable under a theory of respondeat superior because the actions by the employees<br />
were outside the scope of their employment. Defendant contended that while the original<br />
solicitation may have been within the scope of employment, the fraudulent conduct by the<br />
employee did not relate to defendant’s business of offering loan refinances. In support,<br />
defendant noted that the employees’ meeting with the plaintiff and paperwork was completed<br />
outside the defendant’s offices. The court emphasized that the original solicitation stemmed<br />
from a letter by defendant, employees acted as loan officers on the fraudulent loan, defendant<br />
broker received fees based on the fraudulent loan, and that the executives of defendant broker<br />
had knowledge of the employees’ fraudulent conduct. The judgment of the trial court imposing<br />
liability under a theory of respondeat superior was affirmed.<br />
H.1<br />
Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Cuyahoga County Aug. 9,<br />
2012).<br />
Plaintiff, an executor of a decedent’s estate, sued defendant life insurance company, its<br />
agent, and its agent’s employer, alleging that its agent sold the decedent an unsuitable financial<br />
product. Defendant’s agent sold decedent, then 82, a single-purchase payment immediate<br />
annuity. When the decedent passed away less than a year later, the balance of the annuity was<br />
delivered to defendant. Claims against the defendant were stayed while claims against the agent<br />
were referred to arbitration. A FINRA arbitration panel dismissed all of the estate’s claims<br />
against the agent and agent’s employer with prejudice. The award was confirmed. Based on the<br />
arbitration award, defendant moved for summary judgment. Plaintiff opposed the motion,<br />
asserting that defendant failed to properly train and supervise its agent. On appeal, the court<br />
found that the defendant did not raise any causes of action specifically against the defendant.<br />
Furthermore, because no liability was found against the agent during the arbitration proceedings,<br />
there could be no liability imposed upon defendant for its agent’s actions. Thus, summary<br />
judgment in favor of the defendant was appropriate.<br />
237<br />
H.1
2. Control Person<br />
H.2<br />
Okla. Firefighters Pension & Ret. Sys. v. Smith & Wesson Holding Corp. (In re Smith & Wesson<br />
Holding Corp. Sec. Litig.), 669 F.3d 68 (1st Cir. 2012).<br />
Plaintiff investors filed a class action suit against defendant corporation and two of its<br />
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5. Plaintiffs alleged that defendants issued false and misleading public statements<br />
about the demand for its products. The district court, finding a lack of misrepresentation and of<br />
scienter, granted summary judgment to defendants and plaintiffs appealed. The First Circuit<br />
affirmed the district court’s ruling. Because plaintiffs failed to provide sufficient proof to state a<br />
primary securities violation under Section 10(b) of the Exchange Act or Rule 10b-5, the Court of<br />
Appeals held that plaintiffs also failed to state a claim for Section 20(a) control person liability.<br />
Finn v. Barney, 471 F. App’x 30 (2d Cir. 2012).<br />
Plaintiff investors filed suit against defendant financial corporation alleging violations of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The district<br />
court dismissed the claims for failure to state a claim and plaintiffs appealed. The Second<br />
Circuit affirmed the dismissal finding that plaintiffs failed to adequately plead manipulative<br />
conduct or reasonable reliance. Because the complaint failed to state a primary securities<br />
violation, the Court of Appeals held that it also failed to state a claim for Section 20(a) control<br />
person liability.<br />
Frederick v. Mechel OAO, 475 F. App’x 353 (2d Cir. 2012).<br />
Plaintiff trustees filed a class action suit against defendant corporation and its officers,<br />
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The<br />
district court dismissed the complaint for failure to state a claim and plaintiffs appealed. The<br />
Second Circuit affirmed the dismissal finding that plaintiffs failed to adequately plead scienter.<br />
Finding that the complaint failed to state a primary securities violation, the Court of Appeals held<br />
that it also failed to state a claim for Section 20(a) control person liability.<br />
Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d Cir. 2012).<br />
Plaintiff investor brought suit against a broker-dealer, its parent company, and two<br />
securities rating agencies. The broker-dealer had underwritten auction rate securities that<br />
plaintiff had bought. It also participated as a buyer and seller of the securities, and it did this to<br />
prevent auction failures. In 2006, the Securities and Exchange Commission reached a settlement<br />
agreement with a group of banks, including defendant broker-dealer, that had participated in the<br />
auction rate securities market. The SEC alleged that the banks, including defendant, had violated<br />
238<br />
H.2<br />
H.2<br />
H.2
the securities laws by intervening in auctions without making adequate disclosures to investors.<br />
Subsequently, as required by the SEC, the broker-dealer disclosed to the public and to investors<br />
its participation in and intervention in the auction rate securities market. Plaintiff alleged that<br />
these disclosures were false and misleading. When the broker-dealer ceased its participation in<br />
intervention in the auction rate securities market, the market for plaintiff’s securities disappeared.<br />
Plaintiff brought claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934, and also alleged that defendant parent company was liable as a control person under<br />
Section 20(a) of the Exchange Act. In addition, plaintiff alleged violations of California<br />
Corporations Code Sections 25500 and 25501 and alleged control person liability under<br />
California Corporations Code Section 25504. Plaintiff based its claims on a market manipulation<br />
theory. Defendants moved to dismiss the complaint. The district court granted dismissal of the<br />
complaint, holding that the defendant broker-dealer’s disclosures regarding its participation and<br />
intervention in the auction rate securities market were sufficient to put plaintiff on notice.<br />
Plaintiff appealed, and the appellate court affirmed the district court’s judgment. The appellate<br />
court first noted that in a recent case it had considered a substantially similar claim by a different<br />
plaintiff involving a market manipulation theory, and had rejected that claim. In that earlier case,<br />
the appellate court had held that the defendant broker-dealer’s disclosures had been sufficient to<br />
preclude a market manipulation claim. The primary question in this case, then, was whether<br />
plaintiff had raised new issues and alleged new facts that would require a different result than the<br />
one that came out of the prior case. The appellate court concluded that plaintiff had not alleged<br />
sufficient new facts that would dictate a result contrary to the one that came out of the earlier<br />
case, and affirmed dismissal of the Section 10(b) and Rule 10b-5 claims. For similar reasons, as<br />
well as for choice-of-law reasons, the appellate court dismissed plaintiff’s California securities<br />
law claim. Given that there was no primary violation of securities laws, the court also affirmed<br />
dismissal of plaintiff’s control liability claim.<br />
Mill Bridge V, Inc. v. Benton, 2012 U.S. App. LEXIS 19248 (3d Cir. Sept. 13, 2012).<br />
Plaintiff, a seller of a corporation’s shares, brought suit against several defendants who<br />
had bought his shares. Plaintiff alleged that defendant buyers failed to disclose material nonpublic<br />
information about the corporation before they purchased plaintiff’s shares. Specifically,<br />
plaintiff alleged that defendant buyers failed to disclose that the corporation was considering and<br />
negotiating a merger. Plaintiff seller alleged violations of Section 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934. The district court granted defendants’ motion for summary<br />
judgment on the Section 10(b) claim, concluding that plaintiff had not shown that the alleged<br />
failure to disclose the potential merger was “material.” The district court also found that plaintiff<br />
had failed to show that defendants actually knew the alleged non-public information when they<br />
purchased plaintiff’s shares. Given the dismissal of the Section 10(b) claims, the district court<br />
also dismissed the Section 20(a) claims. The appellate court affirmed the district court’s<br />
judgment. The appellate court held that based on the record before the court, the negotiations<br />
between the corporation and another entity regarding a potential merger had not yet become<br />
material at the time of the sale. The court also determined that plaintiff had failed to create a<br />
genuine issue of fact as to whether the defendants knew about the merger negotiations at the time<br />
of the sale. Therefore, the appellate court affirmed the district court’s judgment and dismissal of<br />
H.2<br />
239
the Section 10(b) claim. Given the affirmation of the district court’s dismissal of the<br />
Section 10(b) claim, the appellate court also affirmed the dismissal of the control person liability<br />
claims.<br />
In re Anadigics, Inc., 484 F. App’x 742 (3d Cir. 2012).<br />
In a class action, plaintiff shareholders brought suit against a corporation, its former<br />
CEO, and its former CFO. Plaintiffs alleged that during the class period, defendants issued<br />
material misrepresentations regarding defendant corporation’s manufacturing capacity, its ability<br />
to meet demand for its products, its customers’ purchasing practices and habits, and other<br />
matters. Plaintiffs argued that these alleged misrepresentations constituted violations of<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and imputed Section 20(a)<br />
liability on the former CEO and CFO. Defendants moved to dismiss the complaint. The district<br />
court granted dismissal of all of plaintiffs’ Section 10(b) and Rule 10b-5 claims, holding that the<br />
alleged misstatements were either non-actionable forward-looking statements that were protected<br />
by the Private Securities <strong>Litigation</strong> Reform Act safe harbor provisions or inadequately supported<br />
by particularized factual allegations demonstrating falsity or scienter. The district court also<br />
dismissed plaintiffs’ Section 20(a) control person liability claims given its holding that plaintiffs<br />
had failed to allege a primary violation of securities laws. Plaintiffs appealed the district court’s<br />
judgment. The appellate court, for substantially the same reasons articulated by the district<br />
court, affirmed the district court’s judgment dismissing plaintiffs’ claims.<br />
Waterford Inv. Serv., Inc. v. Lewis Bosco, 682 F.3d 348 (4th Cir. 2012).<br />
The defendant appealed a district court ruling that it must arbitrate claims brought by<br />
investors before FINRA. The plaintiffs alleged that they received bad advice from their financial<br />
advisor and named him as well as his current and prior investment firm as parties to the<br />
arbitration. The district court found that because the financial advisor was an associated person<br />
of the defendant investment firm during the events in question, the defendant must arbitrate the<br />
claims. The Court of Appeals affirmed. FINRA defines a person associated with a member as a<br />
natural person engaged in the investment banking or securities business who is directly or<br />
indirectly controlling or controlled by a member. To determine whether the financial advisor<br />
was an associated person, the court looked to Section 20(a) of the Securities Exchange Act of<br />
1934 and its definition of control person liability. In that context, courts give heavy<br />
consideration to the power or potential power to influence and control the activities of a person,<br />
as opposed to the actual exercise of control. Adopting this analysis, the court found that the<br />
defendant investment firm had the power to control the investment advisor, and thus that he was<br />
an associated person.<br />
H.2<br />
H.2<br />
240
H.2<br />
Fulton County Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047 (7th Cir. 2012).<br />
Plaintiff investor appealed the dismissal of its complaint against defendant private<br />
mortgage insurer and its managers, alleging violations of Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 for an alleged fraudulent statement made by a party that has<br />
46% of its equity units owned by defendants. A third-party corporation also owned 46% of the<br />
party’s equity units, meaning that defendants and the third-party corporation were equally<br />
matched bloc holders. The Seventh Circuit affirmed the lower court’s dismissal of plaintiff’s<br />
Section 20(a) claim, holding that defendants’ non-majority ownership did not make defendants<br />
liable because defendants could not exercise unilateral control.<br />
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012).<br />
In a class action, plaintiff investors brought suit against a pharmaceutical corporation and<br />
a number of individual defendants. Plaintiffs alleged that defendants made materially false and<br />
misleading statements and omissions regarding a drug that was being developed by defendant<br />
corporation. More specifically, plaintiffs alleged that defendants had made misrepresentations or<br />
omissions regarding the drug’s efficacy, safety, and potential partnerships for developing the<br />
drug. Plaintiffs brought claims pursuant to Sections 10(b), 20(a), and Rule 10b-5 of the<br />
Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933.<br />
Defendants moved to dismiss the complaint. The district court granted dismissal of the<br />
complaint, and plaintiffs appealed. The appellate court affirmed the district court’s judgment.<br />
The court first turned to the Section 10(b), Rule 10b-5, and Section 11 primary violation claims.<br />
The court held that plaintiffs had failed to allege that any of the purportedly false or misleading<br />
statements were actually false or misleading. The court further held that the inference of<br />
defendants’ scienter was weak, and that it certainly did not outweigh the inference that<br />
defendants had a non-fraudulent intent in making the statements. For these reasons, the appellate<br />
court affirmed the district court’s dismissal of plaintiffs’ primary violation claims under<br />
Section 10(b), Rule 10b-5, and Section 11. The court then turned to plaintiffs’ control liability<br />
claims under Section 20(a) and Section 15, and the court held that these claims could not stand<br />
without an adequately-pled primary violation claim. With this in mind, the appellate court<br />
affirmed the district court’s dismissal of the control liability claims.<br />
In re Veriphone Holdings, Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,238 (9th Cir.<br />
Dec. 21, 2012).<br />
In a class action, plaintiff investors brought suit against a corporation, its CEO, and its<br />
CFO, alleging violations of Sections 10(b), 20A, 20(a) and Rule 10b-5 of the Securities<br />
Exchange Act of 1934. Plaintiffs alleged that defendants had repeatedly adjusted their financial<br />
results so that they would align with corporate expectations. The district court dismissed<br />
plaintiffs’ complaint, and plaintiffs appealed. The appellate court first addressed the district<br />
court’s dismissal of the Sections 10(a), 20A and Rule 10b-5 claims. The district court had<br />
241<br />
H.2<br />
H.2
dismissed these claims, holding that plaintiffs had failed to sufficiently allege scienter. On<br />
review, the appellate court held that the allegations, viewed holistically, gave rise to strong<br />
inference that defendants were deliberately reckless to the truthfulness or falsity of the<br />
statements regarding the corporation’s financial results. For this reason, the appellate court<br />
reversed the district court’s dismissal of the Sections 10(b), 20A and Rule 10b-5 claims. The<br />
appellate court then reviewed the district court’s dismissal of the Section 20(a) control liability<br />
claims. The district court held that plaintiffs had failed to sufficiently allege scienter with<br />
respect to a supply chain controller at the corporation. The supply chain controller was the<br />
purported controlled person, whose predicate violations of securities laws served as the basis for<br />
the Section 20(a) control liability claims. The appellate court noted that plaintiffs, on appeal, did<br />
not challenge the district court’s holding that plaintiffs had failed to allege scienter as to the<br />
purported controlled person. Given that plaintiffs failed to challenge this determination, the<br />
appellate court was faced with a Section 20(a) control person liability claim, but no predicate<br />
violation of the securities laws. The court, therefore, affirmed the district court’s dismissal of the<br />
Section 20(a) claims.<br />
In re Level 3 Commc’ns Sec. Litig., 667 F.3d 1331 (10th Cir. 2012).<br />
Plaintiff investors filed a class action suit against defendant officers alleging violations of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. The district<br />
court dismissed the complaint for failure to state a claim and one plaintiff appealed. The Tenth<br />
Circuit affirmed the dismissal finding that plaintiff failed to adequately plead scienter. Finding<br />
that the complaint failed to state a primary securities violation, the Court of Appeals also<br />
affirmed the dismissal of the Section 20(a) control person liability claim.<br />
SEC v. Huff, 455 F. App’x 882 (11th Cir. 2012).<br />
In a Securities and Exchange Commission civil enforcement action, defendant corporate<br />
officer appealed the district court’s finding that he was responsible for numerous<br />
misrepresentations and omissions in his company’s SEC filings and liable as a control person for<br />
violation of Section 20(a) of the Securities Exchange Act of 1934. The Eleventh Circuit<br />
affirmed the district court’s finding. The court reasoned that defendant exerted sufficient control<br />
and was the moving force behind the filing’s misrepresentations and omissions because he<br />
reviewed and approved the inaccurate SEC filings. Therefore, defendant was liable as a control<br />
person for violation of Section 20(a) of the Exchange Act.<br />
Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713 (11th Cir. 2012).<br />
Plaintiffs, a putative class action, alleged violations of Section 10(b) and Rule 10b-5<br />
along with Section 20(a) of the Securities Exchange Act of 1934, alleging that the holding<br />
company misrepresented the level of risk associated with commercial real estate loans held by a<br />
subsidiary. Certain of the defendants were alleged to be liable for misstatements as control<br />
242<br />
H.2<br />
H.2<br />
H.2
persons under Section 20(a) of the Exchange Act. The district court discarded two of the jury’s<br />
interrogatory answers and granted a motion for judgment as a matter of law. The Court of<br />
Appeals affirmed the decision on grounds that the evidence was insufficient to support losses<br />
caused by the alleged fraud rather than the collapse of the real estate market, as required to make<br />
a securities fraud claim under Rule 10b-5 of the Exchange Act. Since the primary violations<br />
were dismissed, the control person violations were also dismissed.<br />
Kinnett v. Strayer Educ., Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,227 (11th Cir. Dec. 13, 2012).<br />
In a class action, plaintiff investors brought suit against a corporation in the education<br />
sector and a number of its employees. Plaintiffs alleged that defendants made false or<br />
misleading statements concerning their recruitment and enrollment policies and practices.<br />
Plaintiffs further alleged that in a conference call with investors, defendants subsequently<br />
revealed the falsity of their statements. Plaintiffs alleged that defendants had revealed that<br />
diminishing student enrollment was the result of government intervention that forced defendants<br />
to bring their recruiting practices into compliance with the law. Plaintiffs alleged that these<br />
revelations resulted in a 20% decline in the corporate stock price. Based on these allegations,<br />
plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.<br />
The district court granted defendants’ motion to dismiss the complaint, and plaintiffs appealed.<br />
On review, the appellate court first addressed the district court’s dismissal of the plaintiffs’<br />
Section 10(b) claims. The appellate court affirmed dismissal of these claims, holding that<br />
plaintiffs failed to sufficiently allege loss causation. The court held that in the conference call<br />
with investors on which all of plaintiffs’ claims were based, defendants had not made any<br />
statements or representations that would justify the inference that defendants had previously<br />
engaged in improper recruiting practices and therefore invited government intervention. The<br />
appellate court held that nothing in the alleged statements corrected any prior disclosures or<br />
revealed any material omissions with regard to the defendants’ recruiting practices.<br />
Accordingly, the appellate court held that plaintiffs had failed to sufficiently allege loss<br />
causation. Given plaintiffs’ failure to allege loss causation, the appellate court affirmed the<br />
dismissal of plaintiffs’ Section 10(b) claims. With no sufficiently pled predicate violation of<br />
securities laws, the appellate court also affirmed the district court’s dismissal of the Section 20(a)<br />
control liability claims.<br />
In re Novell, Inc. S’holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).<br />
Former shareholders brought a class action against a software company’s former<br />
directors and a corporation for conduct arising out of the software company’s merger with the<br />
corporation. After finding that plaintiffs failed to establish an aiding and abetting claim against<br />
the purchasing corporation, the court went on to consider plaintiffs’ Section 14(a), Rule 14a-9(a),<br />
and Section 20(a) claims under the Securities Exchange Act of 1934. Plaintiffs alleged liability<br />
under Section 14(a) and Rule 14a-9(a) for material misstatements and omissions in a proxy<br />
statement and control person liability under Section 20(a). Section 20(a) holds liable any person<br />
who controls a party responsible for a securities violation. The purchasing corporation could not<br />
243<br />
H.2<br />
H.2
e liable for a primary violation of Section 14(a) or Rule 14a-9(a) without plaintiffs adequately<br />
pleading control of the software company’s proxy materials by the purchasing corporation.<br />
Plaintiffs alleged that the purchasing corporation had supervisory control over the composition of<br />
the proxy statement, but the court held that simply having the power to control was insufficient.<br />
Plaintiffs failed to plead that the purchasing corporation actually exercised control over the<br />
software company’s proxy materials or actively participated in the software company’s decisionmaking<br />
process. The court granted the motion to dismiss the Exchange Act claims against the<br />
purchasing corporation.<br />
In re Genzyme Corp. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,802 (D. Mass. Mar. 30,<br />
2012).<br />
Investors sued a biotechnology corporation and its executives, alleging violations of<br />
Section 10(b), Rule 10b-5, and control person liability under Section 20(a) of the Securities<br />
Exchange Act of 1934. Defendants allegedly failed to disclose facts about viral outbreaks that<br />
set back production of a new product and manufacturing compliance deficiencies that set back<br />
FDA approval while assuring investors that the product was on track to receive FDA approval.<br />
To state a claim for securities fraud under Section 10(b) and Rule 10b-5, one of the essential<br />
elements is scienter. To satisfy the scienter element, a plaintiff must show that the defendant<br />
engaged in intentional conduct to deceive or defraud investors by controlling or artificially<br />
affecting the price of securities. Scienter can be demonstrated by establishing either that<br />
defendants consciously intended to defraud, or acted with a high degree of recklessness. The<br />
more compelling inference was that the corporation was attempting to develop a product that was<br />
progressing toward FDA approval, and did not expect that setbacks would have a significant<br />
impact on the ultimate approval so as to require more disclosure than there had been. The<br />
complaint therefore failed to adequately allege scienter. Plaintiffs’ control person liability<br />
claims under Section 20(a), which provides for derivative liability for persons who control others<br />
who are primarily liable under the Exchange Act, failed because the plaintiffs failed to properly<br />
allege a primary violation of the securities laws. The court dismissed the Section 20(a) claims<br />
for failure to state a claim.<br />
Urman v. Novelos Therapeutics Inc., 867 F. Supp. 2d 190 (D. Mass. 2012).<br />
Defendants, a biopharmaceutical company and its CEO, president, and director were sued<br />
by plaintiffs, investors in the company. Plaintiffs alleged that the defendants made misleading<br />
statements concerning testing of new drugs and survival rates of patients taking those drugs.<br />
Plaintiffs alleged securities fraud causes of action under Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934, as well as Section 20(a) of the Exchange Act for control<br />
person liability. Defendants moved to dismiss. Because the plaintiffs failed to plead underlying<br />
Section 10(b) and Rule 10b-5 violations, the court granted the defendants’ motion to dismiss,<br />
including the Section 20(a) claims since there was no primary violation found under<br />
Section 10(b) and Rule 10b-5.<br />
H.2<br />
H.2<br />
244
Aronson v. Advanced Cell Tech., Inc., 2012 U.S. Dist. LEXIS 140750 (D. Mass. July 16, 2012).<br />
This action arises out of warrants to purchase securities issued to the plaintiffs by the<br />
defendant. Plaintiffs claimed violations of the agreement because the defendants concealed the<br />
occurrence of transactions that should have triggered adjustments to the plaintiffs’ shares, and, as<br />
a result, the plaintiffs purchased stock at inflated prices and thus obtained fewer shares than they<br />
should have under the agreement. The plaintiffs brought claims under Section 10(b) of the<br />
Securities Exchange Act of 1934, Rule 10b-5, and claims against the administrator of the estate<br />
of the defendants’ former CEO under Section 20(a) of the Exchange Act for control person<br />
liability. The court granted the defendants’ motion to dismiss for failure to state a claim. The<br />
court found that the plaintiffs did not state claims under Section 10(b) and Rule 10b-5 because<br />
one of the warrants was issued after the pricing period, thus there was no requirement that notice<br />
be issued. The other warrant may have been issued during the pricing period. The remaining<br />
securities claims were time-barred. In addition, the plaintiffs failed to plead scienter because<br />
there was insufficient evidence of intent to defraud or recklessness. Since the primary violations<br />
failed, the control person claims likewise failed and were dismissed. Thus, the defendants’<br />
motion to dismiss was granted.<br />
H.2<br />
Lenartz v. Am. Superconductor Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,951 (D. Mass. July 26,<br />
2012).<br />
Plaintiffs, purchasers of defendants’ common stock, brought a securities class action<br />
alleging violations of Sections 10(b) and 20(a) as well as Rule 10b-5 of the Securities Exchange<br />
Act of 1934 against the issuer and certain officers and directors. The plaintiffs also alleged<br />
violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 against the issuer,<br />
individual defendants, and the underwriter of the offering at issue. The plaintiffs alleged<br />
misstatements regarding revenue forecasts and business relationships and alleged insider trading.<br />
Their claims failed because the plaintiffs did not show that the officers and directors knew or<br />
were reckless in not knowing that the issuer was improperly recognizing revenue and thus<br />
artificially inflating the stock price. The opportunity to benefit from such wrongdoing alone was<br />
not found to show scienter. Also, the plaintiffs could not show that the insider sales were<br />
unusual or suspicious in timing or amount because the plaintiffs did not show information about<br />
defendants’ sales before and after the class period. The control person claims under Section 15<br />
of the Securities Act and Section 20(a) of the Exchange Act failed because the plaintiffs did not<br />
properly plead any primary violation.<br />
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass. 2012).<br />
Plaintiffs sued financial institutions and their directors and officers, alleging that<br />
defendants violated Sections 410(a) and (b) of the Massachusetts Uniform Securities Act<br />
(“MUSA”) by misstating or omitting material facts in the offering documents of their mortgage-<br />
245<br />
H.2<br />
H.2
acked securities. The documents represented that the loans were underwritten using prudent<br />
standards and that valuations of the properties were conducted in accordance with appraisal<br />
guidelines and that the resulting loan-to-value (“LTV”) ratios were reliable. Plaintiffs<br />
sufficiently alleged widespread abandonment of underwriting guidelines, that defendants<br />
misrepresented the standard used to generate appraisals, and that the appraisals and LTV ratios<br />
had no basis in fact. MUSA Section 410(a) imposes liability on any person who offers or sells a<br />
security by means of any untrue statement of a material fact or omission of a fact that would<br />
have made the statement not misleading. MUSA Section 410(b) also imposes liability on any<br />
person who controls a seller liable under subsection (a). It was undisputed that the nonunderwriter<br />
defendants did not transfer title of the securities to plaintiffs. Since MUSA<br />
Section 410(a) is only applicable to defendants that have offered or sold securities, the court<br />
dismissed the MUSA Section 410(a) claims against the non-underwriters. To state a control<br />
person claim under Section 410(b), plaintiffs must plead a primary violation under<br />
Section 410(a). Section 410(b) claims against defendants who were alleged to be control persons<br />
of non-underwriters were dismissed because plaintiffs failed to plead primary violations by nonunderwriters.<br />
For all other defendants, plaintiffs’ allegations that they controlled primary<br />
violators were sufficient to survive a motion to dismiss.<br />
Capital Ventures Int’l v. UBS Sec. LLC, 2012 U.S. Dist. LEXIS 140663 (D. Mass. Sept. 28,<br />
2012).<br />
Plaintiff investors purchased over $100 million in residential mortgage-based securities.<br />
Plaintiffs thereafter brought suit against the underwriter of the securities, the sponsor of the<br />
underlying mortgages, and the depositor who securitized the mortgages and sold the mortgage<br />
loans to mortgage-backed securities trusts. Plaintiff alleged violations of Section 410 of the<br />
Massachusetts Uniform Securities Act (“MUSA”). Section 410(a) is modeled after<br />
Section 12(a)(2) of the Securities Act of 1933, and imposes civil liability on offerors and sellers<br />
of securities who make misleading statements or omissions about said securities. Section 410(b)<br />
of MUSA imposes civil liability on any person who controls a liable offeror or seller. Plaintiffs<br />
brought Section 410(a) claims against all three defendants. Plaintiffs also brought<br />
Section 410(b) claims against defendant sponsor and defendant depositor, alleging that defendant<br />
sponsor controlled defendant depositor and both defendant sponsor and defendant depositor<br />
controlled the trusts and that both defendants should therefore be liable as control persons. All<br />
three defendants moved to dismiss the Section 410(a) claims, and defendant depositor and<br />
defendant sponsor moved to dismiss the Section 410(b) claims against them. The court refused<br />
to dismiss the Section 410(a) claim against defendant underwriter, holding that plaintiffs had<br />
sufficiently pled a number of actionable misstatements or omissions and materiality. The court<br />
granted the dismissal of the Section 410(a) claims against defendant sponsor and defendant<br />
depositor, holding that while the allegations served to show that defendant depositor and<br />
defendant sponsor played a role in the securitization of the securities, the allegations did not<br />
show that defendant depositor played a role in the offering or selling of the securities as required<br />
by Section 410(a) of MUSA. The court also dismissed plaintiffs’ Section 410(b) claims of<br />
control liability as against both defendant sponsor and defendant depositor. The court noted that<br />
H.2<br />
246
plaintiffs’ Section 410(b) claims against defendant depositor and defendant sponsor relied on the<br />
allegation that defendant sponsor controlled defendant depositor and both controlled the trusts<br />
into which the securitized mortgages had been placed, but pointed out that plaintiffs had failed to<br />
allege any primary violation of Section 410(a) by either the trusts or defendant depositor. With<br />
no primary violators, the court held that neither defendant depositor nor defendant sponsor could<br />
be held liable as control persons under Section 410(b) of MUSA.<br />
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2012 U.S.<br />
Dist. LEXIS 141626 (D. Mass. Oct. 1, 2012).<br />
The court considered plaintiffs’ motion to proceed with litigation begun more than four<br />
years ago against defendants, who were issuers and underwriters of mortgage-backed securities<br />
purchased by plaintiffs. The court also considered defendants’ renewed motion to dismiss.<br />
Plaintiffs had brought their claims under Sections 11, 12(a)(2), and 15 of the Securities Act of<br />
1933, as well as other violations based on alleged misstatements and omissions with respect to<br />
the underwriting of the loan. The court stated that to survive a motion to dismiss, plaintiffs must<br />
plausibly demonstrate that defendants misrepresented or omitted material information about<br />
defendants’ underwriting guidelines. The court granted plaintiffs’ motion to proceed with the<br />
litigation and denied defendants’ motion to dismiss and to exclude certain expert testimony. The<br />
court found that defendants’ efforts to impugn plaintiffs’ evidence was factual in nature and<br />
better suited to a summary judgment motion, and that plaintiffs had standing to bring their claim.<br />
Datto Inc. v. Broadband, 856 F. Supp. 2d 359 (D. Conn. 2012).<br />
Plaintiff corporation filed suit against defendant, a former corporate officer. Defendant<br />
filed a counterclaim. Defendant alleged plaintiff violated Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934, by knowingly making false, manipulative, and deceptive<br />
representations concerning defendant’s right to acquire an ownership interest in the corporation.<br />
The court dismissed defendant’s Section 10(b) counterclaim for failure to adequately plead a<br />
claim. Because there was no primary violation of the Exchange Act, the Section 20(a) control<br />
person liability counterclaim was also dismissed.<br />
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,766 (D.<br />
Conn. Mar. 19, 2012).<br />
Plaintiff investors filed suit against defendant fund, its managers, and investment advisors<br />
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.<br />
Plaintiffs alleged that defendants misrepresented and failed to correct misleading information<br />
regarding a fund that plaintiffs invested in. Defendants filed motions to dismiss the<br />
Section 20(a) control person liability claim, stating that plaintiffs (1) failed to state an underlying<br />
securities violation under Section 10(b); and (2) failed to make a prima facie showing of control<br />
person liability by not sufficiently alleging control and culpable participation. The court denied<br />
247<br />
H.2<br />
H.2<br />
H.2
the defendants’ motions to dismiss. It held that plaintiffs sufficiently pled a Section 10(b) claim<br />
and adequately pled control and culpable participation by alleging: (1) defendants exerted<br />
control over the primary violators by having influential roles in their respective corporations,<br />
holding closed door meetings regarding the investment fund at issue, and conducting<br />
communications with the fund’s members; and (2) defendants were culpable participants and had<br />
actual knowledge of fraudulent activity since defendants knew and understood that the primary<br />
violators were departing from their own investment standards with respect to a majority of the<br />
fund’s investments. Because plaintiffs sufficiently pled that defendants controlled the primary<br />
violators and culpably participated in the primary violations, the Section 20(a) claims survived<br />
defendants’ motions to dismiss.<br />
Brodzinsky v. FrontPoint Partner LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,818 (D. Conn.<br />
Apr. 25, 2012).<br />
Plaintiff shareholders filed a putative class action suit against defendant investment<br />
advisors, corporation, and hedge funds under Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934. Plaintiffs alleged that defendants “tipped” material, non-public<br />
information, which caused the hedge fund defendants to sell 46% of the stock at issue. This<br />
resulted in plaintiff shareholders suffering financial losses. Defendants filed motions to dismiss<br />
plaintiffs’ Section 20(a) control person liability claims, which the court granted because<br />
plaintiffs failed to adequately plead a primary violation of the Exchange Act.<br />
Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan Acceptance<br />
Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,744 (E.D.N.Y. Feb. 23, 2012).<br />
Plaintiff, a defined benefit pension plan, individually and on behalf of a class of investors<br />
who purchased over $36 billion in mortgage-backed securities, brought a class action against<br />
defendant, a broker-dealer, and three of its directors. Plaintiffs alleged violations of Sections 11<br />
and 15 of the Securities Act of 1933 based on alleged misstatements and omissions of material<br />
facts in offering documents. Defendants filed a motion to dismiss all claims. The individual<br />
defendants argued that the plaintiff failed to allege sufficient control person liability to sustain a<br />
Section 15 claim and failed to allege that any individual defendant was a culpable participant in<br />
the alleged violations. Plaintiff argued that culpable participation was not required for control<br />
person liability.<br />
In order to show control person liability at the pleading stage, the court stated that<br />
plaintiff must plead (1) a primary violation; and (2) control over the primary violator. Since<br />
individual defendants were all officers and directors of the primary violator and they signed the<br />
two registration statements at issue, the court held that plaintiff sufficiently alleged control over<br />
the primary violator. The court stated that it is an open question as to whether the same culpable<br />
participation defense available to causes of action arising under Section 20(a) is also applicable<br />
to causes of action arising under Section 15. The court noted that the Second Circuit has held<br />
that a plaintiff establishes a prima facie case of control person liability under Section 20(a) by<br />
showing a primary violation by the controlled person and control of the primary violator by the<br />
248<br />
H.2<br />
H.2
targeted defendant. Once the plaintiff makes out a prima facie case of Section 20(a) liability, the<br />
burden shifts to the defendant to show that he acted in good faith and that he did not directly or<br />
indirectly induce the act or acts constituting the violation. The court held that even if Section 15<br />
was subject to the same requirements as Section 20(a), the complaint was sufficient to allege a<br />
violation of Section 15.<br />
Orlan v. Spongetech Delivery Sys., Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,781 (E.D.N.Y.<br />
Mar. 29, 2012).<br />
Plaintiffs, investors who purchased shares of Spongetech Delivery Systems, Inc., filed a<br />
consolidated class action against the company and its officers and directors, alleging violations<br />
of federal securities laws and regulations, including Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934 and Section 15 of the Securities Act of 1933. The defendants filed a<br />
motion to dismiss. In order to establish a prima facie case of control person liability under<br />
Section 20(a), a plaintiff must show: (1) a primary violation by the controlled person; (2) control<br />
of the primary violator by the defendant; and (3) that the defendant was, in some meaningful<br />
sense, a culpable participant in the controlled person’s fraud. The court noted that the Third<br />
Circuit construes the control person provisions of the Exchange Act broadly.<br />
Defendant, a director, held approximately 13.86% of all available voting shares<br />
outstanding. He did not dispute that there was a violation of Section 10(b). In analyzing<br />
whether he exercised sufficient control to justify control person liability, the court noted that<br />
director status alone is not sufficient. However, it also noted that he was far more involved with<br />
the company and its day-to-day management and operations than a mere outside director. He<br />
managed daily operations, introduced the company to business, sales, contractual, and<br />
fundraising opportunities, evaluated potential acquisition candidates, and served as a consultant<br />
for the company. The court held that it could not, as a matter of law, conclude that plaintiffs<br />
failed to establish that defendant controlled the company. Nevertheless, the court granted the<br />
director’s motion to dismiss, finding that plaintiffs failed to establish that defendant was a<br />
culpable participant in the purported fraud. The court emphasized that plaintiffs appeared to rely<br />
on a “group pleading theory,” and that they had not sufficiently pleaded this aspect of their<br />
claim.<br />
With regard to plaintiffs’ Section 15 claim, the court stated that to establish control<br />
person liability under Section 15 at the pleading stage a plaintiff must plead: (1) a primary<br />
violation; and (2) control over the primary violator. The court found that the plaintiff had<br />
sufficiently pled both of these elements. The court denied the defendants’ motion to dismiss the<br />
Section 15 claim, noting that it is unsettled whether plaintiffs are required to plead culpable<br />
participation as an additional requirement under Section 15.<br />
Hutchins v. NBTY, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,791 (E.D.N.Y. Mar. 30, 2012).<br />
Plaintiff, individually and on behalf of all purchasers of NBTY’s common stock between<br />
November 9, 2009 and April 27, 2010, filed suit against defendants NBTY, Inc. and two of its<br />
249<br />
H.2<br />
H.2
officers and directors. Plaintiffs alleged violations of Section 10(b), Rule 10b-5, and<br />
Section 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that defendants made<br />
false or misleading statements about NBTY’s business and they did not disclose information<br />
about lost business and future prospects.<br />
Defendants filed a motion to dismiss. The court stated that in order to properly plead a<br />
claim for control person liability, the plaintiff must allege: (1) a primary violation by a<br />
controlled person; (2) actual control by the defendant; and (3) the controlling person’s culpable<br />
participation in the primary violation. The court concluded that plaintiff sufficiently pled<br />
violations of Section 10(b), defendants did not dispute that they were control persons, and<br />
defendants culpably participated in the primary violation. Therefore, defendants’ motion to<br />
dismiss was denied.<br />
In re Gen. Elec. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).<br />
Plaintiff filed a putative class action suit alleging violations of Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 11, 12(a)(2), and 15 of the<br />
Securities Act of 1933 against defendant corporation, its subsidiary, and the corporations’<br />
officers and directors. Plaintiff alleged that the corporation failed to disclose information<br />
regarding its financial status and the financial status of its subsidiary during the relevant class<br />
period. Plaintiff also alleged that the corporation’s and subsidiaries’ officers made materially<br />
misleading statements regarding the corporation’s financial status during the class period.<br />
Plaintiff alleged control person claims under Section 20(a) of the Exchange Act against<br />
two individual directors of the corporation. With regard to those claims, the court stated that<br />
plaintiffs had adequately alleged Section 10(b) claims and noted that to survive a motion dismiss,<br />
plaintiffs were merely required to plead facts supporting a reasonable inference that defendants<br />
had the potential power to influence or direct the activities of the primary violator. The<br />
individual defendants did not contest that they were controlling persons. The court denied<br />
defendants’ motion to dismiss the Section 20(a) claims, concluding plaintiff sufficiently pled a<br />
Section 20(a) violation.<br />
The defendants only contested liability under Section 15 on the grounds that plaintiff had<br />
not properly pled violations of Sections 11 or 12. Because the court held that plaintiffs had<br />
adequately pleaded those claims, their Section 15 control person claim also survived.<br />
In re Vivendi Universal, S.A. Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).<br />
Domestic and foreign individual shareholders filed complaints asserting claims against a<br />
foreign global media corporation and its officers for control person liability under Section 20(a)<br />
of the Securities Exchange Act of 1934, among other things. Defendants moved for partial<br />
judgment on the pleadings and to dismiss claims of individual plaintiffs who purchased shares on<br />
the Paris Bourse. Defendants argued that the Section 20(a) claim must be dismissed under the<br />
Supreme Court’s decision in Morrison v. National Australia Bank Limited, 130 S. Ct. 2869<br />
250<br />
H.2<br />
H.2
(2010), for the proposition that the Exchange Act does not have extraterritorial reach. In<br />
dismissing the plaintiffs’ control person liability claim, the court applied the decision in<br />
Morrison and held that it could not address claims based on the purchase of ordinary shares that<br />
were not listed for trading purposes on any U.S. exchange. The court further held that the<br />
decision in Morrison should be extended to the plaintiffs’ Securities Act of 1933 claims as well.<br />
Pub. Emples. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 280 F.R.D. 130 (S.D.N.Y. 2012).<br />
Plaintiff moved to certify a class of all persons and entities that purchased or acquired<br />
certificates of defendants’ offering, which derived from a pool of securitized fixed-rate, secondlien<br />
home mortgages. Plaintiff alleged that the offering documents for the certificates contained<br />
untrue statements and omitted material facts in violation of Sections 11, 12(a)(2), and 15 of the<br />
Securities Act of 1933. With respect to these claims, the court held that plaintiff had carried its<br />
burden in showing the necessary requirements, and granted plaintiff’s motion for class<br />
certification.<br />
In re Merrill Lynch Auction Rate Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH), 96,741 (S.D.N.Y.<br />
Feb. 15, 2012).<br />
Plaintiff filed a complaint alleging various state and federal causes of action against<br />
defendant corporations, a broker-dealer, its parent company, and an institutional investment<br />
dealer. Plaintiff asserted claims for market manipulation and material misstatements or<br />
omissions under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiff<br />
asserted a control person liability claim under Section 20(a) of the Exchange Act against the<br />
broker-dealer, which moved to dismiss all claims.<br />
The court found that the Section 10(b) claim against the broker-dealer failed because<br />
plaintiff did not allege any actionable misstatement or omission or that the broker-dealer acted<br />
with the requisite scienter. Therefore, the court also dismissed plaintiff’s Section 20(a) claim<br />
against the parent company because plaintiff failed to adequately allege a primary violation<br />
under the Exchange Act.<br />
Arfa v. Mecox Lane Ltd., 2012 Fed. Sec. L. Rep. (CCH) 96,753 (S.D.N.Y. Mar. 1, 2012).<br />
Plaintiff filed an amended consolidated class action complaint alleging violations of<br />
Section 11 and Section 15 of the Securities Act of 1933 against defendant corporation, its board<br />
of directors, its CFO, and underwriters involved in its initial public offering (IPO). Plaintiff<br />
alleged that defendants included or allowed the inclusion of materially false and misleading<br />
statements in the registration statement and prospectus issued in connection with the IPO.<br />
Among plaintiff’s claims were control person violations against the corporate officers and<br />
directors under Section 15. The court held that the complaint failed to adequately plead a<br />
H.2<br />
H.2<br />
H.2<br />
251
Section 11 violation and accordingly dismissed plaintiff’s derivative control person Section 15<br />
claim.<br />
Space Coast Credit Union v. Barclays Capital, Inc., 2012 U.S. Dist. LEXIS 38488 (S.D.N.Y.<br />
Mar. 19, 2012).<br />
Plaintiff credit union filed suit against defendant corporations Barclays and State Street<br />
for violations of securities laws, including Section 20(a) of the Securities Exchange Act of 1934.<br />
Plaintiff’s claims arose out of defendants’ representations that State Street, a purported<br />
“independent, third-party collateral manager,” would select the collateral for the collateralized<br />
debt obligation at issue, and that this qualified as an untrue statement of material fact made in<br />
connection with the purchase or sale of a security if in fact Barclays possessed control over the<br />
selection of the collateral. Defendants moved to dismiss. The court dismissed plaintiff’s control<br />
person claim against State Street, finding that because plaintiff did not sufficiently allege State<br />
Street was, in some meaningful sense, a culpable participant in the alleged fraud, plaintiff did not<br />
state a claim against State Street for controlling person liability under Section 20(a). The court<br />
reasoned that plaintiff’s “conclusory allegation” that State Street was aware or directly<br />
participated in a continuous course of conduct to conceal adverse material information provided<br />
no particularized facts, and thus did not state a Section 20(a) claim.<br />
Dodona I LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012).<br />
Lead plaintiff filed a class action complaint alleging that defendant corporations and<br />
executives of the corporations committed securities and common law fraud. Plaintiff alleged that<br />
defendants made omissions of material fact when they did not disclose to investors that their<br />
products were structured and issued as part of defendants’ strategy to reduce its exposure to<br />
subprime-mortgage risk and to profit by betting against their own product. Plaintiff also alleged<br />
that defendants did not genuinely believe that their product would have a realistic chance of<br />
being profitable for investors. Defendant moved to dismiss the complaint. In order to establish a<br />
prima facie case under Section 20(a) of the Securities Exchange Act of 1934, a plaintiff must<br />
show: (1) a primary violation by the controlled person; (2) control of the primary violator by the<br />
targeted defendant; and (3) that the controlling person was in some meaningful sense a culpable<br />
participant in the fraud perpetrated.<br />
The court held that plaintiff pled a primary violation under Section 10(b). With respect to<br />
the Section 20(a) control person violation, the court found plaintiff sufficiently alleged that the<br />
individual defendants were in charge of structuring, marketing, and selling the products, the<br />
defendants each controlled at least one primary violator and that they were, in some meaningful<br />
sense, culpable participants in the alleged fraudulent omissions. Therefore, the court denied<br />
defendants’ motions to dismiss the Section 20(a) claims.<br />
H.2<br />
H.2<br />
252
N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2012 U.S. Dist. LEXIS 56010 (S.D.N.Y.<br />
Mar. 29, 2012).<br />
Plaintiff, a health fund, filed a class action complaint alleging that defendant, a mortgage<br />
corporation, disregarded its underwriting guidelines in originating residential mortgage loans and<br />
then, through its subsidiary, arranged for the sale of securities to investors that were<br />
collateralized by the mortgage loans. Defendant corporations, registered broker-dealers, were<br />
the underwriters for the certificates.<br />
Plaintiff alleged that the offering documents for the certificates contained material<br />
misstatements and/or omissions in violation of Sections 11, 12, and 15 of the Securities Act of<br />
1933 and that defendant underwriters for the certificates failed to perform sufficient due<br />
diligence in connection with the offering. Plaintiff alleged violations of Section 15 against the<br />
parent corporation and two officers of the parent corporation as controlling persons of the parent<br />
corporation. Plaintiff claimed that the individual defendants were responsible for preparing and<br />
filing the offering documents and, as senior officers of the parent corporation, they were<br />
responsible for selecting the mortgages to be included in the security, structuring the offering,<br />
and pricing the sale of the certificates on the offering. The issuer is a wholly-owned subsidiary<br />
of the parent corporation and plaintiff alleged that the parent corporation had direct<br />
responsibilities in selecting the mortgages in the pool, structuring the offering, and pricing the<br />
certificates. Because the court found that plaintiffs failed to adequately allege a primary<br />
violation of Sections 11 and 12 of the Securities Act, the court also dismissed plaintiff’s claim<br />
under Section 15.<br />
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.<br />
2012).<br />
Plaintiffs, a class of all persons or entities who purchased or acquired interests in<br />
mortgage-backed security pass-through certificates that were prepared and offered by<br />
defendants, filed a consolidated class action complaint against defendants, and their officers and<br />
directors for violations of Sections 11, 12, and 15 of the Securities Act of 1933. Defendants<br />
moved to dismiss. With regard to plaintiffs’ Section 15 control person claim, defendants argued<br />
that plaintiffs failed to allege a primary violation or plead facts demonstrating that any individual<br />
defendant was a control person.<br />
In order to establish a prima facie Section 15 claim, the court required plaintiffs to show:<br />
(1) control; and (2) an underlying violation of Section 11 or Section 12(a)(2). The court held that<br />
plaintiffs adequately pled primary violations and went on to consider if plaintiffs had adequately<br />
pled control. Control was defined as “the power to direct or cause the direction of the<br />
management and policies of the primary violators, whether through the ownership of voting<br />
securities, by contract, or otherwise.” While noting that the Second Circuit has not yet ruled on<br />
whether culpable participation is required, the court stated that a majority of district courts in the<br />
Second Circuit, including itself, do not require it. Because the individual defendants were<br />
H.2<br />
H.2<br />
253
officers or directors of the depositors who signed the registration statements, the court held that<br />
plaintiffs had adequately pled control. The defendants’ motion to dismiss was denied.<br />
Janbay v. Canadian Solar, Inc., 2012 U.S. Dist. LEXIS 47125 (S.D.N.Y. Mar. 30, 2012).<br />
Plaintiff filed a consolidated class action complaint alleging violations of Section 10(b) of<br />
the Securities Exchange Act of 1934 and Rule 10b-5 against defendant corporation, and<br />
individual defendants, as control persons. Plaintiff alleged that during the class period,<br />
defendants made false and/or misleading statements and failed to disclose material adverse<br />
information about the corporation’s business, operations, and prospects. Plaintiff alleged control<br />
person claims under Section 20(a) of the Exchange Act against the individual defendants. The<br />
defendants filed a motion to dismiss.<br />
The court stated that to adequately plead a claim under Section 20(a) of the Exchange<br />
Act, the plaintiff must allege: (1) a primary violation of the Act by a controlled person; (2) direct<br />
or indirect control by the defendant of the primary violator; and (3) “culpable participation.” The<br />
court noted that plaintiffs had not adequately alleged a primary violation under Section 10(b),<br />
and none of the purported control persons were culpable participants in any alleged fraud.<br />
Therefore, the court dismissed plaintiff’s Section 20(a) claims.<br />
In re JP Morgan Auction Rate Sec. Mktg. Litig., 867 F. Supp. 2d 407 (S.D.N.Y. 2012).<br />
Plaintiff, representing a class of investors who purchased auction rate securities for which<br />
the broker-dealer served as an auction dealer between July 10, 2004 and February 13, 2008,<br />
asserted claims for market manipulation, misrepresentations, and omissions in violation of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs also alleged that<br />
defendant corporation violated Section 20(a) of the Exchange Act. Defendant moved to dismiss<br />
all of the plaintiffs’ claims. Plaintiff moved for a stay of the proceedings, including the motion<br />
to dismiss. With regard to the control person claim under Section 20(a), the court denied<br />
plaintiff’s motion to stay and granted defendant’s motion to dismiss because the court held that<br />
plaintiff did not adequately plead any underlying violation of securities law.<br />
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).<br />
Plaintiffs’ putative class action, alleging both federal securities claims and state law<br />
claims, was part of a larger multi-district litigation. The litigation arose out of plaintiffs’<br />
investments in various of defendants’ funds and defendants’ merger agreement. Plaintiffs<br />
alleged various violations of securities laws, including violations under Sections 10(b) and 20(a),<br />
of the Securities Exchange Act of 1934 and Rule 10b-5. The court held that to establish a prima<br />
facie case of control person liability, a plaintiff must show: (1) a primary violation by the<br />
controlled person; (2) control of the primary violator by the defendant; and (3) that the defendant<br />
was, in some meaningful sense, a culpable participant in the controlled person’s fraud. It noted<br />
254<br />
H.2<br />
H.2<br />
H.2
that, at the pleading stage, the extent to which the control must be alleged is governed by Federal<br />
Rules of Civil Procedure Rule 8’s pleading standard. Plaintiffs alleged control person liability<br />
claims under Section 20(a) against seven individual defendants. In defendants’ motions to<br />
dismiss the control person claims, they merely contended that the Section 20(a) claim must be<br />
dismissed based on plaintiffs’ failure to sufficiently allege a primary violation. Finding that the<br />
plaintiffs had adequately alleged a Section 10(b) claim, the court denied defendants’ motions to<br />
dismiss the Section 20(a) claims.<br />
McKenna v. Smart Techs., 2012 Fed. Sec. L. Rep. (CCH) 96,795 (S.D.N.Y. Apr. 3, 2012).<br />
Plaintiff filed a class action against defendant corporation, its officers and directors, and<br />
two other defendants that held significant numbers of shares of the company prior to its initial<br />
public offering. Plaintiffs alleged that the offering documents contained material misstatements<br />
and/or omissions of fact. In addition to various federal securities violations, plaintiffs claimed<br />
that the corporation and large shareholders violated Section 15 of the Securities Act of 1933.<br />
The court stated that for plaintiff’s Section 15 claims to survive a motion to dismiss,<br />
plaintiff was required to allege a primary violation and “actual control” of the primary violator<br />
by the defendant. The court held that plaintiff did not adequately plead a primary violation with<br />
regard to corporate defendant, and thus, dismissed the Section 15 claim against it. The court<br />
found, however, that plaintiff did adequately plead primary violations with regard to the large<br />
shareholders, and therefore went on to analyze whether there was “actual control” as to those<br />
defendants.<br />
The court agreed with defendants that 23.5% or 47% of stock ownership and ability to<br />
appoint directors was not sufficient to allege “control” under Section 15. Plaintiff argued that the<br />
court should consider the defendants’ stock ownership and board presence collectively, and the<br />
court held that the collective 70% stock ownership and board presence was sufficient to show<br />
actual control. Defendants also argued that plaintiff’s complaint should be dismissed for failure<br />
to allege “culpable participation.” Noting that the issue of whether culpable participation is<br />
required for Section 15 claims under the Securities Act is an open question in the Second Circuit,<br />
the court declined to require it. (The court also stated that the majority of courts in the Second<br />
Circuit do not require it.) Accordingly, the court denied the shareholder defendants’ motion to<br />
dismiss the Section 15 claims.<br />
In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277 (S.D.N.Y. 2012).<br />
Plaintiffs filed a putative class action alleging federal securities violations as part of a<br />
larger multi-district litigation against two defendant corporations and defendant corporations’<br />
officers and directors. The court held that to establish a prima facie case of control person<br />
liability, a plaintiff must show: (1) a primary violation by the controlled person; (2) control of<br />
the primary violator by the defendant; and (3) that the defendant was, in some meaningful sense,<br />
a culpable participant in the controlled person’s fraud. Finding that plaintiffs had not adequately<br />
alleged a Section 10(b) violation against one of the defendant corporations, the court dismissed<br />
255<br />
H.2<br />
H.2
the claims against the two individual defendants who were officers or directors of that defendant<br />
corporation. Additionally, because one of the individual defendants did not assume the role of<br />
CEO of one of the defendant corporations until after the alleged misstatements or omissions took<br />
place the court dismissed the Section 20(a) claims against that individual defendant as well. The<br />
court held that plaintiffs had adequately alleged a Section 10(b) violation against the other<br />
defendant corporation, and thus, the first prong of Section 20(a) was satisfied as to the corporate<br />
defendant. Defendant argued in its motion to dismiss with regard to the corporate defendant that<br />
their claim should be dismissed because plaintiffs failed to sufficiently allege a primary<br />
violation. Because the court found that plaintiffs had adequately alleged a primary violation, it<br />
denied the corporate defendant’s motion to dismiss.<br />
Fed. Hous. Fin. Agency v. UBS Ams, Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).<br />
Plaintiff, the Federal Housing Finance Agency (FHFA), filed an amended complaint<br />
against defendant corporation and affiliated entities and individuals asserting claims under<br />
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, the Virginia Securities Act, the<br />
District of Columbia Securities Act, and negligent misrepresentation. Defendants filed a motion<br />
to dismiss the amended complaint.<br />
Plaintiff alleged control person liability claims under Section 15 against individual<br />
defendants as well as a defendant parent corporation. With respect to the individual defendants,<br />
the court stated that the act of signing a registration statement, as the individual defendants in<br />
this case were alleged to have done, is a manifestation of the signor’s responsibility for the<br />
information contained in the document, and therefore sufficient to establish control person status.<br />
With respect to the corporate defendant, the court held that the complaint’s allegation of the<br />
defendant’s involvement in coordinating the securitization process and determining the structure<br />
of offerings was sufficient to allege that the defendant controlled the issuing and selling of<br />
certificates for the purpose of establishing control person liability. Therefore, the court denied<br />
the defendants’ motions to dismiss the Section 15 claims.<br />
In re ITT Educ. Servs. Inc. S’holder & Derivatives Litig., 859 F. Supp. 2d 572 (S.D.N.Y. 2012).<br />
Plaintiff filed an amended consolidated class action complaint against defendant<br />
corporation and two officers of defendant corporation. Plaintiff alleged violations of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Defendants<br />
filed a motion to dismiss. The court dismissed plaintiff’s control person claim against the<br />
individual defendants under Section 20(a) because plaintiffs had failed to adequately allege a<br />
primary violation of the Exchange Act.<br />
In re CRM Holdings, Ltd., 2012 U.S. Dist. LEXIS 66034 (S.D.N.Y. May 10, 2012).<br />
Plaintiffs, investors who purchased common stock of defendant between the date of their<br />
initial public offering and November 5, 2008, filed a class action against defendant corporation<br />
256<br />
H.2<br />
H.2<br />
H.2
and its officers and directors. The complaint alleged that all defendants violated Section 10(b) of<br />
the Securities Exchange Act of 1934 and Rule 10b-5 and that certain individual defendants<br />
violated insider trading laws. The plaintiffs also alleged that all individual defendants violated<br />
Section 20(a) of the Exchange Act. Plaintiffs alleged that, by virtue of their high-level positions,<br />
ownership and contractual rights, participation and awareness of the company’s operations, and<br />
knowledge of the false financial statements filed by the company, the individual defendants had<br />
the power to influence and control the decision-making of the company, including the false and<br />
misleading statements that the company disseminated. The court dismissed plaintiffs’<br />
Section 20(a) claim because plaintiffs failed to state an underlying Section 10(b) violation.<br />
Solow v. Citigroup, Inc., 2012 U.S. Dist. LEXIS 70022 (S.D.N.Y. May 18, 2012).<br />
Plaintiff filed a complaint against defendant corporation and its chief executive officer.<br />
Plaintiff asserted three causes of action against both defendants under Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5, against the CEO under Section 20(a) of the<br />
Exchange Act for control person liability, and against both defendants for common law fraud.<br />
The court stated that in order to establish a prima facie case of control person liability, a<br />
plaintiff must show: (1) a primary violation by the controlled person; (2) control of the primary<br />
violator by the defendant; and (3) that the controlling person was in some meaningful sense a<br />
culpable participant in the alleged fraud perpetrated by the controlled person. Finding that<br />
plaintiff had failed to plead a primary violation of securities law, the court dismissed plaintiff’s<br />
control person liability claim.<br />
Redwen v. Sino Clean Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,933 (S.D.N.Y. June 4,<br />
2012).<br />
Plaintiffs, purchasers of common stock of the defendant, alleged defendants made false<br />
and misleading statements by overstating the revenues and operations. The plaintiffs alleged<br />
causes of action under Sections 11 and 15 of the Securities Act of 1933. The court dismissed the<br />
claims with leave to amend. The second amended complaint asserted claims for violations of the<br />
Securities Act Sections 11 and 15 against the individual defendants as control persons. The court<br />
denied the defendants’ motions to strike and to dismiss, because the defendants could not show<br />
that the reports it wanted to strike had no bearing on the subject of the litigation, and the records<br />
showed that the defendants had an incentive to file false filings with the Securities and Exchange<br />
Commission.<br />
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 477 B.R. 351 (Bankr. S.D.N.Y.<br />
June 20, 2012).<br />
This was a bench memorandum decision and an order denying a motion of the class<br />
action plaintiffs for a determination that the commencement of a securities class action against<br />
non-debtor parties is not prohibited by a permanent injunction issued by the court or violative of<br />
257<br />
H.2<br />
H.2<br />
H.2
the automatic stay. The trustee had previously entered into a settlement agreement, and in this<br />
action, the court accused the plaintiffs of attempting to use inventive pleadings to sidestep the<br />
stay and injunction that resulted from the agreement. The court rejected the plaintiffs’ arguments<br />
that it should look past this and focus on the differences between their harms and the trustee’s,<br />
because the claim was derivative. The plaintiffs had tried to argue that one individual was a<br />
control person at Bernard L. Madoff Investment Services who owed a duty to the plaintiffs to<br />
prevent their purchasing fraudulent securities; however, this claim amounted to allegations<br />
regarding the general direction and control and actions to the detriment of all creditors, which<br />
was based on a common harm. The court further concluded that the plaintiffs were attempting to<br />
re-litigate a prior decision.<br />
Richman v. Goldman Sachs Grp., Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,926 (S.D.N.Y.<br />
June 21, 2012).<br />
The plaintiffs alleged that defendants violated Sections 10(b), 20(a), and Rule 10b-5 of<br />
the Securities Exchange Act of 1934 and Rule 10b-5 and Section 20(a) of the Exchange Act.<br />
The plaintiffs were purchasers of the defendants’ common stock. The plaintiffs alleged that the<br />
defendants made material omissions regarding their receipt of Wells notices from the Securities<br />
and Exchange Commission relating to the defendants’ role in the synthetic collateralized debt<br />
obligations, and conflicts of interest that arose from the defendants’ role in funding certain<br />
collateralized debt obligation transactions. The court held that the plaintiffs did not show that the<br />
defendants’ non-disclosure of the receipt of the Wells notice made previous disclosures about<br />
government investigations materially misleading. The court also held that the defendants had no<br />
affirmative duty to make such a disclosure, and the plaintiffs could not plead scienter. However,<br />
the court held that the plaintiffs sufficiently alleged misstatements about business practices and<br />
conflicts of interest, and the plaintiffs could show scienter and loss causation based upon these<br />
specific allegations. The court denied the motion to dismiss the control person claims because<br />
the plaintiffs alleged sufficient facts under Section 10(b) and Rule 10b-5, and scienter for<br />
purposes of primary liability of the Exchange Act.<br />
In re Longtop Fin. Techs. Ltd. Sec. Litig., 2012 U.S. Dist. LEXIS 91004 (S.D.N.Y. June 28,<br />
2012).<br />
Plaintiffs, investors, filed this class action alleging false and misleading public statements<br />
in connection with the purchase of the company stock. The claim alleged the chief financial<br />
officer knew that the defendant company had falsified its records, improperly stated expenses,<br />
artificially inflated gross margins, and fabricated its revenues and net income. The plaintiffs<br />
alleged that the CFO was intimately involved with financial reporting, and that he benefited<br />
personally by selling shares during the class period. Plaintiffs brought claims under<br />
Section 10(b) and Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934.<br />
Defendants moved to dismiss the complaint. The court held that there were sufficient facts<br />
specifically targeting the CFO to state claims under Sections 10(b) and 20(a), because the<br />
complaint stated with particularity two categories of statements made by the CFO that were<br />
allegedly false. The plaintiffs properly pled a primary violation under Section 10(b) of the<br />
258<br />
H.2<br />
H.2
Exchange Act, as well as reliance and control, because the CFO had control over the financial<br />
statements of the company and direct involvement in its financial reporting. Thus, the plaintiffs<br />
properly pled both Sections 10(b) and 20(a) claims and the defendant’s motion to dismiss was<br />
denied.<br />
Pa. Pub. Sch. Emp. Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y. 2012).<br />
This is a securities class action against defendants, their current and past officers and<br />
directors, underwriters, and accountant. The plaintiffs alleged purposeful concealment of the<br />
defendants’ reliance on Mortgage Electronic Registration Systems Inc. (“MERS”) and exposure<br />
to billions of dollars of loan repurchase claims arising from the sale of mortgage-backed<br />
securities in their Securities and Exchange Commission filings, press releases, and earnings calls,<br />
which rendered those disclosures misleading. The plaintiffs alleged violations of Sections 11<br />
and 15 of the Securities Act of 1933 and violations of Section 10(b) and Rule 10b-5 and<br />
Section 20(a) of the Securities Exchange Act of 1934. The defendants moved to dismiss. The<br />
court held the plaintiffs’ allegations that defendants concealed repurchase claims was factually<br />
insufficient to plead material misstatements or omissions. However, the other claims that<br />
defendants made material misstatements or omissions regarding their vulnerability to repurchase<br />
claims were adequately pled. While plaintiffs alleged underlying primary violations for their<br />
Section 20(a) claims, the claims were dismissed because the plaintiffs failed to allege<br />
particularized facts that the executive defendants had culpable participation in the fraud<br />
perpetrated by the controlled person. The Section 15 control person claim under the Securities<br />
Act was dismissed because the underlying Section 11 claim was dismissed, as it was time-barred.<br />
S&S NY Holdings, Inc. v. Able Energy, Inc., 2012 U.S. Dist. LEXIS 105892 (S.D.N.Y. July 27,<br />
2012).<br />
In this proceeding of the defendant’s motion to dismiss, the court focused only on the<br />
plaintiffs’ claims against the defendant’s former CEO for control person liability under<br />
Section 15 of the Securities Act of 1933. The defendant dealt in the retail distribution of heating<br />
oil, gas, kerosene, and diesel. The agreement giving rise to the dispute was a commercial loan<br />
between the plaintiffs and defendant. Pursuant to the settlement agreement, the former CEO sent<br />
plaintiffs a letter offering to allow them to convert a portion of the amount owed by the<br />
defendant into common stock, which the plaintiffs attempted to accept, but the defendant’s new<br />
CEO responded that he did not agree with the terms and that the former CEO did not have<br />
authority to issue the letter. The court held that the settlement agreement expunged any<br />
misrepresentations made in prior agreements, thus the plaintiffs could not state a primary<br />
violation and the former CEO could not be held liable as a control person. In addition, the<br />
settlement agreement contained a full release, thus the control person claim was dismissed<br />
against the former CEO. The defendant’s motion to dismiss was granted.<br />
H.2<br />
H.2<br />
259
H.2<br />
Krasner v. Rahfco Funds LP, 2012 U.S. Dist. LEXIS 134351 (S.D.N.Y. Aug. 9, 2012).<br />
Plaintiff investors filed suit against several defendants including, notably, several<br />
investment funds, a general partner of the investment funds, and various associated individuals.<br />
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934 in connection with an alleged Ponzi scheme. Plaintiffs also alleged violations of<br />
Section 20(a) as to several defendants—the vice president of the general partner of the funds, a<br />
fund manager, and several of the funds themselves. These defendants moved to dismiss. The<br />
district court first determined that the complaint sufficiently pled only that the fund manager and<br />
the general partner had violated Section 10(b). The court then examined the Section 20(a)<br />
claims. The court, noting that an individual cannot be found to be a control person solely<br />
because of their position as an officer of an entity, concluded that plaintiffs had insufficiently<br />
pled that the vice president of the general partner actually exercised the necessary control over<br />
the general partner. Accordingly, the court dismissed the Section 20(a) claim as against the vice<br />
president of the general partner. Turning next to the fund manager defendant and the defendant<br />
investment funds, the court determined that neither of these defendants controlled any entity that<br />
had committed a Section 10(b) violation. Therefore, the court dismissed the Section 20(a) claims<br />
as against these defendants as well.<br />
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977 (S.D.N.Y.<br />
Aug. 15, 2012).<br />
Plaintiff investors brought a class action against two subdivisions of an asset management<br />
company, a director of those two subdivisions, and the CEO of the asset management company.<br />
Plaintiffs accused all of the defendants of participating in a deceptive scheme, thereby violating<br />
Section 10(b) and Rules 10b-5(a) and 10b-5(c) of the Securities Exchange Act of 1934.<br />
Plaintiffs also brought a Rule 10b-5(b) claim against defendant director for his misleading<br />
disclosures. Finally, plaintiffs brought a “control liability claim under Section 20(a) of the Act”<br />
against defendant CEO. The defendants moved to dismiss the claims. The court dismissed<br />
plaintiffs’ Rule 10b-5(a) and Rule 10b-5(c) claims because plaintiffs failed to sufficiently allege<br />
reliance on defendants’ defective conduct. Finding that plaintiffs had no claims under<br />
Rules 10b-5(a) and 10b-5(c) and that there was no primary violation under these rules, plaintiffs’<br />
Section 20(a) claims based on these allegations were subject to dismissal. The court then turned<br />
to plaintiffs’ Rule 10b-5(b) claim against defendant director. The court found that plaintiffs had<br />
sufficiently alleged a Rule 10b-5(b) claim against defendant director for his misleading<br />
disclosures. The court then addressed whether plaintiffs had sufficiently alleged that defendant<br />
director’s Rule 10b-5(b) violations gave rise to Section 20(a) control person liability on the part<br />
of defendant CEO. The court first noted that plaintiffs had not sufficiently alleged that defendant<br />
CEO controlled the actual deceptive conduct perpetrated by defendant director. The court<br />
further noted that plaintiffs failed to sufficiently allege that defendant CEO was actually a control<br />
person at all and that he controlled the entities who were responsible for the misstatements.<br />
Based on these findings, the court granted dismissal of the remaining Section 20(a) claim against<br />
defendant CEO.<br />
260<br />
H.2
Lau v. Mezei, 2012 Fed. Sec. L. Rep. (CCH) 96,987 (S.D.N.Y. Aug. 15, 2012).<br />
H.2<br />
Plaintiff alleged that defendant accountant fraudulently misrepresented that defendant<br />
investment funds were low risk investment vehicles, thereby violating Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 and Section 12(a)(2) of the Securities Act of<br />
1933. Plaintiff further alleged that defendant investment funds controlled the accountant, and<br />
that they were therefore liable as control persons under Section 20(a) of the Exchange Act and<br />
Section 15 of the Securities Act. Plaintiff premised his control person argument on the view that<br />
defendant funds and defendant accountant had a principal-agent relationship. Defendants moved<br />
for summary judgment as against all of plaintiff’s claims. The court granted summary judgment<br />
with respect to the Section 12(a)(2) claim, and consequently granted summary judgment with<br />
respect to the Section 15 control liability claim. The district court denied summary judgment as<br />
to plaintiff’s Rule 10b-5 claim against defendant accountant, finding that there were sufficient<br />
material disputes of fact on that claim. The court then turned to plaintiff’s control person<br />
arguments premised on the principal-agent relationship. The court found that there was<br />
insufficient evidence that the funds and the accountant had a principal-agent relationship. The<br />
court also found that there was insufficient evidence that defendant funds had controlled<br />
defendant accountant in any way or authorized him to act on their behalf. Based on these<br />
findings, the court granted summary judgment against plaintiff as to the Section 20(a) control<br />
liability claim.<br />
In re IndyMac Mortgage-Backed Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,985 (S.D.N.Y.<br />
Aug. 17, 2012).<br />
In a putative class action, plaintiff investors brought suit against a registrant, a number of<br />
its former officers and directors, and underwriters, alleging violations of Sections 11, 12(a)(2),<br />
and 15 of the Securities Act of 1933 in connection with the issuance of mortgage pass-through<br />
certificates. Lead plaintiffs moved for class certification, appointment as class representatives,<br />
and appointment of class counsel. Defendants opposed the motion with respect to one of its<br />
certificate offerings, arguing that lead plaintiffs had no Sections 11, 12(a)(2), or 15 claims as to<br />
the certificates. Defendants argued, therefore, that lead plaintiffs could not lead a class action<br />
alleging such claims. The court agreed with defendants and dismissed the claims as to these<br />
certificate offerings. The court first held that lead plaintiffs had no standing to bring a<br />
Section 12(a)(2) claim based on the certificates, because lead plaintiffs admittedly purchased the<br />
certificates in the secondary market. Next, the court held that lead plaintiffs’ Section 11 claims<br />
as to the certificates were time-barred. Finally, the court held that lead plaintiffs had no<br />
Section 15 control liability claims as to the certificates, because a Section 15 claim depends on<br />
the existence of a valid Section 11 or Section 12 claim. The court concluded that lead plaintiffs<br />
could not represent class members who had claims based on these certificates because lead<br />
plaintiffs themselves had no viable securities claims as to these certificates. Given that lead<br />
plaintiffs had no viable securities claims as to these certificates, all class claims concerning these<br />
certificates were dismissed.<br />
H.2<br />
261
H.2<br />
Ho v. Duoyuan Global Water Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).<br />
In a class action, plaintiff investors filed suit against a corporation (“defendant<br />
corporation”) and a number of its executives and directors, underwriters, external auditors, as<br />
well as a company (“defendant company”) which had held a large portion of defendant<br />
corporation’s shares prior to public trading. Plaintiffs alleged violations of Sections 10(b) and<br />
20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of<br />
1933. Plaintiffs alleged that defendants issued statements misrepresenting defendant<br />
corporation’s financial conditions, and overstating the number of its distributors in a number of<br />
public offering documents. Plaintiffs alleged that these purported misrepresentations led to a<br />
decline in value of defendant corporation’s stock. Defendants moved to dismiss the complaint.<br />
The court, after determining that plaintiffs had sufficiently alleged primary violations under<br />
Sections 11 and 10(b), turned to the control liability claims under Sections 15 and 20(a). First,<br />
the court addressed defendant officers’ motion. Given that the officer defendants had based their<br />
entire motion on the mistaken belief that plaintiffs had failed to sufficiently plead a primary<br />
violation of the securities laws, the court refused to grant defendant officers’ motion to dismiss.<br />
Second, the court addressed the director defendants’ motion. The court granted defendant<br />
directors’ motion to dismiss, holding that plaintiffs’ control liability allegations against defendant<br />
directors were conclusory and therefore insufficient. Finally, the court turned to defendant<br />
company’s motion to dismiss. Plaintiffs argued that defendant company was liable as a control<br />
person because it had appointed one of the allegedly culpable directors. The court held,<br />
however, that being the mere appointer of an allegedly culpable director is not the equivalent of<br />
having control. The court held that the complaint failed to allege specific facts demonstrating<br />
that defendant company had actual control over the corporation, rather than mere influence. The<br />
court therefore dismissed the control liability claims against defendant company.<br />
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757 (S.D.N.Y.<br />
Aug. 29, 2012).<br />
Plaintiff shareholders filed a class action against a corporation, its CEO, and its CFO<br />
based on allegations that defendants made false or misleading representations that induced<br />
plaintiffs to purchase corporate stock. When defendant corporation’s alleged misrepresentations<br />
came to light through the public media, the stock price plummeted, thereby injuring plaintiffs.<br />
Plaintiffs brought claims against all defendants under Section 10(b) of the Securities Exchange<br />
Act of 1934, as well as control liability claims under Section 20(a) of the Exchange Act.<br />
Defendants moved to dismiss all claims. The court first addressed the defendants’ motion to<br />
dismiss plaintiffs’ Section 10(b) claims. This motion was primarily based on two premises:<br />
first, that the alleged misrepresentations made by the corporation were actually true, and second,<br />
that plaintiffs had failed to allege loss-causation because the most explicit revelations of the<br />
corporation’s alleged misrepresentations to the public occurred after the fall in stock price. As to<br />
the first premise, the court held that truth of alleged misrepresentations is not an appropriate<br />
argument to make on a motion to dismiss a Section 10(b) claim—rather, it is a defense on the<br />
merits. As to the second premise, the court held that plaintiffs had sufficiently pled loss-<br />
262<br />
H.2
causation by pointing to less explicit revelations of defendant corporation’s alleged<br />
misrepresentations to the public occurring before the fall in stock price. The court therefore<br />
refused to grant defendants’ motion to dismiss the Section 10(b) claim, holding that plaintiffs<br />
had sufficiently stated a claim for relief under that statute. The court then turned to the<br />
Section 20(a) claims against the CEO and the CFO. The court noted that defendants’ motion to<br />
dismiss these claims was premised entirely on the argument that plaintiffs had failed to allege a<br />
primary violation by the corporation. Given the court’s determination that plaintiffs had<br />
sufficiently alleged a primary violation of securities laws by the corporation, and that defendants<br />
provided no other basis for their motion to dismiss the Section 20(a) claim, the court denied the<br />
motion.<br />
In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y. Aug. 30,<br />
2012).<br />
A class of investors and several individual plaintiffs brought claims against a corporation,<br />
its executives, and certain underwriters under Sections 10(b) and 20(a) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934, alleging that the defendants had made material<br />
misrepresentations in their SEC filings and with regard to a variety of securities offerings.<br />
Specifically, plaintiffs alleged that defendants misrepresented their exposure to subprime and<br />
Alt-A mortgages, their risk management procedures, and their core capital financials.<br />
Defendants moved to dismiss the claims premised on all three of these alleged<br />
misrepresentations. The court granted these motions to dismiss in part and denied in part. With<br />
respect to the claims based on alleged misrepresentations regarding exposure to subprime and<br />
Alt-A mortgages and risk management procedures, the court denied defendants’ motion to<br />
dismiss. The court first determined that plaintiffs had adequately alleged violations of<br />
Section 10(b) and Rule 10b-5 with regard to these alleged misrepresentations. Turning to<br />
plaintiffs’ Section 20(a) claims, the court held that plaintiffs had sufficiently alleged that<br />
defendant executives had acted with control and culpability. With respect to plaintiffs’ claims<br />
premised on the alleged misrepresentations regarding defendant corporation’s core capital<br />
financials, the court held that plaintiffs had not sufficiently stated culpable misstatements and<br />
granted defendants’ motion to dismiss as to the Section 10(b), Rule 10b-5, and Section 20(a)<br />
claims.<br />
In re Proshares Trust Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,998 (S.D.N.Y. Sept. 7,<br />
2012).<br />
In a putative class action, plaintiff investors brought suit against two trusts and a number<br />
of individuals. Plaintiff alleged that the trust had filed registration statements in connection with<br />
a number of its investment vehicles that had contained material misrepresentations or omissions.<br />
More specifically, plaintiffs alleged that defendants had failed to adequately disclose particular<br />
risks associated with these investment vehicles. Plaintiffs alleged that when these purported<br />
risks materialized, plaintiffs suffered financial injury. Plaintiffs brought claims under<br />
Sections 11 and 15 of the Securities Act of 1933. Defendants moved to dismiss the complaint.<br />
The court first addressed the Section 11 primary violation claims. The court held that the<br />
263<br />
H.2<br />
H.2
egistration statements filed by defendants adequately conveyed the specific risks associated with<br />
the investment vehicles, including the risks that allegedly materialized. The court held that the<br />
statements were therefore not misleading, and the court dismissed the Section 11 primary<br />
violation claims. The court then dismissed the Section 15 control liability claims, holding that a<br />
Section 15 control person liability claim cannot be maintained without an adequately-pled<br />
primary violation.<br />
Lewy v. Skypeople Fruit Juice Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,999 (S.D.N.Y. Sept. 7,<br />
2012).<br />
In a putative class action, plaintiff shareholders brought suit against a corporation, several<br />
of its officers and directors, its controlling shareholder, and the underwriter of certain securities<br />
issued by the corporation. Plaintiffs alleged that defendants had failed to disclose a related-party<br />
transaction, and also alleged that defendants had misstated various financial figures in required<br />
filings. Plaintiffs alleged that they relied on these omissions and misstatements to their<br />
detriment. Plaintiffs brought claims under Sections 11, 12, and 15 of the Securities Act of 1933,<br />
as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved<br />
to dismiss the complaint. Turning first to the Securities Act claims, the court held that plaintiffs<br />
had sufficiently alleged material misrepresentations and omissions in support of their primary<br />
violation claims. The court also held that plaintiffs had sufficiently pled a Section 15 control<br />
liability claim, concluding that the allegations sufficiently demonstrated that the relevant<br />
directors and officers had actual control over the alleged misrepresentations and omissions. The<br />
court then held that the plaintiffs had failed to sufficiently allege a Section 10(b) claim based on<br />
defendant corporation’s 2008 financial statements and the related-party transaction, concluding<br />
that plaintiffs had failed to satisfy the heightened particularity requirements for fraud claims and<br />
failed to sufficiently allege scienter. The court also held, however, that plaintiffs had sufficiently<br />
alleged a Section 10(b) claim based on defendant corporation’s 2009 financial statements.<br />
Turning then to the Section 20(a) claims, the court held that plaintiffs had sufficiently alleged<br />
Section 20(a) claims but only those that were predicated on the 2009 financial statements as<br />
primary violations.<br />
H.2<br />
In re China Valves Tech. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,023 (S.D.N.Y. Sept. 12,<br />
2012).<br />
In a putative class action, plaintiff investors brought suit against a corporation, several of<br />
its officers and directors, and one of its independent auditors. Plaintiffs alleged that defendants<br />
failed to disclose material facts relating to two of defendant corporation’s acquisitions—more<br />
specifically, that defendant corporation failed to disclose its related-party nature. Plaintiffs also<br />
alleged that defendant corporation overstated its financial results in both a registration statement<br />
and a prospectus statement, as the plaintiffs noted discrepancies between financial figures in<br />
defendant corporation’s Securities and Exchange Commission filings and Chinese regulatory<br />
filings. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act<br />
of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933. The court first analyzed<br />
264<br />
H.2
the Section 10(b) primary violation claims. The court held that plaintiffs had failed to allege that<br />
the related party transactions were material or that disclosure of these transactions was required<br />
under the law. The court also held that plaintiffs’ allegations regarding overstatement of<br />
financial results did not meet the heightened pleading standards required for fraud claims. The<br />
court concluded that plaintiffs had failed to allege a material misrepresentation or omission with<br />
the required particularity, and the court dismissed the Section 10(b) claims. For these same<br />
reasons, the court dismissed the Section 11 and Section 12 claims. Given that plaintiffs had<br />
failed to sufficiently allege a primary violation of the securities laws, the court also dismissed the<br />
control liability claims under Section 20(a) and Section 15.<br />
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., 2012 U.S. Dist. LEXIS 146640 (S.D.N.Y.<br />
Sept. 27, 2012).<br />
In a class action, defendant bank and several individual defendants were sued by plaintiff<br />
investors who had purchased an investment vehicle from defendant bank. Plaintiffs alleged that<br />
defendants made several false and misleading statements related to the investment vehicle.<br />
Plaintiffs alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss<br />
the complaint. The court first determined that plaintiffs had failed to sufficiently allege a<br />
primary violation of the securities laws. More specifically, the court held that plaintiffs had<br />
failed to allege scienter and particularized facts with regard to the Section 10(b) claims. As<br />
regards the Sections 11 and 12(a)(2) claims, the court held that plaintiffs had failed to<br />
sufficiently allege that the statements at issue were false. The court therefore dismissed the<br />
Section 10(b) claims, Section 11 claims, and Section 12(a)(2) claims. Given that plaintiffs had<br />
failed to allege a primary violation of the securities laws, the court also dismissed the<br />
Section 20(a) and Section 15 control liability claims.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,040 (S.D.N.Y. Sept. 27, 2012).<br />
Plaintiff hedge funds brought suit against a corporation and a number of its directors and<br />
officers. Plaintiffs alleged that defendants made materially false representations that inflated<br />
defendant corporation’s share price, caused plaintiffs to purchase and hold shares at the inflated<br />
share price, and injured plaintiffs when the truth was revealed and the share price plunged.<br />
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934 and alleged Section 20(a) control liability. Defendants moved to dismiss the complaint.<br />
The court held that plaintiffs had failed to allege loss causation, that many of the statements atissue<br />
were protected by the safe harbor provisions of the Private Securities <strong>Litigation</strong> Reform<br />
Act, and that plaintiffs had failed to plead falsity with respect to several of the statements atissue.<br />
The court concluded that plaintiffs had failed to state a claim under Section 10(b) and<br />
Rule 10b-5. Once the court dismissed those claims, the court then dismissed the Section 20(a)<br />
claims because of plaintiffs’ failure to allege a primary violation of the securities laws.<br />
H.2<br />
H.2<br />
265
H.2<br />
In re UBS AG Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,037 (S.D.N.Y. Sept. 28, 2012).<br />
In a putative class action, plaintiff investors brought suit against a corporation, a number<br />
of its executives, and several of its underwriters for actions related to a securities offering.<br />
Plaintiffs alleged that defendants issued fraudulent statements regarding defendant corporation’s<br />
auction rate securities, its mortgage-related securities portfolio, and its compliance with federal<br />
tax and securities laws. Plaintiffs brought claims under Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933.<br />
Defendant corporation and defendant executives moved to dismiss the Securities Act claims<br />
while the underwriters moved to dismiss the Exchange Act claims. The court turned first to<br />
defendant corporation and defendant executives’ motion. The court held that plaintiffs failed to<br />
sufficiently allege scienter with respect to the purported misrepresentations regarding the<br />
mortgage-backed securities portfolio and the auction rate securities. The court also held that<br />
plaintiffs failed to sufficiently allege materiality with regard to the purported tax fraud. The<br />
court therefore dismissed the Section 10(b) claims as against defendant corporation and<br />
defendant executives, and dismissed the Section 20(a) control liability claims for failure to plead<br />
a primary violation of the securities laws. The court turned next to the underwriters’ motion to<br />
dismiss. The court held that a number of plaintiffs lacked standing to bring a Section 12 claim<br />
against defendant underwriters. More generally, the court held that the plaintiffs failed to allege<br />
that purported misrepresentations were material. The court therefore dismissed the Section 11<br />
and 12 claims. Given that no primary violation had been alleged against defendant underwriters,<br />
the court also dismissed the Section 15 control liability claims.<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052 (S.D.N.Y.<br />
Oct. 15, 2012).<br />
This case arose out of the defendant’s bankruptcy proceedings, involving eight<br />
consolidated securities actions brought by California public entities and an insurance company,<br />
asserting claims against defendant’s former officers, directors, and auditor for alleged violations<br />
of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934, California common law, and Sections 25400, 25401, 25504, and 25500<br />
of the California Corporations Code. The plaintiffs alleged that offering documents with respect<br />
to securities that plaintiffs purchased were false and misleading, because they incorporated the<br />
defendant’s financial statements that contained misleading statements and material omissions.<br />
Defendants moved to dismiss on grounds that the plaintiffs did not adequately plead that the<br />
defendants controlled the alleged primary violations of Section 11; however, the court found this<br />
argument to be unsupported by the statutes or any other authority. The court also held that the<br />
defendant’s argument that only control persons who signed a relevant registration statement may<br />
be liable under Section 15 to be without merit. On that basis, the motion to dismiss the<br />
Section 15 claim was denied. The court granted the motion to dismiss certain Section 10(b)<br />
claims which failed to state a claim. Specifically, the Section 10(b) claims based on<br />
misstatements or omissions relating to stress tests, GAAP violations, valuations of CRE Assets,<br />
and concentrations of credit risk as to two individual defendants were all dismissed, as were the<br />
266<br />
H.2
Section 20(a) claims based on those primary violation. As to the remaining Section 10(b) and<br />
related Section 20(a) claims, the court rejected the defendant’s argument that those claims should<br />
fail because the defendant did not have the requisite control over the primary violator. The court<br />
noted that control exists when a person has power directly or indirectly to direct or cause the<br />
direction or management and policies of a person, whether through ownership of voting<br />
securities or otherwise. Because the individual defendants had the power to direct or cause the<br />
direction of management and policies of the defendant company, the court declined to dismiss<br />
the remaining Section 20(a) claims against them. Finally, the court found that the claims under<br />
Section 25504 of the California Corporations Code for control person liability failed for failure<br />
to plead a primary violation, because the defendants, as the underwriters and non-issuers of the<br />
securities in question, were not in privity with the plaintiffs.<br />
Ross v. Lloyds Banking Grp., PLC, 2012 Fed. Sec. L. Rep. (CCH) 97,056 (S.D.N.Y. Oct. 16,<br />
2012).<br />
This is a putative class action alleging that the defendants committed securities fraud<br />
when they misstated and omitted material information regarding the acquisition of a bank by the<br />
defendants. The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of<br />
1934, including Section 20(a) control person liability. The court considered the defendants’<br />
motion to dismiss. Defendants argued that plaintiffs did not satisfy the pleading requirements of<br />
the Private <strong>Litigation</strong> Securities Reform Act, plaintiffs did not allege actionable misstatements or<br />
omissions, loss causation, and all of the claims were time-barred. The court held that the<br />
complaint did not plausibly allege that the defendants were liable for material misstatements or<br />
omissions and thus granted the defendants’ motion to dismiss. The court held that the plaintiffs<br />
failed to plead primary violations since they could not show that any allegedly undisclosed facts<br />
were material. Thus, all claims, including the Section 20(a) claims, were dismissed.<br />
H.2<br />
Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,075<br />
(S.D.N.Y. Nov. 5, 2012).<br />
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as<br />
conservator for Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleges misconduct on the<br />
part of the nation’s largest financial institutions in connection with the offer and sale of certain<br />
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint<br />
alleged that the offering documents used to market and sell residential mortgage-back securities<br />
as Fannie and Freddie during the relevant period contained material misstatements or omissions<br />
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that<br />
characterize the underlying mortgages. On these bases, the complaint alleged claims under<br />
Sections 11, 12, and 15 of the Securities Act of 1933, the Virginia Securities Act<br />
Sections 13.1-522(A)(ii) and (C), and the District of Columbia Securities Act<br />
Sections 31-5606.05(a)(1)(B), and (c). The FHFA also asserted claims of fraud and aiding and<br />
abetting fraud under the common law of New York State. The defendants’ motions to dismiss<br />
267<br />
H.2
were granted with respect to the Virginia Securities Act claims, the plaintiffs’ claims of owneroccupancy<br />
and loan-to-value ratio fraud relating to the securities for which the defendant served<br />
as the lead underwriter, and the plaintiffs’ claims of owner-occupancy fraud relating to the<br />
securities for which certain defendants served as a sponsor depositor or lead underwriter. The<br />
motions to dismiss were denied in all other respects.<br />
Lau v. Mezei, 2012 Fed. Sec. L. Rep. (CCH) 96,987 (S.D.N.Y. Aug. 15, 2012).<br />
Plaintiff alleged that defendant accountant fraudulently misrepresented that defendant<br />
investment funds were low risk investment vehicles, thereby violating Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934 and Section 12(a)(2) of the Securities Act of<br />
1933. Plaintiff further alleged that defendant investment funds controlled the accountant, and<br />
that they were therefore liable as control persons under Section 20(a) of the Exchange Act and<br />
Section 15 of the Securities Act. Plaintiff premised his control person argument on the view that<br />
defendant funds and defendant accountant had a principal-agent relationship. Defendants moved<br />
for summary judgment as against all of plaintiff’s claims. The court granted summary judgment<br />
with respect to the Section 12(a)(2) claim, and consequently granted summary judgment with<br />
respect to the Section 15 control liability claim. The district court denied summary judgment as<br />
to plaintiff’s Rule 10b-5 claim against defendant accountant, finding that there were sufficient<br />
material disputes of fact on that claim. The court then turned to plaintiff’s control person<br />
arguments premised on the principal-agent relationship. The court found that there was<br />
insufficient evidence that the funds and the accountant had a principal-agent relationship. The<br />
court also found that there was insufficient evidence that defendant funds had controlled<br />
defendant accountant in any way or authorized him to act on their behalf. Based on these<br />
findings, the court granted summary judgment against plaintiff as to the Section 20(a) control<br />
liability claim.<br />
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977 (S.D.N.Y.<br />
Aug. 15, 2012).<br />
Plaintiff investors brought a class action against two subdivisions of an asset management<br />
company, a director of those two subdivisions, and the CEO of the asset management company.<br />
Plaintiffs accused all of the defendants of participating in a deceptive scheme, thereby violating<br />
Section 10(b) and Rules 10b-5(a) and 10b-5(c) of the Securities Exchange Act of 1934.<br />
Plaintiffs also brought a Rule 10b-5(b) claim against defendant director for his misleading<br />
disclosures. Finally, plaintiffs brought a “control liability claim under Section 20(a) of the Act”<br />
against defendant CEO. The defendants moved to dismiss the claims. The court dismissed<br />
plaintiffs’ Rule 10b-5(a) and Rule 10b-5(c) claims because plaintiffs failed to sufficiently allege<br />
reliance on defendants’ defective conduct. Finding that plaintiffs had no claims under<br />
Rules 10b-5(a) and 10b-5(c) and that there was no primary violation under these rules, plaintiffs’<br />
Section 20(a) claims based on these allegations were subject to dismissal. The court then turned<br />
to plaintiffs’ Rule 10b-5(b) claim against defendant director. The court found that plaintiffs had<br />
sufficiently alleged a Rule 10b-5(b) claim against defendant director for his misleading<br />
disclosures. The court then addressed whether plaintiffs had sufficiently alleged that defendant<br />
268<br />
H.2<br />
H.2
director’s Rule 10b-5(b) violations gave rise to Section 20(a) control person liability on the part<br />
of defendant CEO. The court first noted that plaintiffs had not sufficiently alleged that defendant<br />
CEO controlled the actual deceptive conduct perpetrated by defendant director. The court<br />
further noted that plaintiffs failed to sufficiently allege that defendant CEO was actually a control<br />
person at all and that he controlled the entities who were responsible for the misstatements.<br />
Based on these findings, the court granted dismissal of the remaining Section 20(a) claim against<br />
defendant CEO.<br />
In re IndyMac Mortgage-Backed Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,985 (S.D.N.Y.<br />
Aug. 17, 2012).<br />
In a putative class action, plaintiff investors brought suit against a registrant, a number of<br />
its former officers and directors, and underwriters, alleging violations of Sections 11, 12(a)(2),<br />
and 15 of the Securities Act of 1933 in connection with the issuance of mortgage pass-through<br />
certificates. Lead plaintiffs moved for class certification, appointment as class representatives,<br />
and appointment of class counsel. Defendants opposed the motion with respect to one of its<br />
certificate offerings, arguing that lead plaintiffs had no Sections 11, 12(a)(2), or 15 claims as to<br />
the certificates. Defendants argued, therefore, that lead plaintiffs could not lead a class action<br />
alleging such claims. The court agreed with defendants and dismissed the claims as to these<br />
certificate offerings. The court first held that lead plaintiffs had no standing to bring a<br />
Section 12(a)(2) claim based on the certificates, because lead plaintiffs admittedly purchased the<br />
certificates in the secondary market. Next, the court held that lead plaintiffs’ Section 11 claims<br />
as to the certificates were time-barred. Finally, the court held that lead plaintiffs had no<br />
Section 15 control liability claims as to the certificates, because a Section 15 claim depends on<br />
the existence of a valid Section 11 or Section 12 claim. The court concluded that lead plaintiffs<br />
could not represent class members who had claims based on these certificates because lead<br />
plaintiffs themselves had no viable securities claims as to these certificates. Given that lead<br />
plaintiffs had no viable securities claims as to these certificates, all class claims concerning these<br />
certificates were dismissed.<br />
Ho v. Duoyuan Global Water Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).<br />
In a class action, plaintiff investors filed suit against a corporation (“defendant<br />
corporation”) and a number of its executives and directors, underwriters, external auditors, as<br />
well as a company (“defendant company”) which had held a large portion of defendant<br />
corporation’s shares prior to public trading. Plaintiffs alleged violations of Sections 10(b) and<br />
20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of<br />
1933. Plaintiffs alleged that defendants issued statements misrepresenting defendant<br />
corporation’s financial conditions, and overstating the number of its distributors in a number of<br />
public offering documents. Plaintiffs alleged that these purported misrepresentations led to a<br />
decline in value of defendant corporation’s stock. Defendants moved to dismiss the complaint.<br />
The court, after determining that plaintiffs had sufficiently alleged primary violations under<br />
Sections 11 and 10(b), turned to the control liability claims under Sections 15 and 20(a). First,<br />
the court addressed defendant officers’ motion. Given that the officer defendants had based their<br />
269<br />
H.2<br />
H.2
entire motion on the mistaken belief that plaintiffs had failed to sufficiently plead a primary<br />
violation of the securities laws, the court refused to grant defendant officers’ motion to dismiss.<br />
Second, the court addressed the director defendants’ motion. The court granted defendant<br />
directors’ motion to dismiss, holding that plaintiffs’ control liability allegations against defendant<br />
directors were conclusory and therefore insufficient. Finally, the court turned to defendant<br />
company’s motion to dismiss. Plaintiffs argued that defendant company was liable as a control<br />
person because it had appointed one of the allegedly culpable directors. The court held,<br />
however, that being the mere appointer of an allegedly culpable director is not the equivalent of<br />
having control. The court held that the complaint failed to allege specific facts demonstrating<br />
that defendant company had actual control over the corporation, rather than mere influence. The<br />
court therefore dismissed the control liability claims against defendant company.<br />
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757 (S.D.N.Y.<br />
Aug. 29, 2012).<br />
Plaintiff shareholders filed a class action against a corporation, its CEO, and its CFO<br />
based on allegations that defendants made false or misleading representations that induced<br />
plaintiffs to purchase corporate stock. When defendant corporation’s alleged misrepresentations<br />
came to light through the public media, the stock price plummeted, thereby injuring plaintiffs.<br />
Plaintiffs brought claims against all defendants under Section 10(b) of the Securities Exchange<br />
Act of 1934, as well as control liability claims under Section 20(a) of the Exchange Act.<br />
Defendants moved to dismiss all claims. The court first addressed the defendants’ motion to<br />
dismiss plaintiffs’ Section 10(b) claims. This motion was primarily based on two premises:<br />
first, that the alleged misrepresentations made by the corporation were actually true, and second,<br />
that plaintiffs had failed to allege loss-causation because the most explicit revelations of the<br />
corporation’s alleged misrepresentations to the public occurred after the fall in stock price. As to<br />
the first premise, the court held that truth of alleged misrepresentations is not an appropriate<br />
argument to make on a motion to dismiss a Section 10(b) claim—rather, it is a defense on the<br />
merits. As to the second premise, the court held that plaintiffs had sufficiently pled losscausation<br />
by pointing to less explicit revelations of defendant corporation’s alleged<br />
misrepresentations to the public occurring before the fall in stock price. The court therefore<br />
refused to grant defendants’ motion to dismiss the Section 10(b) claim, holding that plaintiffs<br />
had sufficiently stated a claim for relief under that statute. The court then turned to the<br />
Section 20(a) claims against the CEO and the CFO. The court noted that defendants’ motion to<br />
dismiss these claims was premised entirely on the argument that plaintiffs had failed to allege a<br />
primary violation by the corporation. Given the court’s determination that plaintiffs had<br />
sufficiently alleged a primary violation of securities laws by the corporation, and that defendants<br />
provided no other basis for their motion to dismiss the Section 20(a) claim, the court denied the<br />
motion.<br />
H.2<br />
270
In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y. Aug. 30,<br />
2012).<br />
A class of investors and several individual plaintiffs brought claims against a corporation,<br />
its executives, and certain underwriters under Sections 10(b) and 20(a) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934, alleging that the defendants had made material<br />
misrepresentations in their SEC filings and with regard to a variety of securities offerings.<br />
Specifically, plaintiffs alleged that defendants misrepresented their exposure to subprime and<br />
Alt-A mortgages, their risk management procedures, and their core capital financials.<br />
Defendants moved to dismiss the claims premised on all three of these alleged<br />
misrepresentations. The court granted these motions to dismiss in part and denied in part. With<br />
respect to the claims based on alleged misrepresentations regarding exposure to subprime and<br />
Alt-A mortgages and risk management procedures, the court denied defendants’ motion to<br />
dismiss. The court first determined that plaintiffs had adequately alleged violations of<br />
Section 10(b) and Rule 10b-5 with regard to these alleged misrepresentations. Turning to<br />
plaintiffs’ Section 20(a) claims, the court held that plaintiffs had sufficiently alleged that<br />
defendant executives had acted with control and culpability. With respect to plaintiffs’ claims<br />
premised on the alleged misrepresentations regarding defendant corporation’s core capital<br />
financials, the court held that plaintiffs had not sufficiently stated culpable misstatements and<br />
granted defendants’ motion to dismiss as to the Section 10(b), Rule 10b-5, and Section 20(a)<br />
claims.<br />
Lewy v. Skypeople Fruit Juice Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,999 (S.D.N.Y. Sept. 7,<br />
2012).<br />
In a putative class action, plaintiff shareholders brought suit against a corporation, several<br />
of its officers and directors, its controlling shareholder, and the underwriter of certain securities<br />
issued by the corporation. Plaintiffs alleged that defendants had failed to disclose a related-party<br />
transaction, and also alleged that defendants had misstated various financial figures in required<br />
filings. Plaintiffs alleged that they relied on these omissions and misstatements to their<br />
detriment. Plaintiffs brought claims under Sections 11, 12, and 15 of the Securities Act of 1933,<br />
as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved<br />
to dismiss the complaint. Turning first to the Securities Act claims, the court held that plaintiffs<br />
had sufficiently alleged material misrepresentations and omissions in support of their primary<br />
violation claims. The court also held that plaintiffs had sufficiently pled a Section 15 control<br />
liability claim, concluding that the allegations sufficiently demonstrated that the relevant<br />
directors and officers had actual control over the alleged misrepresentations and omissions. The<br />
court then held that the plaintiffs had failed to sufficiently allege a Section 10(b) claim based on<br />
defendant corporation’s 2008 financial statements and the related-party transaction, concluding<br />
that plaintiffs had failed to satisfy the heightened particularity requirements for fraud claims and<br />
failed to sufficiently allege scienter. The court also held, however, that plaintiffs had sufficiently<br />
alleged a Section 10(b) claim based on defendant corporation’s 2009 financial statements.<br />
Turning then to the Section 20(a) claims, the court held that plaintiffs had sufficiently alleged<br />
H.2<br />
H.2<br />
271
Section 20(a) claims but only those that were predicated on the 2009 financial statements as<br />
primary violations.<br />
In re Proshares Trust Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,998 (S.D.N.Y. Sept. 7,<br />
2012).<br />
In a putative class action, plaintiff investors brought suit against two trusts and a number<br />
of individuals. Plaintiff alleged that the trust had filed registration statements in connection with<br />
a number of its investment vehicles that had contained material misrepresentations or omissions.<br />
More specifically, plaintiffs alleged that defendants had failed to adequately disclose particular<br />
risks associated with these investment vehicles. Plaintiffs alleged that when these purported<br />
risks materialized, plaintiffs suffered financial injury. Plaintiffs brought claims under<br />
Sections 11 and 15 of the Securities Act of 1933. Defendants moved to dismiss the complaint.<br />
The court first addressed the Section 11 primary violation claims. The court held that the<br />
registration statements filed by defendants adequately conveyed the specific risks associated with<br />
the investment vehicles, including the risks that allegedly materialized. The court held that the<br />
statements were therefore not misleading, and the court dismissed the Section 11 primary<br />
violation claims. The court then dismissed the Section 15 control liability claims, holding that a<br />
Section 15 control person liability claim cannot be maintained without an adequately-pled<br />
primary violation.<br />
In re China Valves Tech. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,023 (S.D.N.Y. Sept. 12,<br />
2012).<br />
In a putative class action, plaintiff investors brought suit against a corporation, several of<br />
its officers and directors, and one of its independent auditors. Plaintiffs alleged that defendants<br />
failed to disclose material facts relating to two of defendant corporation’s acquisitions—more<br />
specifically, that defendant corporation failed to disclose its related-party nature. Plaintiffs also<br />
alleged that defendant corporation overstated its financial results in both a registration statement<br />
and a prospectus statement, as the plaintiffs noted discrepancies between financial figures in<br />
defendant corporation’s Securities and Exchange Commission filings and Chinese regulatory<br />
filings. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act<br />
of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933. The court first analyzed<br />
the Section 10(b) primary violation claims. The court held that plaintiffs had failed to allege that<br />
the related party transactions were material or that disclosure of these transactions was required<br />
under the law. The court also held that plaintiffs’ allegations regarding overstatement of<br />
financial results did not meet the heightened pleading standards required for fraud claims. The<br />
court concluded that plaintiffs had failed to allege a material misrepresentation or omission with<br />
the required particularity, and the court dismissed the Section 10(b) claims. For these same<br />
reasons, the court dismissed the Section 11 and Section 12 claims. Given that plaintiffs had<br />
failed to sufficiently allege a primary violation of the securities laws, the court also dismissed the<br />
control liability claims under Section 20(a) and Section 15.<br />
H.2<br />
H.2<br />
272
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,040 (S.D.N.Y. Sept. 27, 2012).<br />
Plaintiff hedge funds brought suit against a corporation and a number of its directors and<br />
officers. Plaintiffs alleged that defendants made materially false representations that inflated<br />
defendant corporation’s share price, caused plaintiffs to purchase and hold shares at the inflated<br />
share price, and injured plaintiffs when the truth was revealed and the share price plunged.<br />
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934 and alleged Section 20(a) control liability. Defendants moved to dismiss the complaint.<br />
The court held that plaintiffs had failed to allege loss causation, that many of the statements atissue<br />
were protected by the safe harbor provisions of the Private Securities <strong>Litigation</strong> Reform<br />
Act, and that plaintiffs had failed to plead falsity with respect to several of the statements atissue.<br />
The court concluded that plaintiffs had failed to state a claim under Section 10(b) and<br />
Rule 10b-5. Once the court dismissed those claims, the court then dismissed the Section 20(a)<br />
claims because of plaintiffs’ failure to allege a primary violation of the securities laws.<br />
Lighthouse Fin. Grp. v. Royal Bank of Scot. Grp., 2012 U.S. Dist. LEXIS 146640 (S.D.N.Y.<br />
Sept. 27, 2012).<br />
In a class action, defendant bank and several individual defendants were sued by plaintiff<br />
investors who had purchased an investment vehicle from defendant bank. Plaintiffs alleged that<br />
defendants made several false and misleading statements related to the investment vehicle.<br />
Plaintiffs alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss<br />
the complaint. The court first determined that plaintiffs had failed to sufficiently allege a<br />
primary violation of the securities laws. More specifically, the court held that plaintiffs had<br />
failed to allege scienter and particularized facts with regard to the Section 10(b) claims. As<br />
regards the Sections 11 and 12(a)(2) claims, the court held that plaintiffs had failed to<br />
sufficiently allege that the statements at issue were false. The court therefore dismissed the<br />
Section 10(b) claims, Section 11 claims, and Section 12(a)(2) claims. Given that plaintiffs had<br />
failed to allege a primary violation of the securities laws, the court also dismissed the<br />
Section 20(a) and Section 15 control liability claims.<br />
In re UBS AG Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,037 (S.D.N.Y. Sept. 28, 2012).<br />
In a putative class action, plaintiff investors brought suit against a corporation, a number<br />
of its executives, and several of its underwriters for actions related to a securities offering.<br />
Plaintiffs alleged that defendants issued fraudulent statements regarding defendant corporation’s<br />
auction rate securities, its mortgage-related securities portfolio, and its compliance with federal<br />
tax and securities laws. Plaintiffs brought claims under Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933.<br />
Defendant corporation and defendant executives moved to dismiss the Securities Act claims<br />
H.2<br />
H.2<br />
H.2<br />
273
while the underwriters moved to dismiss the Exchange Act claims. The court turned first to<br />
defendant corporation and defendant executives’ motion. The court held that plaintiffs failed to<br />
sufficiently allege scienter with respect to the purported misrepresentations regarding the<br />
mortgage-backed securities portfolio and the auction rate securities. The court also held that<br />
plaintiffs failed to sufficiently allege materiality with regard to the purported tax fraud. The<br />
court therefore dismissed the Section 10(b) claims as against defendant corporation and<br />
defendant executives, and dismissed the Section 20(a) control liability claims for failure to plead<br />
a primary violation of the securities laws. The court turned next to the underwriters’ motion to<br />
dismiss. The court held that a number of plaintiffs lacked standing to bring a Section 12 claim<br />
against defendant underwriters. More generally, the court held that the plaintiffs failed to allege<br />
that purported misrepresentations were material. The court therefore dismissed the Section 11<br />
and 12 claims. Given that no primary violation had been alleged against defendant underwriters,<br />
the court also dismissed the Section 15 control liability claims.<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052 (S.D.N.Y.<br />
Oct. 15, 2012).<br />
This case arose out of the defendant’s bankruptcy proceedings, involving eight<br />
consolidated securities actions brought by California public entities and an insurance company,<br />
asserting claims against defendant’s former officers, directors, and auditor for alleged violations<br />
of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934, California common law, and Sections 25400, 25401, 25504, and 25500<br />
of the California Corporations Code. The plaintiffs alleged that offering documents with respect<br />
to securities that plaintiffs purchased were false and misleading, because they incorporated the<br />
defendant’s financial statements that contained misleading statements and material omissions.<br />
Defendants moved to dismiss on grounds that the plaintiffs did not adequately plead that the<br />
defendants controlled the alleged primary violations of Section 11; however, the court found this<br />
argument to be unsupported by the statutes or any other authority. The court also held that the<br />
defendant’s argument that only control persons who signed a relevant registration statement may<br />
be liable under Section 15 to be without merit. On that basis, the motion to dismiss the<br />
Section 15 claim was denied. The court granted the motion to dismiss certain Section 10(b)<br />
claims which failed to state a claim. Specifically, the Section 10(b) claims based on<br />
misstatements or omissions relating to stress tests, GAAP violations, valuations of CRE Assets,<br />
and concentrations of credit risk as to two individual defendants were all dismissed, as were the<br />
Section 20(a) claims based on those primary violation. As to the remaining Section 10(b) and<br />
related Section 20(a) claims, the court rejected the defendant’s argument that those claims should<br />
fail because the defendant did not have the requisite control over the primary violator. The court<br />
noted that control exists when a person has power directly or indirectly to direct or cause the<br />
direction or management and policies of a person, whether through ownership of voting<br />
securities or otherwise. Because the individual defendants had the power to direct or cause the<br />
direction of management and policies of the defendant company, the court declined to dismiss<br />
the remaining Section 20(a) claims against them. Finally, the court found that the claims under<br />
Section 25504 of the California Corporations Code for control person liability failed for failure<br />
to plead a primary violation, because the defendants, as the underwriters and non-issuers of the<br />
securities in question, were not in privity with the plaintiffs.<br />
H.2<br />
274
Ross v. Lloyds Banking Grp., PLC, 2012 Fed. Sec. L. Rep. (CCH) 97,056 (S.D.N.Y. Oct. 16,<br />
2012).<br />
This is a putative class action alleging that the defendants committed securities fraud<br />
when they misstated and omitted material information regarding the acquisition of a bank by the<br />
defendants. The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of<br />
1934, including Section 20(a) control person liability. The court considered the defendants’<br />
motion to dismiss. Defendants argued that plaintiffs did not satisfy the pleading requirements of<br />
the Private <strong>Litigation</strong> Securities Reform Act (“PLSRA”), plaintiffs did not allege actionable<br />
misstatements or omissions, loss causation, and all of the claims were time-barred. The court<br />
held that the complaint did not plausibly allege that the defendants were liable for material<br />
misstatements or omissions and thus granted the defendants’ motion to dismiss. The court held<br />
that the plaintiffs failed to plead primary violations since they could not show that any allegedly<br />
undisclosed facts were material. Thus, all claims, including the Section 20(a) claims, were<br />
dismissed.<br />
Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,075<br />
(S.D.N.Y. Nov. 5, 2012).<br />
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as<br />
conservator for Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleges misconduct on the<br />
part of the nation’s largest financial institutions in connection with the offer and sale of certain<br />
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint<br />
alleged that the offering documents used to market and sell residential mortgage-back securities<br />
as Fannie and Freddie during the relevant period contained material misstatements or omissions<br />
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that<br />
characterize the underlying mortgages. On these bases, the complaint alleged claims under<br />
Sections 11, 12, and 15 of the Securities Act of 1933, the Virginia Securities Act<br />
Sections 13.1-522(A)(ii) and (C), and the District of Columbia Securities Act<br />
Sections 31-5606.05(a)(1)(B), and (c). The FHFA also asserted claims of fraud and aiding and<br />
abetting fraud under the common law of New York State. The defendants’ motions to dismiss<br />
were granted with respect to the Virginia Securities Act claims, the plaintiffs’ claims of owneroccupancy<br />
and loan-to-value ratio fraud relating to the securities for which the defendant served<br />
as the lead underwriter, and the plaintiffs’ claims of owner-occupancy fraud relating to the<br />
securities for which certain defendants served as a sponsor depositor or lead underwriter. The<br />
motions to dismiss were denied in all other respects.<br />
Dobina v. Weatherford Int’l Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,081 (S.D.N.Y. Nov. 7,<br />
2012).<br />
This class action arose out of statements regarding the international controls and<br />
accounting practices of the defendant company, after it announced that it had previously<br />
H.2<br />
H.2<br />
H.2<br />
275
understated its tax expenses. The plaintiffs, led by a pension fund, alleged that the defendant and<br />
some of its officers as well as its accounting firm violated Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by knowingly issuing materially<br />
false statements regarding the defendant’s tax accounting, and omitting to state facts necessary to<br />
make the statements that were made not misleading. The defendant moved to dismiss for failure<br />
to state a claim. One executive was found to possess the requisite scienter because of his<br />
involvement in designing and evaluating the defendant company’s internal controls. Similarly,<br />
the plaintiffs adequately alleged scienter with regard to the defendant company; however, they<br />
did not sufficiently allege scienter with respect to the other individual defendants, because their<br />
role in designing the internal controls was not particularly alleged. Plaintiffs’ claims regarding<br />
manipulation of tax rate expenses failed because the plaintiffs did not adequately plead scienter.<br />
The plaintiffs similarly failed to plead scienter as to the accounting defendant. Finally,<br />
plaintiffs’ claims under Section 20(a) of the Exchange Act for control person liability against<br />
certain individual defendant officers and the company did not fail, because they had the power to<br />
direct or cause the direction of the management and policies of the defendant company.<br />
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,079<br />
(S.D.N.Y. Nov. 8, 2012).<br />
The Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and<br />
Freddie Mac, alleged misconduct on the part of the defendant financial institutions in connection<br />
with the offer and sale of certain mortgage-backed securities. The FHFA asserted that the<br />
offering documents contained misstatements or omissions, and brought claims alleging<br />
violations of Sections 11, 12, and 15 of the Securities Act of 1933, including Section 15 control<br />
person liability, as well as the Virginia Securities Act Section 13.1-522(A)(ii) and (C), and<br />
District of Columbia Securities Act Sections 31-5606.05(a)(1)(B) and (c). The FHFA also<br />
alleged fraud and aiding and abetting liability under the common law of New York State. The<br />
fraud claims were dismissed because the plaintiff did not plead fraud with particularity. The<br />
claims against the defendant treasurer who signed the registration statement for liability under<br />
Section 11 of the Securities Act and Section 15 control person liability did not fail, because the<br />
defendant treasurer signed the registration statement. The plaintiff’s claims under the District of<br />
Columbia Blue Sky statute also survived, because contrary to the defendants’ assertions, that<br />
statute did not require a plaintiff to allege elements of reliance on the alleged misstatements.<br />
Defendants’ arguments that the plaintiff’s demands for rescission and punitive damages were<br />
improper failed, because the defendants did not establish that the plaintiff’s delay in making a<br />
demand for rescission was unreasonable, and because the complaint adequately supported a<br />
demand for punitive damages under New York law.<br />
Fed. Hous. Fin. Agency v. Barclays Bank PLC, 2012 U.S. Dist. LEXIS 165138 (S.D.N.Y.<br />
Nov. 19, 2012).<br />
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as<br />
conservator of Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleged misconduct on the<br />
276<br />
H.2<br />
H.2
part of the nation’s largest financial institutions in connection with the offer and sale of certain<br />
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint<br />
alleges that the offering documents used to market and sell residential mortgage-back securities<br />
Fannie and Freddie during the relevant period contained material misstatements or omissions<br />
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that<br />
characterize the underlying mortgages. Plaintiffs alleged claims under Sections 11, 12, and 15 of<br />
the Securities Act of 1933, the Virginia Securities Act Sections 13.1-522(A)(ii) and (C), and the<br />
District of Columbia Securities Act Sections 31-5606.05(a)(1)(B), and (c). Defendants were a<br />
bank and several corporate associates and three associated individuals. The court considered the<br />
defendants’ motion to dismiss. The defendants’ claimed that they could not be held liable under<br />
the Virginia Securities Act for primary or control person violations. The court held that the<br />
Virginia Securities Act required contractual privity between the plaintiff and defendant and<br />
accordingly dismissed the primary and control person claims against defendants under this Act<br />
for lack of contractual privity. The motion to dismiss the remaining claims was denied.<br />
Fed. Hous. Fin. Agency v. SG Ams. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,210 (S.D.N.Y.<br />
Nov. 27, 2012).<br />
Plaintiff, Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and<br />
Freddie Mac (“Fannie and Freddie”) alleged misconduct on the part of the defendants, and its<br />
corporate affiliates as well as individual defendants who signed shelf registration statements in<br />
connection with the offer and sale of mortgage-backed securities purchased by Fannie and<br />
Freddie. The complaint asserted that the offering documents used to sell certain residential<br />
mortgage-backed securities to Fannie and Freddie during the relevant period contained material<br />
misstatements or omissions with respect to the owner-occupancy status, loan-to-value ratio, and<br />
underwriting standards that characterize the underlying mortgages. The complaint alleged<br />
claims under Sections 11, 12, and 15 of the Securities Act of 1933, Section 13.1-522(A)(ii) and<br />
(C) of the Virginia Securities Act, and Section 31-5606.05(a)(1)(B) and (c) of the District of<br />
Columbia Securities Act. The court considered the defendants’ motion to dismiss. The motion<br />
was granted with respect to the Virginia Securities Act claims against non-selling defendants and<br />
all attendant control person claims, as well as the Section 12 claims and the District of Columbia<br />
Securities Act claims against underwriters with respect to certificates purchased from other<br />
parties. Specifically, the court held that the defendants made statements of belief about matters<br />
of objective fact. Because the alleged primary violations failed, the control person claims also<br />
failed.<br />
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,234<br />
(S.D.N.Y. Dec. 17, 2012).<br />
Plaintiff investors brought a number of common law claims and securities fraud claims<br />
against a corporation and a number of its executives. Plaintiffs alleged that defendant<br />
corporation had contracted to buy two companies. In order to finance these acquisitions,<br />
plaintiffs alleged that defendants had approached them about the possibility of securing a loan.<br />
At the conclusion of these negotiations, plaintiffs agreed to lend defendants $7.25 million, which<br />
277<br />
H.2<br />
H.2
was to be used for the sole purpose of funding the acquisition of the two companies. As part of<br />
this loan arrangement, defendant corporation was required to make periodic payments to<br />
plaintiffs. Defendant corporation, however, immediately defaulted on these obligations.<br />
Plaintiffs alleged that defendants had materially misrepresented the financial condition and<br />
business prospects of defendant corporation in order to induce plaintiffs to agree to the loan<br />
transaction and in order to induce plaintiffs to refrain from exercising their rights under the loan<br />
transaction. Based on these allegations, plaintiffs brought a multitude of claims against<br />
defendants, including claims under Sections 10(b) and 20(a) of the Securities Exchange Act of<br />
1934. After several defendants defaulted by failing to respond to the complaint, plaintiffs moved<br />
for default judgment with respect to their Sections 10(b) and 20(a) claims against the defaulting<br />
defendants. The court first noted that Rule 55(b) of the Federal Rules of Civil Procedure, as<br />
interpreted by case law, establishes a defaulting defendant’s liability with respect to well-pleaded<br />
claims in a complaint. The court first turned to address the Section 10(b) claims against the<br />
defaulting defendants. The court held that the complaint sufficiently alleged a Section 10(b)<br />
claim against, among others, defendant corporation. The court then turned to the Section 20(a)<br />
control liability claims brought against one of the defaulting defendant executives. The court<br />
held that the complaint sufficiently alleged that the defaulting defendant executive had acted<br />
with scienter and had actual control over defendant corporation at the time of the alleged<br />
misrepresentations. The court, therefore, held that the complaint sufficiently alleged a<br />
Section 20(a) control liability claim against the defaulting defendant executive, and granted<br />
plaintiffs’ motion for default judgment as against that executive.<br />
Fed. Hous. Fin. Agency v. Ally Fin. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,235 (S.D.N.Y.<br />
Dec. 19, 2012).<br />
Plaintiff, a governmental agency, brought suit against a number of financial institutions.<br />
Plaintiff alleged misconduct in connection with the offer and sale of a number of mortgagebacked<br />
securities. More specifically, plaintiff alleged that the offering documents used to market<br />
these securities contained material misrepresentations with respect to the owner-occupancy state,<br />
loan-to-value ratio, and underwriting standards that characterized the mortgages underlying the<br />
securities. Plaintiff brought claims under Sections 11, 12, and 15 of the Securities Act of 1933.<br />
The lead defendant brought a motion to dismiss which argued, among other things, that the<br />
complaint did not sufficiently allege control person liability with respect to the lead defendant<br />
under Section 15. Plaintiff’s Section 15 control liability claim against the lead defendant was<br />
based upon purported primary violations of Sections 11 and 12 by three of the lead defendants’<br />
subsidiaries. The lead defendant argued that it had entered into an operating agreement with one<br />
of its subsidiaries which, inter alia, required the subsidiary to maintain a number of directors<br />
who were independent from the lead defendant, maintain books and records that were separate<br />
from those of the lead defendant, and maintain a corporate identity that was distinct from that of<br />
the lead defendant. The lead defendant argued that this operating agreement established as a<br />
matter of law that the lead defendant did not control the subsidiary. The court held, however,<br />
that the complaint included allegations that cast doubt on any appearance of independence<br />
created by the operating agreement. The court held that the operating agreement’s terms were<br />
not so unambiguous, given the allegations in the complaint, to demonstrate as a matter of law<br />
H.2<br />
278
that the lead defendant did not control the subsidiary. For this reason, the court refused to grant<br />
the lead defendant’s motion to dismiss the Section 20(a) control liability claims.<br />
Warchol v. Green Mountain Coffee Roasters Inc., 2012 U.S. Dist. LEXIS 9851 (D. Vt. Jan. 27,<br />
2012).<br />
Investors sued a corporation for alleged violations of Section 10(b) of the Securities<br />
Exchange Act of 1934 and individual defendants as control persons under Section 20(a).<br />
Section 20(a) holds liable those who control persons who have violated securities laws. The<br />
complaint alleged false statements connected to the corporation’s earnings by the CEO and CFO.<br />
The statements were proven falsely inflated after an internal audit and SEC investigation.<br />
Plaintiffs attempted to prove scienter under Section 10(b) by showing motive and opportunity to<br />
commit fraud and recklessness on defendants’ part. Plaintiffs failed to prove motive and<br />
opportunity through insider stock sales because the complaint did not allege that any insiders<br />
made sales during the class period. Plaintiffs also failed to articulate motive when the deal was<br />
completed after the corporation admitted its earnings were overvalued. Plaintiffs contended<br />
defendants should have been aware of facts belying the statements, such as defendants’ poor<br />
accounting practices and improper shipments to a third-party vendor, and recklessly failed to act.<br />
But facts amounting to an inference of scienter must be at least as compelling as any inference of<br />
non-fraudulent and non-reckless intent. The optimistic view of the facts that lapses in disclosure<br />
control and faulty accounting were unintended consequences of the company’s rapid growth was<br />
more compelling. To establish liability under Section 20(a), a plaintiff must show: (1) a primary<br />
violation by a controlled person; (2) control of the primary violator by the defendant; and (3) that<br />
the controlled person was a culpable participant in the primary violation. Because plaintiffs<br />
failed to show a primary violation, the court granted defendants’ motions to dismiss.<br />
H.2<br />
IBEW Local 98 Pension Fund v. Cent. Vt. Pub. Serv. Corp., 2012 U.S. Dist. LEXIS 36784 (D.<br />
Vt. Mar. 19, 2012).<br />
Shareholders of a corporation brought a putative class action against the corporation and<br />
individual members of the board. Plaintiffs’ claims arose out of the purchase of the corporation<br />
by a third party. Plaintiffs specifically alleged, among other things, that all defendants violated<br />
Section 14(a) of the Securities Exchange Act of 1934 and Section 20(a). Plaintiffs alleged all<br />
defendants, individually and in concert, violated Section 14(a) by filing incomplete and<br />
potentially misleading proxy statements. In dismissing the claim, the court held that the<br />
plaintiffs adequately alleged material omissions from the proxy statement but did not further<br />
allege that those omissions rendered other statements in the proxy statement false or misleading.<br />
With regards to the Section 20(a) claim, the court dismissed the claim because a plaintiff alleging<br />
a violation of Section 20(a) must show “a primary violation by the controlled person and control<br />
of the primary violator by the targeted defendant . . . and show that the controlling person was in<br />
some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.”<br />
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). Thus, because there was no<br />
279<br />
H.2
primary violation by the controlled person, the court held that there was no violation under<br />
Section 20(a).<br />
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).<br />
Plaintiff investors filed a class action suit against defendant corporation and its officers<br />
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11,<br />
12(a)(2), and 15 of the Securities Act of 1933. Plaintiffs alleged for all claims that defendants<br />
made false and misleading statements regarding defendant corporation’s financial position.<br />
Defendants filed motions to dismiss, claiming that plaintiffs insufficiently pled all claims. In<br />
regard to the Section 20(a) Exchange Act claim, the court granted defendants’ motions to dismiss<br />
because plaintiffs failed to state a primary violation under Section 10(b). As for the Section 15<br />
Securities Act claim, the court granted defendants’ motions to dismiss because plaintiffs failed to<br />
sufficiently plead their Sections 11 and 12(a)(2) claims. Because there were no primary<br />
violations of the Exchange and Securities Acts, the plaintiffs’ control person liability claims were<br />
dismissed.<br />
SEC Police & Fire Prof’ls of Am. Ret. Fund v. Pfizer, Inc., 2012 U.S. Dist. LEXIS 16782 (D.N.J.<br />
Feb. 10, 2012).<br />
Investors who purchased or acquired shares of a company purchased by defendant<br />
corporation filed a class action against defendants, including the acquiring corporation and the<br />
company’s senior executives. During the class period, the company was engaged in the<br />
discovery, development, manufacture, and distribution of pharmaceutical and health care<br />
products. The individual defendants all served as senior executives at the company during the<br />
class period.<br />
Plaintiffs alleged that all of the defendants violated Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5. Plaintiffs further alleged that five individual senior<br />
executives violated Section 20(a) and that two of these executives also violated Section 20A of<br />
the Exchange Act. Defendants filed a motion to dismiss. The court held that plaintiffs failed to<br />
allege a primary violation of the Exchange Act; therefore, their claims under Sections 20(a) and<br />
20A must also be dismissed.<br />
Rahman v. Kid Brands Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012).<br />
Plaintiff, representing a putative class of investors who purchased the common stock of a<br />
company between March 26, 2010 and August 16, 2011, filed a class action against the company<br />
and its officers and directors, alleging securities fraud under Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5. The court found that plaintiff’s complaint was<br />
deficient in alleging violations of Section 10(b) and Rule 10b-5. Since the viability of plaintiffs’<br />
Section 20(a) claim was contingent upon the success of plaintiff’s Section 10(b) claim, the court<br />
dismissed plaintiff’s Section 20(a) claim.<br />
H.2<br />
H.2<br />
H.2<br />
280
Pipefitters Local 636 Defined Benefit Plan v. Tekelec, 2012 Fed. Sec. L. Rep. (CCH) 96,788<br />
(D.N.J. May 22, 2012).<br />
Plaintiffs filed a class action against defendant corporation and its officers and directors,<br />
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5. Plaintiffs claimed that defendants made materially false or misleading statements<br />
that inflated the company’s stock price, and that after problems in the company’s<br />
telecommunications market and disappointing financial results were revealed, the stock price<br />
dropped significantly, causing losses to investors.<br />
Defendants filed a motion to dismiss, which the court granted. With regard to the<br />
Section 20(a) claim, the court held that because plaintiffs had not adequately alleged that<br />
defendants violated Section 10(b) or Rule 10b-5, the plaintiffs’ claim under Section 20(a) should<br />
also be dismissed.<br />
H.2<br />
Monk v. Johnson & Johnson, 2012 U.S. Dist. LEXIS 71425 (D.N.J. May 22, 2012).<br />
Plaintiff filed suit against a corporation and four of its officers and directors. Plaintiff<br />
alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934<br />
against all five defendants. Plaintiff alleged a violation of Section 20(a) of the Exchange Act<br />
against the four individual defendants. Defendants moved to dismiss all claims. The court<br />
granted defendants’ motion to dismiss with respect to two of the individual defendants. The<br />
court denied the corporation’s and the other two individual defendants’ motions to dismiss the<br />
Section 10(b) and Rule 10b-5 claim. The court noted that in order to hold the individuals liable<br />
under Section 20(a), plaintiff must prove: (1) that one person controlled another person; and<br />
(2) that the controlled person was liable under the Act. The court held that because the plaintiff<br />
adequately pled scienter against the two remaining individual defendants, the plaintiff<br />
sufficiently alleged control person liability under Section 20(a).<br />
Plaintiff moved for reconsideration of the two dismissed Section 20(a) claims. Plaintiff<br />
argued that the law only required him to show: (1) an underlying violation by the company; and<br />
(2) circumstances establishing defendants’ control over the company’s actions. Plaintiff argued<br />
that the court wrongfully required culpable participation as a third element of the Section 20(a)<br />
claim. The court held plaintiff had conflated culpable participation with scienter, and that only<br />
scienter was required to survive a motion to dismiss. According to the court, culpable<br />
participation must be proven at trial but that it is not required to survive a motion to dismiss. The<br />
court also noted a split among district courts in the Third Circuit: some hold that culpable<br />
participation must be shown at the pleading stage, while others hold that it is only necessary to<br />
prove culpable participation at trial.<br />
H.2<br />
281
Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions Inc.,<br />
2012 Fed. Sec. L. Rep. (CCH) 96,955 (D.N.J. July 31, 2012).<br />
This is a securities class action based on alleged misstatements and omissions in offering<br />
documents filed by defendants with the Securities and Exchange Commission. The claims arose<br />
out of the defendants’ sale of mortgage-backed securities certificates through public offering,<br />
alleging that the defendants failed to disclose information regarding its lending practices. The<br />
defendants moved to dismiss on grounds that the claims were time-barred, that the plaintiffs<br />
lacked standing to bring claims based on securities they did not purchase, and that the plaintiffs<br />
failed to state a claim under Section 11 of the Securities Act of 1933 as well as Section 12(a)(2).<br />
Defendants also argued that the plaintiffs did not plead a cognizable economic loss, and that<br />
there was no claim for control person liability under Section 15 of the Securities Act. The<br />
defendants’ motion to dismiss was granted, because the plaintiffs did not carry their burden of<br />
showing why they were not on inquiry notice of the basis for their claims, therefore their claim<br />
was time-barred.<br />
Stichting Pensioenfonds ABP v. Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 96,980 (D.N.J.<br />
Aug. 1, 2012).<br />
Plaintiff, an institutional investor, brought suit against a pharmaceutical company and a<br />
number of its officers. Plaintiff alleged that defendant corporation had made material<br />
misrepresentations and omissions regarding the cardiovascular safety aspects of one of its more<br />
popular medicinal products. Plaintiff brought claims under Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934, as well as Section 20(a) control liability claims. Defendants<br />
moved to dismiss plaintiff’s claims, with one defendant executive filing a separate motion to<br />
dismiss. After determining that plaintiff had sufficiently alleged a violation of Rule 10b-5, the<br />
court turned to the Section 20(a) control liability claims. The defendant executives who had filed<br />
a joint motion to dismiss argued that plaintiff had failed to allege that they culpably participated<br />
in the issuance of the purportedly fraudulent misrepresentations. The court agreed, holding that<br />
the complaint lacked particularized allegations of fact demonstrating that these executives had<br />
acted or failed to act with the intent to further the alleged fraud. The court therefore dismissed<br />
the Section 20(a) control liability claims against these executives. The court then turned to the<br />
separate motion to dismiss filed by the individual executive. The court noted that the individual<br />
executive based his entire motion to dismiss on the mistaken belief that plaintiff had failed to<br />
allege a primary violation of the securities laws. The court refused to grant the individual<br />
executive’s separate motion to dismiss, because the court had already ruled that plaintiff had<br />
sufficiently alleged a primary violation of the securities laws.<br />
In re Merck & Co., 2012 U.S. Dist. LEXIS 123800 (D.N.J. Aug. 29, 2012).<br />
Plaintiff investors brought suit against a pharmaceutical corporation and a number of its<br />
executives. Plaintiffs alleged that defendants had made material misrepresentations and<br />
H.2<br />
H.2<br />
H.2<br />
282
omissions regarding the cardiovascular safety profile of one of its more popular medicinal<br />
products. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange<br />
Act of 1934. Defendants moved to dismiss plaintiffs’ claims. The court held that several, but<br />
not all, of the alleged misrepresentations were either mere puffery, forward-looking statements<br />
protected by the Private Securities <strong>Litigation</strong> Reform Act’s safe harbor provisions, or statements<br />
of past earnings. These kinds of misrepresentations, the court held, were not actionable and to<br />
the extent that the Section 10(b) claims were based on these purported misrepresentations, they<br />
were dismissed. The court then turned to the Section 20(a) control liability claims brought<br />
against defendant executives. The court held that the complaint failed to sufficiently plead<br />
control liability as to seven of the individual defendants. The court held that plaintiffs failed to<br />
allege specific facts establishing a strong inference that these individuals deliberately or<br />
recklessly acted to deceive investors about the cardiovascular safety profile of this popular drug.<br />
For this reason, the court dismissed the Section 20(a) control liability claims as against those<br />
seven executives.<br />
In re Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,239 (D.N.J. Dec. 20, 2012).<br />
Plaintiff, a foreign investor, brought suit against a corporation and a number of its<br />
executives in connection with alleged material misrepresentations and omissions with respect to<br />
the cardiovascular safety profile of one of the corporation’s most popular drugs. Although<br />
similar claims had been raised against defendants in a putative class action, plaintiff had elected<br />
to bring an independent action on behalf of itself. Plaintiff brought claims under Sections 10(b)<br />
and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Defendants moved to dismiss<br />
the claims. Defendants argued that the Section 10(b) claims were barred by a five-year statute of<br />
repose. Defendants also argued that the Section 20(a) claim should be dismissed, given the lack<br />
of a predicate violation of Section 10(b). The court first held that the Section 10(b) claims were<br />
not barred by the statute of repose, holding that the timely filing of the class action complaint had<br />
tolled the statute of repose applicable to plaintiff’s Section 10(b) claims. Given that the sole<br />
basis for defendants’ motion to dismiss the Section 10(b) claim was erroneous, the court refused<br />
to dismiss the Section 10(b) claim. The court then addressed the motion to dismiss the<br />
Section 20(a) claims. The court noted that defendants’ sole argument for dismissing the<br />
Section 20(a) claims was that there was no predicate violation of Section 10(b). Given that<br />
defendants had failed to dismiss the Section 10(b) claims, the court refused to dismiss the<br />
Section 20(a) claims.<br />
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa. Jan. 6,<br />
2012).<br />
This case arose out of a Ponzi scheme. Plaintiffs alleged that various corporations, which<br />
the perpetrator had an interest in, and individual directors were liable under Section 20(a) of the<br />
Securities Exchange Act of 1934 for the perpetrator’s actions. To succeed on a claim under<br />
Section 20(a), a plaintiff must show: (1) one person controlled another person or entity; (2) that<br />
the controlled person or entity committed a primary violation of the securities laws; and (3) that<br />
the defendant was a culpable participant in the fraud. Fox Int’l Relations v. Fiserv Sec., Inc.,<br />
283<br />
H.2<br />
H.2
490 F. Supp. 2d 590, 601 (E.D. Pa. 2007). Because plaintiffs relied solely on the inaction of the<br />
other defendants to support their position, the court granted summary judgment for defendants on<br />
the claim. It held that inaction alone cannot be a basis for Section 20(a) liability.<br />
Underland v. Alter, 2012 Fed. Sec. L. Rep. (CCH) 96,939 (E.D. Pa. July 11, 2012).<br />
This was a securities class action brought by purchasers of defendants’ notes. The court<br />
previously dismissed certain claims and allowed the amended complaint to proceed. The<br />
plaintiffs claimed that the officers and directors signed the Securities and Exchange Commission<br />
Registration Statements that contained material misstatements and omissions to sell its notes.<br />
The plaintiffs alleged violations of the Securities Act of 1933, Sections 11, 12(a)(2), and control<br />
person liability under Section 15. The defendants’ motion to dismiss was denied, because the<br />
plaintiffs adequately pled its claims under the Exchange Act.<br />
In re Constellation Energy Group, Inc., 2012 U.S. Dist. LEXIS 44036 (D. Md. Mar. 28, 2012).<br />
Plaintiffs filed a class action against a corporation, its officers, directors, and<br />
underwriters. Plaintiffs alleged violations of Sections 11 and 12(a)(2) of the Securities Act of<br />
1933 and Section 10(b) of the Securities Exchange Act of 1934 with respect to alleged<br />
misrepresentations and omissions regarding the corporation’s exposure and collateral obligations<br />
to Lehman Brothers’ bankruptcy. Plaintiffs sought to hold the individual defendants liable as<br />
control persons under Section 15 of the Securities Act and Section 20(a) of the Exchange Act.<br />
The first two amended complaints did not include sufficient factual allegations to support<br />
scienter or severe recklessness under the Private Securities <strong>Litigation</strong> Reform Act of 1995<br />
(“PSLRA”). Plaintiffs moved to file a third amended complaint, alleging that informal discovery<br />
produced new evidence of scienter and materiality. Plaintiffs’ efforts to show scienter through<br />
severe recklessness did not meet the PSLRA’s high bar of showing defendants were so reckless<br />
as to be oblivious to readily apparent malfeasance. The third amended complaint contained new<br />
evidence of prior knowledge of missing credit information, but it fell short of the particularity<br />
and proof of severe recklessness needed to survive a motion to dismiss under the PSLRA.<br />
Furthermore, because it was not Lehman Brothers that owed defendant money, plaintiffs failed<br />
to allege material exposure to Lehman Brothers’ bankruptcy. Finally, plaintiffs contended new<br />
evidence showed that defendants’ “puffery” regarding risk management systems was misleading,<br />
but the court found the statements immaterial because they were vague enough that no<br />
reasonable investor would rely on them. The third amended complaint was insufficient and the<br />
court denied leave to amend.<br />
In re Mun. Mortg. & Equity, LLC Sec. & Derivative Litig., 876 F. Supp. 2d 616 (D. Md. 2012).<br />
Investors filed a complaint against the defendant corporation, which was one of the<br />
country’s largest syndicators of low income housing tax credits, and six of its senior officers and<br />
directors. Pursuant to reporting rules for consolidated financial statements, the defendant had<br />
incurred substantial costs and had to restate those statements twice. This led to a reduction of<br />
284<br />
H.2<br />
H.2<br />
H.2
dividend payments and delisting from the New York Stock Exchange. The plaintiffs alleged<br />
violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934 and<br />
Sections 11, 12, and 15 of the Securities Act of 1933. The plaintiffs alleged that defendants<br />
omitted information and left investors with no way of knowing that the company faced the task<br />
of consolidating the funds and also significantly understated the abilities of the funds.<br />
Defendants filed motions to dismiss. The court found that although the alleged misstatements<br />
concerned the core operations of the business, it did not necessarily mean that the officers knew<br />
the statements were false when made. Additionally, the defendants made repeated disclosures<br />
about the costs and difficulty of the restatement project tending to negate the inference of<br />
scienter. Because the plaintiffs could not plead primary violations under Section 10(b) and<br />
Rule 10b-5, their Section 20(a) control person liability claims failed. However, the court found<br />
merit to plaintiffs’ alleged violations of Sections 11 and 12 of the Securities Act with regard to<br />
the dividend reinvestment plan registration claim. Therefore, the Section 15 claim for control<br />
person liability based on those primary violations survived the motion. The remaining<br />
Sections 11 and 12 claims, based on the statements related to a secondary public offering were<br />
dismissed, as were the Section 15 claims based on those claims.<br />
Thorpe v. Ameritas Inv. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,021 (E.D.N.C. Sept. 19,<br />
2012).<br />
Plaintiffs trust and trustee brought suit against a registered representative, his employer—<br />
a life insurance company—and his employer’s affiliates. The plaintiffs alleged that the<br />
registered representative encouraged and induced plaintiffs to invest in a number of investment<br />
vehicles, and he had repeatedly assured plaintiffs that they would receive a 5% annual return<br />
with these investment vehicles. The investment vehicles’ performance fell short of these<br />
guarantees. Plaintiffs alleged that the registered representative’s performance guarantees were<br />
misrepresentations that violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of<br />
1934. Plaintiffs also alleged that the employer and affiliates were liable as control persons under<br />
Section 20(a) of the Exchange Act. Defendants moved to dismiss the claims, arguing that<br />
plaintiffs had not sufficiently alleged scienter with respect to the registered representative. The<br />
court held that plaintiffs had sufficiently alleged that defendants had a motive to induce plaintiffs<br />
to invest in these particular securities and that defendants knew that plaintiffs were<br />
unsophisticated investors. The court also held that plaintiffs had sufficiently alleged that the<br />
registered representative had either intentionally or recklessly misrepresented the investments’<br />
guaranteed returns. The court concluded that based on these factual allegations plaintiffs had<br />
sufficiently alleged a violation of Section 10(b) and Rule 10b-5, and the court refused to dismiss<br />
the claim. The court further held, albeit without a detailed explanation, that plaintiffs had<br />
plausibly alleged control person liability under Section 20(a) as to the defendant’s employer and<br />
its affiliates.<br />
In re Massey Energy Co. Sec. Litig., 2012 U.S. Dist. LEXIS 42563 (S.D. W. Va. Mar. 28, 2012).<br />
This civil action arose out of the alleged securities fraud committed by a corporation and<br />
several of its officers and directors. The plaintiffs, on behalf of the putative class, alleged that<br />
285<br />
H.2<br />
H.2
the price of the corporation’s stock was artificially inflated because the corporation and several<br />
of its senior executives and directors misled the market about its safety and compliance record<br />
and its disregard for safety regulatory compliance. Plaintiffs asserted a claim under<br />
Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. In their Section 20(a)<br />
claim, plaintiffs contended that the officer defendants by virtue of their positions, stock<br />
ownership, and actions were controlling persons of the corporation who had the power to, and<br />
did, directly and indirectly, exercise control over the corporation. The officer’s alleged control<br />
included controlling content and dissemination of statements that the plaintiffs alleged were false<br />
and misleading. To state a prima facie case under Section 20(a), a plaintiff must allege: (1) a<br />
predicate violation of Section 10(b); and (2) control by the defendant over the primary violator.<br />
In re Mut. Funds Inv. Litig., 566 F.3d 111, 129–30 (9th Cir. 2009). Because the plaintiffs<br />
sufficiently alleged a primary violation of Section 10(b), and the defendants did not attack the<br />
Section 20(a) claim individually, the court held that the plaintiffs’ Section 20(a) claim survived<br />
the defendant’s motions to dismiss.<br />
Rabbani v. DryShips Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,077 (E.D. Miss. Nov. 6, 2012).<br />
In this class action against the defendant company and several of its senior managers and<br />
its underwriter, on behalf of purchasers of its common stock, the plaintiffs claimed that the<br />
defendants violated Sections 10(a) and 20(a) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5 thereunder, for knowingly or recklessly making false and misleading statements or<br />
omissions about a planned spinoff of a subsidiary of the defendant company, as well as the<br />
defendant company’s ability to comply with existing loan covenants, and its general financial<br />
condition. Further, a sub-class of plaintiffs alleged that the defendants violated Sections 11, 12,<br />
and 15 of the Securities Act of 1933 by making false and misleading statements and omissions in<br />
connection with a securities offering. The defendants moved to dismiss, because the statements<br />
were not actionable, protected by a bespeaks caution doctrine, and fell within the safe harbor<br />
provisions of the Private Securities <strong>Litigation</strong> Reform Act (“PSLRA”). The defendants also<br />
failed to show that the plaintiffs did not need the heightened pleading requirements of the<br />
PSLRA. The court dismissed the action because the plaintiffs did not state a claim for securities<br />
fraud against the defendants. They further failed to sufficiently allege an actionable<br />
misrepresentation or omission for scienter.<br />
In re BP P.L.C., 843 F. Supp. 2d 712 (S.D. Tex. 2012).<br />
This case also addresses a group of plaintiffs within the securities class action filed again<br />
BP regarding the oil spill in the Gulf of Mexico. The “New York and Ohio Plaintiffs” filed this<br />
consolidated class action complaint against three corporate defendants, and ten individual<br />
defendants. The New York and Ohio Plaintiffs were successful in alleging that two individual<br />
defendants had violated Section 10(b) of the Securities Exchange Act of 1934. Because the<br />
plaintiffs adequately alleged a violation of Section 10(b), the court considered their Section 20(a)<br />
claim against the remaining defendants. Under the control person doctrine, even corporate<br />
officers who did not personally make a representation or play a significant role in the preparation<br />
of a misrepresentation may still be liable under Section 20(a). See In re Enron Corp. Sec.<br />
286<br />
H.2<br />
H.2
Derivative & ERISA Litig., 235 F. Supp. 2d 549, 594–96 (S.D. Tex. 2002). A plaintiff must<br />
plead facts indicating that defendants not directly involved in the making of actionable<br />
misrepresentations nonetheless had the requisite power to directly or indirectly control or<br />
influence corporate policy. G.A. Thompson & Co., 636 F.2d 945, 958 (5th Cir. 1981). The court<br />
reasoned that such a showing could be made by pointing to day-to-day control of a company’s<br />
operations, knowledge of the underlying primary violation by the controlled person, or facts<br />
showing the defendant had the requisite power to influence corporate policies. In this case, the<br />
court dismissed the Section 20(a) claim because the plaintiffs pointed to no specific knowledge<br />
or facts demonstrating such control.<br />
In re BP P.L.C., 852 F. Supp. 2d 767 (S.D. Tex. 2012).<br />
Plaintiffs were members of a consolidated securities class action against BP P.L.C.<br />
following the explosion of the Deep Water Horizon rig, which caused the loss of life and the<br />
greatest oil spill in the nation’s history. The plaintiffs filed a consolidated class action complaint<br />
alleging securities fraud violations against two corporate defendants, and against nine individual<br />
defendants. The plaintiffs specifically alleged that the company violated Section 10(b) of the<br />
Securities Exchange Act of 1934 and Section 20(a) of the Exchange Act by providing investors<br />
with materially false and misleading representations and omissions regarding the safety<br />
procedures of the company. Under Section 20(a) of the Exchange Act, “every person who,<br />
directly or indirectly, controls any person liable under any provision of this chapter or any rule or<br />
regulation thereunder shall also be liable jointly and severally with and to the same extent as<br />
much controlled person to any person to whom such controlled person is liable. . . .” 15 U.S.C.<br />
§ 78t(a). The court dismissed plaintiffs’ Section 20(a) claim because plaintiffs failed to establish<br />
a primary violation under Section 10(b).<br />
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012).<br />
The Securities and Exchange Commission brought this enforcement action against two<br />
officers of an international corporation that provided offshore drilling services and equipment.<br />
The enforcement action arose out of offshore drilling activity in Nigerian waters. To maintain<br />
operations in Nigerian waters, Nigerian law required offshore drilling rig owners to either pay<br />
import duties or obtain a temporary import permit. The SEC alleged that defendants had<br />
authorized a customs agent to bribe Nigerian officials in order to obtain the false documents<br />
necessary for the acquisition of a temporary import permit. Based on this allegation, the SEC<br />
charged one of defendant corporation’s top executives and one of defendant corporation’s local<br />
managers with violations of the Foreign Corrupt Practices Act and a number of securities laws.<br />
Given the defendant executive’s purported control over both defendant corporation and the<br />
defendant local manager, the SEC also sought to hold the defendant executive liable as a control<br />
person under Section 20(a) of the Securities Exchange Act of 1934. Defendant executive moved<br />
to dismiss the complaint. After determining that the SEC had sufficiently alleged that defendant<br />
corporation and local manager had committed primary violations of the securities laws, the court<br />
addressed defendant executive’s motion to dismiss the Section 20(a) control liability claims. The<br />
court held that the complaint sufficiently alleged that defendant executive knew about and<br />
287<br />
H.2<br />
H.2
facilitated the violations of the Foreign Corrupt Practices Act, and that he had the power to<br />
control defendant corporation and defendant local manager and, in fact, exercised that control.<br />
The court also held that defendant executive at all relevant times had the power to reveal what he<br />
knew of defendant corporation and defendant local manager’s actions to defendant corporation’s<br />
audit committee, thereby facilitating an internal investigation that likely would have put an end<br />
to the violations. When these allegations were considered in full, the court held, they suggested<br />
that defendant executive could have prevented both the Foreign Corrupt Practices Act violations<br />
and the securities laws violations. The court held that the complaint had adequately alleged<br />
control liability as to defendant executive, and therefore refused to dismiss the Section 20(a)<br />
claims.<br />
In re Almost Family Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,737 (W.D. Ky. Feb. 9,<br />
2012).<br />
Plaintiffs’ class action alleged that a health care corporation and its senior executives<br />
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit<br />
fraudulent, material misrepresentations in relation to the sale or purchase of securities. Plaintiffs<br />
alleged that defendants’ financial reports to the Securities and Exchange Commission<br />
misrepresented that defendants were abiding by securities laws and regulations. Plaintiffs also<br />
alleged that statements issued by senior executives following publication of news of<br />
investigations into defendants were material misrepresentations. Plaintiffs did not establish that<br />
defendants’ financial reports constituted material misrepresentations because plaintiffs did not<br />
adequately allege that the financial reports were inaccurate regarding the corporation’s financial<br />
condition. Defendants’ certifications of SEC filings asserted nothing more than beliefs that their<br />
financial reports were accurate and that their actions did not violate securities laws. These<br />
certifications and the CEO’s comments defending the legality of the corporation’s practices<br />
against allegations in the news constituted “soft” information which could not form the basis of a<br />
Section 10(b) and Rule 10b-5 claim without showing knowledge of unlawful conduct on the part<br />
of corporate officers. Furthermore, because plaintiffs failed to identify any disclosure of fraud<br />
on behalf of defendants, plaintiffs did not establish loss causation. Plaintiffs also alleged that the<br />
CEO and vice president were liable under Section 20(a) of the Exchange Act, which imposes<br />
liability on control persons. To state a claim under Section 20(a), a complaint must adequately<br />
allege that underlying primary liability exists. Because plaintiffs failed to adequately allege a<br />
primary violation, their control person liability claim also failed.<br />
City of Pontiac Gen. Emples. Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).<br />
Plaintiffs, on behalf of themselves and a class of purchasers of common stock, filed suit<br />
against a medical technology company and two of its officers. Plaintiffs claimed that defendants<br />
committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange<br />
Act of 1934. They alleged that the defendant corporation achieved earnings growth by cutting<br />
corners on quality and regulatory compliance spending which exposed the corporation to<br />
unnecessary risk and hid millions of dollars in regulatory compliance costs. The defendants<br />
H.2<br />
H.2<br />
288
moved to dismiss. The court granted the motion, holding that because the plaintiffs had failed to<br />
plead a primary violation of Section 10(b), there could be no Section 20(a) violation.<br />
L.A. Mun. Police Emp. Ret. Sys. v. Cooper Indus., 2012 Fed. Sec. L. Rep. (CCH) 97,054 (N.D.<br />
Ohio Oct. 16, 2012).<br />
This is a shareholder derivative action relating to the proposed sale of one of the<br />
defendant’s company to the other defendant corporation. The plaintiffs alleged that the<br />
defendants violation Irish corporate law and provisions of the Securities Exchange Act of 1934.<br />
The plaintiffs alleged that the defendants did not implement a process to obtain a maximum price<br />
for the shareholders, that the consideration paid was unfair to the shareholders, and that the<br />
proxy was misleading. The plaintiffs brought claims under Section 14(a) for alleged<br />
misrepresentations in a proxy statement and Section 20(a) of the Exchange Act for control<br />
person liability. The plaintiffs alleged that the individual defendants acted as control persons by<br />
virtue of their positions as officers and/or directors, and participation in and/or awareness of the<br />
company’s operations and/or intimate knowledge of the false statements contained in the proxy,<br />
and that they had the power to influence and control and did in fact influence and control,<br />
directly and indirectly, the decision-making of the company, including the allegedly false and<br />
misleading statements. The court considered the defendants’ motion to dismiss and found that<br />
the plaintiffs failed to state a claim for an alleged violation of Section 14. The court granted the<br />
defendants’ motion as to the control person liabilities claims for failure to plead a primary<br />
violation.<br />
Garden City Emples. Ret. Sys. v. Anixter Int’l Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,780 (N.D.<br />
Ill. Mar. 29, 2012).<br />
Plaintiffs brought a putative class action on behalf of all persons who acquired the<br />
defendant corporation’s stock between January 2008 and October 2008. Count I of the second<br />
amended complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934<br />
and Rule 10b-5. Count II alleged violations of Section 20(a) of the Exchange Act, which<br />
provides that any person who controls any person liable for a securities violation under the<br />
Exchange Act shall also be jointly and severally liable to the same extent. To state a claim under<br />
Section 20(a), a plaintiff must first adequately plead a primary violation of securities laws.<br />
Plaintiffs alleged that defendants engaged in a scheme to deceive and defraud investors of the<br />
true value of the corporation’s stock. Plaintiffs claimed that defendants misled investors about<br />
negative economic trends affecting defendants’ business in statements that defendants made<br />
during the class period. The court held that plaintiffs failed to specify any statements that were<br />
false or misleading and the reasons why the statements were false or misleading as required by<br />
the Private Securities <strong>Litigation</strong> Reform Act (“PSLRA”). Because plaintiffs also failed to plead<br />
any facts that created a strong inference of scienter as required in a Section 10(b) action, the<br />
court dismissed Count I. Because plaintiffs failed to plead a primary violation of securities laws,<br />
Count II alleging control person liability was dismissed as well.<br />
H.2<br />
H.2<br />
289
Commodities Futures Trading Comm’n v. Sentinel Mgmt. Grp., 2012 U.S. Dist. LEXIS 46198<br />
(N.D. Ill. Mar. 30, 2012).<br />
The Commodities Futures Trading Commission (“CFTC”) alleged violations of the<br />
Commodities Exchange Act (“CEA”) against defendants, an investment advisor group registered<br />
as a Futures Commission Merchant (“FCM”), its CEO, and its vice president. The CFTC alleged<br />
that defendants violated CEA Section 4b(a)(2) by misappropriating investor assets, but because<br />
defendants never solicited or accepted orders for the purchase or sale of futures contracts, the<br />
CFTC could not establish that the alleged fraud was in connection with futures contracts. The<br />
CFTC alleged that defendants failed to segregate investor funds in violation of CEA<br />
Section 4d(a)(2), which applies to FCMs engaged in soliciting or accepting orders for futures<br />
contracts and accepting money to margin, guarantee, or secure resulting trades or contracts.<br />
Because the investment advisor group was not engaged in futures trading, it was not an FCM as<br />
defined by the CEA. The CFTC’s allegations of misappropriating customer funds under<br />
Section 4d(b) failed because defendants did not receive any customer funds as described under<br />
Section 4d(a)(2). The CFTC alleged that defendants, including the CEO as a control person,<br />
filed false Form 1-FRs regarding defendants’ financial condition. To succeed on its claim<br />
against the CEO as a control person under CEA Section 13(b), the CFTC had to establish: (1) a<br />
primary violation of the CEA; (2) that the CEO exercised general control over defendants’<br />
operations; and (3) that the CEO acted in bad faith or knowingly induced the violation. The<br />
evidence showed that defendants did not file false Form 1-FRs and the CFTC could not show<br />
that the CEO acted knowingly, recklessly, or in bad faith. Because the CFTC was unable to<br />
show primary violations of the CEA, defendants’ motion for summary judgment was granted.<br />
Brasher v. Broadwind Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,811 (N.D. Ill. Apr. 19,<br />
2012).<br />
Plaintiffs brought a class action against an energy product manufacturer, several officers<br />
and directors, and the corporation’s primary shareholders for violations of Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs alleged that defendants failed to<br />
disclose the impact of demand cuts by the corporation’s largest customers and overstated the<br />
value of the corporation’s good will and intangible assets through fraudulent delay of impairment<br />
testing. Plaintiffs also alleged control person liability under Section 20(a) against primary<br />
shareholders that owned 47.7% of the corporation’s common stock. In order to state a claim<br />
under Section 20(a), plaintiffs must allege three things: (1) a primary securities violation; (2) the<br />
alleged control person exercised general control over the operations of the corporation; and<br />
(3) the alleged control person possessed the power to control the transaction or activity giving<br />
rise to the primary violation. The complaint failed to allege that the primary shareholders<br />
possessed the power or ability to control the content of the corporation’s Securities and<br />
Exchange Commission disclosures or determine the timing of impairment testing of good will<br />
and other intangible assets. Instead, plaintiffs relied on the fact that the primary shareholders<br />
owned 47.7% of the corporation’s stock and general statements contained in the Form 10-K that<br />
they influenced the corporation’s affairs. These facts failed to state with particularity how the<br />
290<br />
H.2<br />
H.2
primary shareholders were in a position to control the conduct that constituted primary securities<br />
violations. The claim against the primary shareholder defendants was dismissed with prejudice.<br />
SEC v. Black, 2012 U.S. Dist. LEXIS 145587 (N.D. Ill. Oct. 9, 2012).<br />
In this case the court considered the plaintiff Securities and Exchange Commission’s<br />
motion for entry of final judgment, injunctive relief, and civil penalties. Previously, an amount<br />
for disgorgement of $3,819,689.50 against the defendants, to be paid to the victim of the fraud,<br />
was agreed upon by the parties, thus the remaining issue for consideration was the imposition of<br />
the civil penalty. The cause of action arose out of the defendants’ participation in a wide-ranging<br />
fraud. The court granted injunctive relief, preventing the defendant and its agents as control<br />
persons under Section 20(a) of the Securities Exchange Act of 1934 from violating Section 13(a)<br />
of the Exchange Act and other sections of the Exchange Act, by failing to file quarterly reports<br />
with the SEC, and any information required to make those reports not misleading, and preventing<br />
the defendant and its agents as control persons under Section 20(a) of the Exchange Act from<br />
violating Section 13(b) of the Exchange Act for failure to make and keep books and records<br />
reflecting the transactions and disposition of the assets of the issuer. The court declined to issue<br />
a third-tier penalty because under the circumstances of the case, where ill-gotten gains were<br />
forfeited or recovered and the fraudulent conduct was criminally punished and fined, civil<br />
sanctions in the form of disgorgement plus payment of compound interest was found to be<br />
sufficient. Therefore, the defendant was ordered to disgorge $3,819,689.50, plus prejudgment<br />
interest of $2,321,220.00.<br />
Ross v. Career Educ. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,068 (N.D. Ill. Oct. 30, 2012).<br />
In a class action, plaintiff investors brought suit against a corporation, its CEO, and its<br />
CFO. Defendant corporation operated for-profit professional schools and colleges. Plaintiffs<br />
alleged that prior to the class period, defendant corporation was having problems with job<br />
placement statistic improprieties. More specifically, defendant corporation faced accusations of<br />
falsifying job reports. In response, defendant corporation hired defendant CEO, announcing that<br />
he would return defendant corporation to compliance. Four years later, internal investigations<br />
revealed that defendant corporation was still engaging in improper job placement reporting<br />
practices. After the release of these investigations, defendant corporation’s stock price<br />
plummeted. Plaintiffs alleged violations of Rule 10b-5 of the Securities Exchange Act of 1934<br />
and control liability under Section 20(a). Defendants moved to dismiss the complaint.<br />
Defendants argued that plaintiffs had failed to sufficiently allege any misleading statements,<br />
scienter, and loss causation. The court disagreed, holding that plaintiffs had sufficiently pled a<br />
Rule 10b-5 claim. The court then turned to the Section 20(a) claims against the CEO and CFO.<br />
Plaintiffs alleged that the CEO was a control person by virtue of his position with defendant<br />
corporation, his ability to control the daily activities of defendant corporation, and his role in<br />
crafting the public disclosures made by defendant corporation. The court held that this was a<br />
sufficient allegation to support a Section 20(a) claim and denied defendants’ motion to dismiss<br />
the Section 20(a) claim as against defendant CEO. However, the court held that plaintiffs failed<br />
H.2<br />
H.2<br />
291
to sufficiently allege scienter with respect to defendant CFO, and dismissed the Section 20(a)<br />
claims against defendant CFO.<br />
IBEW Local 98 Pension Fund v. Best Buy Co., 2012 Fed. Sec. L. Rep. (CCH) 96,779 (D. Minn.<br />
Mar. 20, 2012).<br />
The plaintiffs filed a securities class action on behalf of all persons who purchased or<br />
otherwise acquired the common stock of defendant corporation during the class period. The<br />
defendants were the corporation and three officers and directors. The plaintiffs argued that<br />
defendants made false and misleading statements concerning the company’s financial status,<br />
revenue, and earnings prospects for fiscal year 2011 and devised a scheme to deceive investors<br />
and the market about the company’s true financial condition. The complaint alleged violations<br />
of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. The defendants<br />
moved to dismiss. With respect to the officers and directors, the court noted that plaintiffs failed<br />
to allege facts sufficient to demonstrate any individual defendants’ acts of fraud. Furthermore,<br />
plaintiffs failed to allege facts that showed any individual defendant possessed scienter.<br />
Regardless of those deficiencies, because the court had denied the plaintiffs’ claims under<br />
Section 10(b) and Rule 10b-5, the plaintiffs’ Section 20(a) claim necessarily failed.<br />
Okla. Firefighters Pension & Ret. Sys. v. Capella Educ. Co., 873 F. Supp. 2d 1070 (D. Minn.<br />
2012).<br />
The plaintiffs alleged the defendant and three officers violated Section 10(b) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934, as they allegedly made materially false and<br />
misleading statements and omissions concerning its enrollment practices, incentive<br />
compensation system, and graduated loan repayment rates. The complaint also claimed the<br />
financial statements did not comply with the Securities and Exchange Commission and GAAP<br />
rules, and that the defendant failed to maintain proper controls over its financial reporting. The<br />
plaintiffs also alleged violations of Section 20(a) of the Exchange Act against the individual<br />
defendants as control persons. The defendants moved to dismiss, arguing that the complaint did<br />
not satisfy the heightened pleading requirements of the Private Securities <strong>Litigation</strong> Reform Act.<br />
The court found that the plaintiffs failed to make out securities fraud claims, because the<br />
plaintiffs could not show a material omission since they could not demonstrate that had<br />
defendants’ actions been timely disclosed, investors would have made different decisions.<br />
Because plaintiffs failed to state a primary violation of the Exchange Act, the control person<br />
claim was also dismissed. The defendants’ motion to dismiss was granted with prejudice.<br />
Rochester Laborers Pension Fund v. Monsanto Co., 2012 Fed. Sec. L. Rep. (CCH) 96,960<br />
(E.D. Mo. Aug. 1, 2012).<br />
In a class action, plaintiff investors filed suit against a corporation and several of its<br />
managers, alleging violations of Sections 10(b) and 20(a), and Rule 10b-5 of the Securities<br />
Exchange Act of 1934. Plaintiffs alleged that defendant corporation had made material<br />
292<br />
H.2<br />
H.2<br />
H.2
misrepresentations about its business, a number of its products, and its earning projections and<br />
financial figures for four of its fiscal years. Defendants moved to dismiss the claims. The court<br />
held that the purported misrepresentations were not actionable because they were protected by<br />
the Private Securities <strong>Litigation</strong> Reform Act’s safe harbor provision and “bespeaks caution”<br />
doctrine, and that the allegations regarding these statements also failed to meet the heightened<br />
pleading requirements for fraud. The court therefore dismissed these claims. Turning next to the<br />
Section 20(a) claims, the court held that a Section 20(a) claim cannot be sustained without an<br />
adequately pled primary violation of the securities laws. Therefore, the court also dismissed the<br />
Section 20(a) control liability claim.<br />
In re QA3 Fin. Corp., 466 B.R. 142 (Bankr. D. Neb. Jan. 18, 2012).<br />
Claims were filed with FINRA against a broker-dealer and individuals associated with<br />
the broker-dealer for alleged violations of securities and other laws. Shortly thereafter, the<br />
broker-dealer filed for bankruptcy. The debtor broker-dealer filed a motion requesting the court<br />
to extend the automatic stay of proceedings to certain non-debtor individuals, including two<br />
individuals who held management positions with the debtor, who the debtor identified as control<br />
persons. The debtor asserted that it owed a duty of indemnification to the individuals for liability<br />
incurred as a result of being control persons of the debtor. (The individuals and the brokerdealer<br />
had an agreement to this effect.)<br />
In support of its motion to extend the stay to non-debtors, the debtors submitted<br />
statements of claims before FINRA containing allegations against the individuals as control<br />
persons of the broker-dealer. The court granted the debtors’ motion to extend the stay to control<br />
person claims, finding that the debtor and the non-debtor individuals had such an identity of<br />
interest that any judgment against the non-debtors would in effect be a judgment or finding<br />
against the debtor.<br />
An investor with claims pending in arbitration before FINRA filed a motion for<br />
clarification of the court’s order regarding the claims. He argued that his claims were not control<br />
person claims, but instead were based on other forms of liability. The individual forwarded the<br />
court’s order to FINRA to proceed with the arbitration on the claims not subject to the stay order.<br />
The debtor contacted FINRA and expressed disagreement with the investor’s characterization of<br />
the claims and the scope of the court’s order. The court clarified that the FINRA arbitrations<br />
could proceed on any and all claims that did not constitute control person claims under federal<br />
securities law. Emphasizing its limited jurisdiction, the court also left to FINRA the task of<br />
determining what constituted a control person claim.<br />
In re Allstate Life Ins. Co. Litig., 2012 U.S. Dist. LEXIS 72900 (D. Ariz. May 24, 2012).<br />
Plaintiff investors sued defendants alleging violations of Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs allege that defendants made<br />
omissions in their disclosures pertaining to the purchase, redemption, financing, debt servicing,<br />
and security of revenue bonds. The district court held that because the plaintiffs stated a valid<br />
293<br />
H.2<br />
H.2
Rule 10b-5 claim against two of the defendants, and the defendants owned a 50% share in one of<br />
the alleged violators of Rule 10b-5, the plaintiffs adequately pled control person liability against<br />
the two defendants.<br />
In re Apollo Grp. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,924 (D. Ariz. June 22,<br />
2012).<br />
Plaintiffs, purchasers of stock issued by a private education provider, filed a class action<br />
against the private education provider and its officers. The court previously dismissed, with<br />
leave to amend, the plaintiffs’ complaint for failure to state a claim for securities fraud. The<br />
plaintiffs’ amended complaint alleged false and misleading statements in violation of the<br />
Securities Exchange Act of 1934 Section 10(b), Rule 10b-5, and Section 20(a). The plaintiffs<br />
specifically alleged that defendants engaged in unethical marketing and recruiting practices and<br />
made statements that were designed to mislead investors or omit material information from the<br />
investors regarding unethical marketing and recruiting practices. The court found that the<br />
statements were inherently subjective and that the plaintiffs failed to prove scienter because they<br />
could not show that the defendants knew about the misleading marketing practices. The control<br />
person claim under Section 20(a) failed because the plaintiffs could not show primary violations<br />
under Section 10(b) and Rule 10b-5 of the Exchange Act.<br />
Red River Res. v. Marine Sys., 2012 U.S. Dist. LEXIS 90959 (D. Ariz. June 29, 2012).<br />
The plaintiffs alleged that their investments in defendants’ company were fraudulently<br />
induced and that the defendant corporation and its officers, including the CEO, concealed<br />
information, made false statements, and breached the investment agreement. The plaintiffs<br />
brought claims under Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange<br />
Act of 1934, as well as claims under Arizona Revised Statutes Sections 44-1991, 44-2003(A),<br />
statutory control person liability under Section 44-1999(B), and consumer fraud under<br />
Section 44-1521. The defendants moved to dismiss on grounds that there was no personal<br />
jurisdiction over the individual defendants and that the plaintiffs failed to state a claim. The<br />
plaintiffs alleged that by virtue of their positions and power to control public statements, the<br />
individual defendants had power to control the defendant company. The court rejected this<br />
argument because plaintiffs failed to allege that the individual defendants exercised actual power<br />
or control over any controlled person. The fact that a person is a CEO or a high ranking officer<br />
does not create a presumption that he or she is a controlling person. Rather, the court looked at<br />
the participation in day-to-day affairs of the corporation and the power to control the corporate<br />
actions. Therefore, the Section 20(a) claims were dismissed. The Arizona securities law claims<br />
for deceptive schemes or conduct failed, but the claims for misstatements of material facts were<br />
adequately pled. Finally, the Arizona control person claims failed because they were conclusory<br />
and insufficient to state a cause of action for the same reason as the Section 20(a) claims.<br />
H.2<br />
H.2<br />
294
H.2<br />
Anderson v. McGrath, 2012 Fed. Sec. L. Rep. (CCH) 97,071 (D. Ariz. Nov. 1, 2012).<br />
Plaintiffs, a group of investors in the defendant company, sued the former officers of the<br />
company along with individuals who sold securities for the company, and five corporate entities.<br />
The plaintiffs alleged violations of Section 10(b), Rule 10b-5, and Sections 14(e) and 20(a) of<br />
the Securities Exchange Act of 1934 as well as breach of fiduciary duties. The plaintiffs alleged<br />
that the defendants failed to disclose material information and sold securities after the defendant<br />
company began contemplating bankruptcy. The plaintiffs alleged certain members of the board<br />
breached their fiduciary duties based on their approval of the new securities offerings despite<br />
knowing of the company’s financial condition. The defendants filed motions to dismiss. The<br />
motions as to the Rule 10b-5 claims against the board member defendants were granted, and the<br />
motions of the officer defendants were granted in part. The Section 20(a) claims failed because<br />
the underlying Section 10(b) claims failed. Finally, the Section 14(e) claims, related to<br />
statements concerning tender offers, were dismissed because they were not adequately pled. The<br />
state law claims were dismissed for lack of personal jurisdiction and lack of standing.<br />
Smilovits v. First Solar, Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,230 (D. Ariz. Dec. 17, 2012).<br />
In a class action, plaintiff investors brought suit against a solar-panel manufacturing<br />
corporation and a number of its officers and directors. Plaintiffs alleged violations of<br />
Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs’<br />
claims were based on allegations that defendants had issued materially false or misleading<br />
statements regarding their products’ cost-per-watt metric and that they had concealed the<br />
existence and severity of known product defects. Defendants moved to dismiss the claims. First,<br />
the court refused to dismiss the Section 10(b) claims, holding that plaintiffs’ allegations<br />
sufficiently pled material misstatements, scienter, and loss causation. The court then addressed<br />
the individual defendants’ motion to dismiss the Section 20(a) control liability claims. The<br />
individual defendants based their motion on their belief that plaintiffs had failed to sufficiently<br />
allege a predicate violation of Section 10(b), and that plaintiffs had failed to demonstrate that the<br />
individual defendants had actual control over the alleged material misstatements not directly<br />
attributed to them. The court noted, however, that plaintiffs had sufficiently pled a primary<br />
violation of Section 10(b). The court also noted that plaintiffs had sufficiently alleged the<br />
individual defendants’ involvement in the decision-making process that generated the<br />
purportedly fraudulent statements. The court concluded that plaintiffs’ allegations were<br />
sufficient to survive a motion to dismiss, and the court therefore refused to dismiss the<br />
Section 20(a) claims.<br />
In re Am. Apparel, Inc. S’holders Litig., 855 F. Supp. 2d 1043 (C.D. Cal. 2012).<br />
Plaintiff investors filed a putative class action suit against defendant corporation and its<br />
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and<br />
Rule 10b-5. Plaintiffs alleged that false and misleading statements were made by defendants.<br />
H.2<br />
H.2<br />
295
Defendants filed motions to dismiss for failure to state a claim. The district court granted<br />
defendants’ motions and dismissed plaintiffs’ Section 20(a) claim because plaintiff failed to<br />
adequately plead a primary securities violation under Section 10(b) and Rule 10b-5.<br />
Karam v. Corinthian Colleges, Inc., 2012 U.S. Dist. LEXIS 44153 (C.D. Cal. Jan. 30, 2012).<br />
Plaintiff investors filed a putative class action against defendant corporation and its<br />
officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendant was<br />
a for-profit education company. Plaintiffs purchased defendant’s securities, and alleged that<br />
during the class period, defendant engaged in a practice of misleading applicants and enrolling<br />
and maintaining as many students as possible without regard to their abilities or academic<br />
progress, in order to maximize its federal funding. Plaintiffs alleged that individual defendants<br />
were aware of the pervasive problems, at defendant company, and therefore they knew that<br />
public statements were materially false and misleading. The court held that because plaintiffs<br />
failed to state a claim under Section 10(b), no primary securities violation was committed.<br />
Because there was no primary securities violation, plaintiffs’ Section 20(a) control person claim<br />
was dismissed.<br />
Scott v. ZST Digital Networks, Inc., 2012 U.S. Dist. LEXIS 19392 (C.D. Cal. Feb. 14, 2012).<br />
Plaintiff investors sued defendant corporation and its officers for violations of<br />
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934. Plaintiffs alleged that defendants submitted materially false<br />
reports to the Securities and Exchange Commission. Specifically, plaintiffs alleged that<br />
defendant filed different registration statements with the SEC and the Chinese State<br />
Administration of Industry and Commerce. In regard to the Section 15 control person liability<br />
claim, the court granted the defendants’ motions to dismiss because plaintiffs failed to<br />
sufficiently plead a primary securities violation under Section 11 of the Securities Act of 1933.<br />
As for plaintiffs’ control person liability claim, the court dismissed the Section 20(a) claim<br />
against one defendant because plaintiffs failed to adequately plead a primary securities violation<br />
under Section 10(b) of the Exchange Act. However, with respect to a second defendant, his<br />
motion to dismiss was denied because plaintiffs sufficiently pled a primary securities violation<br />
under Section 10(b). This is because the plaintiffs sufficiently pled loss causation and reliance.<br />
Dexia Holdings, Inc. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71374 (C.D. Cal.<br />
Feb. 17, 2012).<br />
Plaintiff investors sued defendant corporation and its subsidiaries and officers for<br />
violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Plaintiffs alleged that<br />
misrepresentations were made in regard to the quality of residential mortgage-backed securities<br />
which plaintiffs purchased. With respect to plaintiffs’ Section 15 control person liability claims,<br />
296<br />
H.2<br />
H.2<br />
H.2
the court held that plaintiffs alleged sufficient facts to support a Section 15 claim by listing in the<br />
complaint the defendants’ names, titles, and offering documents that the defendants signed.<br />
Because these facts made it plausible that the defendants were in a position to exercise control<br />
over the fund and its disclosures, the Section 15 claim survived the defendants’ motions to<br />
dismiss.<br />
In re China Educ. Alliance, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,804 (C.D. Cal. Apr. 6,<br />
2012).<br />
Plaintiff filed a putative class action suit against defendants for violation of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Plaintiff<br />
alleged misrepresentations were made on financial statements filed with the SEC by the<br />
defendant corporation’s audit committee. The issue before the court was whether plaintiff<br />
sufficiently pled that defendants had actual power or control over the corporation so that<br />
plaintiff’s Section 20(a) claim could survive defendants’ motions to dismiss. The court denied<br />
one defendant’s motion to dismiss since plaintiff supported the assertion that the defendant<br />
participated in or controlled the day-to-day operations of the corporation by alleging that<br />
defendant wrote and signed forms on behalf of the corporation’s audit committee. The court<br />
denied a second individual defendant’s motion to dismiss because plaintiff alleged that this<br />
defendant was the chairperson of the corporation’s audit committee—which was sufficient to<br />
establish a prima facie case of control person liability. As for a third individual defendant, the<br />
court granted the dismissal of plaintiff’s Section 20(a) claim since plaintiff merely included a<br />
letter that listed the defendant’s qualifications to serve as a director of the corporation.<br />
Katz v. China Century Dragon Media, Inc., 2012 U.S. Dist. LEXIS 65748 (C.D. Cal. May 7,<br />
2012).<br />
Plaintiff shareholders sued defendant corporation and its officers under Sections 11, 12,<br />
and 15 of the Securities Act of 1933. Plaintiffs alleged false statements were made in various<br />
public filings with the Securities and Exchange Commission in connection with defendants’<br />
public offering. Specifically, plaintiffs sought to impose associate liability on defendant’s<br />
underwriters and auditors. The court denied the defendant’s motion to dismiss, because<br />
plaintiffs sufficiently pled that the SEC filings were false. The court denied defendants’ motions<br />
to dismiss the Section 15 claim, because plaintiffs sufficiently pled that defendants were control<br />
persons. Plaintiffs alleged the individual defendant was the CEO and sole owner of the<br />
corporation who controlled its management and policies, was involved in the structuring and<br />
completion of the public offering, had day-to-day control over the corporation, and designed the<br />
particular reverse merger process by which the corporation was made public. Because plaintiffs<br />
sufficiently pled facts to support the Section 15 control person claim, defendants’ motions to<br />
dismiss were denied.<br />
H.2<br />
H.2<br />
297
In re A-Power Energy Generation Sys. Sec. Litig., 2012 U.S. Dist. LEXIS 79417 (C.D. Cal.<br />
May 31, 2012).<br />
Plaintiff investors filed a class action suit against defendants, a foreign holding<br />
corporation and its officers, for violations of Sections 10(b) and 20(a) of the Securities Exchange<br />
Act of 1934, and Rule 10b-5. Plaintiffs alleged misrepresentations were made by defendants<br />
about a security which plaintiffs purchased. The district court dismissed plaintiffs’ Section 20(a)<br />
control person liability claims. The court reasoned that plaintiffs merely made conclusory<br />
assertions that defendants were control persons, based on defendant officers’ roles as<br />
independent directors of the corporation. Because there was no showing of defendants’ actual<br />
participation in or influence over the corporation’s operation, the Section 20(a) claim was<br />
dismissed.<br />
Mass. Mut. Life Ins. Co. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 121702 (C.D. Cal.<br />
Aug. 17, 2012).<br />
Plaintiff insurance company, which had purchased a number of mortgage-backed<br />
securities, filed suit against the seller of these securities, its underwriters, and a number of<br />
individuals for violations of Section 410(a) of the Massachusetts Uniform Securities Act<br />
(“MUSA”). The complaint included a Section 410(a) control liability claim against an<br />
officer/director of a defendant underwriter’s parent company. Defendant officer/director moved<br />
to dismiss the claim, arguing that he had no formal role at the underwriting subsidiary and that<br />
plaintiff had failed to sufficiently allege that he had actual control over the underwriting<br />
subsidiary. The court first held that plaintiff had sufficiently alleged that the underwriting<br />
subsidiary had committed primary violations of MUSA. In ruling on defendant officer/director’s<br />
motion to dismiss, the court noted several allegations in the complaint. First, the court noted that<br />
defendant officer/director was allegedly a “top officer and director” at the subsidiary’s parent<br />
company. Second, the court noted that defendant officer/director allegedly exercised substantial<br />
influence on the parent company which, in turn, closely supervised the subsidiary’s underwriting<br />
of mortgage-backed securities. Third, the court noted that the underwriting subsidiary’s parent<br />
company operated its subsidiaries as a “collective enterprise” and that defendant officer/director<br />
was an influential participant in the underwriting process for mortgage-backed securities. The<br />
court held that these allegations were sufficient to plead control on the part of defendant<br />
officer/director, and the court therefore denied his motion to dismiss the claims.<br />
In re China Intelligent Lighting & Elecs. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,008 (C.D. Cal.<br />
Sept. 5, 2012).<br />
Plaintiff investors filed suit against a foreign corporation and a number of its officers,<br />
directors, underwriters, and auditors, alleging violations of Sections 11, 12, and 15 of the<br />
Securities Act of 1933. In connection with a public offering in the United States, defendant<br />
foreign corporation made a number of registration filings with the Securities and Exchange<br />
298<br />
H.2<br />
H.2<br />
H.2
Commission reflecting defendant foreign corporation’s financial conditions. In that same year,<br />
defendant foreign corporation filed audited statements with regulatory agencies in its home<br />
country. The statements filed in its home country were much less optimistic about the<br />
corporation’s financial condition. Plaintiffs alleged that the statements filed in the United States<br />
were, given the discrepancies, false and misleading. An officer from one of the underwriting<br />
defendants moved to dismiss the Section 15 control liability claims asserted against him.<br />
Plaintiffs pointed to several allegations in support of their argument that this officer controlled<br />
the defendant underwriter. First, plaintiffs pointed to the fact that he was the underwriter’s CEO<br />
and founder, the sole owner of the underwriter’s parent company, and that the officer had<br />
exercised control over the underwriter’s banking operations at the time of the purported<br />
misrepresentations. Plaintiffs also alleged that the underwriter itself had represented to<br />
American regulatory authorities that this officer controlled and managed the policies of the<br />
underwriter and that this officer had been a major shareholder of defendant foreign corporation at<br />
the time of the purported misrepresentations. The court concluded that these allegations were<br />
sufficient to plead control person liability under Section 15 as against the officer. The court<br />
therefore denied his motion to dismiss those claims.<br />
Embraceable You Designs, Inc. v. First Fid. Grp. Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,217<br />
(C.D. Cal. Dec. 3, 2012).<br />
Plaintiff, a corporation that manufactured clothing, brought suit against a private equity<br />
fund, the fund’s managing director, a company affiliated with the fund, the affiliate company’s<br />
manager, a corporation, and the corporation’s president. Plaintiff’s owner had put plaintiff and<br />
plaintiff’s assets up for sale. Defendant president, in tandem with defendant manager, offered to<br />
pay for plaintiff’s assets with two bonds purportedly issued by defendant fund. Plaintiff alleged<br />
that the president and the manager had misrepresented and concealed material facts with regard<br />
to the bonds’ character and validity. In reliance on these misrepresentations and concealments,<br />
plaintiff’s owner closed the deal selling plaintiff’s assets to the president. Subsequently,<br />
plaintiff’s owner discovered that the bonds were worthless and constituted inadequate<br />
compensation for plaintiff’s assets. Plaintiff brought claims under Sections 10(b) and 20(a) and<br />
Rule 10b-5 of the Securities Exchange Act of 1934. The court, on prior motion, had dismissed<br />
all defendants except for the president and the manager. As against these two defendants,<br />
plaintiff moved for summary judgment. Defendants failed to oppose the motion. The court first<br />
granted the motion for summary judgment with respect to the Section 10(b) and Rule 10b-5<br />
claims, holding that plaintiff had sufficiently proved all necessary elements of those claims. The<br />
court then turned to the Section 20(a) control liability claim against the manager. Plaintiff<br />
alleged that the manager controlled the president and had directed the president to perpetrate the<br />
fraud on plaintiff. Plaintiff’s argument was based solely on the manager’s managerial position.<br />
The court acknowledged the manager’s managerial position, but held that managerial position<br />
alone is not dispositive as to an individual’s liability under Section 20(a). The facts of the case,<br />
the court concluded, did not create an appearance of control—it was more accurate to say that<br />
the manager and the president collaborated in perpetrating the fraud on plaintiff. Because<br />
plaintiff’s contentions with regard to the Section 20(a) claim were conclusory and unsupported<br />
by factual allegations, the court refused to grant summary judgment with respect to that claim.<br />
H.2<br />
299
H.2<br />
Alberts v. Razor Audio, Inc., 2012 U.S. Dist. LEXIS 20386 (E.D. Cal. Feb. 16, 2012).<br />
A defendant filed a cross-complaint against cross-defendants, a law firm and three<br />
individuals for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5. Cross-complainant alleged that an individual cross-defendant was the CFO of<br />
several corporations and that he used his control over the corporations to “siphon off” investment<br />
money that should have been used for research and development and allegedly disregarded<br />
corporate governance rules such as holding board meetings regularly.<br />
Cross-defendant filed a motion to dismiss. Though the court dismissed the underlying<br />
violations alleged in the cross-complaint, in dismissing the Section 20(a) claim against the<br />
individual cross-defendant, the court focused on the substantive issue of control. The court held<br />
that alleging that a defendant held an executive position within a company was not sufficient to<br />
adequately allege control person liability. The court noted that the controlling person must have<br />
acted in bad faith and directly or indirectly induced the conduct constituting a violation or a<br />
cause of action.<br />
MVP Asset Mgmt. (USA) LLC v. Vestbirk, 2012 Fed. Sec. L. Rep. (CCH) 96,938 (E.D. Cal.<br />
July 11, 2012).<br />
Plaintiffs alleged violations of the Securities Exchange Act of 1934 under Section 10(b)<br />
and control person liability under Section 20(a). The defendants moved to dismiss, arguing that<br />
Section 10(b) of the Exchange Act did not have an extraterritorial reach, thus the plaintiffs’<br />
claims were barred because they were based on offshore transactions, and the Section 20(a)<br />
claim fell within the underlying Section 10(b) claim. The court stated that the focus of the<br />
Exchange Act was not upon the place where the deception originated, rather upon purchasers or<br />
sales of the securities in the United States. The court held that the defendants’ claims regarding<br />
the transactions were insufficient to establish the existence of domestic transactions, thus the<br />
dismissal was warranted. Since the plaintiffs could not properly plead primary violations of the<br />
Exchange Act, the Section 20(a) claims were also dismissed. The court denied the motion to<br />
dismiss on the plaintiffs’ remaining claims of collusion for purposes of asserting federal<br />
jurisdiction.<br />
Wozniak v. Align Tech., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).<br />
Plaintiff investors filed suit against defendant corporation under Sections 10(b) and 20(a)<br />
of the Securities Exchange Act of 1934. Plaintiffs alleged that defendant disseminated materially<br />
false and misleading statements and concealed material adverse facts regarding the corporation’s<br />
growth prospects, business, and product. Defendant filed a motion to dismiss, claiming that<br />
plaintiff had not adequately pled a primary securities violation. The court granted defendant’s<br />
motion to dismiss because plaintiff failed to sufficiently plead a primary securities violation<br />
which is required in order to establish Section 20(a) liability.<br />
300<br />
H.2<br />
H.2
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
96,757 (N.D. Cal. Mar. 2, 2012).<br />
Plaintiff investors filed a class action suit against defendant corporation and its officers<br />
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that<br />
defendants made a number of false and misleading statements concerning defendant<br />
corporation’s financial forecasts and pricing strategy. The court dismissed plaintiffs’<br />
Section 20(a) control person liability claim because plaintiffs failed to sufficiently plead an<br />
underlying securities violation under Section 10(b) of the Exchange Act.<br />
Police Ret. Sys. v. Intuitive Surgical, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,832 (N.D. Cal.<br />
May 22, 2012).<br />
Plaintiff investors filed a class action suit against defendant corporation and its officers<br />
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that 31<br />
false and misleading statements were made in the corporation’s Form 10-K annual report or<br />
during “analyst calls.” The court granted defendants’ motions to dismiss the Section 20(a)<br />
control person liability claim because plaintiffs failed to plead a violation of a primary securities<br />
claim under Section 10(b).<br />
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,945<br />
(N.D. Cal. July 23, 2012).<br />
This securities fraud class action was brought by purchasers of defendants’ common<br />
stock, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5. The plaintiffs also alleged violations of Section 20(a) of the Exchange Act. The<br />
plaintiffs alleged that defendants made false and misleading statements regarding future growth<br />
prospects and insufficient disclosures of the defendants’ adoption of new accounting practices.<br />
Specifically, the plaintiffs alleged that defendant withheld information that it lacked salespeople<br />
to sell its products, and that it withheld information regarding slumping sales at major customers,<br />
compatibility issues with its products, bugs in its system, pricing pressures from competitors, and<br />
below target sales at a customer. The court considered the defendants’ motion to dismiss. The<br />
court found that the alleged misstatements were either forward-looking or “mere puffery” and<br />
thus there were not actionable under the Private Securities <strong>Litigation</strong> Reform Act safe harbor<br />
provision. The plaintiffs also failed to show that the statements were false and misleading when<br />
made. Because the plaintiffs failed to plead a primary violation, the control person claims also<br />
failed. The defendants’ motion to dismiss was therefore granted.<br />
H.2<br />
H.2<br />
H.2<br />
301
H.2<br />
Bonato v. Yahoo Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,968 (N.D. Cal. Aug. 10, 2012).<br />
In a putative class action, plaintiff investors filed suit against a corporation and a number<br />
of its executives, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act<br />
of 1934. Plaintiffs alleged that defendants issued materially false and misleading statements<br />
concerning defendant corporation’s investment in a foreign company. Defendants moved to<br />
dismiss the claims. The court first addressed the Section 10(b) primary violation claims. The<br />
court held that plaintiffs had not sufficiently alleged that defendants’ statements were either false<br />
or otherwise misleading, or that the statements gave rise to a duty to correct or update. The<br />
court, therefore, granted the motion to dismiss the Section 10(b) claims. The court also<br />
dismissed the Section 20(a) control liability claims, holding that a Section 20(a) claim cannot be<br />
sustained where there has not been a sufficiently pled primary violation of the securities laws.<br />
Curry v. Hansen Med. Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,972 (N.D. Cal. Aug. 10, 2012).<br />
Plaintiff shareholders filed suit against a corporation and a number of its former<br />
executives, alleging that defendants had encouraged and induced them to buy defendant<br />
corporation’s stock at artificially inflated prices by intentionally misrepresenting defendant<br />
corporation’s sales performance and its revenue recognition practices. Plaintiffs brought claims<br />
under Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Notably,<br />
plaintiffs also brought a Section 20(a) control liability claim against defendant corporation itself.<br />
Defendants moved to dismiss the claims. The court, after determining that plaintiffs had<br />
adequately pled primary violations of the securities laws under Rule 10b-5, turned to the issue of<br />
control liability under Section 20(a). The court first addressed the individual defendants’ motion<br />
to dismiss the control liability claims. The court held that plaintiffs had sufficiently alleged that<br />
each individual defendant exercised actual control over defendant corporation by virtue of their<br />
supervisory involvement in defendant corporation and their involvement in the every day<br />
operations of defendant corporation. The court, therefore, denied the individual movants’<br />
motion to dismiss. The court then turned to defendant corporation’s motion to dismiss the<br />
control liability claims. The court granted defendant corporation’s motion, noting that a<br />
corporation is a fictitious entity and cannot, under the law, control those who act on its behalf.<br />
Cho v. UCBH Holdings, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,996 (N.D. Cal. Aug. 29, 2012).<br />
Plaintiff investors filed suit against a corporation and a number of its directors and<br />
officers for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934,<br />
and also brought control liability claims under Section 20(a) of the Exchange Act. Plaintiffs’<br />
claims were based on alleged material misrepresentations concerning defendant corporation’s<br />
allowance and provision for loan loss and its financial reporting controls. Defendants moved to<br />
dismiss the claims. After determining that plaintiffs had sufficiently alleged a primary violation<br />
of securities laws under Section 10(b), the court addressed the control liability claims under<br />
Section 20(a). The court addressed these claims with respect to each individual defendant in<br />
302<br />
H.2<br />
H.2
turn. The court held that plaintiffs’ allegations of control over defendant corporation and over<br />
the alleged fraud were sufficient with respect to all individual defendants except for one officer<br />
and one director. With respect to the one officer, the court noted that plaintiffs had based their<br />
control liability claims solely on his position with defendant corporation and that plaintiffs had<br />
failed to plead any facts demonstrating his role in the fraud. With respect to the one director, the<br />
court noted that plaintiffs had failed to allege that the director’s control over defendant<br />
corporation was contemporaneous with the alleged fraud. Therefore, the court denied the motion<br />
to dismiss the Section 20(a) claims pertaining to all individual defendants except for the one<br />
officer and one director mentioned above.<br />
In re Diamond Foods Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,216 (N.D. Cal.<br />
Nov. 30, 2012).<br />
This putative class action arose from allegations of false and misleading statements.<br />
Plaintiffs were investors who purchased securities of the defendant corporation. Plaintiffs<br />
brought claims against the defendant corporation, as well as individual board members and<br />
officers and the outside auditor, alleging that the defendants deliberately understated commodity<br />
costs, and improperly accounted for payments made to suppliers to increase apparent profits and<br />
maintain higher share prices. The court considered the defendants’ motion to dismiss. The<br />
outside auditor’s motion was granted, but the remaining defendants’ motions were denied.<br />
Plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934 were sufficiently<br />
pled because the complaint raised a strong inference of scienter. As to the individual defendants,<br />
plaintiffs successfully pled scienter by alleging that one defendant was directly involved in<br />
making accounting decisions, and that the other had actual knowledge of the business at issue.<br />
Finally, the plaintiffs’ control person claims under Section 20(a) of the Exchange Act were<br />
adequately pled because the individual defendants were actively involved in the day-to-day<br />
operations of the defendant corporation, and were senior executives or board members.<br />
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,220 (N.D. Cal. Dec. 5, 2012).<br />
In a putative class action, plaintiff pension funds brought suit against a corporation, its<br />
CEO, and its CFO. Plaintiffs alleged that defendant corporation’s stock price was artificially<br />
inflated due to defendants’ materially false and misleading statements regarding defendant<br />
corporation’s pricing strategy and sales force integration endeavor. Plaintiffs further alleged that<br />
subsequent statements by defendants revealed the fraud, and consequently the corporation’s<br />
stock price plummeted. Plaintiffs brought claims under Sections 10(b), 20(a), and Rule 10b-5 of<br />
the Securities Exchange Act of 1934. Defendants moved to dismiss the complaint. The court<br />
held that plaintiffs had failed to sufficiently allege falsity and scienter with respect to the<br />
statements regarding sales force integration endeavors. Instead, the allegations merely<br />
demonstrated that defendant corporation had been initially optimistic about the future success of<br />
the sales force integration effort, but that the endeavors did not go as smoothly as initially hoped.<br />
The court similarly held that plaintiffs failed to sufficiently allege falsity and loss causation with<br />
303<br />
H.2<br />
H.2
espect to the statements regarding pricing strategy. For these reasons, the court granted<br />
dismissal of plaintiffs’ Section 10(b) claims. Given that plaintiffs had failed to sufficiently<br />
allege a predicate violation of Section 10(b), the court also dismissed the Section 20(a) control<br />
liability claims.<br />
Mallen v. Alpha Tech Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).<br />
Plaintiff investors filed a class action suit against defendant corporation and its officers<br />
for violations of Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a)<br />
of the Securities Exchange Act of 1934. Plaintiffs alleged false statements were made and<br />
material information was omitted by defendants in order to inflate the corporation’s price so it<br />
could profit financially. The defendants filed motions to dismiss claiming that plaintiffs could<br />
not sufficiently plead primary securities violations under Sections 11 of the Securities Act and<br />
Section 10(b) of the Exchange Act. The court granted defendants’ motions to dismiss plaintiffs’<br />
control person liability claims because plaintiffs failed to plead a primary violation of the<br />
Securities Act or the Exchange Act.<br />
In re MGM Mirage Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,787 (D. Nev. Mar. 26, 2012).<br />
Plaintiffs, investors in the securities of defendants between August 2, 2007 and March 5,<br />
2009, filed a class action against defendants, a corporation and its officers and directors, alleging<br />
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged<br />
that some of the officers and directors made materially false and misleading statements about the<br />
company’s liquidity and revenues, causing them to purchase stock for artificially inflated prices<br />
while corporate insiders sold close to $90 million in personally-held stock. After the truth of the<br />
company’s financial situation became known, the stock price significantly dropped, causing<br />
losses to investors.<br />
Defendants filed a motion to dismiss, claiming that plaintiffs failed to allege a false or<br />
misleading statement, the required strong inference of scienter, and loss causation. Since no<br />
primary violation was properly pled, defendants moved to dismiss plaintiffs’ Section 20(a) claim.<br />
The court held that plaintiffs failed to adequately plead an underlying claim, and accordingly, it<br />
dismissed plaintiffs’ Section 20(a) claim.<br />
Baroi v. Platinum Condo. Dev., LLC v. Marcus Hotels, Inc., 2012 U.S. Dist. LEXIS 95724 (D.<br />
Nev. July 10, 2012).<br />
Plaintiffs purchased condominiums in defendants’ housing development. Defendants<br />
were a condominium development company, a management company, and a hotel company.<br />
The plaintiffs alleged violations of the Nevada Securities (Uniform Act) laws, including Nevada<br />
control person liability claims, under Nevada Revised Statutes Sections 90.460, 90.660, and<br />
90.660(4). There was a dispute in this case over whether selling condominium units with rental<br />
304<br />
H.2<br />
H.2<br />
H.2
agreements constituted securities. Plaintiffs moved for summary judgment on this and other<br />
issues. The court granted the motion, holding that an interest in a common interest community,<br />
combined with a rental agreement, was a security. The control person claim was also decided in<br />
the plaintiffs’ favor on summary judgment based on the fact that one defendant owned over 10%<br />
of the various corporate defendants, and eventually owned 100% of the other defendants. Thus,<br />
the defendant was in a position to influence and make important decisions on the others’ behalf;<br />
thus, he was a control person under NRS Section 90.660(4).<br />
Elliot v. China Green Agrics., Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,076 (D. Nev. Nov. 1,<br />
2012).<br />
Defendant, a United States corporation headquartered in China, completed an alternative<br />
public offering to become a public company in the United States. In connection with its<br />
secondary offering, the defendant filed prospectuses and registration statements with the<br />
Securities and Exchange Commission. These statements were underwritten by the defendant<br />
underwriter. The plaintiff, purchasers of the securities, filed a class action under Sections 10(b),<br />
15, and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the<br />
Securities Act of 1933 against the defendant company as well as individual officers, and against<br />
the underwriter defendant. The defendants filed a motion to dismiss for failure to state a claim<br />
upon which relief could be granted. The Section 11 claims were dismissed because the lead<br />
plaintiffs failed to allege facts showing that the particular shares could be traced back to the<br />
public offering at issue. Similarly, the Section 15 control person liability claims were dismissed<br />
because the plaintiffs failed to plead a primary violation under Section 11. The Section 10(b)<br />
claims survived dismissal because the plaintiffs sufficiently pled scienter and material<br />
representation. Finally, the Section 20(a) claims survived dismissal because the plaintiffs<br />
sufficiently alleged primary violations under Section 10(b), and because the plaintiffs sufficiently<br />
alleged control as to the top directors and officers of the defendant company, because they signed<br />
the registration statements at issue and made statements during public conference calls and<br />
presentations. Moreover, by their position as directors and officers, the individual defendants<br />
had the power to issue false statements. Therefore, the motion to dismiss as to that claim was<br />
denied.<br />
King Cnty. Wash. v. Merrill Lynch & Co., 2012 U.S. Dist. LEXIS 87734 (W.D. Wash. June 25,<br />
2012).<br />
Plaintiff King County, Washington, brought a claim against its broker-dealer and<br />
registered representative for losses which arose out of a purchase of asset-backed commercial<br />
paper, the vast majority of which consisted of subprime mortgage-backed securities. The<br />
plaintiff alleged breach of contract and violations of Washington State Securities Act<br />
Sections 21.20.430(3) for control person liability, and 21.20.010(2) and (3), including alleged<br />
misstatements or omissions in connection with the offer, sale, or purchase of securities, fraud or<br />
deceit. As to the control person claims, plaintiff argued that several entities related to the<br />
corporate defendant controlled other entities directly responsible for the alleged violations.<br />
305<br />
H.2<br />
H.2
Defendants filed a motion to dismiss. The court granted the motion with respect to the breach of<br />
contract claim, but denied the motion for control person liability because plaintiff’s cause of<br />
action for primary violations of the Washington State Securities Act, upon which the control<br />
person claims were based, survived in whole or in part.<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).<br />
Plaintiff investors filed a class action against defendant municipal bond funds, fund<br />
managers, and trustees under Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs<br />
alleged that defendants misrepresented or failed to disclose the nature and degree of risk<br />
associated with extremely risky investment strategies. Defendants filed motions to dismiss. In<br />
denying the defendants’ motion to dismiss plaintiffs’ Section 15 control person liability claims,<br />
the court reasoned that the plaintiffs successfully pled primary violations of the Securities Act.<br />
Additionally, the court held the plaintiffs sufficiently demonstrated that each of the moving<br />
defendants exerted sufficient control by alleging: (1) the defendant officers oversaw the<br />
preparation and content of the fund offering statements; and (2) the defendant trustees had at<br />
least indirect control over the subject of the primary violation since they had authority to sign or<br />
not sign the registration statements at issue.<br />
Wolfe v. AspenBio Pharma, Inc., 2012 U.S. Dist. LEXIS 130490 (D. Colo. Sept. 13, 2012).<br />
In a putative class action, plaintiff investors brought suit against a corporation and several<br />
of its officers alleging that the corporation had issued materially false and misleading statements<br />
about its progress in developing a new product. Plaintiffs claimed that because of the purported<br />
misrepresentations, they bought stock in defendant corporation at artificially high prices. When<br />
pessimistic reports surfaced regarding the product’s development, defendant corporation’s stock<br />
price plummeted. Plaintiffs’ complaint alleged violations of Section 10(b) and Rule 10b-5 of the<br />
Securities Exchange Act of 1934 and control person liability under Section 20(a) of the<br />
Exchange Act. Defendants moved to dismiss the complaint. The court held that plaintiffs had<br />
failed to sufficiently allege that the statements at issue were false or misleading. The court<br />
therefore held that plaintiffs had failed to plead Section 10(b) and Rule 10b-5 claims. Since a<br />
Section 20(a) claim is actionable only when there is a primary violation of a securities law, the<br />
court also dismissed the Section 20(a) claim.<br />
Touchstone Grp., LLC v. Rink, 2012 Fed. Sec. L. Rep. (CCH) 97,241 (D. Colo. Dec. 21, 2012).<br />
In a prior litigation, the court had entered summary judgment against a corporation for its<br />
perpetration of a Ponzi scheme. Under the prior judgment, defendant corporation was found<br />
liable for violations of various securities laws. In this case, a class action, plaintiff investors<br />
brought suit against a number of the corporation’s officers and affiliates for their alleged<br />
participation in the scheme. Plaintiffs alleged that defendant officers had made materially false<br />
statements to investors, had otherwise participated in the fraud, and had received fraudulently<br />
306<br />
H.2<br />
H.2<br />
H.2
transferred assets from the corporation. Under Section 20(a) of the Securities Exchange Act of<br />
1934, plaintiffs brought control liability claims against the CFO, the headhunter who had placed<br />
defendant CFO with the Ponzi-scheme-perpetrating corporation, the general counsel, and the<br />
controller. Defendant officers moved to dismiss the control liability claims, arguing that<br />
plaintiffs had failed to sufficiently allege that they each had control over the corporation. The<br />
court held that the CFO and the general counsel were both chief executives who had either<br />
personally prepared or ultimately controlled the actionable misstatements issued by the<br />
corporation. For this reason, the court refused to dismiss the Section 20(a) claims as against the<br />
CFO and the general counsel. The court also held that plaintiffs had sufficiently stated a claim<br />
for vicarious liability as against the headhunter based on defendant CFO’s alleged violation of<br />
Section 20(a). Lastly, the court held that plaintiffs failed to sufficiently allege a control liability<br />
claim against the controller. The court noted that even if the controller had assisted in the<br />
preparation of the actionable misstatements, he did so at the direction of the CFO. While the<br />
facts sufficiently demonstrated that the CFO and the general counsel wielded the power to guide<br />
the management and policies of the Ponzi-scheme-perpetrating corporation, the facts did not<br />
sufficiently demonstrate that this power also rested in the hands of the controller. For this<br />
reason, the court dismissed the Section 20(a) claims as against the controller.<br />
Prissert v. Emcore Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,047 (D.N.M. Sept. 28, 2012).<br />
Plaintiff investors brought suit against a corporation and its current and former executives<br />
alleging violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities Exchange Act of<br />
1934. Plaintiffs alleged that defendant corporation’s announcements regarding contracts with<br />
particular customers were materially false and misleading. Plaintiffs further argued that these<br />
alleged misrepresentations created an artificially inflated stock price, which deflated thereafter<br />
when two independent reports painted a bleak picture of defendant corporation’s future.<br />
Defendants moved to dismiss. The court first addressed plaintiffs’ Section 10(b) and Rule 10b-5<br />
claims. The court first determined that plaintiffs’ highly generalized allegations were<br />
insufficient to show that defendants had the necessary scienter. The court also determined that<br />
plaintiffs failed to plead loss causation. Plaintiffs’ loss causation argument hinged on the fact<br />
that publication of the pessimistic independent reports coincided with defendant corporation’s<br />
deflating stock price. The court noted, however, that the independent reports made no mention<br />
of the alleged misrepresentations. The complaint, therefore, failed to allege that the<br />
misrepresentations were disclosed to the public, a key element of loss causation. The court<br />
granted defendants’ motion to dismiss the Section 10(b) and Rule 10b-5 claims. Since plaintiffs<br />
failed to plead a primary violation of the securities laws, the court also dismissed the<br />
Section 20(a) control liability claims.<br />
In re Thornburg Mortg. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,218 (D.N.M.<br />
Nov. 26, 2012).<br />
The court in this case considered the plaintiffs’ motion for final approval of proposed<br />
settlement, plan of allocation, and certification of class for settlement purposes, as well as<br />
307<br />
H.2<br />
H.2
attorneys’ fees. The underlying complaint involved four public offerings that the plaintiffs<br />
alleged were made pursuant to false or misleading offering documents. Plaintiffs were<br />
purchasers of defendant’s stock during the class period at allegedly inflated prices. Defendant<br />
was a publicly-traded residential mortgage lender, and individual defendants included board<br />
members and officers, as well as underwriter defendants. The plaintiffs alleged claims under<br />
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) under the<br />
Securities Exchange Act of 1934, and Rule 10b-5. The defendants had moved to dismiss and the<br />
court had granted in part, denied in part, and reserved judgment on that motion, ruling that the<br />
Rule 10b-5 claim survived only as to one defendant, and that the plaintiffs successfully alleged a<br />
claim under Section 20(a) of the Exchange Act against that defendant because he was the chief<br />
executive officer and chief operating officer of the defendant company at the time the statements<br />
at issue were made. As to the other individual defendants, the court found that the plaintiffs<br />
failed to allege sufficient facts for control person liability, as the misleading acts or omissions did<br />
not occur at a time when those individual defendants were in control of the defendant company.<br />
Finally, the court found that the former chief financial officer when the statements at issue were<br />
made could be liable as a control person on the face of the complaint. Plaintiffs subsequently<br />
dismissed the defendant mortgage lender and its current and former officers and other affiliated<br />
parties, and filed a stipulation and agreement of settlement.<br />
Cather v. Isom, 2012 U.S. Dist. LEXIS 1687 (D. Utah Jan. 5, 2012).<br />
Investor brought this action against two individual defendants alleging violations of<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiff had invested<br />
$60,000 with one investor, who then passed the money along to another investor. The first<br />
investor made misrepresentations to the plaintiff regarding the investments, which led to plaintiff<br />
filing this suit. Plaintiff pursued two Section 10(b) theories against the second investor:<br />
(1) primary liability; and (2) control person liability, whereby a secondary actor can be liable for<br />
the misrepresentations of a primary actor if the secondary controlled the primary’s actions. To<br />
establish control person liability, the plaintiff must show (1) a primary violation of Section 10(b);<br />
and (2) control over the primary violator by the alleged controlling person. Maher v. Durango<br />
Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). The court granted the second investor’s<br />
motion for summary judgment because it found there had been no showing that the first investor<br />
committed a primary violation.<br />
Kinnett v. Strayer Educ., Inc., 2012 U.S. Dist. LEXIS 37737 (M.D. Fla. Jan. 3, 2012).<br />
Investors filed a class action suit against defendant corporation under Sections 10(b) and<br />
20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Plaintiffs alleged defendant made<br />
false and misleading statements and failed to disclose adverse facts about the corporation’s<br />
growth, which deceived the investing public and artificially inflated the price of defendant’s<br />
stock. Defendant filed a motion to dismiss claiming that plaintiffs failed to adequately plead<br />
their claims. The court granted defendant’s motion because plaintiffs failed to adequately plead<br />
violations of Section 10(b) of the Exchange Act and Rule 10b-5. Because there was no primary<br />
securities violation, the Section 20(a) control person liability claim was dismissed.<br />
308<br />
H.2<br />
H.2
H.2<br />
McGee v. S-Bay Dev. LLC, 2012 Fed. Sec. L. Rep (CCH) 96,751 (M.D. Fla. Mar. 8, 2012).<br />
Investors filed suit against defendant property owner and developer for fraud and<br />
misrepresentations under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and<br />
Rule 10b-5. Defendants filed motions to dismiss the complaint, including the Section 20(a)<br />
control person liability claim, which was granted by the court because plaintiffs did not allege<br />
sufficient facts for their Section 10(b) or Rule 10b-5 claims. Because there was no primary<br />
securities violation, the plaintiffs’ Section 20(a) control person claim was dismissed.<br />
City of St. Clair Shores Gen. Emples. Ret. Sys. v. Lender Processing Servs., Inc., 2012 Fed. Sec.<br />
L. Rep (CCH) 96,790 (M.D. Fla. Mar. 30, 2012).<br />
Investors filed a class action suit against defendant corporation and its officers under<br />
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that<br />
defendants engaged in a fraudulent scheme, causing plaintiffs to suffer millions of dollars in<br />
losses. Defendants filed motions to dismiss, claiming that plaintiffs’ complaint failed to<br />
adequately plead violations of the Exchange Act. The court granted the motions to dismiss<br />
because plaintiffs failed to adequately plead a Section 10(b) violation. Because there was no<br />
primary violation of the Exchange Act, the plaintiffs’ claim under Section 20(a) was also<br />
dismissed.<br />
Meyer v. St. Joe Co., 2012 U.S. Dist. LEXIS 3861 (N.D. Fla. Jan. 23, 2012).<br />
Investors filed a purported class action suit against defendant corporation and its officers<br />
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5.<br />
Plaintiffs alleged that defendants intentionally deceived investors about the value of certain<br />
properties. Defendants filed motions to dismiss, claiming that plaintiffs failed to sufficiently<br />
plead an underlying securities violation. The court granted the motions to dismiss because<br />
plaintiffs’ claims were insufficient since they failed to allege that defendants acted with the<br />
requisite scienter. Because there was no primary securities violation, the plaintiffs’ control<br />
person liability claim under Section 20(a) was dismissed.<br />
In re Jiangbo Pharm., Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,958 (S.D. Fla. Aug. 1,<br />
2012).<br />
In a putative class action, plaintiffs alleged that defendant corporation’s press releases<br />
overstated cash balances and failed to disclose related-party transactions, regulatory<br />
investigations, and other material information. Plaintiffs alleged that defendant corporation<br />
made these misrepresentations in order to sustain an artificially high market price. Plaintiffs<br />
brought claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as<br />
well as control liability claims under Section 20(a) of the Exchange Act, against defendant<br />
309<br />
H.2<br />
H.2<br />
H.2
corporation, its CFO, and others. Defendant CFO moved to dismiss the claims against him. The<br />
court held that plaintiffs failed to sufficiently allege a strong inference of scienter on the part of<br />
defendant CFO. The court also held that plaintiffs failed to sufficiently allege falsity with<br />
respect to a number of the purported misrepresentations. Based on these failings in the<br />
allegations, the court dismissed the Section 10(b) claims as against defendant CFO. The court<br />
then proceeded to dismiss the Section 20(a) claims, noting plaintiffs’ failure to establish a<br />
primary violation of the securities laws.<br />
N. Atl. Sec., LLC v. Me. Office of Sec., 2012 Me. Super. LEXIS 111 (Me. Super. July 10, 2012).<br />
In this case the defendant sought review of a decision of the securities administrator of<br />
the Maine Office of Securities, concluding that the defendant committed unlawful, dishonest, or<br />
unethical practices. The defendant is a Maine broker-dealer and investment advisor. The events<br />
in question arose in dealings with a client, the mother-in-law of a registered representative of the<br />
defendant. The registered representative borrowed money from the mother-in-law, and did not<br />
repay most of it, made a loan to his son, and asked to borrow money from the mother-in-law’s<br />
loan account because of alleged financial difficulties in part due to margin calls on his personal<br />
brokerage account. The state alleged violations of the Maine Uniform Securities Act, 32 M.R.S.<br />
§ 16412, which prohibits a registered representative from borrowing money from a client. The<br />
defendant also argued that the court had abused its discretion because the alleged victim of the<br />
conduct was a supportive relative. The administrator found that the individual defendants were<br />
control persons under Section 16412, who may be disciplined as well as those directly engaging<br />
in the prohibited conduct. The court therefore affirmed the administrator’s findings.<br />
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Jan. 26, 2012).<br />
Investors sued defendants, hedge funds, their general partner, layers of the partners’<br />
parents, and their auditor, for various violations of securities laws. Plaintiffs specifically alleged,<br />
among other things, primary violations of state securities laws against the general partner and<br />
“controlling person” liability against one of the partner’s parent corporations. The parent<br />
corporation argued that it could not be held liable for any state securities law violation to the<br />
extent it is based strictly on controlling person liability. The parties agreed that because each<br />
state’s control person provision is modeled after Section 20(a) of the Securities Exchange Act of<br />
1934, federal decisional law interpreting Section 20(a) offered persuasive guidance as to what is<br />
required for control person liability. The agreed upon standard for liability was stated in<br />
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 85 (1st Cir. 2002). In that case the First Circuit stated<br />
that to meet the control element, the alleged controlling person must not only have the general<br />
power to control the company, but must also actually exercise control over the company. Id.<br />
The court noted that although the question of control is not ordinarily resolved summarily at the<br />
pleading stage, the plaintiffs’ allegations fell well short of showing that the parent corporation<br />
exerted actual control over the general partner. The plaintiffs only relied on the parent<br />
corporation’s status as a parent corporation, the listing of the parent corporation as a control<br />
person on the general partner’s Securities and Exchange Commission form, and some overlap of<br />
directors between the parent corporations and the general partner. The court held that these facts<br />
310<br />
H.2<br />
H.2
only showed some potential to control the general partner, which was not sufficient. The court<br />
stated that in order to satisfy the standard of liability the plaintiffs had to show facts from which<br />
it might reasonably be inferred that the parent corporation actively participated in the decisionmaking<br />
processes of the general partner. See Aldridge, 284 F.3d at 85. In granting the<br />
defendants’ motion to dismiss this claim, the court held that plaintiffs failed to state any of these<br />
facts.<br />
3. Aiding & Abetting<br />
H.3<br />
Berman v. Morgan Keegan & Co., 455 F. App’x 92 (2d Cir. 2012).<br />
Appellants, investors, sued appellee, a broker-dealer, for aiding and abetting a<br />
corporation’s fraud, conversion, and breach of fiduciary duty. The appellants alleged that the<br />
corporation, under the guise of a tax deferral transaction, took the owners’ securities and<br />
purported to “loan” them 90% of the securities value. Instead, the firm allegedly sold the<br />
securities and conveyed 90% of the proceeds to the owners in the form of a sham loan, with the<br />
result that the owners owed back taxes and penalties. The district court dismissed the appellants’<br />
complaint because it failed to plead fraud with sufficient particularity under Rule 9(b) of the<br />
Federal Rules of Civil Procedure. Specifically, the complaint failed to allege a strong inference<br />
that the aider and abettor had actual knowledge of the primary offender’s wrongdoing. On<br />
appeal, appellants made the following four arguments: (1) that the presence of a document in the<br />
broker-dealer’s account files describing how the corporation marketed the 90% loan program<br />
establishes that broker-dealer knew that corporation’s customers’ collateral was supposed to be<br />
hedged and not sold; (2) that the broker-dealer was obligated by “Know Your Customer Rules”<br />
to closely monitor the corporation’s operations; thus one can infer that it did so; (3) that the<br />
broker-dealer assisted the corporation’s sale of appellants’ collateral before the corporation was<br />
authorized to do so under the Master Loan Financing and Security Agreements, and therefore<br />
must have known of the corporation’s fraud; and (4) that one can infer from broker-dealer’s<br />
entering into a lease agreement with the corporation that broker-dealer was aware of the<br />
corporation’s fraud. The Second Circuit was not persuaded by any of the appellants’ arguments,<br />
stating that, at most, the arguments created an inference that the broker-dealer should have<br />
known of the fraud. The Second Circuit further affirmed the district court’s dismissal of the<br />
complaint for failure to allege that the broker-dealer provided substantial assistance to the<br />
corporation’s fraudulent scheme. The Second Circuit stated that “[s]ubstantial assistance exists<br />
where: (1) a defendant affirmatively assist, helps conceal, or by virtue of failing to act when<br />
required to so enables the fraud to proceed; and (2) the actions of the aider/abettor proximately<br />
caused the harm on which the primary liability is predicated.” UniCredito Italiano SpA v.<br />
JPMorgan Chase Bank, 288 F. Supp. 2d 485, 502 (S.D.N.Y. 2003). Appellants’ complaint only<br />
alleged that the broker-dealer executed securities transactions on the corporation’s behalf, which<br />
the Second Circuit does not consider substantial assistance. Therefore, the court affirmed the<br />
district court’s dismissal of the appellants’ claims for failure to state a claim under Rule 9(b).<br />
311
Meridian Horizon Fund, LP v. KPMG, 2012 U.S. App. LEXIS 140431 (2d Cir. July 10, 2012).<br />
Plaintiff-appellant, an investor who invested in funds that fed into the fraudulent Madoff<br />
investment scheme, appealed from a judgment dismissing its federal securities law claims and<br />
common law claims for fraud, negligence, breach of fiduciary duty, and aiding and abetting the<br />
fiduciary breaches, against appellee fund auditors. The Second Circuit affirmed the dismissal. A<br />
plaintiff alleging a claim for aiding and abetting a breach of fiduciary duty must show: (1) a<br />
breach by a fiduciary of obligations to another; (2) that the defendant knowingly induced or<br />
participated in the breach; and (3) that plaintiff suffered damages as a result of the breach.<br />
Kaufman v. Cohen, 307 A.D.2d 113 (App. Div. 1st Dept. 2003). Although a plaintiff is not<br />
required to allege that the aider and abettor had an intent to harm, there must be an allegation that<br />
said defendant had actual knowledge of the breach of duty. Id. To satisfy the knowing<br />
participation element, a plaintiff must show that the defendant provided substantial assistance to<br />
the primary violator, which means more than just performing routine business services of the<br />
alleged fraudster. Id. The plaintiff’s allegation did not meet this demanding standard. The court<br />
reasoned that the risks present in the investment were not only plainly disclosed to the plaintiff<br />
and the broker-dealers offering the materials, but also to the investors and auditors of Madoff’s<br />
feeder funds, and the SEC, none of whom discovered the Madoff scheme. As such, the appellate<br />
court agreed with the District Court’s opinion that “the more compelling inference as to why<br />
Madoff’s fraud went undetected for two decades was his proficiency in covering up his scheme<br />
and deceiving the SEC and other financial professionals.” Meridian Horizon Fund, LP v.<br />
Tremont Group Holdings, Inc., 747 F. Supp. 2d 406, 413 (S.D.N.Y. 2010). As such, the<br />
plaintiffs failed to plead sufficient factual matter to show aiding and abetting of the alleged<br />
breaches of fiduciary duty.<br />
SEC v. Apuzzo, 2012 U.S. App. LEXIS 16510 (2d Cir. Aug. 8, 2012).<br />
The Securities and Exchange Commission alleged that defendant aided and abetted<br />
securities laws violations in his role in a fraudulent accounting scheme. In order for defendant to<br />
be liable as an aider and abettor in a civil enforcement action, the SEC must prove: (1) the<br />
existence of a securities law violation by the primary (as opposed to the aiding and abetting)<br />
party; (2) knowledge of this violation on the part of the aider and abettor; and (3) substantial<br />
assistance of the aider and abettor in achievement of the primary violation. SEC v. Dibella,<br />
587 F.3d 553, 566 (2d Cir. 2009). The district court granted defendant’s motion to dismiss.<br />
Specifically, the district court held that the substantial assistance component required that the<br />
aider and abettor proximately cause the harm on which the primary violation was predicated, and<br />
the complaint did not plausibly allege such proximate causation. The appellate court reversed<br />
the decision of the district court, and held that to satisfy the “substantial assistance” component<br />
of aiding and abetting, the SEC must show that the defendant “in some sort associated himself<br />
with the venture, that he participated in it as in something that he wished to bring about, and that<br />
he sought by his action to make it succeed.” U.S. v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938).<br />
Here, the defendant was the chief financial officer of a manufacturing corporation and entered<br />
into a series of fraudulent “sale-lease back” transactions. These transactions were designed to<br />
allow a third-party lessor to “recognize revenue prematurely and to inflate the profit generated<br />
312<br />
H.3<br />
H.3
from third-party lessor’s sales.” This practice was prohibited under the generally accepted<br />
accounting principles (“GAAP”). Under the fraudulent sale-lease back transactions, the<br />
defendant executed various agreements that disguised the third-party lessor’s continuing risks<br />
and financial obligations, and also approved inflated invoices from his corporation that were<br />
designed to conceal the third-party lessor’s indemnification payments to the defendant’s<br />
company. The Second Circuit concluded that the complaint in this case plausibly alleged the<br />
defendant provided substantial assistance to the primary violator in carrying out the fraud and<br />
therefore the court reversed the district court’s opinion. As such, the case was remanded.<br />
SEC v. Goble, 682 F.3d 934 (11th Cir. 2012).<br />
The Securities and Exchange Commission brought an enforcement action against<br />
defendant, a corporate board member, for aiding and abetting the corporation’s violation of the<br />
Customer Protection Rule at Section 15(c)(3) of the Securities Exchange Act of 1934 and<br />
Rule 15(c)(3)-3 thereunder. The SEC also alleged that defendant aided and abetted the<br />
corporation’s violation of the Exchange Act’s books and records requirements found in<br />
Section 17(a) and Rule 17a-3 thereunder. The district court concluded that the defendant aided<br />
and abetted these violations. On appeal, defendant argued that he could not be liable for aiding<br />
and abetting the violations of the Customer Protection Rule and the books and records<br />
requirements because there was no underlying securities fraud. The Eleventh Circuit affirmed<br />
the district court, holding that the imposition of aiding and abetting under Section 20(e) of the<br />
Exchange Act is proper when the following elements are satisfied: (1) there is a primary<br />
violation of the securities law; (2) the aider and abettor had knowledge of the primary violations;<br />
and (3) the aider and abettor provided substantial assistance in the commission of the violation.<br />
Thus, the court upheld the district court’s ruling because a primary securities fraud violation is<br />
not an element of an aiding and abetting claim.<br />
H.3<br />
SEC v. Grendys, 840 F. Supp. 2d 36 (D.D.C. 2012).<br />
H.3<br />
The Securities and Exchange Commission brought an action against the owner of a<br />
corporation that sold frozen chicken commodities. The corporation sold commodities to and<br />
through a food service distribution company that later was acquired by a publicly-traded<br />
corporation. The SEC’s complaint alleges three violations of securities law by defendant:<br />
(1) aiding and abetting violation of Section 10(b) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5; (2) aiding and abetting violation of Section 13(a) of the Exchange Act; and<br />
(3) aiding and abetting violation of Sections 13(b)(2)(A)–(B) and 13(b)(5) and Exchange Act<br />
Rule 13(b)2-1. Specifically, the SEC alleges defendant aided and abetted a scheme to materially<br />
inflate the operating income recorded by the distributor in its financial statements, which were<br />
included in the parent corporation’s SEC filings and other public statements. The defendant<br />
moved for summary judgment. In this circuit, to prove aiding and abetting, the SEC must show:<br />
(1) another party has committed a securities law violation; (2) the accused aider and abettor has a<br />
general awareness that his role was part of an overall activity that was improper; and (3) the<br />
accused aider and abettor knowingly and substantially assisted the principal violation. Investors<br />
Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980). Defendant argued that with respect<br />
313
to the second element, the SEC must prove defendant had actual knowledge of the primary<br />
violation. The court rejected this argument. Defendant also contended that the Exchange Act<br />
provides only for aiding and abetting a primary violation, rather than aiding and abetting another<br />
party’s aiding and abetting of a primary violation. The defendant argued the SEC only alleged<br />
that the defendant aided and abetted the distributor’s conduct and not the parent corporation’s<br />
primary violations of the Exchange Act. However, the court read the complaint as alleging that<br />
defendant was liable for aiding and abetting the parent company’s violations by helping the<br />
distributor to conceal a fraudulent scheme. The court further noted that the SEC need not allege<br />
that the defendant directly aided and abetted the primary violations because the statute only<br />
requires substantial assistance. The court held that a reasonable trier of fact could conclude that<br />
the defendant knew that the distributor was filing misleading documents because of his position<br />
as principal contact for the distributor, among other things. On the issue of substantial<br />
assistance, defendant argued that he did not have a motive to assist the primary violations. The<br />
court noted that it was unnecessary for the SEC or the court to speculate as to the defendant’s<br />
potential motivation for aiding and abetting the scheme. The court dismissed the defendant’s<br />
motion holding that the SEC had met its burden that defendant knew he was aiding and abetting<br />
primary violations of the Exchange Act.<br />
SEC v. Familant, 2012 U.S. Dist. LEXIS 179007 (D.D.C. Dec. 19, 2012).<br />
In this civil enforcement action, the Securities and Exchange Commission alleged that a<br />
senior vice president of defendant cell phone retailer ran a scheme to conceal the retailer’s<br />
deteriorating financial state—specifically, that the corporation directed its employees to issue<br />
unearned memos of credit to the retailer, which used sham credits to pad its financial reports, and<br />
then, acting through the vice president, repaid the president’s company through a stream of<br />
hidden disbursements that ranged from inflated contract prices to outlays for fictitious repairs.<br />
The SEC brought five counts of alleged violations of Sections 10(b) and 13 of the Securities<br />
Exchange Act of 1934, and for aiding and abetting the Rule 10b-5 claims. Defendant moved to<br />
dismiss the complaint for failure to state a claim. Three principal elements are required to<br />
establish aiding and abetting liability: “(1) that a principal committed a primary violation;<br />
(2) that the aider and abettor provided substantial assistance to the primary violator; and (3) that<br />
the aider and abettor had the necessary ‘scienter’—i.e., that she rendered such assistance<br />
knowingly or recklessly.” Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000). “Drawing<br />
guidance from the well-developed law of aiding and abetting liability in criminal cases,” the<br />
Second Circuit set forth a combined test for substantial assistance in scienter; “the government—<br />
in addition to proving the primary violation occurred and that the defendant had knowledge of<br />
it—must also prove ‘that he in some sort associated himself with the venture, that the defendant<br />
participated in something that he wished to bring about, and that he sought to buy his action to<br />
make it succeed.’” SEC v. Apuzzo, 689 F.3d 204, 212 (2d Cir. 2012). The court ruled that the<br />
SEC sufficiently stated a claim for relief to survive a motion to dismiss as it relates to violations<br />
of Section 10(b) and Rules 10b-5(a) and (c). Therefore, the court also held that the aiding and<br />
abetting claim survived as well. The motion to dismiss was denied.<br />
H.3<br />
314
H.3<br />
In re Novell, Inc. S’holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).<br />
Investors brought a class action against a corporation and its former directors and a<br />
related corporation. The causes of action arose out of the corporation’s merger with the related<br />
corporation. Plaintiffs claimed that the directors breached their fiduciary duties of care and<br />
loyalty by failing to maximize shareholder value through the merger process. They also alleged<br />
that the related corporation aided and abetted the breaches. The related corporation moved to<br />
dismiss. In order to survive the motion to dismiss, the complaint must allege facts that satisfy<br />
the four elements of an aiding and abetting claim: (1) the existence of a fiduciary relationship;<br />
(2) a breach of the fiduciary’s duty; (3) knowing participation in that breach by the defendants;<br />
and (4) damages proximately caused by the breach. Malpiede v. Townson, 780 A.2d 1075, 1096<br />
(Del. 2001). Knowing participation requires that the third party: (1) act with the knowledge that<br />
the conduct advocated or assisted constitute such a breach; (2) the third party conspires with the<br />
board; or (3) the third party agrees with the board to the fiduciary breach. In dismissing the<br />
plaintiffs’ claim, the court held that the plaintiffs’ arguments that the related corporation knew of<br />
a board member’s conflicts did not sufficiently prove that the related corporation knowingly<br />
participated in the alleged breach. The court also noted that plaintiffs failed to prove a primary<br />
breach, and therefore the related corporation could not be found to have aided and abetted in that<br />
breach.<br />
Poptech L.P. v. Stewardship Inv. Advisors, LLC, 849 F. Supp. 2d 249 (D. Conn. 2012).<br />
Investors brought suit against various defendants, including a broker-dealer, the CFO of<br />
the broker-dealer, a fund, and an independent manager of the fund. Plaintiffs alleged, among<br />
other things, that the individual defendants aided and abetted securities violations. The two<br />
incidental defendants challenged the aiding and abetting claim on the merits. Connecticut<br />
General Statute § 36b-29 creates liability for anyone who materially assists in a violation of the<br />
securities laws. In order for conduct to be considered material assistance, it must be proven that<br />
the aider or abettor materially assisted the primary violator: (1) in the offer or sale; and (2) in the<br />
violation by which the primary violator accomplished the offer or sale. In addition to the<br />
foregoing elements of proof, the buyer must also prove that the aider and abettor knew or should<br />
have known of the untruth or omission. If the buyer meets this burden, the burden of proof<br />
shifts, so that the defendant then bears the burden of persuading the fact finder that it did not<br />
know, and in the exercise of reasonable care could not have known, of the untruth or omission.<br />
The court denied the CFO’s motion to dismiss because it was sufficiently pled that he offered<br />
material assistance in violation of the securities laws. In granting the independent manager’s<br />
motion to dismiss, the court focused on the manager’s limited position. It noted that the<br />
manager’s role was essentially limited to evaluating whether transactions between the brokerdealer<br />
and the fund were fair, and the evaluations occurred only after investors had become<br />
members of the fund. Plaintiffs argued that the manager was not disinterested and that he never<br />
engaged in any independent valuation or investigation of any transaction between the brokerdealer<br />
and the fund and never challenged or voiced any objection to any questionable<br />
transaction. Even taking plaintiffs’ claim that the manager was not a disinterested independent<br />
manager as true, the court granted the motion to dismiss because the plaintiffs failed to satisfy<br />
315<br />
H.3
the burden of alleging that the manager assisted the other defendants in the securities fraud<br />
violation or that, even if he did, the manager knew or should have known of the alleged<br />
misrepresentations and omissions.<br />
Short v. Conn. Cmty. Bank, N.A., 2012 U.S. Dist. LEXIS 42617 (D. Conn. Mar. 28, 2012).<br />
This action arose out of the Ponzi scheme perpetrated by Bernard L. Madoff through<br />
Bernard L. Madoff Investment Securities, LLC (“BLMIS”). The plaintiffs, two custodial<br />
account holders, commenced this action against defendant bank, raising numerous claims,<br />
including aiding and abetting breach of fiduciary duty and fraud. The defendant acted as the<br />
intermediary custodian in an arrangement between a consulting services company and BLMIS.<br />
Plaintiffs were clients of the pension and retirement plan consulting services company at the time<br />
it entered into the agreement with BLMIS. The defendant bank filed a motion for summary<br />
judgment on all of plaintiffs’ claim. With regards to the aiding and abetting claim, the bank<br />
argued that summary judgment in its favor was appropriate because: (1) the bank lacked<br />
knowledge of any underlying tortious conduct by the consulting services company and BLMIS;<br />
and (2) the bank did not provide substantial assistance to any such tortious conduct. In order to<br />
show aiding and abetting liability in Connecticut, a plaintiff must show: (1) the party whom the<br />
defendant aids performed a wrongful act that caused an injury; (2) the defendant was generally<br />
aware of his role as part of an overall illegal or tortious activity at the time that he provides the<br />
assistance; and (3) the defendant knowingly and substantially assisted the principal violation.<br />
Efthimiou v. Smith, 846 A.2d 222, 226 (Conn. 2004). In order to be generally aware, an aider or<br />
abettor must have actual knowledge of the underlying tort or act with reckless indifference to the<br />
possibility that the underlying tort is occurring. In granting the bank’s motion for summary<br />
judgment on this claim, the court noted that the record contained no specific evidence that<br />
established that the bank was generally aware that BLMIS was a fraud. The plaintiffs relied only<br />
on evidence that the bank failed to audit or verify BLMIS’s reported assets, promulgated<br />
inaccurate records, and did not become suspicious when BLMIS refused the bank’s electronic<br />
access to its account and insisted that the bank have no contact with the account’s clients.<br />
Evidence provided in the record created a genuine issue of fact as to the bank’s negligence, but<br />
the court held that mere negligence is not sufficient for aiding and abetting liability purposes.<br />
Therefore, the court granted the defendant’s motion for summary judgment.<br />
SEC v. Ehrenkrantz King Nussbaum, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,761 (E.D.N.Y.<br />
Mar. 15, 2012).<br />
The Securities and Exchange Commission filed an action against a broker-dealer and a<br />
related corporation for alleged market timing violations. The related corporation provided<br />
services to the broker-dealer, including locating professional investors and money managers who<br />
engaged in market timing, recruiting those investors to become the broker-dealer’s clients, and<br />
facilitating those investors’ market timing once they became the broker-dealer’s clients. The<br />
related corporation also provided back-office support for the processing of these market timing<br />
trades. The SEC voluntarily dismissed the claims against the broker-dealer and the related<br />
corporation but filed a motion for summary judgment in support of its claims against the related<br />
316<br />
H.3<br />
H.3
corporation’s CEO. The SEC alleged that the CEO violated Section 17(a) of the Securities Act<br />
of 1933, Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC<br />
specifically alleged that the CEO employed methods to place market timing trades that would<br />
otherwise have been prohibited by the fund companies and that he systematically used multiple<br />
mirror accounts. The court found that the CEO’s practices were used with the intent to deceive<br />
the fund companies. The court also found sufficient evidence of the SEC’s claim against the<br />
CEO for aiding and abetting violations of Section 15(c)(1). Section 15(c)(1) of the Exchange<br />
Act prohibits brokers and dealers from using manipulative, deceptive, or other fraudulent devices<br />
or contrivances in connection with securities transactions. The court found that the SEC could<br />
maintain its aiding and abetting claim against the CEO by establishing: (1) the existence of a<br />
primary violation of this section; (2) that the aider and abettor had knowledge of the primary<br />
violation; and (3) that the aider and abettor knowingly and substantially participated in the<br />
wrongdoing. The court found that the SEC established that the CEO had actual knowledge of<br />
the primary violation and that he provided substantial assistance in carrying out that violation,<br />
and therefore granted the SEC’s motion for summary judgment on the aiding and abetting claim.<br />
The court, however, denied the SEC’s motion for summary judgment for the claim that the CEO<br />
violated Section 15(b)(7) and Rule 15b-7-1 of the Exchange Act because questions of fact still<br />
existed regarding the CEO’s knowledge of any primary violation.<br />
Barbara v. Marinemax, Inc., 2012 U.S. Dist. LEXIS 171975 (E.D.N.Y. Dec. 4, 2012).<br />
This case arose from plaintiffs’ sale of a boat business to defendants for cash and stock.<br />
The defendants refused to remove a restrictive legend from the stock certificates resulting in a<br />
long delay before plaintiffs could sell the stock and thus realize the value of the sale. The<br />
plaintiffs’ complaint set forth twelve claims for relief, including aiding and abetting breach of<br />
fiduciary duty. Under Delaware law, “a claim for aiding and abetting requires the following<br />
three elements: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty,<br />
and (3) a non-participation in that breach by the defendant.” In re Santa Fe Pac. Corp. S’holder<br />
Litig., 669 A.2d 59, 72 (Del. 1995). Similarly, under New York law, to state a claim for aiding<br />
and abetting a breach of fiduciary claim, a plaintiff must allege that there was “a breach by a<br />
fiduciary of obligations to” the plaintiff. Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d Cir.<br />
2006). As to the underlying breach of fiduciary duty claim, the plaintiffs alleged that the breach<br />
of fiduciary duty was premised on insider trading, also known as a Brophy claim. The court<br />
determined that plaintiffs could not bring this claim because it was derivative in nature. As such,<br />
the breach of fiduciary claim failed as a matter of law. Consequently, the district court also ruled<br />
that the plaintiffs were unable to state a claim for aiding and abetting breach of that fiduciary<br />
duty. See Schandler v. N.Y. Life Ins. Co., 2011 U.S. Dist. LEXIS 46322 (S.D.N.Y. Apr. 26,<br />
2011).<br />
In re Refco Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 41298 (S.D.N.Y. Jan. 17, 2012).<br />
The special master recommended that a broker-dealer’s attorneys’ motion to dismiss be<br />
granted in part as to plaintiffs’ claims that the attorneys aided and abetted a fraud in connection<br />
with the broker-dealer’s financial condition. The court granted dismissal in part because the<br />
317<br />
H.3<br />
H.3
claims sought recovery of assets placed with the broker-dealer before the date of the attorneys’<br />
wrongdoing. The plaintiffs alleged aiding and abetting fraud, breach of fiduciary duty, and<br />
conversion. In New York, to establish a claim of aiding and abetting fraud, a plaintiff must<br />
allege: (1) the existence of a violation by the primary wrongdoing; (2) knowledge of this<br />
violation by the aider and abettor; and (3) proof that the aider and abettor substantially assisted in<br />
the primary wrong. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). The special master<br />
found that the plaintiffs adequately alleged that the defendants had knowledge of the primary<br />
fraud. He relied on, among other things, the defendants’ work on the broker-dealer’s<br />
repatriation, specifically that the defendants oversaw virtually all aspects of the broker-dealer’s<br />
business plan, and the defendants’ knowledge of the broker-dealer’s propensity to siphon assets<br />
to fund their operations. The special master also found that the defendants substantially assisted<br />
the primary violation because they were responsible for not only reviewing public documents<br />
regarding the questionable transactions, but also for issuing opinions regarding transactions that<br />
misrepresented the broker-dealer’s financial status. The plaintiffs also adequately alleged that<br />
there was reasonable reliance on these misrepresentations. However, because it was not clear if<br />
the defendants proximately cause some of the damages. Therefore, the motion to dismiss was<br />
denied. Plaintiffs also asserted a claim for aiding and abetting breach of fiduciary duty.<br />
Specifically, the plaintiffs claimed that the broker-dealer breached fiduciary duties by causing<br />
customer assets to be converted and used in furtherance of their fraudulent scheme. The<br />
defendants allegedly assisted this breach by, among other things, advising the broker-dealer in<br />
connection with its financial affairs. In dismissing this claim, the special master found the<br />
plaintiffs could not show the defendants knew the wrongdoing was a breach of fiduciary duty.<br />
The plaintiffs also alleged that the broker-dealer converted customer assets, and that the<br />
defendants aided and abetted the conversion. The special master dismissed plaintiffs’ claims<br />
because they could not adequately allege knowledge. Although the plaintiffs alleged that the<br />
defendants knew that customer assets were being used for the broker-dealer, they could not<br />
allege defendants’ knowledge that the transfer of funds was a conversion since it was not pled<br />
that the defendants knew the transactions were unauthorized. For the foregoing reasons, the<br />
special master dismissed the plaintiffs’ aiding and abetting, breach of fiduciary duty claim, and<br />
(plaintiff’s) aiding and abetting conversion claim with prejudice.<br />
SEC v. Juno Mother Earth Asset Mgmt., 2012 Fed. Sec. L. Rep. (CCH) 96,748 (S.D.N.Y.<br />
Mar. 2, 2012).<br />
The Securities and Exchange Commission brought an action against defendants, a<br />
registered investment advisor (RIA), its portfolio manager, and CEO. The SEC alleged that the<br />
portfolio manager and CEO aided and abetted the RIA’s violation of Section 206(4) of the<br />
Investment Advisers Act of 1940 and associated Rules 206(4)-2 and 206(4)-4, and Section 203A<br />
of the Advisers Act. Defendants moved to dismiss these claims for failure to state a claim under<br />
Federal Rule of Civil Procedure 12b-6. With regards to plaintiff’s Section 206(4) and<br />
Rule 206(4)-2 claims, the defendants argued that the plaintiff made only conclusory allegations<br />
regarding the mental states of the individual defendants, and that those allegations are<br />
insufficient to state a claim for aiding and abetting. The court noted that to satisfy a claim of<br />
aiding and abetting, the complaint need not allege the aider and abettor actually knew about the<br />
principal violation of the Advisers Act. Rather, it suffices to allege that the aider and abettor<br />
318<br />
H.3
ecklessly disregarded the violation. See SEC v. Landberg, 2011 U.S. Dist. LEXIS 127827, at<br />
*22–23 (S.D.N.Y. Oct. 26, 2011). Therefore, the court denied the motion to dismiss this claim<br />
because the plaintiff pleaded sufficient facts to support a reasonable inference that defendants<br />
knew or recklessly disregarded the violation. With regards to the plaintiff’s claim under<br />
Rule 206(4)-4, the court found that the defendants’ failure to disclose the financial condition of<br />
the RIA to investors was a violation of Section 206(4). Defendants argued that the Section 203A<br />
aiding and abetting claim failed to state a claim because it did not plausibly allege that<br />
defendants knew of or recklessly disregarded the RIA’s violation. In denying the defendants’<br />
motion to dismiss this claim, the court held that the complaint’s allegations created a reasonable<br />
inference that the individual defendant knew of or disregarded the alleged violations. Therefore,<br />
the court denied defendants’ motions to dismiss claims for aiding and abetting.<br />
Dodona I, LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012).<br />
Plaintiff, a hedge fund, brought suit on behalf of a putative class of investors in two<br />
securities offerings of collateralized debt obligation (CDO) led by defendants’ broker-dealer<br />
subsidiary. Plaintiff alleges various violations of securities laws, common law fraud, aiding and<br />
abetting fraud, fraudulent concealment, and unjust enrichment. The claims arose out of<br />
defendants’ involvement in the subprime mortgage market. After several years in the market, the<br />
defendants were aware of the increased risks in subprime lending, and had recognized a<br />
corresponding need to reduce their long-term exposure. The defendants decided to reduce their<br />
overall exposure given the uncertainty of the future direction of the housing market and the<br />
increased volatility of the mortgage-related product markets. The downturn of the housing<br />
market led to the liquidation of the CDO securities, which the hedge fund had to sell at a loss.<br />
Plaintiff alleged that the defendants created the CDOs as part of a scheme to decrease their<br />
subprime mortgage exposure at the expense of its investors by shorting those same CDOs. The<br />
plaintiff also alleged that the defendants failed to disclose this strategy and that they did not<br />
reasonably believe that the CDOs would be profitable for investors. The plaintiff alleged that the<br />
defendants aided and abetted common law fraud because the broker-dealer subsidiary could not<br />
have perpetrated the fraud without the substantial assistance of the other defendants. Defendants<br />
moved to dismiss the complaint. The court noted that the plaintiff’s complaint adequately pled<br />
that the broker-dealer subsidiary committed an underlying fraud because the defendants had<br />
knowledge of facts or access to information contradicting their public statements. The court also<br />
found that the defendants’ employees had actual knowledge of the alleged fraud and enabled or<br />
substantially assisted it. The knowledge of these employees, the court noted, could be imputed<br />
to defendants. Because the court found a primary violation of common law fraud, that<br />
defendants substantially assisted or enabled that alleged fraud, and had knowledge of the fraud,<br />
the defendants’ motion to dismiss the claim was denied.<br />
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).<br />
Investors filed a putative class action against defendants, a broker-dealer and a<br />
corporation, for violations arising out of a merger agreement between the two defendants.<br />
319<br />
H.3<br />
H.3
Plaintiffs alleged that the corporation aided and abetted the broker-dealer’s breach of fiduciary<br />
duty by negotiating and finalizing the merger even though the corporation knew that the brokerdealer<br />
had not performed due diligence. Because the corporation was incorporated in Bermuda,<br />
the court applied Bermuda law to the analysis of the aiding and abetting claim. The plaintiffs<br />
conceded that the claim was precluded by the elements of the Securities <strong>Litigation</strong> Uniform<br />
Standards Act of 1998, but they argued that the claim was preserved by the “Delaware carveout”<br />
exception. 15 U.S.C. § 78bb. The court dismissed the claim because the Delaware carveout<br />
exception applies only to claims based upon the law of the state in which the issuers<br />
incorporated, and the publicly-traded corporation was not incorporated under the laws of any<br />
state.<br />
King Cnty. v. IKB Deutsche Industriebank AG, 863 F. Supp. 2d 288 (S.D.N.Y. 2012).<br />
Investors brought an action against various corporations for negligence, negligent<br />
misrepresentation, breach of fiduciary duty, and aiding and abetting those violations. The court<br />
dismissed plaintiffs’ claims of aiding and abetting negligence and negligent misrepresentation<br />
because no cause of action for aiding and abetting negligence or negligent misrepresentation<br />
exists in New York. With regards to the plaintiffs’ aiding and abetting a breach of fiduciary duty<br />
claim, the court noted that New York does recognize a cause of action for this claim where:<br />
(1) one breached a fiduciary duty owed to another; (2) the defendant knowingly induced or<br />
participated in the breach; and (3) the plaintiff suffered damage as a result of the breach. Design<br />
Strategy, Inc. v. Davis, 469 F.3d 284, 303 (2d Cir. 2006). The court dismissed plaintiffs’ claim<br />
for aiding and abetting because it found no primary breach of fiduciary duty claim.<br />
SEC v. Gruss, 859 F. Supp. 2d 653 (S.D.N.Y. 2012).<br />
The Securities and Exchange Commission brought suit against defendant, a former CFO<br />
of a hedge fund, alleging aiding and abetting violations of Sections 206(1) & (2) of the<br />
Investment Advisers Act of 1940. The SEC specifically alleged that defendant violated these<br />
sections by approving unauthorized transfers and withdrawals of clients’ money, and improper<br />
interfund transfers. Defendant filed a motion to dismiss the SEC’s complaint for failure to state<br />
a claim under Federal Rule of Civil Procedure 12(b)(6) and for failure to set forth a plausible<br />
cause of action pursuant to Federal Rules of Civil Procedure 8(a) and 9(b). The defendant<br />
argued that the SEC’s complaint failed under Rule 12(b)(6) because Section 206 of the<br />
Investment Advisers Act, by its terms, could not be applied extraterritorially. The court denied<br />
the motion to dismiss on these grounds because it found that the Investment Advisers Act did<br />
have extraterritorial authority. The defendant also attacked the adequacy of the SEC’s complaint<br />
under Rule 8(a), arguing that the claims were implausible because of inconsistencies in the<br />
complaint. The court dismissed defendant’s motion on these grounds, finding that the material<br />
inconsistencies pointed out by the defendant were not sufficiently persuasive to undermine the<br />
SEC’s claims to the point of implausibility. The court also found that the SEC’s complaint was<br />
adequate because Rule 8’s liberal standard only requires the complaint give the defendant fair<br />
notice of what the plaintiff’s claim is and the grounds upon which it rests. Lastly, defendant<br />
argued that the SEC failed to allege sufficient facts under Rule 9(b) to give rise to a strong<br />
320<br />
H.3<br />
H.3
inference of fraudulent intent. Specifically, defendant maintained that the SEC failed to allege<br />
facts sufficient to demonstrate that he acted recklessly to satisfy the requisite knowledge to be an<br />
aider or abettor. The court found, however, that the complaint need only plead facts that give<br />
rise to a strong inference of either fraudulent intent or negligence by the defendant. It noted that<br />
Rule 9(b) does not require that a complaint plead fraud with the detail of a desk calendar or a<br />
street map. Nor should the word “particularity” be used as a talisman to dismiss any but a finely<br />
detailed fraud allegation brought in the federal court. For the foregoing reasons, the court denied<br />
defendant’s motion to dismiss the complaint.<br />
SEC v. Mudd, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10, 2012).<br />
The Securities and Exchange Commission brought multiple claims against three<br />
defendants for allegedly misleading investors concerning Federal National Mortgage<br />
Associations’ level of exposure to risky subprime and reduced documentation “Alt-A” loans. Of<br />
interest, the SEC charged all the defendants with aiding and abetting violations of Section 13(a)<br />
of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13. Defendants<br />
moved to dismiss. The court stated that to state a claim under Section 20(e), the SEC “must<br />
prove: ‘(1) the existence of a securities law violation by the primary (as opposed to the aiding<br />
and abetting) party; (2) “knowledge” of this violation on the party of the aider and abettor; and<br />
(3) “substantial assistance by the aider and abettor in the achievement of the primary violation.”<br />
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009). The court held that the SEC had adequately<br />
alleged that FNMA and one of the defendants committed the primary securities violation by<br />
materially misstating FNMA’s subprime and exposure, and that the remaining defendants had<br />
actual knowledge of this violation—thus, the knowledge requirement was met. As to<br />
“substantial assistance,” the court noted that the SEC plausibly alleged that all three individual<br />
defendants consciously assisted the venture to misstate the risk exposures in an active way—they<br />
received and reviewed FNMA’s periodic filings, drafted FNMA’s first definition of subprime,<br />
certified all FNMA’s 10-K’s and 10-Q’s during the relevant period and spoke to investors and<br />
repeated the misleading disclosures while emphasizing that FNMA’s subprime exposure was<br />
immaterial. As such, the court held that the SEC had alleged facts sufficient to meet the<br />
“substantial assistance” requirement as well. The defendants’ motion to dismiss was denied.<br />
Fragin v. Mezei, 2012 U.S. Dist. LEXIS 119064 (S.D.N.Y. Aug. 22, 2012).<br />
Plaintiffs brought suit in their capacity as trustees for the trusts of decedent’s five<br />
children. Claims were brought against the defendant, a former family friend of the family and<br />
investment advisor, and related companies that were allegedly controlled by the defendant.<br />
Plaintiffs contended that the trusts invested $800,000 in notes based on misrepresentations and<br />
material omissions by the defendant. The defendant, aided by his son-in-law, used the funds in a<br />
different, unauthorized manner, resulting in a loss. Additionally, the notes were not properly<br />
registered. Plaintiffs allege, among other things, that federal securities laws were violated.<br />
Defendants moved for summary judgment. Specifically, the son-in-law defendant moved for<br />
summary judgment as to the aiding and abetting claims for the unlawful and undisclosed<br />
diversion of the trust funds. Under New York law, a claim for aiding and abetting requires:<br />
321<br />
H.3<br />
H.3
(1) the existence of wrongful conduct by the primary wrongdoer; (2) knowledge of the wrongful<br />
conduct on the part of the defendant; and (3) substantial assistance of the defendant in achieving<br />
the wrongdoing. Kromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001). In<br />
support of his motion for summary judgment, the son-in-law argued that there was nothing in the<br />
record to conclude that he knew of the defendants’ alleged torts. The plaintiffs provided no<br />
factual basis to conclude that the son-in-law knew what was said or not said between the<br />
defendants and plaintiffs. As such, the son-in-law’s motion for summary judgment was granted.<br />
Banco Indus. de Venez. v. CDW Direct, L.L.C., 2012 U.S. Dist. LEXIS 125277 (S.D.N.Y.<br />
Sept. 4, 2012).<br />
Plaintiff bank brought a claim for negligence, aiding and abetting breach of fiduciary<br />
duty, and unjust enrichment against defendant computer information technology vendor alleging<br />
that the defendant sold merchandise to a faithless employee who purported to be acting on behalf<br />
of the plaintiff. The plaintiff sought to recover the costs of the merchandise that it claimed it<br />
never received. To establish a claim for aiding and abetting a breach of fiduciary duty under<br />
New York law the plaintiff must accurately plead: “(1) the existence of a violation by the<br />
primary wrongdoer; (2) knowledge of the violation by the aider and abettor; and (3) proof that<br />
the aider and abettor substantially assisted the primary wrongdoer.” In re Rafco Sec. Litig.,<br />
759 F. Supp. 2d 301, 333 (S.D.N.Y. 2010). The court found that the plaintiff had not pled<br />
sufficient facts to establish either that the defendant had knowledge that the employee’s wrongful<br />
conduct was occurring or that the defendant substantially assisted the employee’s breach of<br />
fiduciary duty. Either actual knowledge or “conscience avoidance may satisfy the knowledge<br />
prong of an aiding and abetting charge.” Rafco, 759 F. Supp. 2d at 334. “The burden of<br />
demonstrating actual knowledge, although not insurmountable, is nevertheless a heavy one.”<br />
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349, 367 (S.D.N.Y.<br />
2007). Conscience avoidance involves a culpable state of mind whereas constructive knowledge<br />
imputes a state of mind on a theory of negligence. The court reasoned that the plaintiff here<br />
relied on conclusory and sparse allegations that the defendant knew or should have known about<br />
the primary breach of duty. As for substantial assistance, “substantial assistance occurs when a<br />
defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby<br />
enabling the primary wrong to occur.” Rafco, 759 F. Supp. 2d at 336. An action of an alleged<br />
aider and abettor does not constitute substantial assistance unless the defendant owes a fiduciary<br />
duty directly to the plaintiff. The court reasoned that the mere fact that the participant in the<br />
breach of fiduciary duty used the defendant’s regular business operation did not rise to the level<br />
of substantial assistance. The court granted defendant’s motion to dismiss.<br />
SEC v. Alternative Green Technologies, Inc., 2012 U.S. Dist. LEXIS 142154 (S.D.N.Y. Sept. 24,<br />
2012).<br />
The Securities and Exchange Commission brought an enforcement action arising out of<br />
the alleged fraudulent issuance of purportedly unrestricted shares of the corporation. The<br />
complaint alleged that the moving defendants, a corporation and its director, aided and abetted<br />
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c)<br />
322<br />
H.3<br />
H.3
promulgated thereunder, in addition to other violations of the Exchange Act. Specifically, the<br />
SEC alleged the individual defendant and his company aided and abetted violations of<br />
Section 10(b) as they knowingly provided substantial assistance to defendant corporation in<br />
“obtaining and furnishing false documents (including a sham assignment of debt and a fabricated<br />
and back dated corporate resolution and convertible note), to support a legal opinion letter that<br />
was provided to the corporation’s transfer agent so that the transfer agent would issue millions of<br />
shares of purportedly unrestricted stock of the corporation in an unregistered offering.” The<br />
defendants moved to dismiss on the ground that the claim brought by the SEC failed to<br />
adequately allege any of the three requirements for aiding and abetting: (1) that the corporation<br />
committed a primary violation of Section 10(b) and Rule 10b-5; (2) that the individual<br />
defendants had “actual knowledge” of that primary violation; or (3) that the individual<br />
defendants substantially assisted the violation. The court analyzed all three of these<br />
requirements and held that the SEC had adequately alleged a primary violation by the<br />
corporation, that both of the individual defendants had actual knowledge of the fraud, and<br />
provided substantial assistance in the fraud, thereby stating a claim that they aided and abetted<br />
the violation of Section 10(b). The motion to dismiss was denied.<br />
In re Lehman Bros. Sec. Litig., 2012 U.S. Dist. LEXIS 148177 (S.D.N.Y. Oct. 15, 2012).<br />
Eight consolidated securities actions were brought by seven California-based public<br />
entities and a California-based insurance company against Lehman Brothers after Lehman’s<br />
collapse and subsequent bankruptcy. All of the securities and most of the other cases brought in<br />
or removed to federal courts were consolidated before the S.D.N.Y. for pretrial purposes. They<br />
asserted claims against Lehman’s former officers, directors, and auditors under the Securities Act<br />
of 1933, the Securities Exchange Act of 1934, and California state law.<br />
Plaintiffs collectively made twenty-one separate purchases of defendant broker-dealer’s<br />
securities in fifteen different offerings during the period of October 25, 2004 to March 31, 2008.<br />
Count Ten of their claim for relief sought recovery from officers and non-officer directors of the<br />
broker-dealer on a theory of aiding and abetting the alleged common law fraud under California<br />
law. The non-officer directors allegedly aided and abetted the violation of the officer defendants<br />
by “intentionally allowing and/or recklessly failing to detect or deter the officer defendants’<br />
misleading statements.” California recognizes aiding and abetting liability where plaintiff<br />
establishes (1) a primary fraud, and (2) the alleged aider and abettor’s actual knowledge of, and<br />
substantial assistance to, the successful consummation thereof. See Fortaleza v. PNC Fin. Servs.<br />
Grp., Inc., 642 F. Supp. 2d 1012, 1017 (N.D. Cal. 2009). Absent a sufficient claim for primary<br />
fraud, a claim for aiding and abetting fraud must fail without regard to whether the remaining<br />
elements are satisfied. Here, the aiding and abetting claims against the individual defendants—<br />
both the officers and the non-officer directors—rest on the assertions that the officers aided the<br />
fraud committed by other officers and that the non-officer directors aided the fraud committed by<br />
all of the officers. However, the amended complaint did not adequately state a claim for fraud<br />
against any of the officer defendants. Accordingly, the aiding and abetting claim was dismissed.<br />
H.3<br />
323
H.3<br />
SEC v. Espuelas, 2012 U.S. Dist. LEXIS 154465 (S.D.N.Y. Oct. 26, 2012).<br />
The Securities and Exchange Commission sued various former executives of a<br />
corporation for accounting fraud. Pending in the case at hand was the defendant’s motion for<br />
summary judgment as to the remaining claims against her for aiding and abetting the<br />
corporation’s violations of Sections 13(a) and 13(a)(2)(A) of the Securities Exchange Act of<br />
1934 and Exchange Act Rules 12b-20, 13a-1, and 13a-13, and for directly violating Exchange<br />
Act Rule 13b-2-1. The individual defendant in the case was once the director of business<br />
development for the corporation. The SEC alleged she aided and abetted the corporation’s<br />
misstatements of its financial condition. Section 13(a) requires issuers of securities to file<br />
information, documents, and annual and quarterly reports as required by the SEC. Rules 13a-1<br />
and 13a-13 require issuers to file annually and quarterly reports, respectively. 17 C.F.R.<br />
§§ 240.1, 13a-1, 240.13a-13. “To state a claim that defendants aided and abetted violations of<br />
the Exchange Act, the SEC must allege: (1) a primary violation of the Exchange Act; (2) actual<br />
knowledge of the violation by the aider and abettor; and (3) that the aider and abettor<br />
substantially assisted the primary violation.” SEC v. Espuelas (Espuelas 1), 579 F. Supp. 2d at<br />
583–84; see also SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012). “These three requirements<br />
cannot be considered in isolation from one another. Satisfaction of the knowledge requirement<br />
will depend on the theory of primary liability, and there may be a nexus between the degree of<br />
knowledge and the requirement that the alleged aider and abettor render substantial assistance.”<br />
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009). Plaintiff conceded that there was a genuine<br />
issue of material fact as to the existence of the primary violation, insofar as the SEC’s theory is<br />
that these were contingent transactions. As for the knowledge requirement, the SEC failed to<br />
establish a genuine issue of material fact with regard to whether the individual defendant knew<br />
of the facts that made the recognition of revenue inappropriate. Due to the SEC’s failure to<br />
demonstrate a genuine issue of material fact as to the knowledge requirement, the court granted<br />
the defendant’s motion for summary judgment. Specifically, the court relied on the fact that the<br />
defendant was not a certified public accountant and had little accounting expertise and, thus, was<br />
not aware of the facts that made recognition of the revenue in question improper.<br />
Star Int’l Co. v. Fed. Reserve Bank of N.Y., 2012 U.S. Dist. LEXIS 165289 (S.D.N.Y. Nov. 19,<br />
2012).<br />
This case arose from the federal government’s rescue of American International Group,<br />
Inc. (“AIG”) during the financial meltdown of 2008. Plaintiff, a major stockholder in AIG,<br />
challenged, directly and derivatively on AIG’s behalf, various actions taken by the Federal<br />
Reserve Bank of New York (“FRBNY”) in connection with that rescue. In particular, the<br />
complaint claims that FRBNY required, induced, or aided and abetted breaches of fiduciary duty<br />
by AIG’s directors. Under Delaware law, “corporate directors have an unyielding fiduciary duty<br />
to protect the interests of the corporation and to act in the best interests of the shareholders.” In<br />
re Alloy, Inc., C.A., 2011 Del. Ch. LEXIS 159, at *22 (Del. Ch. Oct. 13, 2011). A third party<br />
may be liable for aiding and abetting a breach of a corporate fiduciary as a duty to the<br />
stockholders if the third party knowingly participates in the breach. To survive a motion to<br />
324<br />
H.3
dismiss, the complaint must allege facts that satisfy the four elements of an aiding and abetting<br />
claim: (1) the existence of a fiduciary relationship; (2) a breach of the fiduciary’s duty;<br />
(3) knowing participation in that breach by the defendants; and (4) damages proximately caused<br />
by the breach. Malpiede v. Townsend, 780 A.2d 1075, 1096 (Del. 2001). The breaches of duty<br />
that the plaintiff asserts were committed by AIG’s directors and aided by FRBNY are the same<br />
ones that the plaintiff asserted in its fiduciary duty claims brought directly against FRBNY. The<br />
court stated that the goal of rescuing is to “preserve the stability of the banking system, to<br />
minimize the losses to the public, and to reduce the possibility of grave national and international<br />
financial repercussions.” In re Franklin Nat’l Bank Sec. Litig., 478 F. Supp. at 217–19. The<br />
threat that a federal reserve bank would be derivatively liable for corporate directors’ alleged<br />
breaches of fiduciary duty in accepting such aid could deter the bank from furnishing this aid. A<br />
potential for vicarious or secondary liability for such a breach would stand as an obstacle to, and<br />
impede and burden, the implementation of federal policy by a federal instrumentality. See<br />
McCullough, 17 U.S. at 436. Accordingly, the court determined that the plaintiff’s aiding and<br />
abetting claims against FRBNY, must be dismissed.<br />
SEC v. Greenstone Holdings, Inc., 2012 SEC LEXIS 3639 (S.D.N.Y. 2012).<br />
The federal district court granted the Securities and Exchange Commission’s partial<br />
summary judgment against an attorney holding her liable for aiding and abetting securities fraud<br />
by issuing a false legal opinion that certain of her co-defendants used to illegally obtain more<br />
than six million shares of unrestricted stock of a large public company. Among other things, the<br />
attorney falsely prepared promissory notes, note holders, and communications with those<br />
holders, none of which actually existed. The court held the attorney liable for aiding and<br />
abetting securities fraud under Section 10(b) of the Securities Exchange Act of 1934, but denied<br />
the summary judgment against the attorney for primary liability under Section 10(b). The court<br />
also reserved decision on the SEC’s claim that the attorney violated Section 5 of the Securities<br />
Act of 1933.<br />
In re Commodity Exch. Inc., 2012 U.S. Dist. LEXIS 181487 (S.D.N.Y. Dec. 21, 2012).<br />
Plaintiffs filed a consolidated class action complaint claiming that the defendant bank<br />
violated Sections 9(a) and 22(a) of the Commodity Exchange Act, 7 U.S.C. §§ 13a, 25a, and<br />
Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. The complaint alleged that the<br />
defendants violated these Acts by combining, conspiring, and agreeing to manipulate the prices<br />
of silver futures and silver options contracts traded on the Commodity Exchange Inc.<br />
Defendants filed a motion to dismiss. Section 22 of the Commodity Exchange Act creates<br />
liability for any person “who willfully aids, abets, counsels, induces, or procures the commission<br />
of a violation” of the Act. 7 U.S.C. § 25a(l). In order to state a claim under this section, a<br />
plaintiff must show that a “defendant (1) had knowledge of the principal’s intent to violate the<br />
Commodity Exchange Act; (2) intended to further that violation; and (3) committed some act in<br />
furtherance of the principal’s objective.” Platinum & Paladium, 828 F. Supp. 2d at 599. As a<br />
matter of law, where a complaint fails to allege the requisite intent of any primary act to<br />
325<br />
H.3<br />
H.3
manipulate a market, that complaint also fails to state a claim for aiding and abetting liability of<br />
the Commodity Exchange Act. Id. Plaintiffs failed to state a claim for market manipulation by<br />
the principal and, thus, also failed to state that defendants knowingly aided and abetted a market<br />
manipulation. The plaintiffs’ claim also failed to state a claim for aiding and abetting liability<br />
because the complaint did not identify the person alleged to be involved in knowingly aiding and<br />
abetting the alleged manipulation of silver future prices on the COMEX market. Lastly, the<br />
complaint made no reference to specific communications between the defendants to manipulate<br />
the market, thus plaintiffs’ aiding and abetting liability claim was dismissed.<br />
Zazzali v. Hirschler Fleischer, P.C., 2012 U.S. Dist. LEXIS 118090 (D. Del. Aug. 21, 2012).<br />
Defendant and related entities, all of whom are Idaho real estate investment entities, filed<br />
bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware<br />
beginning on November 6, 2008. The bankruptcy court confirmed the Chapter 11 Plan of<br />
Liquidation. The plan created two trusts: the defendants’ estate litigation trust and the<br />
defendants’ private actions trust. From 2004 to 2008 the defendant and its affiliates presented to<br />
the world an illusion of a monolith of wealth, competence, and power. However, facts came to<br />
light in the fall of 2008 when the world learned that the defendant was running an elaborate<br />
Ponzi scheme. Various creditors filed claims against the bankruptcy estate, including claims for<br />
aiding and abetting fraud, aiding and abetting breaches of fiduciary duties and breaches of trust.<br />
The defendant filed motions to dismiss. With respect to the aiding and abetting claims, the<br />
parties disputed which state law was to govern the claims. The trustees contended that it was<br />
unclear which law would govern as there were investors who were defrauded throughout the<br />
United States; however, in its brief, the trustee analyzed the claim exclusively under Delaware<br />
law. Defendant asserted that the claim for aiding and abetting fraud would be governed by<br />
Delaware, Idaho, or Virginia law to the extent that the states recognize a cause of action for<br />
aiding and abetting fraud. The court deferred making a decision as to the matter of the choice of<br />
law until there was a development for a more complete factual record. See Graboff v. The Coller<br />
Firm, 2010 U.S. Dist. LEXIS 118732, 2010 WL 4456923, at *8 (E.D. Pa. Nov. 8, 2010). In<br />
order to state a claim for aiding and abetting fraud under either Idaho or Delaware law, the<br />
plaintiff must allege that the defendant had knowledge of the underlying fraud. The court<br />
determined here that the plaintiff had failed to plead facts giving rise to an inference that the<br />
defendant had knowledge of the fraudulent scheme. As such, the motion to dismiss was granted<br />
as to this claim. Along these same lines, allegations of aiding and abetting of breaches of<br />
fiduciary duties and breaches of trust both failed for failure to state a claim. Both counts of the<br />
complaint failed to allege knowing participation in the breach of fiduciary duty. As such, the<br />
defendants’ motion to dismiss was granted as to those claims.<br />
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012).<br />
The Securities and Exchange Commission filed this enforcement action against the<br />
former and current officers of an international provider of offshore drilling services and<br />
equipment. To operate drilling rigs offshore in Nigeria, the Nigerian laws require that the owner<br />
of the rig to either pay permanent import duties or obtain a temporary import permit (“TIP”).<br />
326<br />
H.3<br />
H.3
The SEC alleged two officers of the corporation violated the Foreign Corrupt Practices Act, and<br />
federal securities laws by allegedly making bribes to obtain TIPs and TIP extensions in order to<br />
avoid paying permanent import duties. Specifically, the individual defendants are alleged to<br />
have made numerous “special handling” and “procurement” payments to Nigerian government<br />
officials, which were, in essence, bribes to obtain false paperwork necessary to secure TIPs or to<br />
obtain discretionary TIP extensions. Furthermore, through this conduct, the individual<br />
defendants allegedly aided and abetted the international corporation’s violations of Section 30(a)<br />
of the Securities Exchange Act of 1934, and violation of Section 20(e) of the Exchange Act.<br />
Defendants argued that these aiding and abetting claims should be dismissed because no<br />
plausible allegations have been made that a primary violation was committed. “Aiding and<br />
abetting liability consists of: (1) existence of a securities violation by a primary wrongdoer;<br />
(2) knowledge of the violation by the aider and abettor; and (3) proof that the aider and abettor<br />
substantially assisted in the primary violation.” SEC v. Treadway, 430 F. Supp. 2d 293, 336<br />
(S.D.N.Y. 2006). In order to plead substantial assistance, the plaintiff must allege facts sufficient<br />
to show that defendant “in some sort associated himself with the venture, that he participated in<br />
it as in something that he wished to bring about, and that he sought by his action to make it<br />
succeed.” SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012). “A high degree of knowledge may<br />
lessen the SEC’s burden in proving substantial assistance.” Id. at 215. The court determined<br />
that the SEC had properly stated a primary FCPA violation based on the payments made to<br />
obtain TIPs based on false paperwork. Additionally, the individual defendants repeatedly<br />
approved the “special handling” fee to customs agents, despite knowing the fee was associated<br />
with false paperwork. Defendants ensured that the customs agent was paid his fee, which, in<br />
turn, ensured that the bribes reached the appropriate foreign official. This conduct constituted<br />
substantial assistance under aiding and abetting law. Defendants’ motion to dismiss was<br />
therefore denied.<br />
In re Nat’l Century Fin. Enters., Inc., 846 F. Supp. 2d 828 (S.D. Ohio 2012).<br />
Institutional investors brought an action against a financial corporation and a brokerdealer,<br />
alleging violations of Section 10(b) of the Securities Exchange Act of 1934, blue sky<br />
laws of various states, and various tort claims, arising from the investors’ purchase of nearly<br />
$2 billion in the corporation’s notes. The plaintiffs alleged that the corporation committed a<br />
multibillion-dollar fraud on investors by “purchasing” accounts receivables that were worthless<br />
or non-existent and that the broker-dealer knew or should have known of the material aspects of<br />
the corporation’s fraud. Plaintiffs argued that the broker-dealer assisted the corporation by<br />
bringing the corporation’s notes to the market despite knowing of the misrepresentations the<br />
corporation made to its investors regarding its operations. Plaintiffs brought claims against the<br />
broker-dealer of aiding and abetting fraud and aiding and abetting breach of fiduciary duty. The<br />
defendants moved for summary judgment. The broker-dealer argued that aiding and abetting<br />
breach of fiduciary duty claims are precluded by New York’s Martin Act, N.Y. Gen. Bus. Law<br />
§ 352 et seq. The court disagreed as New York’s highest court held that the Martin Act does not<br />
preempt common law causes of action arising out of securities transactions. Assured Guar. Ltd.<br />
v. J.P. Morgan Inv. Mgmt. Inc., 962 N.E.2d 765 (N.Y. 2011). In order to state a claim for aiding<br />
and abetting breach of fiduciary duty the plaintiffs must prove: (1) a breach by a fiduciary of<br />
obligations to another; (2) that the defendants knowingly induced or participated in the breach;<br />
327<br />
H.3
and (3) that plaintiffs suffered damages as a result of the breach. Plaintiffs alleged that the<br />
corporation’s officers owed a fiduciary duty to creditors not to waste corporate assets. In<br />
granting summary judgment on this claim for the broker-dealer, the court noted that the<br />
corporation did not owe a fiduciary duty to its creditors. The broker-dealer also moved for<br />
summary judgment on plaintiffs’ claim of aiding and abetting fraud. Under New York law, a<br />
claim for aiding and abetting fraud require: (1) the existence of a fraudulent scheme; (2) the<br />
defendants’ actual knowledge of the fraud; and (3) the defendants’ substantial assistance to the<br />
fraudulent scheme. Oster v. Kirschner, 905 N.Y.S.2d 69, 72 (App. Div. 2010). Although it was<br />
undisputed that the corporation conducted a fraudulent scheme, the broker-dealer argued that it<br />
did not substantially assist the fraud. Substantial assistance exists where: (1) a defendant<br />
affirmatively assists, helps, conceals, or by virtue of failing to act when required to do so enables<br />
the fraud to proceed; and (2) the actions of the aider/abettor proximately caused the harm on<br />
which the primary liability is predicated. Stanfield Offshore Leveraged Assets v. Metro. Life Ins.<br />
Co., 883 N.Y.S.2d 486, 489 (App. Div. 2009). Although the broker-dealer contended that it<br />
performed routine banking functions for the corporation, the court held the assistance it provided<br />
to the corporation was more than ministerial because it served as the primary marketer and<br />
solicitor of the corporation’s notes. Therefore, the court denied the defendants’ motion for<br />
summary judgment, holding that the broker-dealer was critical to the success of the corporation’s<br />
fraudulent scheme and a proximate cause of the injury to the investors.<br />
In re Nat’l Century Fin. Enters., Inc. v. Touche, <strong>LLP</strong>, 2012 U.S. Dist. LEXIS 154042 (S.D. Ohio<br />
Oct. 26, 2012).<br />
A limited partnership that makes private equity investments for its limited partner<br />
investors brought an action against defendant securities bank for fraud in connection with a<br />
failed $12 million equity investment. The investment at issue was the purchase of preferred<br />
stock in a corporation where the defendant acted as a co-placement agent on a stock offering and,<br />
according to plaintiff, should have told plaintiff that the corporation they were investing in was<br />
not operating its business in a manner consistent with what was represented to the plaintiff.<br />
Specifically, plaintiff alleged that the bank aided and abetted the corporation’s fraud against the<br />
plaintiff. Though the bank was based in New York, its alleged assistance in the fraud came in its<br />
role as a conduit for an Ohio company to convey false information to the plaintiff. Thus, the<br />
court determined that Ohio law would govern. The plaintiff alleged that the bank allegedly aided<br />
the corporation’s fraud in several ways: (1) it introduced the plaintiff to the potential investment<br />
opportunity; (2) it sent the plaintiff a private placement memorandum; (3) it arranged for the<br />
plaintiff to receive data, and offering materials; (4) it answered the plaintiff’s questions about the<br />
investment; and (5) it set up the site visit. Until recently, Ohio state courts repeatedly expressed<br />
doubt about whether a claim for aiding and abetting tortious conduct was cognizable. See<br />
Andonian v. A.C.&S., Inc., 97 Ohio App. 3d 572, 574 (Ohio Ct. App. 1994). Some courts in<br />
Ohio have flatly refused to recognize such a claim. The court also noted that federal court<br />
decisions have reflected this uncertainty. The Sixth Circuit twice noted that it was unclear<br />
whether Ohio would recognize a claim for aiding and abetting tortious conduct. See Aetna Cas.<br />
& Sur. Co. v. Leahey Constr. Co., 219 F.3d 519, 533 (6th Cir. 2000). However, the Ohio<br />
Supreme Court recently settled this issue by holding that Ohio does not recognize the cause of<br />
action under RESTATEMENTS (SECOND) OF TORTS, § 876 for aiding and abetting tortious conduct.<br />
H.3<br />
328
DeVries Dairy, L.L.C. v. White Eagle Coop. Ass’n, Inc., 132 Ohio St. 3d 516, 517 (Ohio 2012).<br />
Given that under Ohio law aiding and abetting tortious conduct is not cognizable, the court<br />
granted summary judgment as to the aiding and abetting claim.<br />
In re Rough Rice Commodity Litig., 2012 U.S. Dist. LEXIS 17773 (N.D. Ill. Feb. 9, 2012).<br />
Traders brought a class action against a registered commodity broker and several of its<br />
employees. The plaintiffs alleged that all defendants were liable for aiding and abetting the<br />
manipulation of rice futures and options prices under Section 13(a) of the Commodity Exchange<br />
Act. Specifically, plaintiffs alleged that the defendants impacted the rough rice futures and<br />
options contract prices through the unlawful portion of their trades and positions. Section 13(a)<br />
of the Act creates liability for any person who willfully aids, abets, counsels, commands,<br />
induces, or procures the commission of a violation of any provisions of the chapter. Because the<br />
court determined that the plaintiffs could not sustain a claim for price manipulation under the<br />
Act, the claim for aiding and abetting others in committing the violations failed. The court noted<br />
that this claim would fail based on the pleadings as well. To state a claim for aiding and abetting<br />
liability a plaintiff must allege that the defendant: (1) had knowledge of the principal’s intent to<br />
commit a violation of the CEA; (2) had the intent to further that violation; and (3) committed<br />
some act in furtherance of the principal’s objective. The court held that plaintiffs’ allegations<br />
that certain defendants allowed others to place trades for an account without a power of attorney<br />
authorization and allowed them to repeatedly violate the board of trade’s position limits did not<br />
constitute acts in furtherance of the principal’s objective. Therefore, the court granted the<br />
defendant’s motion to dismiss the aiding and abetting claim without prejudice.<br />
U.S. Commodity Futures Trading Comm’n v. Sarvey, 2012 U.S. Dist. LEXIS 16881 (N.D. Ill.<br />
Feb. 10, 2012).<br />
The United States Commodity Futures Trading Commission (“CFTC”) sued defendants,<br />
two former traders at the Chicago Board of Trade, in an enforcement action for violations of<br />
Commodity Exchange Act and various CFTC regulations. Because the primary day trader died<br />
prior to the trial, the claims against the remaining trader only alleged aiding and abetting the<br />
primary trader’s scheme. Sections 4b(a)(2)(C)(i) and (iii) of the Act prohibit any person from<br />
cheating, defrauding, or deceiving another person in connection with orders for futures contracts.<br />
According to the CFTC, the two traders arranged a trade between themselves at a below-market<br />
price, and as a result, the primary trader’s clients lost more than $2 million while the second<br />
trader netted over $1.6 million. To be guilty of aiding and abetting this violation the second<br />
trader must have known of the primary trader’s objective in the scheme and had a desire to help<br />
him attain it. The court found that the second trader clearly had a financial motive for the illegal<br />
trades. The nature of the timing and the structure of the trades themselves also clearly indicate<br />
that the trader was working with the primary trader to achieve this violation. The trader also<br />
knew these were customer sales and the trade was not made anywhere close to the prevailing<br />
market price. The court noted that the factor that truly showed the trader’s scienter was the<br />
nature and timing of the contract’s sale at a below-market price. There was no economic<br />
justification for the contract sale, and the second trade was made so quickly after the first trade<br />
329<br />
H.3<br />
H.3
that it was clearly prearranged. This trade was purely a vehicle to compensate the primary trader<br />
for his involvement in the scheme. For the foregoing reasons, the court granted the CFTC’s<br />
motion for summary judgment and permanently enjoined the trader from: (1) violating the Act<br />
or any CFTC regulations; and (2) trading commodity futures directly or indirectly for himself,<br />
others, or acting in any capacity that requires registration with the CFTC. The court also ordered<br />
the trader to disgorge his $1,652,187.50 in profits from the trade and pay a civil monetary<br />
penalty, plus post-judgment interest.<br />
SEC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 57579 (N.D. Ill. Mar. 30, 2012).<br />
The Securities and Exchange Commission brought suit against defendants, the CEO and<br />
a vice president of a registered investment adviser (RIA), claiming various securities violations.<br />
The SEC alleged that the CEO and vice president aided and abetted violations of Section 10(b)<br />
and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1), (2), & (4) of the<br />
Investment Advisers Act of 1940 by making misrepresentations to investors. Specifically, the<br />
SEC alleged that the CEO personally, indicated that the RIA operated much like a money market<br />
fund in that its investments were relatively low-risk. The CEO misrepresented the risk<br />
associated with the investment strategy in four ways, including the extensive use of leverage;<br />
proper segregation of assets, commingled interest from its house and client accounts; and<br />
investments in below grade securities. The SEC alleged that the vice president knowingly<br />
utilized portions of loans collateralized by investor securities to generate returns for the RIA’s<br />
house portfolio, pooled the interest generated by the RIA’s portfolios, and then redistributed it<br />
across the portfolios. The vice president admitted that the RIA conducted these practices. The<br />
SEC filed a motion for summary judgment against both the CEO and the vice president, and the<br />
CEO filed a cross-motion for summary judgment. In affirming the SEC’s motion for summary<br />
judgment against the vice president, the court noted that the vice president was the head trader,<br />
had knowledge of the RIA’s trading practices and was charged with the primary responsibility of<br />
implementing those practices. The vice president’s scienter was also established by his actions<br />
because he was aware of the RIA’s use of client assets. The SEC also established that the vice<br />
president substantially assisted the primary violation because, as head trader, the vice president<br />
implemented the RIA’s fraudulent trading practices on a daily basis. Therefore, the court held<br />
that the vice president aided and abetted violations of Section 10(b) of the Exchange Act and<br />
Sections 206(1), 206(2), and 206(3) of the Investment Advisers Act and granted the SEC’s<br />
motion. The court, however, dismissed the SEC’s motion for summary judgment against the<br />
CEO and the CEO’ counter motion. The SEC was unable to conclusively establish primary<br />
violations of Section 10(b), Rule 10b-5 and Sections 206(1) & (2) against the CEO, and the CEO<br />
failed to establish the absence of such violations. The court dismissed the motion for summary<br />
judgment with regards to the violation of Section 206(4) of the Investment Advisers Act because<br />
the evidence was not clear enough to establish that the CEO acted with scienter.<br />
H.3<br />
330
H.3<br />
CFTC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 109747 (N.D. Ill. Aug. 6, 2012).<br />
The CFTC brought various claims against several officers and employees of defendant<br />
corporation, an investment group registered as both an investment advisor with the SEC and as a<br />
Futures Commission Merchant (FCM) with the CFTC. The defendant corporation’s business<br />
strategy relied on recruiting FCM’s to invest their excess margin funds with the defendant.<br />
Troubles began in 2007 when a broker who had held over $1 billion in outstanding reverse repos<br />
with the defendant began to redeem them. The following month, another broker with<br />
$600 million in outstanding reverse repos followed suit. At first, the corporation paid these<br />
brokers with money obtained from the nightly BONY loans. By August 13, 2007, the<br />
corporation lacked the capital to meet its clients’ redemption orders. BONY sent the defendants’<br />
chief executive officer a letter notifying him that the corporation had defaulted on the loan<br />
agreement, and that it had the right to sell the securities that the corporation had pledged as<br />
collateral. The corporation filed for Chapter 11 bankruptcy the same day. In April 2008 the<br />
CFTC filed a complaint alleging that the corporation, its CEO, and its vice president violated<br />
various sections of the Commodities Exchange Act (CEA). The CFTC alleged that the vice<br />
president was liable under Section 4d(b) for aiding and abetting the corporation by drawing upon<br />
the overnight BONY loan to benefit the house portfolio. Under Section 13(a) of the CEA, a<br />
person who willfully aids and abets someone in an unlawful venture is liable as a principal.<br />
7 U.S.C. § 13c(a). Liability for aiding and abetting under the CEA requires knowledge of the<br />
principal’s objective and desire to attain that objective. Bosco v. Serhant, 836 F.2d 271, 279 (7th<br />
Cir. 1987). The CFTC argued that the vice president was liable under Section 13(a) because he<br />
was in charge of the corporation’s customer and house portfolios, and that he therefore possessed<br />
the requisite knowledge and design to further the illegal scheme. While the vice president’s<br />
authority within defendant corporation may lead to an inference of his knowledge and design to<br />
further the defendant corporation’s goal of misusing his clients’ assets, the CFTC failed to<br />
demonstrate that the vice president had actual knowledge with respect to the transactions. The<br />
vice president filed a cross-motion for summary judgment, asserting that he did not control,<br />
maintain, or otherwise service the BONY loan. The court reasoned that even if the vice<br />
president supported his contention, he had failed to establish that he lacked the knowledge of the<br />
allegedly improper use of the BONY loan, or that he lacked the authority to right the ship.<br />
Furthermore, the court reasoned the nature of the vice president’s position casted doubt on his<br />
claim that he was unaware that the securities in the house portfolio were insufficient to<br />
collateralize the BONY loan. Thus, because these general issues of material fact existed with<br />
respect to the vice president’s mental state, the CFTC and the vice president’s respective motions<br />
for summary judgment were denied.<br />
Gondeck v. A Clear Title & Escrow Exch., LLC, 2012 U.S. Dist. LEXIS 151210 (N.D. Ill.<br />
Oct. 22, 2012).<br />
Plaintiffs alleged that they were the victims of a fraudulent real estate scheme involving<br />
the misappropriation of funds they deposited into an escrow account the defendant maintained at<br />
a bank. Among other things, the complaint stated a cause of action for common law fraud and<br />
331<br />
H.3
aiding and abetting the fraud. Defendant filed a motion to dismiss. Aiding and abetting is a<br />
viable theory of fraud liability under Illinois law. See Hefferman v. Bass, 467 F.3d 596, 601 (7th<br />
Cir. Ill. 2006). The elements of common law fraud are: “(1) a false statement of material fact;<br />
(2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement<br />
induce the plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and<br />
(5) plaintiff’s damages resulting from reliance on the statement.” Connick v. Suzuki Motor Co.,<br />
174 Ill. 2d 482 (Ill. 1996). “Under Illinois law, to state a claim for aiding and abetting one must<br />
allege: (1) the party whom defendant aids performed a wrongful act causing injury; (2) the<br />
defendant was aware of his role when he provided the assistance; and (3) the defendant<br />
knowingly and substantially assisted the violation.” Hefferman, 467 F.3d at 601. A fraud claim<br />
premised on the aiding and abetting liability must satisfy the heightened pleading standards of<br />
Rule 9(b). Rule 9(b) requires that “facts such as the identity of the person making the<br />
misrepresentation, the time, place, and content of the misrepresentation, and the method by<br />
which the misrepresentation was communicated to the plaintiff be alleged in detail.” With<br />
respect to the defendant’s liability for aiding and abetting the fraud, the complaint here alleged<br />
that the defendant was aware of the false statements and misappropriation of the plaintiff’s<br />
funds, yet failed to take any action to stop the fraud. The complaint further alleged that<br />
defendant was a managing partner, and an inference may be drawn that the defendant would<br />
benefit from keeping plaintiffs in the dark about the fraudulent scheme. Moreover, the complaint<br />
adequately pled that the defendant owed plaintiff a fiduciary duty. Those allegations were<br />
sufficient to state a fraud claim against the defendant on an aiding and abetting theory. See<br />
Lerner v. Fleet, N.A., 459 F.3d 273, 295 (2d Cir. 2006) (holding in a common law fraud case that<br />
“the mere inaction of an alleged aider and abettor constitutes substantial assistance . . . if the<br />
defendant owes a fiduciary duty directly to the plaintiff”).<br />
SEC v. Wealth Mgmt., LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,814 (E.D. Wis. Apr. 24, 2012).<br />
The district court granted the Securities and Exchange Commission’s motion for<br />
summary judgment in a complaint alleging violations of Sections 206(1), (2), (4), of the<br />
Investment Advisers Act of 1940 as well as Rule (4)-8 thereunder, and Section 10(b) and<br />
Section 17(a) of the Securities Exchange Act of 1934. The SEC brought these charges against<br />
defendant, the founder and chairman of a broker-dealer. The court granted summary judgment to<br />
the SEC on the ground that defendant was the ringleader of the broker-dealer’s fraudulent<br />
activities, he was aware that his conduct was illegal, and he was instrumental in the brokerdealer’s<br />
violation of the Exchange Act and Investment Advisers Act. The court also noted that<br />
the defendant was aware of the applicable disclosure requirements and knew that failing to<br />
disclose his fee arrangement and the inappropriateness of the investments was improper.<br />
Accordingly, the district court found the defendant liable for all alleged violations and for aiding<br />
and abetting those violations.<br />
SEC v. True N. Fin. Corp., 2012 U.S. Dist. LEXIS 161044 (D. Minn. Nov. 9, 2012).<br />
The Securities and Exchange Commission alleged violations of Section 10(b) of the<br />
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 in the offer and sale of<br />
332<br />
H.3<br />
H.3
interests in a capital fund, which was an unregistered investment pool. The SEC alleged that the<br />
defendants engaged in written and oral misrepresentations to investors and registered<br />
representatives from March 2008 to December 2009. Additionally, the SEC asserted aiding and<br />
abetting liability against the fund management company and its president. The fund<br />
management company moved for summary judgment on grounds that it could not be secondarily<br />
liable because no primary violations occurred and because the SEC could not prove that the fund<br />
management company was aware of the primary actor, the president’s role in the fraudulent<br />
scheme. The fund management company further asserted that it was entitled to summary<br />
judgment on the aiding and abetting claim because the president “who owned and controlled the<br />
fund management company” was unaware of the purported fraudulent scheme and that assertions<br />
of the fund management company’s negligence are insufficient for aiding and abetting liability.<br />
The Eighth Circuit has a three-prong approach to determining liability for aiding and abetting the<br />
commission of securities violations. Camp v. Dema, 948 F.2d 455, 459 (8th Cir. 1991). First,<br />
the court asks whether a primary party has committed a securities law violation. Camp, 948 F.2d<br />
at 459. Second, the court assesses the aider and abettor’s “knowledge” of the violation. Id.<br />
Third, the court evaluates whether the aider and abettor substantially assisted the primary<br />
violator in committing the violation. Id. Knowledge and substantial assistance are inverse<br />
related, “where there is a minimal showing of substantial assistance, a greater showing of<br />
scienter is required.” Id. The “exact level” of knowledge is fact-dependent, but negligence is<br />
insufficient. In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 893 (8th Cir. 2002). An aider and<br />
abettor can also be found secondarily liable if that party was aware of the primary violator’s<br />
“illegal” scheme. K&S P’ship v. Cont’l Bank, N.A., 952 F.2d 971, 977 (8th Cir. 1991).<br />
Additionally, issuer-entities may be liable for fraudulent statements made by analysts. See In re<br />
Novarre Corp. Sec. Litig., 229 F.3d 735, 743 (8th Cir. 2002). The court determined that the fund<br />
management company could potentially be primarily liable for statements regarding various<br />
categories of information sent to investors and potential investors because the fund management<br />
company appeared to have had ultimate authority over the contents of these documents.<br />
Consequently, the court denied the fund management company and the president’s respective<br />
motions for summary judgment on the aiding and abetting liability claims as well as the primary<br />
alleged violation.<br />
Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong> <strong>LLP</strong>, 2012 U.S. Dist. LEXIS 36228 (D. Ariz. Mar. 19, 2012).<br />
Investors brought suit against a mortgage lender, a related corporation, and the two<br />
corporations’ legal counsel, alleging that the corporations’ counsel aided and abetted securities<br />
violations under Arizona law and common law. The related corporation’s legal counsel moved<br />
to dismiss the aiding and abetting claims. To state a claim for aiding and abetting fraud, a<br />
plaintiff must plead (1) a primary violation has occurred; (2) defendant’s knowledge or duty of<br />
inquiry with regard to the primary violation; and (3) the defendant substantially assisted or<br />
encouraged the primary actor’s violation. Wells Fargo Bank v. Ariz. Laborers, Teamsters &<br />
Cement Masons, 38 P.3d 12, 23 (2002). Defendant argued that under Arizona’s aiding and<br />
abetting law the plaintiffs must show that a defendant provided substantial assistance in the<br />
fraudulent sales of securities, and not just in the fraudulent scheme. The court noted, however,<br />
that the Arizona Supreme Court defined substantial assistance as a necessary contribution to the<br />
underlying fraudulent scheme by the person charged. Because the primary securities fraud in<br />
H.3<br />
333
this case was a fraudulent scheme perpetrated by the corporations, and the legal counsel assisted<br />
the corporations by continually providing advice and assistance, the court denied the motion to<br />
dismiss the aiding and abetting claim under Arizona law. The legal counsel also moved to<br />
dismiss the plaintiffs’ aiding and abetting claim under common law, alleging that only Arizona’s<br />
securities fraud statutes provide a form of aiding and abetting liability. In denying the motion to<br />
dismiss plaintiffs’ claims for aiding and abetting, the court noted that claims for common law<br />
aiding and abetting and statutory aiding and abetting are distinct. Grand v. Nacchio (Grand II),<br />
236 P.3d 398, 401 (2010).<br />
Dexia Holdings, Inc. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71374 (C.D. Cal.<br />
Feb. 17, 2012).<br />
Investors brought an action against a home loan corporation for aiding and abetting<br />
common law fraud with regard to residential mortgage-backed securities. In New York, an<br />
aiding and abetting claim requires: (1) actual knowledge and (2) substantial participation.<br />
Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006). Substantial participation must be<br />
pled with particularity, while actual knowledge may be averred generally. Plaintiffs alleged<br />
aiding and abetting against the same defendants whom they accused of primary fraud violations.<br />
While it is possible that a defendant might commit certain primary violations while aiding and<br />
abetting others, plaintiffs did not explain how that theory applied in the case. The court also<br />
noted that the charge required a pleading of substantial assistance with the actual fraud alleged.<br />
In this case, that would mean that a defendant must have assisted with the allegedly false<br />
statements that formed the basis of the complaint. The court held that assistance with<br />
underwriting the corporation generally does not suffice. The court dismissed the cause of action<br />
for aiding and abetting without prejudice, and leave to amend, noting that plaintiffs must explain<br />
which defendant substantially assisted with each false statement and how the defendant<br />
substantially assisted the dissemination of the false statement.<br />
Thrivent Fin. for Lutherans v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71376 (C.D. Cal.<br />
Feb. 17, 2012).<br />
Investors brought an action against a home loan corporation, its subsidiaries, and its<br />
depositors, alleging aiding and abetting fraudulent misrepresentations regarding certain<br />
residential mortgage-backed securities. The claims in this case were analyzed under relevant<br />
state law only. In Minnesota, an aiding and abetting claim requires a plaintiff to show: (1) a<br />
primary violation; (2) actual knowledge of the primary violation; and (3) substantial assistance.<br />
Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn. 1999). Substantial<br />
assistance must be pled with particularity, while actual knowledge may be alleged generally.<br />
Plaintiffs’ allegations referred to false statements and offering documents distributed by the<br />
corporation. They do not allege, however, that the aiding and abetting defendants assisted with<br />
creating or disseminating these offering documents. Rather, they alleged that those defendants<br />
were involved in underwriting loans, setting underwriting standards, choosing which loans to<br />
securitize, failing to transfer title properly, and failing to properly service the offerings. In<br />
dismissing the cause of action, the court noted that the touchstone of a fraud claim is not the<br />
334<br />
H.3<br />
H.3
underlying action but the misrepresentation of that action. In this case, the court found that<br />
plaintiffs did not allege with particularity that the corporation or other defendants substantially<br />
participated in the creation of the offering documents or in the alleged misrepresentations<br />
therein. Therefore, the court granted defendants’ motion to dismiss plaintiffs’ claim for aiding<br />
and abetting.<br />
SEC v. Wilde, 2012 U.S. Dist. LEXIS 183252 (C.D. Cal. Dec. 17, 2012).<br />
The Securities and Exchange Commission brought this civil enforcement action alleging<br />
that beginning in April 2008 defendant, through his company, raised over $11 million for<br />
investors by falsely promising exceedingly high returns from two prime bank or high yield<br />
investment schemes. The defendants promoted the investment schemes by misleading the<br />
investors regarding the nature of their investments, resulting in a near total loss of the investors’<br />
money. The SEC filed a motion for summary judgment which the defendants opposed.<br />
Specifically, the SEC alleged various defendants aided and abetted violations of Section 10(b)<br />
and Rule 10b-5. Section 20(e) of the Securities Exchange Act of 1934 allows the SEC to bring<br />
civil actions against the aiders and abettors of securities fraud. 15 U.S.C. § 78t(e). The SEC<br />
may bring such an action against “any person that knowingly provides substantial assistance” to<br />
a primary violator of the securities laws. SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012).<br />
Specifically, the SEC must show: (1) the existence of a violation of the primary party; (2) the<br />
knowledge by the aider and abettor of the primary violation and of his own role in furthering it;<br />
and (3) substantial assistance in the commission of the primary violation. SEC v. Fehn, 97 F.3d<br />
1276, 1288 (9th Cir. 1996). The court determined that the SEC was successful in establishing<br />
the first element—the existence of a primary violation (Section 10(b)/Rule 10b-5) by other<br />
defendants through the promotion of the bank guarantee program. As to the second and third<br />
elements, undisputed evidence demonstrated that the individual defendants, knowing of the<br />
primary violation and their respective roles in the fraudulent scheme, substantially assisted in it.<br />
Accordingly, the court entered summary judgment against these individual defendants on the<br />
claim for aiding and abetting the Section 10(b) and Rule 10b-5 violation.<br />
SEC v. Dafoitis, 874 F. Supp. 2d 870 (N.D. Cal. 2012).<br />
The Securities and Exchange Commission alleged various securities violations, including<br />
aiding and abetting alleged violations of Section 10(b), Rule 10b-5, and Rule 206(4)-8 of the<br />
Investment Advisers Act of 1940 against defendant, an executive of a broker-dealer subsidiary,<br />
based upon his management of an ultra-short bond fund. The SEC alleged that the defendant<br />
misstated and amended information regarding the bond fund. As to the aiding and abetting<br />
claims, the defendant moved for summary judgment, arguing that the claims failed because<br />
defendant’s alleged scienter cannot be used to satisfy the requirements for both the primary<br />
violation and his purported secondary liability for the same violation. The court agreed with the<br />
defendant’s argument, stating that the defendant was the only natural person put forward as<br />
having scienter. Even though there was previously another defendant in the action, the SEC did<br />
not argue or point to evidence in the summary judgment record that he had scienter for the<br />
primary violations alleged. Instead, the SEC repeatedly argued that its aiding and abetting theory<br />
335<br />
H.3<br />
H.3
was premised on defendant supplying the necessary scienter for the primary violation. In<br />
granting summary judgment as to the aiding and abetting claims, the court held that aiding and<br />
abetting requires proving a primary violation by someone else and that person would need to<br />
have scienter, which the SEC failed to prove.<br />
SEC v. Sells, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal. Aug. 10, 2012).<br />
The Securities and Exchange Commission alleged that two defendants, the vice president<br />
of sales at a medical supplies company and the former senior vice president of commercial<br />
operations for the same company, violated the Securities Act of 1933 and the Securities<br />
Exchange Act of 1934. Both defendants filed a motion to dismiss the claims. The corporation’s<br />
primary product was a robotic catheter system which is sold to hospitals for use in cardiac<br />
surgical procedures. Under the corporation’s announced policy, revenue could be recognized as<br />
a sale only after the catheter unit was installed at the customer’s location and training of the<br />
customer on the unit was complete. Upon joining the corporation, both defendants were<br />
informed of the policy. However, the defendants completed a series of transactions that did not<br />
conform to these revenue recording procedures. As a result of these improperly recorded<br />
transactions, the corporation filed a flawed prospectus supplement as part of an offer to sell<br />
common stock. The corporation then had to file restated financial statements for the fiscal years<br />
when both defendants worked for the corporation. The restatement disclosed that revenue from<br />
more than twenty sales transactions had been improperly reported. The SEC brought a variety of<br />
claims for relief against both defendants. The SEC alleged that the senior vice president violated<br />
Section 10(b) of the Exchange Act and Rule 10b-5(b) and that the senior vice president provided<br />
substantial assistance to the corporation’s Rule 10b-5(b) violations. The senior vice president<br />
argued that he could not be held liable for aiding and abetting the corporation’s violations of<br />
Section 10(b) and Rule 10b-5(b) because the SEC had not alleged a primary violation by the<br />
corporation. The senior vice president pointed out that for the corporation to be liable for<br />
Rule 10b-5(b) violations, it must have acted with scienter in disseminating false information, and<br />
here the corporation allegedly did not know the falsity of the financial statement that it issued.<br />
He argued that his scienter cannot be imputed to the corporation, for the proposition that only the<br />
knowledge of the corporate officer who makes the alleged false and misleading statements can<br />
be imputed to the corporation. The court rejected this argument citing that the Ninth Circuit,<br />
while not foreclosing the possibility of imputing collective scienter to a corporation, limited that<br />
theory to circumstances in which a company’s public statements were so important and so<br />
dramatically false that they would not create a strong inference that at least some corporate<br />
officials knew of the falsity upon publication. Here, the court reasoned that the theory of<br />
collective scienter was not at issue nor was the SEC subject to the heightened pleading standard<br />
required by the PSLRA. As such, the senior vice president’s knowledge could be imputed to the<br />
corporation by application of the doctrine of respondeat superior. See, e.g., Hollinger v. Titan<br />
Capital Corp., 914 F.2d 1564, 1578 (9th Cir. 1990). Thus, the court concluded that the SEC had<br />
alleged a primary Rule 10b-5(b) violation against the corporation, and the aiding and abetting<br />
claim was valid.<br />
H.3<br />
336
Nova Leasing, LLC v. Sun River Energy, Inc., 2012 U.S. Dist. LEXIS 124061 (D. Colo. Aug. 31,<br />
2012).<br />
Plaintiff asserted various claims against individual defendant who was the principal of<br />
two corporate defendants. Plaintiff’s claims against these defendants hinged on its allegation<br />
that the individual defendant in his role as principal, improperly sought to prevent the plaintiff<br />
from selling stock it owned in the company. Plaintiff alleged that the individual defendant’s<br />
actions artificially inflated the price of the company shares, thereby financially benefitting him,<br />
and both corporate defendants by preventing dilution of their beneficial ownership interests in<br />
the company. Defendants moved to dismiss the claim for aiding and abetting securities fraud<br />
under the Colorado Securities Act. The defendants’ primary argument was that plaintiff failed to<br />
allege that they “provided substantial assistance in connection with the alleged securities fraud.”<br />
The court disagreed with the defendants’ assessment of the plaintiff’s allegation. Pursuant to the<br />
Colorado Securities Act, “any person who knows that another person . . . is engaged in conduct<br />
which constitutes a violation of Section 11-51-501 and who gives substantial assistance to such<br />
conduct is jointly and severally liable to the same extent as such other person.” COLO. REV.<br />
STAT. § 51-604(5)(c) (emphasis added). In its complaint the plaintiff alleged that the individual<br />
defendant and the corporate defendants rendered substantial assistance to the conduct of the<br />
company, including causing or assisting the company to make materially false or misleading<br />
statements, and failing to disclosure material facts necessary to make the company’s statements<br />
not false or misleading. The court agreed with the plaintiff that it had adequately alleged<br />
defendant’s liability based on the actions of the individual defendant as their agent. “The general<br />
rule that a principal is liable for the fraud and misrepresentations of his agent while acting within<br />
the scope of his authority or employment is fully applicable to corporations. . . .” Kerbs v. Fall<br />
River Indus., Inc., 502 F.2d 731, 740–41 (10th Cir. 1974). In the instant case, plaintiff alleged<br />
that the individual defendant was a principal of the defendant corporations and a managing<br />
member as well. Accordingly, the court ruled, that plaintiff’s aiding and abetting securities fraud<br />
claim was well pled.<br />
Groom v. Bank of Am., 2012 U.S. Dist. LEXIS 2374 (M.D. Fla. Jan. 9, 2012).<br />
Investors brought a mass action against the banks where Louis J. Perlman a Ponzi scheme<br />
perpetrator, maintained accounts. Plaintiffs asserted that the banks aided and abetted breach of<br />
fiduciary duty, fraud, and Florida securities laws. Under Florida law, a cause of action for aiding<br />
and abetting a breach of fiduciary duty requires: (1) a fiduciary duty on the part of the<br />
wrongdoer; (2) a breach of fiduciary duty; (3) knowledge of the breach by the alleged aider and<br />
abettor; and (4) the aider and abettor’s substantial assistance or encouragement of the<br />
wrongdoing. S&B/Bibb Hines PB 3 Joint Venture v. Progress Energy Fla., Inc., 365 F. App’x<br />
202, 207 (11th Cir. 2010). Plaintiffs argued that Perlman was a fiduciary with respect to funds<br />
the investors deposited in the accounts offered by Perlman’s corporation. Although the plaintiffs<br />
were arguably in a fiduciary relationship with Perlman with respect to the investment accounts,<br />
the plaintiffs were unable to show that the banks had knowledge of that relationship. The<br />
plaintiffs only conclusively stated that the banks “knew, or had ample reason to know that the<br />
plaintiffs’ employee investment savings accounts’ funds were intended by plaintiffs to be treated<br />
337<br />
H.3<br />
H.3
as trust funds” and that the banks “had notice of the fiduciary nature” of their relationship with<br />
Perlman. These conclusions, the court found, were devoid of factual support and therefore not<br />
entitled to an assumption of truth. The plaintiffs also failed to prove that the banks provided<br />
substantial assistance to Perlman’s breach of fiduciary duty. The only contention plaintiffs made<br />
was that the defendant banks failed to adhere to the customary and accepted standard of care and<br />
failed to monitor incoming deposits and wires entrusted to them. The court noted, however, that<br />
an allegation of the failure to act, absent a duty to act, is not substantial assistance. The<br />
plaintiffs’ claims regarding the banks’ aiding and abetting fraud also failed because plaintiffs<br />
could not prove the banks’ knowledge or substantial assistance. Plaintiffs’ claims regarding<br />
aiding and abetting violation of the Florida Securities and Investor Protection Act failed because<br />
they could not establish that the banks personally participated or aided the sales of investments.<br />
Accordingly, the court granted defendants’ motion to dismiss the aiding and abetting claim<br />
without prejudice.<br />
Gault v. SRI Surgical Express, Inc., 2012 U.S. Dist. LEXIS 151409 (N.D. Fla. Oct. 22, 2012).<br />
Plaintiff initiated action on behalf of himself and other public shareholders of the<br />
defendant corporation against the corporation and its board of directors and an acquisition<br />
company, a wholly-owned subsidiary of the defendant. Plaintiff alleged that the defendant<br />
directors breached their fiduciary duties and violated Section 14(e) of the Securities Exchange<br />
Act of 1934 by “attempting to sell defendant corporation to acquisition company by means of an<br />
unfair practice and for an unfair price during a recent merger.” The complaint also included a<br />
claim against the subsidiary for aiding and abetting breaches of fiduciary duties. Claims<br />
involving internal affairs of corporations, such as the breach of fiduciary duties, are subject to the<br />
laws of the state of incorporation. Chatlos Found., Inc. v. D’Arata, 882 So. 2d 1021, 1023 (Fla.<br />
5th D.C.A. 2004). Thus, because the defendant is a Florida corporation, the court will analyze<br />
the alleged breach of fiduciary duty claim in accordance with Florida law. “Under Florida law a<br />
claim for aiding and abetting a breach of fiduciary duty requires: (1) a fiduciary duty on the part<br />
of the primary wrongdoer; (2) a breach of the fiduciary duty; (3) knowledge of the breach by the<br />
alleged aider and abettor; and (4) the aider and abettor’s substantial assistance or encouragement<br />
in the wrongdoing.” Court Appointed Receiver of Lancer Offshore, Inc. v. Citco Grp. Ltd.,<br />
2008 U.S. Dist. LEXIS 25740, *5 (S.D. Fla. Mar. 31, 2008). The plaintiff here failed to allege<br />
sufficient facts to establish the subsidiary substantially assisted or encouraged the alleged breach<br />
of fiduciary duty. The complaint only contained conclusory allegations that the subsidiary<br />
colluded in or aided and abetted in the director defendants’ fiduciary duties. In the absence of<br />
any facts establishing that the former subsidiary substantially assisted in or encouraged defendant<br />
directors’ fiduciary claim, the court dismissed the complaint without prejudice.<br />
SEC v. BankAtlantic Bancorp, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,901 (S.D. Fla. May 29,<br />
2012).<br />
The Securities and Exchange Commission filed an action against defendants, a<br />
corporation and its CEO, alleging multiple violations of the Securities Exchange Act of 1934.<br />
Specifically, the SEC alleged that defendant CEO aided and abetted the corporation’s securities<br />
338<br />
H.3<br />
H.3
fraud, recordkeeping and control violations, and reporting violations. The CEO brought a<br />
motion to dismiss the complaint for failure to state a claim pursuant to Federal Rules of Civil<br />
Procedure 9(b) and 12(b)(6). A claim for aiding and abetting a securities violation requires that:<br />
(1) another party was the primary violator; (2) the accused party had a general awareness that his<br />
role was part of an overall activity that was improper; and (3) the accused knowingly and<br />
substantially assisted the violation. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045<br />
(11th Cir. 1986). Applying these standards, the court dismissed the SEC’s control violations<br />
claim against the CEO for lack of a primary violation. The court denied his motion to dismiss<br />
the SEC’s claim of aiding and abetting the corporation’s securities fraud violations,<br />
recordkeeping violations, and reporting violations. With regard to the securities fraud violation,<br />
the court found that the SEC sufficiently stated a claim for a primary violation and included<br />
allegations that the defendant made misrepresentations in earnings calls and signed public filings<br />
containing misrepresentations. The court noted that these allegations against the CEO defendant<br />
alleged with sufficient factual detail that defendant had a general awareness that he was part of<br />
an improper and illegal practice, and that he knowingly or recklessly provided substantial<br />
assistance in those alleged violations. With regard to the recordkeeping violation, the court<br />
found that the SEC sufficiently alleged a primary violation and included allegations that the<br />
defendant was subjectively aware of the primary violation and knowingly provided substantial<br />
assistance in avoiding reclassifying and recording certain loans. Finally, the court found that the<br />
SEC sufficiently alleged a primary reporting violation that included allegations that the<br />
defendant provided substantial assistance and certified the filing of the corporation’s 10-Q that<br />
allegedly contained material misrepresentations or omissions of material fact. Thus, the court<br />
denied defendant’s motion to dismiss in part and granted in part.<br />
Lamm v. State St. Bank & Trust Co., 2012 U.S. Dist. LEXIS 135008 (S.D. Fla. Aug. 21, 2012).<br />
Plaintiff investor brought a claim for aiding and abetting breach of fiduciary duty against<br />
defendant bank. Plaintiff had hired a registered representative and entrusted him with a<br />
significant portion of his assets. Plaintiff established two custody accounts for the holding and<br />
disposition of the assets, and defendant eventually took over both accounts. Without the<br />
plaintiff’s consent, the registered representative replaced the plaintiff’s conservative investments<br />
with riskier securities. Upon the registered representative’s instructions, the bank disbursed the<br />
funds from plaintiff’s account to effectuate the transactions. The court granted the bank’s<br />
motion to dismiss the aiding and abetting breach of the fiduciary duty. Under Florida law, in<br />
order to establish aiding and abetting, the plaintiff must establish that the aider and abettor had<br />
knowledge of the underlying breach of fiduciary duty for fraud, and that the aider and abettor<br />
substantially assisted or encouraged commission of the breach or fraud. In re Caribbean K Line,<br />
Ltd., 288 B.R. 908, 919 (S.D. Fla. 2002). “In order for a claim to survive a motion to dismiss,<br />
the plaintiff must allege the defendant had actual knowledge of the underlying wrongdoing.”<br />
Lawrence v. Bank of Am., N.A., 2010 U.S. Dist. LEXIS 89539 (M.D. Fla. Aug. 30, 2010). Here,<br />
the defendant bank did not disregard any obvious “red flags” in executing the transaction,<br />
because the transactions were routine and typical, and thus the plaintiff failed to plead facts to<br />
establish the knowledge prong for an aiding and abetting claim. Moreover, the court reasoned,<br />
plaintiff could not meet the substantial assistance prong because the bank had no duty to disclose<br />
the alleged irregularities in the transactions.<br />
339<br />
H.3
H.3<br />
In re Detling, Release No. 66161, 2012 SEC LEXIS 142 (Jan. 17, 2012).<br />
The Securities and Exchange Commission instituted public administrative proceedings<br />
against the general counsel of a corporation. The SEC’s complaint alleged, among other things,<br />
that the attorney made material misrepresentations and omissions in connection with the<br />
corporation’s bond transactions. The attorney failed to disclose key participants to the<br />
transaction, that the corporation had been indicted for financial fraud in late 2005, and that he<br />
was in the process of negotiating a plea agreement for the corporation. In addition, the attorney<br />
failed to disclose material information about a $200,000 loan to the corporation from a company<br />
that was partially owned by the attorney, in order to facilitate the closing of the transaction. His<br />
failure to disclose details about the criminal proceeding and the loan rendered certain statements<br />
in the bond’s Official Statement materially misleading. By reviewing the Official Statement,<br />
which was distributed to investors in connection with the transaction, and failing to correct the<br />
misstatements and omissions therein, the attorney aided and abetted the violations of the<br />
corporation. Without admitting or denying the allegations, the attorney consented to the SEC’s<br />
findings and agreed to a suspension from appearing or practicing before the SEC for at least five<br />
years.<br />
In re Brown, Release Nos. 66469 & 3376, 2012 SEC LEXIS 636 (Feb. 27, 2012).<br />
Defendants, registered representatives, appealed the decision of an administrative law<br />
judge. The ALJ found that the defendants aided and abetted and caused the broker-dealer’s<br />
failure to keep accurate books and records in violation of Section 17(a) of the Securities<br />
Exchange Act of 1934 and Rule 17a-3 thereunder. The provisions include the requirement that<br />
the records be accurate, which applies regardless of whether the information itself is mandated.<br />
An individual can cause a broker-dealer’s violation of the provision if he is responsible for an act<br />
or omission that he knew or should have known would have contributed to the violation. To<br />
establish an aiding and abetting claim of a books and records violation, the ALJ must find that:<br />
(1) a violation of the books and records provisions occurred; (2) the respondent substantially<br />
assisted the violation; and (3) the respondent provided that assistance with the requisite scienter.<br />
See In re vFinance Invs., Inc., Release No. 62448, 2010 SEC LEXIS 2216 (July 2, 2010).<br />
Scienter may be satisfied by evidence that the respondent knew of, or recklessly disregarded, the<br />
wrongdoing and his or her role in furthering it. Here, the broker-dealer committed a primary<br />
violation of the books and records provisions by maintaining new account forms that falsely<br />
indicated that registered representative “A,” and not registered representative “B,” was the<br />
associated person responsible for the accounts. The broker-dealer made these representations to<br />
conceal that registered representative “B” was prohibited from selling variable annuities to new,<br />
elderly customers. The two registered representatives substantially and knowingly assisted these<br />
violations by having registered representative “A” sign the customers’ new account forms. As a<br />
result, the ALJ issued an opinion and order, finding it in the public interest to bar the registered<br />
representatives from association for two years; to impose a cease and desist order on registered<br />
representative “A” and “B”; and to impose civil penalties of $560,000 for registered<br />
representative “B,” $310,000 for “A,” and $255,000 for “C.”<br />
340<br />
H.3
H.3<br />
In re Chiu, Release Nos. 6647 & 3367, 2012 SEC LEXIS 639 (Feb. 27, 2012).<br />
The Securities and Exchange Commission instituted public administrative proceedings<br />
against an audit partner of a major public accounting firm. Without admitting or denying the<br />
allegations, the partner consented to the SEC’s findings that he aided and abetted the<br />
corporation’s fraudulent scheme. The SEC found the corporation’s senior management and<br />
some directors engaged in a complex scheme to overstate the corporation’s revenues and<br />
earnings and artificially inflate its stock price. This resulted in the corporation’s reported<br />
financial statements being materially false and misleading. The scheme was concealed with<br />
forged sales and shipping documents, as well as through the circular transfer of cash among and<br />
between the corporation, its primary manufacturer, and its purported distributor. The<br />
corporation’s executives sought to recognize revenue on what were actually fictitious year-end<br />
sales. The SEC alleged that based on the facts presented to the partner, he knew it was improper<br />
for the corporation to recognize the revenue. Specifically, he knew that the sales failed to meet<br />
requirements under the Generally Accepted Accounting Principles. The SEC also alleged that<br />
during the audits of the consulting firm’s financial statements, the partner failed to object to the<br />
firm’s issuance of multiple consents to the reissuance of its audit opinion. The partner agreed to<br />
a suspension from appearing or practicing before the Commission as an accountant for a period<br />
of at least five years.<br />
In re MidSouth Capital, Inc., Release Nos. 66828, 3398, & 30038, 2012 SEC LEXIS 1254<br />
(Apr. 18, 2012).<br />
The Securities and Exchange Commission instituted public administrative and cease-anddesist<br />
proceedings against a registered broker-dealer and its former CEO and chief financial<br />
officer. The respondents submitted an offer of settlement in anticipation of the institution of the<br />
proceedings, which the SEC accepted. Without admitting or denying the allegations, the<br />
respondents consented to findings that the former CEO willfully aided and abetted and caused<br />
the registered broker-dealer’s violations of Sections 15(c)(3), and 17(a)(1) of the Securities<br />
Exchange Act of 1934 and Rules 15(c)(3)-1, 17(a)-11, 17(a)-3 thereunder. The registered<br />
broker-dealer, for several years, continued to effect transactions and securities on multiple<br />
occasions when it did not have the required net capital. The broker-dealer continued these<br />
improper transactions even after the SEC and Financial Industry Regulatory Authority<br />
(“FINRA”) notified the broker-dealer that it should cease effecting transactions while not in net<br />
capital compliance. The broker-dealer also failed to file the requisite notifications of its net<br />
capital deficiencies with FINRA and the SEC. The CEO aided and abetted these violations<br />
because he was aware of and had primary responsibility to address the broker-dealer’s net capital<br />
obligations, remedy past deficiencies, and ensure future compliance. FINRA had sent three<br />
deficiency notifications directly to the CEO. Notwithstanding this knowledge and the notices<br />
from the SEC and FINRA, the CEO intentionally, or with severe recklessness, permitted and<br />
caused the broker-dealer to fail to keep accurate books and records, provide appropriate<br />
Rule 17(a)-11 notifications, and failed to cease to effect transactions while not in net capital<br />
compliance. Thus, the CEO willfully aided and abetted the broker-dealer’s net capital violations.<br />
The CEO consented to cease and desist from willfully aiding and abetting and causing any<br />
341<br />
H.3
violations and any future violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and<br />
Rules 15(c)(3)-1, 17(a)-11, and 17(a)-3 thereunder. The CEO consented to a bar from<br />
association and from participating with a registered investment company or affiliated person of<br />
such investment adviser for a period of six months.<br />
In re Montford & Co., 2012 SEC LEXIS 1264, SEC Initial Decision Release No. 457 (Apr. 20,<br />
2012).<br />
In this Initial Decision, the Securities and Exchange Commission charged that a<br />
registered investment adviser (RIA) violated Section 204 of the Investment Advisers Act of 1940<br />
and Rule 204-1(a)(2) thereunder. The SEC also charged that the registered investment advisers’<br />
founder was guilty of aiding and abetting these violations. Taken together, Section 204 of the<br />
Investment Advisers Act and the instructions on the Form ADV require RIA to update their<br />
Form ADV annually, and to amend Part 2 of the Form ADV promptly, if information therein<br />
becomes materially inaccurate. The RIA violated Section 204 because it failed to correct the<br />
representations in Part 2 of its 2009 Form ADV filing when the form became materially<br />
inaccurate. To establish aiding and abetting liability, the SEC must prove: (1) a securities law<br />
violation by a primary wrongdoer; (2) knowledge of the violation by the persons sought to be<br />
charged; and (3) proof that the persons sought to be charged substantially assisted in the primary<br />
wrongdoing. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983), citing IIT, an International<br />
Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). The founder was held to have<br />
aided and abetted the RIA’s primary violations of Section 204 and Rule 204-1(a)(2) because he<br />
knew, or was reckless in not knowing, that the RIA was in violation with respect to its<br />
Form ADV filings and, as the person in control who supervised the filings, he provided<br />
substantial assistance in the commission of the violations. As a result of this Initial Decision, the<br />
founder of the RIA was barred from association and ordered to cease and desist from committing<br />
or causing any violations, and any future violations of Sections 204, 206-1, 206-2, and 207 and<br />
Rule 204-1(a)(2) of the Investment Advisers Act. The founder was also ordered to pay<br />
prejudgment interest and a civil penalty of $150,000.<br />
In re Adams, Release Nos. 9324 & 67019, 2012 SEC LEXIS 1564 (May 18, 2012).<br />
The Securities and Exchange Commission issued an order instituting proceedings and<br />
entered a final judgment by default against defendant, formerly the president, chairman,<br />
principal, and registered representative of a registered broker-dealer. The SEC’s complaint<br />
alleged that defendant manipulated stock prices by posting increasing, fictitious quotations for<br />
the stock on the OTC bulletin board and falsely creating the appearance of active trading in the<br />
stock. Defendant also instructed registered representatives of the broker-dealer to use fraudulent<br />
sales practices to inflate the market price and demand for the stock and to sell the stock to<br />
customers at inflated prices. Defendant, with the consent of other broker-dealer management,<br />
paid additional undisclosed compensation to registered representatives in connection with their<br />
sales of the stock. The registered representatives used a variety of deceptive and fraudulent sales<br />
practices to induce customers to purchase the securities at inflated prices. Because of the above<br />
actions, the SEC charged that defendant violated, and as a principal of the broker-dealer caused<br />
342<br />
H.3<br />
H.3
others to violate Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and the antifraud<br />
provisions, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC also<br />
claimed that defendant, as a principal of the broker-dealer and a participant in its manipulative,<br />
deceptive, and fraudulent practices, aided and abetted and caused the firm’s violation of<br />
Section 15(c)(1) and Rules 15c1-2 and 15c1-8 of the Exchange Act. Defendant was barred from<br />
association with any registered broker-dealer.<br />
In re Quantek Asset Mgmt., Release Nos. 9326, 3408, & 30085, 2012 SEC LEXIS 1654<br />
(May 29, 2012).<br />
The Securities and Exchange Commission instituted administrative proceedings against a<br />
hedge fund adviser, its principal, and its former director of operations. In anticipation of the<br />
institution of those proceedings, the parties submitted an offer of settlement, which the SEC<br />
accepted. Without admitting or denying the allegations, the respondents consented to the SEC<br />
findings that through a pattern of misrepresentations and misstatements provided to investors, the<br />
respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and<br />
Sections 206(4) and 204 of the Investment Advisers Act of 1940. The SEC alleged that<br />
respondents made a number of misrepresentations to its investors, including investment<br />
strategies and misrepresentations regarding the fund’s loan agreements. The principal was the<br />
founder and managing principal of the hedge fund adviser as well as portfolio manager of its<br />
funds. He knew about the hedge fund adviser’s regulatory compliance obligations and undertook<br />
to provide compliance staff for the firm. However, he assigned compliance staff that did not<br />
have the necessary training, experience, and time to perform the required advisory compliance<br />
functions. Therefore, he willfully aided and abetted and caused the hedge fund adviser’s to<br />
violate Section 206(4) and Rule 206(4)-7 thereunder. The SEC also found that the director of<br />
operations and the principal aided and abetted Section 206(4) of the Advisers Act and<br />
Rule 206(4)-8 thereunder by making untrue statements of material fact on various forms sent to<br />
investors. Also, the director of operations and the principal willfully aided and abetted and<br />
caused the hedge fund adviser’s violations of Section 204 of the Investment Advisers Act and<br />
Rule 204-2(a)(7) by failing to maintain certain books and records regarding the fund’s related<br />
party loans. As a result, the principal and director of operations were barred from association for<br />
at least five and one years, respectively. The respondents consented to the following sanctions:<br />
the principal was to pay disgorgement of $2.5 million; the principal was to pay a civil penalty of<br />
$150,000; and the director of operations was to pay a civil penalty of $50,000.<br />
In re Leaddog Capital Mkts., LLC, 2012 SEC LEXIS 2918 (Sept. 14, 2012).<br />
An Administrative Law Judge concluded that respondents violated the antifraud<br />
provisions of the securities laws by making material misrepresentations and omissions to<br />
investors and potential investors in a hedge fund. The Order Instituting Proceedings (“OIP”)<br />
charges that the two individual respondents aided and abetted and “caused” the violations by the<br />
investment company respondent of Section 17(a) of the Securities Act of 1933, Section 10(b)<br />
and Rule 10b-5 of the Securities Exchange Act of 1934, and Investment Advisers Act of 1940<br />
Section 206(4) and Rule 206(4)-8. The ALJ found that respondents established a hedge fund in<br />
343<br />
H.3<br />
H.3
late 2007 and provided materials to investors and potential investors containing incomplete or<br />
false representations to one of the individual respondent’s disciplinary history, the liquidity of<br />
the fund’s investments, and related party transactions. The initial decision ordered respondents<br />
to cease and desist from violations of the antifraud provisions and jointly and severally, to<br />
disgorge ill-gotten gains and pay civil money penalties. The ALJ also imposed a bar from<br />
association with any broker-dealer, investment advisor, and investment company. Additionally,<br />
the Order permanently bars one respondent the privilege of appearing or practicing before the<br />
commission as an attorney.<br />
In re Premo, 2012 SEC LEXIS 4036 (Dec. 26, 2012).<br />
The Securities and Exchange Commission alleged that an individual: (1) engaged in<br />
fraudulent and deceitful conduct that willfully violated Sections 206(1) and (2) of the Investment<br />
Advisers Act of 1940; (2) provided knowing and substantial assistance that willfully aided and<br />
abetted and caused an investment management company to violate Sections 206(1) and (2) of the<br />
Advisors Act; and (3) willfully aided and abetted the fund’s violation of the Investment<br />
Company Act, Rule 22c-1(a). The SEC alleged that the individual was acting both as an<br />
investment advisor and as a person associated with an investment advisor, and that she violated<br />
the Advisers Act Sections 206(1) and (2) by failing to disclose the information regarding the risk<br />
of a subprime, short-term bond fund to the fund’s valuation committee, who was responsible for<br />
ensuring compliance with internal procedures when she recommended the investment company<br />
invest in the fund. The Administrative Law Judge found that the individual did not commit<br />
willful violations of Sections 206(1) and (2) of the Advisors Act because she was not an<br />
“investment advisor” under the language of the Act. However, the ALJ did find that the<br />
individual willfully aided and abetted and caused the violations of the Act. The SEC met the<br />
minimum requirements by proving that: (1) an independent securities law violation was<br />
committed by a third party; (2) the person who aided and abetted the violation, knew that his or<br />
her role was part of an overall activity that was improper; and (3) the aider and abettor<br />
knowingly and substantially assisted the conduct that constituted the violation. See Woods v.<br />
Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985). The individual was subsequently ordered<br />
to cease and desist from aiding and abetting and causing future violations of the Act and was<br />
barred for five years from associating or serving as an employee in the investment industry.<br />
H.3<br />
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Ct. 2012).<br />
H.3<br />
Investors sued hedge funds, their general partner, and their auditor, for various violations<br />
of securities laws. The action arose in the aftermath of the criminal conduct of Bernard Madoff.<br />
The plaintiffs alleged that they lost millions of dollars when they invested in two of Madoff’s<br />
feeder funds. The complaint alleged that the fund’s general partner and its parent corporation<br />
aided and abetted a breach of fiduciary duty through mismanagement of the fund partnerships.<br />
The court dismissed the breach of fiduciary duty cause of action because a claim for deficient<br />
management of a fund is “a paradigmatic derivative claim” under Delaware law. The complaint<br />
also alleged that the general partner’s parent corporation and the hedge fund’s auditor aided and<br />
abetted fraud. Under Massachusetts law, a defendant may be held liable for aiding and abetting a<br />
344
tort committed by another upon proof that the defendant provided substantial assistance or<br />
encouragement to the other party. Go-Best Assets Ltd. v. Citizens Bank of Mass., 947 N.E.2d<br />
581 (Mass. App. Ct. 2011). The court denied the auditor’s motion to dismiss because it had<br />
already concluded that the complaint stated a claim for fraud, and held it properly pled a claim<br />
for aiding and abetting fraud. The court dismissed the claim against the parent corporation<br />
because the plaintiffs did not provide sufficient information to establish substantial assistance.<br />
The court noted that the factual allegations made by the plaintiffs show only common stock<br />
ownership and a modest overlap of senior executives and company directors, which was not<br />
enough.<br />
In re Celera Corp. S’holder Litig., 2012 Del. Ch. LEXIS 66 (Del. Ch. Mar. 23, 2012).<br />
H.3<br />
This class action was before the court on an application for the approval of settlement of<br />
the class’s claims for, among other things, breaches of fiduciary duty in connection with the<br />
merger of two publicly-traded Delaware corporations. The target’s largest stockholder, which<br />
acquired the vast majority of its shares after the challenged transaction was announced,<br />
strenuously objects to the proposed settlement. The stockholder objects to the settlement<br />
because, among other things, the settlement undervalues valuable claims for money damages<br />
against some of the defendants that would be released upon signing the settlement. One of these<br />
valuable claims is against the target’s financial advisor for aiding and abetting the board’s<br />
breaches of fiduciary duty. A third party may be liable for aiding and abetting a breach of a<br />
corporate fiduciary’s duty to the stockholders if the party knowingly participates in the breach.<br />
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001). The court noted that the claim was<br />
viable even though the plaintiffs could only allege that the board breached its duty of care. The<br />
plaintiff asserted that the financial advisor knew its financial analysis of the corporation was<br />
questionable. To support that assertion, the plaintiff relied on three e-mails written by the leader<br />
of the financial advisor’s transaction team. The court, however, held that the information in<br />
these e-mails could equally reflect no more than an internal debate within the financial advisor<br />
about the proper approach to employ in conducting an expert financial analysis. Therefore, the<br />
court held that the claim for aiding and abetting a breach of fiduciary duty was not valuable<br />
enough to discredit the proposed settlement.<br />
Frank v. Elgamal, 2012 Del. Ch. LEXIS 62 (Del. Ch. Mar. 30, 2012).<br />
Investors brought a class action suit against defendants, a company, its board of directors,<br />
and purchasing entities, alleging that the board and the company’s control group breached their<br />
fiduciary duties during a merger transaction. Plaintiffs also alleged that the purchasing entities<br />
aided and abetted the breach. First, plaintiffs alleged the purchasing entities were intimately<br />
involved in the negotiations and structuring of the merger and understood that the control group<br />
and the minority shareholders were competing for the purchasing entities’ consideration.<br />
Second, the plaintiffs alleged the purchasing entities demanded deal protection measures and<br />
enticed the corporation’s management to enter into a deal with them through equity offerings and<br />
lucrative salaries and bonuses. To state a claim that the purchasing entities aided and abetted<br />
breach of fiduciary duty, the plaintiffs must show: (1) the existence of a fiduciary relationship;<br />
(2) a breach of the fiduciary’s duty; (3) knowing participation in that breach by the purchasing<br />
345<br />
H.3
entities; and (4) damages proximately caused by the breach. Malpiede v. Townson, 780 A.2d<br />
1075, 1096 (Del. 2001). The court held that neither of the plaintiffs’ arguments suggested that<br />
the merger was anything other than an arm’s-length transaction. Specifically, the court noted<br />
that the first argument failed because the plaintiffs did not show that the entities attempted to<br />
exploit the competition between the control group and minority shareholders. With regards to<br />
the plaintiffs’ second argument, the court noted that nearly every third-party bidder seeks deal<br />
protection devices when bargaining at arm’s length. Therefore, the court granted defendant’s<br />
motion to dismiss the cause of action for aiding and abetting a breach of fiduciary duty.<br />
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012).<br />
Plaintiffs, judgment creditors, filed suit against defendants, a manager and related<br />
entities, for various claims related to defendants’ alleged participation in a scheme to dissolve a<br />
company after siphoning off its assets. Plaintiffs alleged that the manager aided and abetted the<br />
company directors’ alleged breaches of fiduciary duty in unlawfully dissolving the company and<br />
engaging in a series of self-dealing and interested transactions to the detriment of the creditors.<br />
Defendants filed a motion to dismiss, claiming that the court lacked jurisdiction and that<br />
plaintiffs failed to state a claim. The court denied the defendants’ motion to dismiss as to the<br />
aiding and abetting claim concluding without analysis that plaintiffs adequately pled a claim for<br />
aiding and abetting the directors’ breaches of fiduciary duty. Turning to the conspiracy claim,<br />
the court noted that aiding and abetting a breach of fiduciary duty will satisfy the first two<br />
elements required to plead conspiracy. Here, the court noted that plaintiffs could show (1) a<br />
fiduciary relationship, (2) a breach of that relationship, (3) that the alleged aider and abettor<br />
knowingly participated in the fiduciary breach of duty, and (4) damages proximately caused by<br />
the breach. At issue was whether the alleged aider and abettor knowingly participated in the<br />
breach. The court rejected the argument that, because only the directors had authority to affect<br />
the dissolution, there could be no aiding and abetting liability. The court noted that the<br />
complaint sufficiently alleged that there were a series of self-dealing and interested transactions.<br />
Here, plaintiffs only need to allege facts permitting an inference that defendants knowingly<br />
assisted in giving preferential treatment. Because plaintiffs met this standard, this showing of<br />
aiding and abetting liability was sufficient to meet the first two elements for conspiracy.<br />
Additionally, the court rejected defendants’ claim that the claims for civil conspiracy were<br />
redundant or duplicative of the aiding and abetting claim. Defendants’ motion to dismiss the<br />
civil conspiracy and aiding and abetting claims were therefore denied.<br />
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 Del. Ch. LEXIS 287 (Del. Ch.<br />
Dec. 20, 2012).<br />
Plaintiffs, insurance carriers, were limited partners of a Delaware limited partnership.<br />
That partnership invested in another fund, which invested substantially all of its investment<br />
capital in Madoff’s investment firm. The plaintiffs opted out of a settlement and filed an action<br />
against the limited partnership, two related entities, and various officers, directors, and managers,<br />
alleging, among other things, aiding and abetting a breach of fiduciary duty. Defendant filed a<br />
346<br />
H.3<br />
H.3
motion to dismiss. The elements for aiding and abetting a breach of fiduciary duty under<br />
Delaware law are: “(1) the existence of a fiduciary relationship; (2) the fiduciary breached its<br />
duty; (3) a defendant who is not a fiduciary, knowingly participated in a breach; and (4) damages<br />
to the plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary.” Globis<br />
Partners, L.P. v. Plumtree Software, Inc., 2007 Del. Ch. LEXIS 169 (Del. Ch. Nov. 30, 2007).<br />
Defendant contended that its partner did not have actual knowledge of or knowingly participate<br />
in the breach. Plaintiffs alleged that the partner was an agent for the investment firm and, thus,<br />
knowledge could be imputed to the principal. The court agreed, stating that, “Under Delaware<br />
law, the ‘knowledge’ of an agent acquired while acting within the scope of his or her authority is<br />
imputed to the principal.” In this case, [the partner] should be considered [the partnership’s]<br />
agent and the agent’s knowledge can be imputed to the partnership. The court therefore denied<br />
defendants’ motion to dismiss as to the aiding and abetting claim.<br />
Tong v. Dunn, 2012 NCBC 16 (N.C. Super. Ct. 2012).<br />
Investors filed an action for monetary relief against a corporation, five of its directors,<br />
and a second corporation. The investors asserted claims for breach of fiduciary duty against the<br />
individual defendants and claims against the corporate defendants for aiding and abetting the<br />
breach. Plaintiffs alleged that the board members placed their own interests ahead of the<br />
common shareholders when negotiating and planning the sale of the corporation. Both parties<br />
disputed whether North Carolina recognized the claim assessed, but they conceded that the<br />
central terms of aiding and abetting breach of fiduciary duty are articulated by the North<br />
Carolina Court of Appeal. To establish a claim for aiding and abetting a breach of fiduciary<br />
duty, plaintiffs must show: (1) violation of a fiduciary duty by the primary party; (2) knowledge<br />
of the violation by the aiding and abetting party; and (3) substantial assistance by the aider and<br />
abettor in achieving the primary violation. Blow v. Shaughnessy, 364 S.E.2d 444 (N.C. Ct. App.<br />
1988). In granting the defendants’ motion to dismiss, the court noted that the conduct of a<br />
corporate officer, within the scope of employment, cannot expose the corporation itself to aider<br />
and abettor liability because of the intercorporate immunity doctrine. The court noted that<br />
Delaware also adopts the general principle that a corporation’s directors and officers are all part<br />
of a single legal entity and, therefore, cannot conspire with each other because it takes at least<br />
two people or entities to carry out a conspiracy. Therefore, the court held that the board<br />
members’ actions cannot give rise to aider and abettor liability under these circumstances<br />
because of the board members’ relationship with the corporation.<br />
H.3<br />
4. Conspiracy<br />
H.4<br />
Armstrong v. SEC, 476 F. App’x 864 (D.C. Cir. 2012).<br />
In 2006, petitioner pled guilty to conspiring to commit securities and wire fraud. He was<br />
sentenced to five years in prison, three years of supervised release, and ordered to pay<br />
$80,000,001 in restitution. Two years later, petitioner entered into a civil consent judgment with<br />
the Securities and Exchange Commission which permanently enjoined him from violating<br />
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 17(a) of the<br />
347
Securities Act of 1933. Soon after the consent judgment was finalized, the SEC initiated an<br />
administrative proceeding to impose a bar on petitioner associating with any investment adviser,<br />
which was granted by an administrative law judge. Petitioner appealed this administrative<br />
action. Pursuant to the Investment Advisers Act of 1940, the SEC must show that petitioner had<br />
been convicted of any felony involving the purchase or sale of any security within ten years of<br />
the commencement of the proceedings, or was enjoined from any action, conduct, or practice<br />
specified in the statute. Petitioner attempted to collaterally attack his underlying conviction by<br />
arguing that the convicting court lacked jurisdiction; however, the court determined he had not<br />
previously raised this issue. Before imposing an associational bar, the SEC must determine that<br />
it would serve the public interest. Petitioner argued that because he would receive credit towards<br />
the amount from payments made by third parties, the SEC improperly relied on the $80 million<br />
he owed in restitution in evaluating both the egregiousness of his conduct and the likelihood that<br />
his job would present opportunities for future violations. The court found that the SEC did not<br />
abuse its discretion when it evaluated the debt as it presently stood and determined that this debt,<br />
combined with petitioner’s occupation as a securities and commodities trader, would present him<br />
with motive and opportunity to violate the law again. The court noted the SEC’s suggestion that<br />
if the district court credited payments by other parties against the restitution petitioner was<br />
ordered to pay, he could file an application to lift the associational bar.<br />
U.S. v. Hagen, 468 F. App’x 373 (4th Cir. 2012).<br />
In 2009, defendant was convicted of conspiracy to commit securities fraud, mail fraud,<br />
wire fraud, and money laundering. The convictions arose out of defendant’s role in a “pumpand-dump”<br />
securities fraud scheme, in which he and his co-conspirators acquired control of a<br />
corporation and made successful attempts to artificially increase its stock price before selling<br />
their shares at this elevated price and gaining proceeds of approximately $27 million. The<br />
promotional campaign to “pump” up the stock price consisted of creating websites that<br />
fraudulently touted the corporation’s business prospects and misrepresented the corporation’s<br />
financial condition. In the months prior to the promotional campaign, no shares of the<br />
corporation had been traded. During the “pump” phase of the scheme, trading skyrocketed to<br />
500,000 shares a day and the price increased to $10 per share. Over the next ten months, the<br />
conspirators sold approximately 19 million shares to the public. After this “dump” phase was<br />
complete, the share price dropped to $1 and below. The defendant appealed the conviction<br />
asserting that the district court erred in calculating the loss attributable to the conduct for which<br />
he was convicted. The district court applied a 22-level upward adjustment to defendant’s<br />
sentence based on a finding that the loss resulting from the fraud was over $20 million. In<br />
accordance with the U.S. SENTENCING GUIDELINES MANUAL § 2B1.1(b)(1), for a defendant<br />
convicted of fraud the offense level should be adjusted upward to varying degrees depending on<br />
the amount of “loss.” District courts are instructed to apply either “actual loss” or “intended<br />
loss,” whichever is greater. If the “actual loss” or “intended loss” cannot be reasonably<br />
determined, then courts are to use the gain that resulted from the offense as an alternative<br />
measure of loss. The district court used this alternative measure in finding the loss was<br />
$27.6 million. The appellate court found that the district court did not err in declining to<br />
aggregate the amount the investors lost from the residual value of their shares or in applying the<br />
22-level enhancement called for by USSG § 2B1.1(b)(1)(L).<br />
348<br />
H.4
H.4<br />
Tucker v. Soy Capital Bank & Trust Co., 974 N.E.2d 820 (7th Cir. 2012).<br />
Plaintiffs sued defendant custodian bank under multiple theories for losses they sustained<br />
as a result of an alleged Ponzi scheme by the owner of a fund in which plaintiffs had invested<br />
their individual retirement accounts. Among the claims, plaintiffs alleged civil conspiracy. The<br />
custodian bank moved for dismissal for failure to state a claim of action as to all of the claims<br />
and the trial court granted defendant’s motion with prejudice. Plaintiffs appealed. Civil<br />
conspiracy is defined as “a combination of two or more persons for the purpose of accomplishing<br />
by concerted action either an unlawful purpose or a lawful purpose by unlawful means.” In<br />
order to state a claim for civil conspiracy, plaintiffs must allege an agreement and a tortious act<br />
committed in furtherance of that agreement. As civil conspiracy is an intentional tort, proof that<br />
a defendant knowingly and voluntarily participates in a common scheme to commit an unlawful<br />
act or a lawful act in an unlawful manner is required. The appellate court found that plaintiffs’<br />
complaint failed to state a cause of action for civil conspiracy as plaintiffs do not allege any<br />
agreement between the defendants and plaintiffs failed to set forth a tortious act by the moving<br />
defendant. The circuit court did not err in dismissing plaintiffs’ civil conspiracy claim for failure<br />
to state a claim.<br />
U.S. v. Sklena, 692 F.3d 725 (7th Cir. 2012).<br />
Defendant challenges his conviction for wire fraud, commodities fraud, and noncompetitive<br />
futures trading. Defendant and his alleged co-conspirator were floor brokers at the<br />
Chicago Board of Trade and traded in five-year treasury note futures. In April 2004 a significant<br />
drop in the price of the futures contracts triggered stop-loss sell orders for co-conspirator’s<br />
clients. By the time co-conspirator acted to execute the stop-loss orders, the price had already<br />
rebounded. Although the price had rebounded, co-conspirator sold the contracts to defendant for<br />
the bottom-of-the-market price that triggered the stop-loss orders, resulting in the loss of more<br />
than $2 million to co-conspirator’s clients. Moments later, defendant re-sold a portion of the<br />
contracts to co-conspirator, again at a price near the bottom-of-the-market price. Both defendant<br />
and co-conspirator held in their personal accounts futures contracts that they acquired at a price<br />
significantly below the market price and then sold the contracts on the open market for the then<br />
prevailing price, realizing significant profits. Defendant was convicted on seven counts.<br />
Defendant appealed on the grounds that the government’s evidence was insufficient to sustain<br />
his conviction. The Seventh Circuit rejected defendant’s argument holding that while the<br />
government did not present strong evidence that defendant either knew or consciously avoided<br />
knowledge that the contracts he purchased and re-sold belonged to co-conspirator’s customers,<br />
defendant’s conviction can be sustained under the Pinkerton theory. Pinkerton v. U.S., 328 U.S.<br />
640, 66 S. Ct. 1180, 90 L. Ed. 1489 (1946). The Pinkerton theory provides that a conspirator can<br />
be liable for foreseeable crimes committed by a co-conspirator and, therefore, even if defendant<br />
did not know the contracts belonged to co-conspirator’s customers, it was foreseeable by<br />
defendant that they were. Defendant’s conviction was overturned on other grounds.<br />
H.4<br />
349
H.4<br />
In re Nat’l Century Fin. Enters., 846 F.Supp.2d 828 (S.D. Ohio 2012).<br />
Plaintiffs lost over $2 billion in a large-scale securities fraud committed by an issuer of<br />
notes. Plaintiffs purchased notes directly from defendant, which served as the initial purchaser<br />
and placement agent for the issuer. The plaintiffs alleged violation of state and federal securities<br />
laws, including conspiring to commit such violations that defendant conspired with the issuer of<br />
notes to defraud them. The defendant moved for summary judgment. New York does not<br />
recognize civil conspiracy as an independent cause of action; however, a plaintiff may advance a<br />
theory of civil conspiracy to connect the actions of a defendant to the actions of another party in<br />
committing an actionable tort. Therefore, to bring a claim of civil conspiracy plaintiff must<br />
prove the primary tort plus the four elements of conspiracy: (1) an agreement between two or<br />
more parties; (2) an overt act in furtherance of the agreement; (3) the parties’ intentional<br />
participation in furtherance of a plan or purpose; and (4) resulting damage or injury. Defendant<br />
argued that their employees, to whom the evidence regarding knowledge of the fraud related, did<br />
not begin working for defendant until years after the issuer’s fraud began. Just because their<br />
employees were latecomers, the court found this did not mean their employees did not join the<br />
conspiracy. The court found that if their employees obtained knowledge of the scheme, tacitly<br />
agreed to it, and committed an overt act in furtherance of the conspiracy, then defendant would<br />
be liable at a minimum for the injury done by the conspiracy after the employees joined. The<br />
court found that the plaintiffs submitted sufficient evidence to create a genuine issue of fact as to<br />
whether the issuer and investment banks had a tacit understanding to defraud investors.<br />
Defendant’s motion for summary judgment as to the claim for conspiracy was denied.<br />
U.S. v. Fleishman, 2012 U.S. Dist. LEXIS 65165 (S.D.N.Y. May 7, 2012).<br />
On September 20, 2011, a jury convicted defendant of both conspiracy to commit wire<br />
fraud and conspiracy to commit securities fraud. On December 21, 2011, the court sentenced<br />
defendant to forfeit property traceable to offenses in an amount to be determined. Under<br />
18 U.S.C. § 981(a)(1)(c) a defendant convicted of securities fraud must forfeit any property<br />
constituted or derived from proceeds traceable to the violation. While the government could<br />
have argued that defendant jointly and severally with his co-conspirators, must forfeit all of the<br />
conspiracy’s gains he could have foreseen, the government instead suggested that defendant<br />
forfeit all income received from his business, arguing that the business could not have survived<br />
without the criminal conspiracy in which certain employees engaged. The court found that the<br />
government did not prove by a preponderance of the evidence that the business’ continued<br />
existence depended on the criminal conspiracy. While hundreds of thousands of dollars were<br />
derived through the actions of defendant and his co-conspirators, the business also received<br />
millions of dollars through others who did not engage in fraud. Finding that the business likely<br />
could have survived without the criminal conspiracy, the income defendant received from his<br />
business was not solely the result of the commission of the conspiracy. Therefore, the court<br />
differentiated between the income received as a result of the conspiracy and the income received<br />
from legitimate business. Defendant proposed calculating the amount by multiplying<br />
commissions received from a particular client by the percentage of clients’ calls involving the<br />
350<br />
H.4
co-conspirators. Then, adding these amounts together, for all of the defendants’ clients,<br />
determined the total amount defendant must forfeit. Applying this method, the defendant<br />
calculated that he must forfeit $49,100. The government did not object to this calculation and<br />
the court determined this represented the correct forfeiture amount.<br />
Fazzari v. Hilbrant (In re Hilbrant), 2012 Bankr. LEXIS 5001 (Bankr. W.D.N.C. Oct. 24, 2012).<br />
Plaintiffs invested in a buy-back property development investment deal. The developer<br />
was involved in several other projects that were struggling financially. After sale of the lots, the<br />
developer ceased sales, marketing, and development activities and the buy-backs were never<br />
honored. Defendant filed bankruptcy. Plaintiffs filed individual adversary proceedings against<br />
defendant, objecting to dischargeability and asserting twelve causes of action against defendant,<br />
one of which was civil conspiracy. Defendant filed a motion for summary judgment. Plaintiffs’<br />
claim for civil conspiracy necessarily failed because only one defendant was left. Civil<br />
conspiracy, at a minimum, involves two people. Although North Carolina courts have<br />
acknowledged that it is permissible to use circumstantial evidence to establish the elements of a<br />
conspiracy, plaintiffs still have not produced enough evidence against defendant to justify<br />
submission of this claim to the jury. The court granted defendant’s motion for summary<br />
judgment on plaintiffs’ civil conspiracy claim.<br />
Liverett v. Island Breeze Int’l, Inc., 2012 U.S. Dist. LEXIS 111621 (D.S.C. Aug. 9, 2012).<br />
Plaintiff sued for, inter alia, breach of contract. In plaintiff’s seventh cause of action for<br />
civil conspiracy, plaintiff alleges that defendants joined together in a scheme to mislead plaintiff,<br />
to take the benefits of his labor without compensating him, and to harm his reputation in the<br />
business community. Defendants moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to<br />
dismiss plaintiff’s civil conspiracy cause of action. Civil conspiracy consists of three elements:<br />
(1) a combination of two or more persons; (2) for the purpose of injuring the plaintiff, and<br />
(3) which causes him special damages. Plaintiff alleged defendants joined together in an attempt<br />
to mislead plaintiff, to take the benefits of his labor without compensating him, and to harm his<br />
reputation in the business community. Plaintiff failed to allege facts that defendants acted<br />
outside of their normal corporate duties or had any independent stake in achieving the objectives<br />
of the alleged conspiracy. Therefore, plaintiff’s civil conspiracy claim fails under the intracorporate<br />
conspiracy doctrine which provides that “no conspiracy can exist if the conduct<br />
challenged is a single act by a single corporation acting exclusively through its own directors,<br />
officers, and employees, each acting within the scope of his employment.” By failing to include<br />
a party outside of the defendant corporation who was also involved in the conspiracy, plaintiff<br />
failed to allege sufficient facts to state the claim and plaintiff’s civil conspiracy claim was<br />
dismissed.<br />
H.4<br />
H.4<br />
351
H.4<br />
Kerr v. Exobox Techs. Corp., 2012 WL 201872 (S.D. Tex. Jan. 23, 2012).<br />
Investors alleged that defendants engaged in a scheme involving the issuance and sale of<br />
securities in violation of Texas and federal securities laws. As to the claims brought under the<br />
Texas common law, plaintiffs asserted that the corporation and individual defendants engaged in<br />
fraud, misrepresentation, and civil conspiracy. Plaintiffs alleged these claims involved violations<br />
of state securities laws and that there were pendent claims for damages and injuries resulting<br />
from statutory and common law fraud, misrepresentation, gross negligence, and conspiracy to<br />
commit the violations of law. The Securities <strong>Litigation</strong> Uniform Standards Act of 1998<br />
(“SLUSA”), precludes a securities class action in state or federal court if: (1) the action is a<br />
“covered class action”; (2) the claims are based on state law; (3) the action involves one or more<br />
“covered securities”; and (4) the claims allege a misrepresentation or omission of material fact<br />
relating to the purchase or sale of the security. The court dismissed the claims outlined above<br />
because the plaintiffs failed to advance any argument that their claims were outside of the<br />
SLUSA requirements.<br />
Aaes v. 4G Cos., 2012 U.S. Dist. LEXIS 37356 (S.D. Tex. Mar. 20, 2012).<br />
Plaintiffs filed this action in the Southern District of Texas against defendants asserting<br />
causes of action including conspiracy arising out of economic damages they suffered when they<br />
purchased allegedly fraudulent shares in Texas oil and gas ventures sold by the defendants.<br />
Here, plaintiffs were 121 foreign citizens and residents. The facts alleged indicated that every<br />
transaction underlying the case was entirely foreign, given that all plaintiffs were foreign citizens<br />
and were at all relevant times in foreign countries. Because there was no indication that the<br />
transactions took place domestically plaintiffs’ securities fraud claims were dismissed.<br />
Rabin v. McClain, 2012 U.S. Dist. LEXIS 58441 (W.D. Tex. Apr. 26, 2012).<br />
Plaintiff filed suit alleging that defendants, personally, through agents, and through other<br />
entities that they controlled, engaged in false and misleading promotion of stock for financial<br />
gain, and thus defrauded investors through stock sales of $14 million. Plaintiff further alleged<br />
that defendants created four entities, also named as defendants, using each one to finance the<br />
start-up of the next. Plaintiff asserted claims including common law fraud, fraud in the<br />
inducement, breach of contract, and civil conspiracy. The first entity was created to finance the<br />
second entity, which had the appearance of a legitimate financial stock lender, but operated more<br />
like a Ponzi scheme. The third entity claimed to own, develop, and promote a drug that the<br />
fourth entity claimed in its Securities and Exchange Commission filings and website to have the<br />
exclusive rights to sell. Plaintiff asserted that defendants devised a scheme wherein they would<br />
befriend persons in local communities and provide them with false information to sell stock in<br />
the fourth entity, in exchange for a commission and/or gifted stock. Defendants failed to respond<br />
to plaintiff’s complaint. The court, upon finding that there were well-pleaded facts stating a<br />
claim upon which relief could be granted, entered default judgment against defendants.<br />
352<br />
H.4<br />
H.4
H.4<br />
U.S. v. Sutton, 2012 U.S. Dist. LEXIS 75103 (E.D. Mo. Jan. 17, 2012).<br />
Defendants were indicted on 50 counts alleging various violations of federal law<br />
including conspiracy to commit mail, wire, and bank fraud affecting a financial institution, in<br />
violation of 18 U.S.C. § 1349. The defendants filed a motion to dismiss, arguing that the<br />
government based its indictment on defendants’ duty to disclose the alleged lack of<br />
independence of one of the defendants, contending there was no such duty, and challenging the<br />
government’s position that this person was not an independent registered investment adviser<br />
(RIA). The indictment alleged that defendants failed to fully fund a pre-need funeral trust and<br />
improperly withheld money from that trust. Missouri law provides that any pre-need funeral<br />
trust in excess of $250,000 may use a federally registered or Missouri registered RIA to make<br />
investment decisions about the principle and undistributed income of the trust. Defendants made<br />
materially false and fraudulent representations that their RIA was independent. The<br />
independence of this RIA was compromised in at least 18 respects, including the receipt by his<br />
firm of $1 million in fees from defendants. In 1999, the firm entered into a written agreement<br />
with defendants to transfer custody of all the life insurance policies obtained by individuals who<br />
purchased pre-need funeral contracts to the custody of defendants’ corporation. The RIA<br />
permitted defendants’ corporation to use his firm’s statutory authority as the independent RIA to<br />
direct bank-trustees to make transfers and distributions from the trust.<br />
Defendants argued that none of the indictment’s allegations formed a basis for bank fraud<br />
because there was no affirmative misrepresentation and no independent duty to disclose this<br />
information to bank-trustees. Under the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1–<br />
b-21, an RIA is a fiduciary who has an affirmative duty of good faith, fair disclosure of all<br />
material facts, as well as an obligation to avoid misleading his clients. The indictment alleged<br />
that the RIA had the duties of a fiduciary and for purposes of the motion to dismiss, the court<br />
accepted this as true.<br />
The defendants’ argument that the mail and wire fraud counts were defective because the<br />
government could not establish materiality was also rejected by the court. The materiality<br />
requirement is not a mandate that a term in a contract or insurance policy be designated as<br />
“material” to actually be material for purposes of a mail fraud statute. The court explained that if<br />
something is capable of influencing the intended victim, it is material. So long as the<br />
indictment’s allegation of materiality is facially sufficient, materiality is an issue to be<br />
determined by the jury. The court instructed that bank, wire, and mail fraud statutes were to be<br />
given the same broad construction. Because the court determined that defendants’ arguments to<br />
dismiss the various fraud counts were defective, for the same reasons, the court determined that<br />
the argument to dismiss the conspiracy count was defective.<br />
Kim v. Kearney, 838 F. Supp. 2d 1077 (D. Nev. 2012).<br />
Plaintiffs brought suit against a variety of defendants, who had assisted plaintiffs in the<br />
purchase transaction and subsequent foreclosure on a parcel of real property. Defendants had<br />
H.4<br />
353
introduced plaintiffs to an investment opportunity in a parcel of undeveloped land and<br />
recommended plaintiffs borrow $100,000 from another defendant. Before the court was the<br />
registered representative and real estate licensees’ (“defendants”) motion for a partial summary<br />
judgment on plaintiffs’ fraud claims, which included federal securities fraud, conspiracy to<br />
commit federal securities fraud, and Nevada securities fraud. Defendants argued that they were<br />
entitled to summary judgment because to state a federal securities fraud claim the fraud must be<br />
in connection with a “security” and there was no evidence of a “security.” Plaintiffs argued that<br />
under federal securities laws a Note or other evidence of indebtedness counts as a “security.”<br />
Finding that no security was involved, the court granted defendants’ motion for partial summary<br />
judgment on the federal securities fraud and conspiracy to commit federal securities fraud.<br />
Fried v. Stiefel Labs., Inc., 2012 U.S. Dist. LEXIS 122507 (S.D. Fla. June 8, 2012).<br />
Plaintiffs, current and former employees of defendant corporation, alleged defendants,<br />
including certain board members of defendant corporation engaged in a plan to manipulate the<br />
employees’ ownership of shares of the privately-held company in order to improperly profit from<br />
the company’s eventual sale. Plaintiffs filed a complaint asserting various causes of action, one<br />
of which was civil conspiracy under Florida law. Defendants moved to dismiss, arguing that the<br />
intra-corporate conspiracy doctrine mandates dismissal of the civil conspiracy claims. The intracorporate<br />
conspiracy doctrine provides that a corporation’s employees, acting as agents of the<br />
corporation, are deemed incapable of conspiring among themselves or with the corporation.<br />
Nationwide Mut. Co. v. Ft. Myers Total Rehab Ctr., Inc., 657 F. Supp. 2d 1279 (M.D. Fla. 2009).<br />
This rule does not apply if an agent of the corporation has a personal stake in the activities that<br />
are separate and distinct from the corporation’s interest. Cedar Hills Properties Corp. v. E. Fed.<br />
Corp., 575 So.2d 673, 676 (Fla. Ct. App. 1st Dist. 1991). The allegations must be sufficient to<br />
put the defendants on notice as to how the actions of individual defendants were at odds with,<br />
rather than on behalf of, the corporation, to a point where the individuals’ interests can be said to<br />
be separate and distinct from the corporation’s interests. Leisure Founders v. CUC Int’l, 833 F.<br />
Supp. 1562, 1575 (S.D. Fla. 1993). Plaintiffs argue that the intra-corporate conspiracy doctrine<br />
does not apply because the defendants were not merely outside directors, but instead formed the<br />
control group of shareholders and officers with direct operational control over the company and<br />
all acted on its behalf as agents. The court held that the intra-corporate conspiracy doctrine<br />
precluded plaintiffs from pursuing a conspiracy claim. Defendants’ motion to dismiss the civil<br />
conspiracy claim was granted.<br />
Burger v. Hartley, 2012 U.S. Dist. LEXIS 129783 (S.D. Fla. Sept. 12, 2012).<br />
Plaintiffs sought rescission and substantial damages from defendants related to<br />
$4.525 million plaintiffs invested to acquire shares in a company based on false representations<br />
that such interests would provide indirect ownership of Series A preferred shares in a different<br />
company. After making the investment, plaintiffs never received the closing documents<br />
reflecting their shares and later learned that defendants did not own any Series A preferred shares<br />
in the corporation. Plaintiffs brought claims against defendants for violations of Section 10(b)<br />
354<br />
H.4<br />
H.4
and Rule 10b-5(a), (b), and (c) of the Securities Exchange Act of 1934; fraud (rescission); fraud<br />
(damages); conspiracy; and civil theft in violation of Florida Statute Section 772.11. Plaintiffs<br />
moved for summary judgment. Defendants opposed the motion and moved to dismiss the<br />
amended complaint. A civil conspiracy requires: (1) an agreement between two or more parties;<br />
(2) to do an unlawful act or to do a lawful act by unlawful means; (3) the doing of some overt act<br />
in pursuance of the conspiracy; and (4) damage to plaintiff as a result of the act done under the<br />
conspiracy. Hogan v. Provident Life & Accident Ins. Co., 665 F. Supp. 2d 1273, 1285 (M.D. Fla.<br />
2009) (quoting Charles v. Fla. Foreclosure Placement Ctr., LLC, 988 So.2d 1157, 115960 (Fla.<br />
Dist. App. 2008). Under Florida law, conspiracy is not a separate or independent tort, but is a<br />
vehicle for impeding the tortious actions of one conspirator to another to establish joint and<br />
several liability. Hoch v. Rissman, Weisberg, Barrett, 742 So.2d 451, 460 (Fla. Dist. Ct. App.<br />
1999) (citing Ford v. Rowland, 562 So.2d 731 (Fla. Dist. Ct. App. 1990). “To be held liable for<br />
the acts of all co-conspirators, each conspirator need only know of the scheme and assist in it in<br />
some way.” Principal Life Ins. v. Mosberg, No. 98-22341-CIV, 2010 U.S. Dist. LEXIS 10271,<br />
2010 WL 473042, at *6 (S.D. Fla. Feb. 5, 2010) (quoting Donofrio v. Matassini, 503 So.2d 1278,<br />
1281 (Fla. Dist. Ct. App. 1987)). The undisputed facts before the court establish that one<br />
defendant was in a partnership with the other defendant, and participated in drafting the private<br />
placement memorandum and subscription documents containing the false statements, and met<br />
personally with plaintiffs to further the transaction. Thus, the court held that plaintiffs<br />
established the existence of a conspiracy amongst the defendants and that the moving defendant<br />
may be held jointly and severely liable for the actions of the other defendants.<br />
21st Century Sys. v. Perot Sys. Gov’t & Servs., 284 Va. 32 (2012).<br />
The plaintiff company alleged that defendants, former employees of the plaintiff,<br />
conspired to improperly use the plaintiff’s confidential and proprietary information so that<br />
another company, also a defendant, could establish itself in the United States Navy consulting<br />
business. Defendants appealed a verdict in favor of the plaintiff on grounds that the evidence<br />
was insufficient to support an award of lost good will damages because of the alleged<br />
conspiracy. Any entity injured as a result of a conspiracy to injure its business may recover the<br />
damages sustained because of that conspiracy, including damages for loss of good will. The<br />
court recognized that the market value method for computing good will damages is acceptable;<br />
however, it held that plaintiff’s evidence lacked comparable sales information and was<br />
insufficient as a matter of law to support an award of lost good will damages. The appellate<br />
court held that the trial court erred when it refused to set aside the award of damages relating to<br />
plaintiff’s lost good will as a result of the conspiracy.<br />
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012).<br />
Plaintiffs are judgment creditors of defendant corporation. They claim defendants’<br />
alleged participation in an elaborate scheme to dissolve the company after siphoning off its assets<br />
resulted in damages. Defendants, a manager and related entities of defendant corporation, filed a<br />
motion to dismiss on grounds that the court lacked personal jurisdiction and plaintiffs failed to<br />
355<br />
H.4<br />
H.4
state a cause of action for conspiracy. Defendants argue that a distinct claim for civil conspiracy<br />
is redundant or duplicative of a claim of aiding and abetting. Though related, “there is a<br />
distinction between civil conspiracy and aiding and abetting.” At times and in certain<br />
circumstances, that distinction might be immaterial or amount to “mere hair splitting.” While<br />
relief granted for the civil conspiracy claims would be redundant of the relief for aiding and<br />
abetting, the claims are different. Aiding and abetting is a cause of action that focuses on the<br />
wrongful act of providing assistance, and civil conspiracy focuses on the agreement. The court<br />
found that ultimately the two claims are not redundant or duplicative and that under the<br />
circumstances there is no categorical bar to the plaintiffs asserting both aiding and abetting and<br />
civil conspiracy claims. Therefore, defendants’ motion to dismiss the civil conspiracy claim was<br />
denied.<br />
Highland Capital Mgmt. v. Ryder Scott Co., 2012 Tex. App. LEXIS 2674 (Tex. App. 2012).<br />
Plaintiffs brought claims against defendants for alleged violations of Section 2 of<br />
article 33F of the Texas Securities Act, TEX. REV. CIV. STAT. ANN. art. 581-33(F)(2), fraud,<br />
negligent misrepresentation, conspiracy, and aiding and abetting fraud in connection with their<br />
purchases of over $23 million in unsecured bonds issued by defendant. Plaintiffs contended that<br />
defendant petroleum engineering firm overestimated the volume of the proved oil reserves of an<br />
oil and gas exploration company in which plaintiffs held the unsecured bonds. Plaintiffs alleged<br />
that the petroleum engineering firm’s overvaluation resulted from its failure to apply generally<br />
accepted engineering practices and follow Securities and Exchange Commission guidelines.<br />
Plaintiffs further alleged that the engineering firm knew or should have known that it had not<br />
followed SEC regulations and that the firm knew that the oil and gas exploration company would<br />
rely on the reserve estimates in its SEC filings and that the investors would examine and rely on<br />
this information in deciding whether or not to invest. Plaintiffs alleged they relied on the<br />
estimates set forth in the 10-K forms and prospectuses in deciding to invest in the unsecured<br />
bonds and later to refrain from selling them. Plaintiffs further alleged that defendant<br />
independent oil and gas producer knew that defendant engineering firm overestimated the proved<br />
oil reserves, and in so doing, entered into a conspiracy with the oil and gas exploration company<br />
to perpetuate the misrepresentations regarding the reserve estimates. The trial court granted<br />
defendants’ motion for a partial summary judgment regarding plaintiffs’ claim of conspiracy to<br />
defraud since plaintiffs failed to plead the underlying fraud claim. Plaintiffs appealed,<br />
contending in part that the trial court erred in granting summary judgment with respect to the<br />
conspiracy to defraud claim. Because the fraud claim against the petroleum engineering firm<br />
failed, the appellate court ruled that the conspiracy claim dependent on that fraud also failed.<br />
Eagletech Communications Inc. v. Bryn Mawr Inv. Group, 79 So.3d 855 (Fla. Dist. Ct. App.<br />
2012).<br />
Plaintiff corporation, a start-up seeking capital, claimed that defendants engaged in a<br />
conspiracy in connection with financing transactions and in order to execute short sales to drive<br />
down the price of plaintiff’s stock prior to their investment. In Florida, a civil conspiracy<br />
356<br />
H.4<br />
H.4
equires: (a) an agreement between two or more parties; (b) to do an unlawful act or to do a<br />
lawful act by unlawful means; (c) the doing of some overt act in pursuance of the conspiracy;<br />
and (d) damage to the plaintiff. A complaint must set forth clear, positive, and specific<br />
allegations of civil conspiracy. Plaintiff alleged that defendants “combined, agreed, and<br />
conspired with each other to devise a scheme” but never explained what the alleged improper<br />
scheme was. As such, the trial court found that plaintiff failed to clearly set forth the “act”<br />
defendants allegedly agreed to undertake. In addition, plaintiff failed to allege sufficient facts<br />
where the complaint merely speculated that defendants all participated in a conspiracy because<br />
they ultimately received a benefit from the transactions. For these reasons, the conspiracy count<br />
was insufficient, but the trial court abused its discretion in dismissing the complaint with<br />
prejudice rather than with leave to amend.<br />
5. Failure to Supervise<br />
H.5<br />
Stout St. Funding LLC v. Johnson, 873 F. Supp.2d 632 (E.D. Pa. 2012).<br />
Plaintiff, a provider of commercial loans to real estate investors, filed suit against<br />
defendant insurance underwriter and others, alleging misappropriation of funds by defendant’s<br />
agent. Plaintiff alleged negligent supervision of the agent even though the misappropriation<br />
occurred after its contract with defendant was terminated. Defendant moved for summary<br />
judgment, arguing that courts have uniformly held an employer cannot be liable for negligent<br />
supervision for torts committed by an employee after the employment relationship has ended.<br />
Plaintiff urged the close proximity between the termination date and the misappropriation (a<br />
matter of days) as a reason to extend liability. Plaintiff also argued for vicarious liability. The<br />
court dismissed the case, noting that plaintiff had no authority for these propositions, and stating<br />
that a claim for negligent supervision is a claim for direct liability, rather than vicarious liability<br />
under a respondeat superior theory.<br />
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).<br />
On appeal from a FINRA disciplinary action, the Securities and Exchange Commission<br />
found that broker-dealer, its president, and trading desk supervisor failed to reasonably supervise<br />
the broker-dealer’s registered representative who engaged in the unregistered sale of securities.<br />
The representative admitted to selling 2.3 million shares of thinly-traded penny stock and failing<br />
to register the transactions with the SEC.<br />
The president and trading desk supervisor shared responsibility for supervising registered<br />
representatives. Neither required the representative to ask questions of customers regarding their<br />
proposed penny stock sales, and they ignored red flags that should have prompted investigation.<br />
Contrary to the supervisor’s belief, the SEC maintained a broker-dealer has the primary<br />
responsibility to prevent illegal sales of securities from taking place, and supervisors may no<br />
more ignore the obvious need for further inquiry than may the broker-dealer.<br />
H.5<br />
357
The SEC also found the written procedures deficient. The supervisory manual lacked<br />
meaningful guidance setting forth “reasonable inquiry” procedures for representatives to follow<br />
when customers seek to sell large amounts of an unknown stock to the public without<br />
registration. The procedures also lacked meaningful guidance for determining whether a<br />
proposed sale was exempt from registration and failed to provide supervisors with a reliable<br />
mechanism for flagging unregistered sales of securities.<br />
The SEC sustained the FINRA sanctions, a fine of $30,000 each against the broker-dealer<br />
and its president, a $20,000 fine, and a forty-five day and thirty-day suspension of the president<br />
and trading desk supervisor, respectively.<br />
In re AXA Advisors, LLC, Release No. 66206, 2012 SEC LEXIS 206 (Jan. 20, 2012).<br />
Without admitting or denying the allegations, respondents consented to Securities and<br />
Exchange Commission findings that the firm failed to reasonably supervise its registered<br />
representative who fraudulently induced customers to redeem securities held at the broker-dealer,<br />
including variable annuities and mutual funds, under the false representation that the proceeds<br />
would be invested in other securities. The representative caused seven customers to place the<br />
funds, totaling $1.2 million, in a bank account he controlled, in violation of Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5.<br />
The SEC alleged that the broker-dealer failed to implement adequate procedures<br />
regarding review of variable annuity redemptions and failed to establish reasonable procedures to<br />
supervise representatives on leave for an extended period of time, yet continuing to service<br />
customer accounts.<br />
The broker-dealer consented to a $100,000 civil penalty and agreed to improve its<br />
supervisory system, including creation of a variable product withdrawal report and an automated<br />
system for reviewing redemptions. In accepting the settlement offer, the SEC considered the<br />
broker-dealer’s cooperation with the SEC and criminal authorities who investigated the<br />
representative’s scheme, and the broker-dealer’s prompt reimbursement of all customer losses.<br />
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012).<br />
The SEC sustained findings in a FINRA disciplinary action that a broker-dealer and its<br />
president and CEO failed to maintain adequate written supervisory procedures and exercise<br />
reasonable supervision over the firm’s registered representatives engaging in the sale of<br />
unregistered securities in violation of Section 5 of the Securities Act of 1933 and NASD Conduct<br />
Rule 2110.<br />
The broker-dealer’s representatives admitted to selling 760,000 shares of a thinly-traded<br />
unregistered penny stock. The supervisory manual required representatives to conduct all<br />
restricted securities transactions in accordance with Rule 144 and to contact the CEO for his<br />
approval beforehand. The inadequate supervision system consisted solely of relying on transfer<br />
358<br />
H.5<br />
H.5
agents and clearing firms to ensure compliance with Rule 144. The minimal written procedures<br />
lacked meaningful “reasonable inquiry” procedures for representatives to follow when customers<br />
seek to sell large amounts of an unknown stock to the public without registration, and how to<br />
determine whether a proposed sale is exempt.<br />
The SEC upheld the finding that the broker-dealer ignored the representatives’ sale of a<br />
large block of recently issued shares of a little-known, thinly-traded stock despite numerous red<br />
flags. The SEC sustained the FINRA sanctions, which consisted of a two-year suspension of the<br />
CEO and a $30,000 fine against the broker-dealer for unregistered sales, and $50,000 fines<br />
against each for supervisory failures. The broker-dealer was prohibited from receiving and<br />
selling unregistered securities until it revised its written procedures to comply with Section 5 of<br />
the Securities Act.<br />
In re 1st Disc. <strong>Broker</strong>age, Inc., Release No. 66212A, 2012 SEC LEXIS 220 (Jan. 23, 2012).<br />
Without admitting or denying the allegations, respondent consented to Securities and<br />
Exchange Commission findings that the broker-dealer failed to reasonably supervise its<br />
registered representative within the meaning of Section 15(b)(4)(e)of the Exchange Act and<br />
Section 203(e) of the Investment Advisers Act of 1940. The representative operated a Ponzi<br />
scheme that defrauded more than fifty investors out of almost $9 million. The broker-dealer<br />
failed to detect the fraud due to multiple failures in its supervisory system, including the vice<br />
president’s individual failure to implement the Heightened Supervision Committee specified in<br />
the broker-dealer’s written compliance policies and procedures.<br />
The SEC alleged inadequate policies and procedures regarding compliance audits, which<br />
provided only for review of limited information about a representative’s “doing business as”<br />
(“DBA”) account. The SEC also alleged the broker-dealer failed to have reasonable procedures<br />
requiring compliance auditors to review compliance audit reports from previous years. Due to<br />
this deficiency, the auditors failed to identify a reoccurring red flag, the representative’s<br />
intentional failure to have adequate signage outside his office that would have given investors<br />
notice of his affiliation with the broker-dealer.<br />
The broker-dealer settled and paid $2 million to victims of the fraud, and consented to<br />
sanctions including a civil penalty of $40,000 and suspension of the vice president from<br />
association in a supervisory capacity with any broker-dealer or investment advisor with the rights<br />
to reapply for association after nine months. The executive vice president consented to<br />
individually pay a civil penalty of $10,000.<br />
In re Urban, Release No. 3366, 2012 SEC LEXIS 346 (Jan. 26, 2012).<br />
On October 19, 2009, the Securities and Exchange Commission instituted administrative<br />
proceedings against the former general counsel and executive vice president of a registered<br />
broker-dealer and investment advisor firm. The SEC alleged that a registered representative<br />
violated anti-fraud provisions of the securities laws and that the supervisor failed to reasonably<br />
359<br />
H.5<br />
H.5
exercise his supervision within the meaning of Section 15(b) of the Securities Exchange Act of<br />
1934 and Section 203(f) of the Investment Advisers Act of 1940. On September 8, 2010, the<br />
administrative law judge found that the representative engaged in securities laws violations and<br />
that the former general counsel and executive vice president was his supervisor. The ALJ<br />
dismissed the proceedings against the supervisor, however, because she found he did not fail to<br />
reasonably exercise supervision.<br />
In re Brown, Release No. 66469, 2012 SEC LEXIS 636 (Feb. 27, 2012).<br />
The Securities and Exchange Commission upheld an administrative law judge’s findings<br />
that a supervisor failed to adequately supervise the firm’s registered representative who violated<br />
Section 17(a) of the Securities Act of 1933, Section 10(b), and Rule 10b-5 of the Securities<br />
Exchange Act of 1934 in connection with the sale of variable annuities to elderly customers. In<br />
December 2002, the firm appointed the supervisor to review and approve all suitability issues for<br />
the representative’s accounts. The firm did not begin training the supervisor until several months<br />
after he began supervising the representative, and the supervisor acknowledged that the training<br />
was “lacking.” In 2003, the Florida Department of Financial Services filed an administrative<br />
complaint against the representative, alleging he knowingly made false statements in connection<br />
with the sale of variable annuities to elderly customers. After he failed to respond to the<br />
complaint, the state revoked the representative’s insurance license. The supervisor learned that<br />
Florida had revoked the representative’s license but continued to allow him to discuss variable<br />
annuities at public seminars and to sell them to customers.<br />
The state reinstated the representative’s license in April 2004 on the condition that he not<br />
market annuities to individuals over 65 years old who are not currently his clients. The<br />
representative continued to sell variable annuities to new, elderly clients with the assistance of<br />
his supervisor, who listed the supervisor’s name as the registered representative on new<br />
customers’ account forms. The SEC found the supervisor failed to supervise the representative<br />
by “falsifying documents that misled his employer and the issuing insurance companies about<br />
what the registered representative was doing, thus creating an environment where the registered<br />
representative could defraud his clients with impunity.”<br />
The SEC upheld the ALJ’s decision and barred the supervisor and representative from<br />
associating with any broker, dealer, or investment advisor, although that the representative could<br />
apply to become so associated in a non-supervisory capacity after two years; imposed a ceaseand-desist<br />
order; ordered a disgorgement; and imposed a civil penalty of $310,000.<br />
In re Rizzo, Release Nos. 67479 & 3436, 2012 Fed. Sec. L. Rep. (CCH) 80,127 (July 20,<br />
2012).<br />
Without admitting or denying the allegations, respondents, owner of a registered<br />
investment advisory firm and its chief compliance officer (“CCO”), consented to Securities and<br />
Exchange Commission findings relating to violations arising out of failure to supervise the firm’s<br />
co-founder. The co-founder, acting as an investment advisor, misappropriated $7 million from<br />
360<br />
H.5<br />
H.5
15 clients over a period of several years in violation of the antifraud provisions of the Securities<br />
Exchange Act of 1934 and the Investment Advisers Act of 1940. The owner and CCO permitted<br />
the co-founder’s continued access to clients’ accounts while failing to investigate numerous red<br />
flags and suspicious transactions that caused them to suspect the co-founder of a Ponzi scheme,<br />
including co-founder’s serious financial problems. They also ignored a client’s instructions to<br />
prohibit the co-founder from managing its accounts and concealed co-founder’s continued<br />
involvement in those accounts. Finally, they ignored an attorney’s advice to contact affected<br />
clients. Respondents consented to a bar from associating in a supervisory capacity with any<br />
broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent,<br />
or nationally recognized statistical rating organization. The owner consented to pay<br />
disgorgement of $35,079, prejudgment interest of $7,731 and civil penalties of $130,000. The<br />
CCO consented to pay disgorgement of $15,592 plus prejudgment interest of $3,467, and civil<br />
penalties of $25,000.<br />
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).<br />
Without admitting or denying the allegations, respondents, a broker-dealer and its<br />
principals, consented to Securities and Exchange Commission findings that from January 2007<br />
through June 2010, they failed reasonably to supervise associated day traders who used the<br />
broker-dealer’s order management system to engage in a manipulative trading practice known as<br />
“layering” on U.S. securities markets. Despite repeated indications of this practice occurring,<br />
respondents failed to establish procedures to prevent and detect the manipulative trading. They<br />
failed to respond to repeated red flags, failed to file suspicious activity reports, and failed to<br />
retain instant messages related to the broker-dealer business. The broker-dealer failed<br />
reasonably to supervise its overseas traders by failing to ensure that the broker-dealer had<br />
procedures to prevent and detect manipulative trading in violation of the Securities Exchange<br />
Act Section 9(a)(2). Respondents consented to a cease and desist order; revocation of the<br />
broker-dealer’s registration; and a permanent bar from association with any broker, dealer,<br />
investment advisor, municipal securities dealer, or transfer agent, and from participating in any<br />
offering of penny stock. The individual respondent agreed to pay a civil penalty in the amount of<br />
$250,000.<br />
Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Aug. 9, 2012).<br />
Plaintiff, executor of an annuity holder’s estate, sued an insurance agent, the agent’s<br />
employer, and an insurance company, alleging that the annuity was unsuitable given the<br />
purchaser’s age, medical condition, and past financial directives. Claims against the insurance<br />
company were stayed by agreement while claims against the agent and agent’s employer were<br />
referred to arbitration.<br />
The stay agreement recited that the company’s liability, “if any, is based solely upon a<br />
determination that the allegations against agent are true.” The arbitrators issued an award<br />
H.5<br />
H.5<br />
361
dismissing the claims against the agent and her employer (FINRA ID No. 10-01456 (4/28/11))<br />
and plaintiff did not oppose the award’s confirmation.<br />
Plaintiff then proceeded against the insurance company in state court. The trial court<br />
granted summary judgment for the company based on the arbitration award and the parties’<br />
agreement. Plaintiff appealed, arguing that genuine issues of material fact existed on his claim<br />
for negligent supervision. After de novo review, the appellate court concluded that plaintiff<br />
waived the claim by failing to plead it in the trial court, and that it failed because the arbitration<br />
award established the agent had no liability. The court noted that, if the agent has no liability, it<br />
logically follows that there can be no liability imposed upon the principal for the agent’s actions.<br />
The summary judgment was affirmed.<br />
LaWarre v. Fifth Third Sec., Inc., 2012 Ohio 4016 (Ohio Ct. App., Sept. 5, 2012).<br />
Plaintiffs sued their broker-dealer for negligence, breach of fiduciary duty, and fraud in<br />
connection with losses from options trading which they permitted their registered representative<br />
to engage in on their behalf. Plaintiffs suffered no losses while their accounts were with the<br />
defendant broker-dealer. They then moved their accounts with the representative to a new<br />
broker-dealer and ultimately suffered substantial losses at that firm. The trial court found that<br />
the first broker-dealer could not be held responsible for losses sustained after plaintiffs had<br />
transferred their accounts away. The appellate court affirmed summary judgment, holding that<br />
once the representative left the defendant firm’s employ and plaintiffs transferred their<br />
investments to the new firm, the firm no longer owed plaintiffs a duty and could not be held<br />
liable for negligence, negligent supervision, or breach of fiduciary duty.<br />
H.5<br />
I. Private Rights of Action for Violations of SRO Rules<br />
I.<br />
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012).<br />
Investor brought a class action against Morgan Stanley Dean Witter, Inc., alleging that<br />
the brokerage firm breached its contract with investors by improperly charging its clients various<br />
transaction fees for costs the brokerage firm did not actually incur. Prior to amending her<br />
complaint, plaintiff alleged that the fees violated NASD and NASDAQ Stock Market Rules,<br />
which were incorporated into client contracts by reference. However, the court dismissed the<br />
complaint finding that plaintiff did not have a private right of action under such rules, and that, in<br />
any case, plaintiff’s claim was precluded by the Securities <strong>Litigation</strong> Uniform Standards Act.<br />
Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261 (S.D.N.Y. 2012).<br />
I.<br />
Investors brought a putative securities fraud class action against Goldman Sachs Group,<br />
Inc. Among other things, plaintiffs alleged that Goldman failed to disclose its receipt of Wells<br />
Notices in connection with its role in certain synthetic collateralized debt obligations. Plaintiffs<br />
362
claimed that Regulation S-K and FINRA and NASD rules required such disclosure. However,<br />
the court dismissed plaintiffs’ claim to the extent that it was based on a violation of SRO rules<br />
because such rules do not confer private rights of action.<br />
Holladay v. CME Group, No. 11-CV-8226, 2012 WL 5845621 (N.D. Ill. 2012).<br />
The court dismissed claims brought against the Chicago Mercantile Exchange, CME<br />
Group (“CME”) and related entities pursuant to Section 22 of the Commodity Exchange Act<br />
(“CEA”) and CME rules. Plaintiff, a former employee of defendants, sued the SROs for<br />
employment discrimination and sexual harassment. Plaintiff’s complaint also included a claim<br />
pursuant to Section 22, which provides a private right of action to any person for damages<br />
sustained while engaging in a transaction subject to the rules of the SRO. The court dismissed<br />
the claim, finding that Section 22 has been interpreted to apply only to persons injured by<br />
violations of the CEA in connection with trading on a contract market. It did not apply to<br />
employees alleging employment discrimination under the SRO’s rules regarding discrimination.<br />
NASDAQ OMX PHLX, Inc. v. PennMont Sec., 52 A.3d 296 (Pa. Super. Ct. 2012).<br />
Plaintiff NASDAQ OMX PHILX, Inc. (“Exchange”) sued PennMont Securities<br />
(“PennMont”), a member of the Exchange, for breach of contract. The Exchange alleged that<br />
PennMont failed to pay an invoice for the Exchange’s legal fees in accordance with Exchange<br />
Rule 651, a fee shifting provision that required a member of the Exchange to reimburse the<br />
Exchange for its legal fees if the member did not prevail in an action it initiated against the<br />
Exchange. The Exchange invoked Rule 651, billing PennMont for its legal fees, after PennMont<br />
was unsuccessful in an action it brought against the Exchange. In resolving the issue of whether<br />
the state court had jurisdiction to hear the Exchange’s breach of contract claim, the court first<br />
considered whether the Exchange had authority to bring a private right of action to enforce Rule<br />
651. The court held the Exchange had no authority to initiate a private right of action to collect<br />
disciplinary fines imposed by Rule 651, a rule enacted by the Exchange pursuant to the federal<br />
Securities Exchange Act of 1934. The court found that a private right of action would not be<br />
implied based on Congressional silence, especially where Congress explicitly authorized private<br />
rights of action for other sections of the Exchange Act.<br />
I.<br />
I.<br />
Jirak v. Eichten, No. A11-1388, 2012 WL 2505748 (Minn. Ct. App. July 2, 2012).<br />
I.<br />
Appellants challenged the district court’s determination that Eleanor Eichten made a<br />
valid 2006 inter vivos gift to her daughter Ellen Jirak and her grandson Timothy Jirak, a<br />
representative of Ameriprise Financial Services, Inc. For the first time on appeal, appellants<br />
asserted a violation of a Financial Industry Regulatory Authority (“FINRA”) rule. The court<br />
declined to address appellants’ FINRA violation argument, noting that it was not included in any<br />
pleadings to the district court. The court also noted that it was unclear whether FINRA creates a<br />
private right of action for those affected by a breach of FINRA members’ rules of conduct.<br />
363
J. RICO<br />
J.<br />
Yannotti v. U.S., 475 Fed. Appx. 784 (2d Cir. 2012).<br />
Defendant, a federal inmate convicted of conspiracy under RICO and an alleged member<br />
of the Gambino organized crime family, filed a motion to vacate, set aside, or correct his<br />
sentence. In support of his RICO conviction, the government adduced extensive evidence that<br />
two foreseeable predicate acts were committed during the limitations period. Specifically, there<br />
was extensive testimony detailing the Gambino family’s extortion of the construction industry<br />
and the Gambino family’s securities fraud. Defendant’s trial counsel admitted that he was<br />
unaware that defendant could be convicted of RICO conspiracy on the basis of two timely<br />
predicate acts, where defendant was neither named as a participant nor personally involved. On<br />
appeal, defendant alleged that counsel’s failure to understand the law constituted ineffective<br />
assistance of counsel and required a new trial. Without addressing whether counsel was<br />
deficient due to his misunderstanding of RICO conspiracy law, the Second Circuit concluded<br />
that defendant could not prevail on his ineffective assistance of counsel claim because there was<br />
substantial evidence that he was a member of the organized crime family, he failed to provide a<br />
specific line of attack for counsel to pursue, and the jury was properly instructed about RICO<br />
conspiracy law.<br />
Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir. 2012).<br />
Buyer brought an action against an auction house, alleging that the value of wine<br />
purchased by buyer was inflated on account of it being falsely attributed to the collection of<br />
former President Thomas Jefferson. Plaintiff purchased four bottles of the now-discredited<br />
“Jefferson wines” from third-party dealers in November and December of 1998, allegedly<br />
relying on promotional representations made by the auction house. In 2008, the parties agreed to<br />
toll the statute of limitations with respect to any claims against the auction house arising out of<br />
the Jefferson wine sales. In 2010, plaintiff asserted a civil claim against the auction house under<br />
RICO. The district court dismissed the RICO claim as time-barred. The Second Circuit<br />
affirmed. It held that RICO claims are subject to a four-year statute of limitations and accrual<br />
began no later than at the time when buyer submitted the wine for testing. Plaintiff contended<br />
that the district court erred with respect to what facts must be discovered for a RICO claim to<br />
accrue. The Second Circuit held that 28 U.S.C. § 1658(b), which applies to securities fraud<br />
actions, does not apply to RICO actions. The civil RICO statute is silent on the issue, and in<br />
such circumstances, federal courts generally apply a discovery accrual rule. In applying the<br />
discovery accrual rule, the court concluded that discovery of the injury, not discovery of the<br />
other elements of the claim, begins the statute of limitations.<br />
J.<br />
364
J.<br />
Gilmore v. Gilmore, No. 11-4091-CV, 2012 WL 5935341 (2d Cir. Nov. 28, 2012).<br />
The District Court for the Southern District of New York granted defendants’ motion for<br />
summary judgment on the ground that plaintiff’s RICO claim was barred by the Private<br />
Securities <strong>Litigation</strong> Reform Act. On appeal, plaintiff argued that the district court erred in<br />
deciding not to split the alleged predicate acts into two separate enterprises asserted under RICO.<br />
The Second Circuit disagreed, noting that: (1) the two sets of predicate acts shared an alleged<br />
purpose and result, defrauding other siblings; (2) the alleged victims were the same; and (3) the<br />
only arguable difference was the alleged method of taking money out of the companies by<br />
charging finders’ fees, rather than making representations to acquire stock from the siblings on<br />
favorable terms. Because the predicate acts were related to a single RICO enterprise, the court<br />
held that the district court properly refused plaintiff an opportunity to amend his complaint to<br />
split the predicate acts into two separate RICO enterprises.<br />
Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783 (6th Cir. 2012).<br />
Employers brought class action lawsuit against various insurance companies, attorneys,<br />
and insurance agents, who marketed and sold a purportedly tax-deductible welfare benefit plan,<br />
alleging that defendants conspired in violation of RICO to defraud employers into adopting plans<br />
that purchased variable life insurance policies that qualified as securities. Defendants argued that<br />
even though plaintiffs did not allege securities fraud, their complaint could present a claim for<br />
violation of securities laws and is thus barred by the Private Securities <strong>Litigation</strong> Reform Act<br />
(“PLSRA”). Plaintiffs responded that they did not allege fraud relating to the purchases by the<br />
plan. Further, plaintiffs’ fraud claim related to tax consequences of the plan, and it was merely<br />
incidental that the policies were securities. The Sixth Circuit found that the securities<br />
transactions were not integral to or “in connection with” the fraudulent scheme as a whole.<br />
Thus, because the fraud and the securities transactions were essentially independent events, the<br />
PSLRA did not bar plaintiffs’ RICO claims.<br />
Son Ly v. Sonlin, Inc., No. 12-CV-1004 (EGS), 2012 WL 6561557 (D.D.C. Dec. 17, 2012).<br />
Plaintiffs alleged that defendant corporations Solin and LPK were “enterprises” within<br />
the meaning of RICO. Plaintiffs alleged that defendants’ pattern of racketeering activity<br />
included the fraudulent execution of a promissory note for stock in the defendant corporations.<br />
Plaintiffs further alleged that defendants engaged in numerous overt and predicate fraudulent<br />
racketeering acts in furtherance of the conspiracy, including the commission of fraud in the sale<br />
of securities in violation of 18 U.S.C. § 1961(1)(D). The district court concluded that plaintiffs<br />
wholly failed to set forth a RICO claim under Section 1962(c). First, plaintiffs alleged only one<br />
predicate act, despite the requirement by statute of at least two predicate acts. Because plaintiffs<br />
alleged only one predicate act, plaintiffs could not establish the elements of relatedness and<br />
J.<br />
J.<br />
365
continuity. Further, the court found that plaintiffs failed to allege a threat of continued criminal<br />
activity. With respect to plaintiffs’ claim for conspiracy to violate RICO under Section 1962(D),<br />
the court noted that plaintiffs merely incorporated by reference their allegations of a single-event<br />
based on alleged securities fraud committed by Intavong and Surachai. Accordingly, the court<br />
held that plaintiffs failed to establish that “two or more people agreed to commit a RICO<br />
violation,” a necessary element for a RICO conspiracy claim.<br />
Cabacoff v. Wells Fargo Bank, N.A., No. 12-CV-56-PB, 2012 WL 5392545 (D.N.H. Nov. 5,<br />
2012).<br />
Pro se plaintiff sued several entities that owned, serviced, or had some other connection<br />
to his residential mortgage loan, challenging the process by which his loan was securitized.<br />
Among other things, plaintiff argued that the process of pooling his loan with other loans and<br />
using the loans as security for other investments violated securities laws, antitrust laws, tax laws,<br />
and RICO. The court determined that plaintiff’s RICO claim suffered from multiple<br />
deficiencies. Although plaintiff alleged generally that defendants engaged in a fraudulent<br />
scheme, he failed to plead two predicate acts of fraud with particularity, a requirement for a<br />
viable RICO claim. Further, the court concluded that plaintiff did not sufficiently allege that his<br />
claimed injuries were proximately caused by defendants’ predicate acts of racketeering. Plaintiff<br />
could not recover on his RICO claim without proof that his claimed injuries were caused by the<br />
alleged pattern of racketeering activity.<br />
Calderon Serra v. Banco Santander Puerto Rico, No. 10-1906 GAG, 2012 WL 3067609 (D.<br />
Puerto Rico Jul. 30, 2012).<br />
Plaintiffs brought action against Banco Santander Puerto Rico (“BSPR”), arising from<br />
various BSPR loans that were issued to purchase investments, which caused significant financial<br />
losses. Plaintiffs alleged that they had a custodial bank account with BSPR. BSPR informed<br />
plaintiffs that $9,000,000 would be available on loan for the purchase of securities through<br />
BSPR’s subsidiary. Plaintiffs signed a series of blank loan applications, which bank personnel<br />
later filled in. Plaintiffs claimed that defendants subsequently traded $5,000,000 worth of<br />
securities in plaintiffs’ names. Plaintiffs alleged that they suffered losses estimated to be<br />
$2,947,420.25 due to the decreased value of these securities. Plaintiffs asserted a RICO claim.<br />
Defendants moved for dismissal, arguing that the Private Securities <strong>Litigation</strong> Reform Act<br />
(“PSLRA”) preempted plaintiffs’ ability to sue under RICO. Plaintiffs alleged that the violations<br />
did not involve the purchasing and selling of securities. Rather, the acts described in the<br />
complaint constituted bank fraud. The court disagreed, holding that the action stemmed from the<br />
purchase and sale of securities, and was therefore preempted by PSLRA.<br />
J.<br />
J.<br />
366
Saunders v. Principal Residential Mortgage, Inc., No. 11-cv-1817 (VLB), 2012 WL 4321974<br />
(D. Conn. Sept. 20, 2012).<br />
Foreclosed homeowner sued lender and financial institutions involved in securitization of<br />
plaintiff’s mortgage for violations of RICO and the securities laws. Among other things, the<br />
plaintiff alleged that defendants failed to properly securitize her loan and thus unlawfully<br />
foreclosed on plaintiff’s home. The court dismissed plaintiff’s securities claim for insufficient<br />
conclusory pleading. Similarly, the court dismissed plaintiff’s RICO claim for failure to allege<br />
specific facts establishing an enterprise or a pattern of racketeering activity.<br />
Velecela v. WMC Mortgage Corp., No. 3:11-cv-1720 AWT, 2012 WL 5868125 (D. Conn. Nov.<br />
19, 2012).<br />
Plaintiffs signed a note for $156,000 to purchase real property. Defendant was the lender<br />
under the note. Plaintiffs alleged that defendant violated the RICO statute by attempting to<br />
fraudulently take over Plaintiff’s real property and presenting false documents to the court. The<br />
court held that the complaint failed to state a RICO claim because it did not allege facts<br />
establishing a pattern of conduct that would constitute racketeering activity.<br />
Dorn v. Berson, No. 09-CV-2717 ADS AKT, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).<br />
The Eastern District of New York dismissed a RICO action brought by an investor<br />
against her financial advisor because the claims were barred under the Private Securities<br />
<strong>Litigation</strong> Reform Act. Plaintiff alleged that defendant advised her to invest in excess of<br />
$80,000 in a fund offering 12% annual returns and which could be liquidated at any time. When<br />
the investor sought to roll over her investment into an IRA, the defendant advised that someone<br />
at the fund had used her investment to purchase certain stock, and that she could not liquidate her<br />
investment. Plaintiff sued the advisor for securities fraud and RICO violations, among other<br />
claims. Although the defendant defaulted, the court found that plaintiff could not recover on the<br />
RICO claims because they involved securities fraud and were thus barred by the Private<br />
Securities <strong>Litigation</strong> Reform Act.<br />
SEC v. Wyly, 860 F. Supp. 2d 275 (S.D.N.Y. 2012).<br />
In July 2010, the S.E.C. brought a securities enforcement action against defendant for<br />
securities law violations. The S.E.C. sought civil penalties, injunctive relief, and disgorgement.<br />
Thereafter, defendant died in an automobile accident, and the S.E.C. dropped its requests for<br />
injunctive relief and monetary penalties. However, it maintained the disgorgement claim and<br />
J.<br />
J.<br />
J.<br />
J.<br />
367
sought to substitute as defendant the executor of defendant’s estate. The executor opposed the<br />
motion, arguing that the disgorgement claim was non-compensatory, and thus did not survive<br />
defendant’s death. The court rejected this argument, citing the survivability of disgorgement<br />
claims in the RICO context, and finding that, although disgorgement may not be compensatory,<br />
it seeks to prevent the unjust enrichment of the defendant and, in this case, defendant’s heirs.<br />
TAGG Mgmt. v. Lehman, 842 F. Supp. 2d 575 (S.D.N.Y. 2012).<br />
The Southern District of New York granted in part a motion to dismiss filed by defendant<br />
business entities and individuals based in the People’s Republic of China for defective service of<br />
process and lack of personal jurisdiction. Plaintiff investors placed approximately one million<br />
dollars into escrow for investment in a Chinese credit card business, which was not returned after<br />
the relationship between the parties deteriorated. Plaintiffs sued for, among other claims,<br />
violations of the securities laws and RICO Act. However, because none of the defendants’<br />
alleged fraudulent acts occurred in New York, and plaintiffs attempted to serve defendants at an<br />
address in New York not shown to be defendants’ actual place of business, the court dismissed<br />
the action against all but two of the corporate defendants, which had consented to service and<br />
personal jurisdiction.<br />
Boudinot v. Shrader, No. 09 CIV. 10163 LAK, 2012 WL 489215 (S.D.N.Y. Feb. 15, 2012).<br />
Plaintiffs were former officers of defendant Booz Allen Hamilton Inc. (“BAH”).<br />
Plaintiffs filed suit against BAH, its former chief executive officer Sharder, and a number of<br />
other former BAH officers, alleging securities fraud and RICO violations. Plaintiffs alleged that<br />
the BAH defendants orchestrated a plan to force certain BAH officers, including plaintiffs, to<br />
retire and sell their shares under BAH’s officers’ stock rights plan and/or redeem their rights<br />
under its shadow stock plan before BAH’s government sector was sold. Plaintiffs alleged that<br />
the scheme wrongfully denied them economic benefits so that the remaining BAH officers would<br />
receive higher profits. The court found that the RICO claims were based on alleged fraud in<br />
connection with the sale of a security and were therefore barred by the Private Securities<br />
<strong>Litigation</strong> Reform Act.<br />
Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012).<br />
The Southern District of New York dismissed an action for RICO violations brought by<br />
the Bankruptcy Trustee for the estate of Bernard L. Madoff Investment Securities LLC<br />
(“Madoff”) against various individuals, financial institutions, and feeder funds. The trustee<br />
alleged that the defendants participated in an extensive criminal enterprise to feed investor funds<br />
to Madoff in order to perpetuate Madoff’s Ponzi scheme. Plaintiff claimed that had defendants<br />
not delivered the funds to Madoff, his Ponzi scheme could not have continued as long or caused<br />
J.<br />
J.<br />
J.<br />
368
as much harm as it did. The court dismissed the RICO claims, arguing that plaintiff failed to<br />
establish how defendants’ alleged activities proximately caused the losses sustained under<br />
Madoff’s Ponzi scheme. The court also found that the RICO claims involved securities fraud<br />
and were thus barred by the Private Securities <strong>Litigation</strong> Reform Act. In doing so, it rejected the<br />
trustee’s argument that the alleged criminal enterprise did not involve securities fraud because it<br />
concerned only transactions in foreign securities, to which the Securities Exchange Act did not<br />
apply.<br />
Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Group, Inc., No. 11 Civ. 5832 AJN,<br />
2012 WL 3542196 (S.D.N.Y. Aug. 15, 2012).<br />
Defendant FBR Capital Trust purchased assets held by certain CDOs. The CDOs<br />
generated income from a portfolio of underlying assets, which was paid out in a “waterfall” to<br />
investors holding securities issued by the CDOs in tranches corresponding to varying degrees of<br />
risk. The most junior stakeholders held only equity in the CDOs and were at the bottom of the<br />
waterfall of payments. At one time, the portfolio collateral included $35 million in debt<br />
securities (TruPS) issued by defendant. Plaintiff contended that defendant purported to repurchase<br />
the TruPS for a total of $5.25 million. Plaintiff brought a RICO claim against<br />
defendant, alleging that the repurchase of the TruPS was part of a fraudulent scheme to<br />
extinguish $300 million of defendant’s debt. Plaintiff alleged commercial bribery, mail fraud,<br />
and wire fraud as the predicate acts of racketeering activity under the RICO claim. The court<br />
dismissed the RICO claim because plaintiff did not allege that it suffered a clear and definite<br />
RICO injury. First, plaintiff’s allegations did not establish that it had actually been harmed by<br />
the sale of the TruPS. Although the sale of the TruPS decreased the amount of collateral<br />
generating income for the noteholders, plaintiff did not allege a payment default or a shortfall of<br />
funds generated by the CDOs. Second, plaintiff’s RICO claim was premature because plaintiff<br />
did not fully pursue its other remedies that might reduce or eliminate the alleged injury, a<br />
prerequisite to asserting a RICO claim. Further, plaintiff’s RICO damages were not clear and<br />
definite and no RICO cause of action had yet accrued.<br />
Zazzali v. Swenson, 852 F.Supp.2d 438 (D. Del. 2012).<br />
A bankruptcy trustee filed suit against numerous individuals and corporations alleging<br />
violations of the federal and Idaho RICO Acts and violations of the Idaho securities laws.<br />
Defendants sought dismissal of the case on the grounds that the District of Delaware is the<br />
improper venue. The court concluded that the District of Delaware was a proper venue because<br />
plaintiffs’ allegations of defendants’ scheme to commit securities fraud “sufficiently linked the<br />
alleged dissemination of false and misleading materials to a Delaware investor, who was an<br />
alleged victim of the fraud.” Based on the court’s finding that venue was proper for the<br />
securities fraud claims, the court also found that the district court was the appropriate venue for<br />
the RICO claims. The court emphasized that the complaint alleged RICO violations and<br />
J.<br />
J.<br />
369
securities fraud claims which arose from the same common nucleus of operative fact—namely,<br />
defendants’ fraudulent representations to potential investors.<br />
Zazzali v. Hirschler Fleischer, P.C., 482 B.R. 495 (D. Del. 2012).<br />
The trustee of a litigation trust created pursuant to a confirmed Chapter 11 plan of DBSI,<br />
Inc. brought an action against the law firm that had acted as debtors’ counsel pre-petition,<br />
alleging violation of the RICO Act and Idaho’s RICO statute. Plaintiff alleged that defendant<br />
drafted memoranda informing investors that DBSI was a successful real estate holding company<br />
with a history of successful and sophisticated real estate ventures, in which no investor had ever<br />
lost money. The complaint alleged that the DBSI enterprises were created “for the purpose of<br />
carrying on a fraudulent Ponzi scheme and to cheat investors,” and that members of the<br />
enterprise used the memoranda to defraud investors into buying syndications. Finding that the<br />
complaint explicitly alleged that the syndications were sold by a “securities” corporation and that<br />
the plaintiff admitted that its interests in the syndications were in fact securities, the court held<br />
that the securities fraud exception barred plaintiff’s claims and concluded that the complaint<br />
failed to adequately plead a violation of the federal or Idaho RICO statutes. The court also<br />
concluded that the complaint failed to adequately plead the requisite elements of the underlying<br />
racketeering activity of mail fraud or wire fraud and that defendant conducted a RICO enterprise.<br />
Prudential Ins. Co. of Am. v. J.P. Morgan Secs., LLC, No. 12-CV-3489 (WHW), 2012 U.S. Dist.<br />
LEXIS 181464 (D.N.J. Dec. 12, 2012).<br />
The New Jersey District Court remanded an action brought by plaintiff insurance<br />
companies against several mortgage securities firms for, among other things, New Jersey Civil<br />
RICO violations. Plaintiffs alleged that due to defendants’ abandonment of their disclosed<br />
underwriting guidelines, default rates on mortgage loans increased, resulting in a decline in the<br />
value of plaintiffs’ mortgage-backed certificates. Defendants removed the claims to federal<br />
court as related to ongoing bankruptcy proceedings because the defendants had indemnification<br />
agreements with the loan originators and several of the loan originators were involved in<br />
bankruptcy proceedings. The court remanded, finding that the claims concerned untrue<br />
statements by the defendants and were not related to any liability by the loan originators.<br />
Rabin v. McClain, No. 10-CV-981-XR, 2012 WL 1448107 (W.D. Tex. Apr. 25, 2012).<br />
Plaintiff brought a securities fraud and RICO action against defendant entities and<br />
individuals who sold plaintiff stock in a fake pharmaceutical investment venture. Plaintiff served<br />
defendants, who did not answer, and the court granted plaintiff’s motion for default judgment.<br />
J.<br />
J.<br />
J.<br />
370
Gen. Ret. System of City of Detroit v. Onyx Capital Advisors, LLC, No. 10-CV-11941, 2012 WL<br />
1018949 (E.D. Mich. Mar. 26, 2012).<br />
Plaintiff pension funds brought a civil RICO and securities fraud action against Onyx<br />
Capital Advisors and related entities, alleging that defendants made material misrepresentations<br />
in connection with the establishment of a new fund. Plaintiffs partnered with Onyx to form the<br />
new fund, each contributing several million dollars to the new fund, but alleged that the<br />
defendants misrepresented the nature of the new fund’s investments. The court granted default<br />
judgments as to certain defendants as to liability, but denied damages, which plaintiffs had not<br />
adequately supported.<br />
Bradley v. Miller, No. 10-CV-760, 2012 WL 4447454 (S.D. Ohio Sept. 25, 2012).<br />
Plaintiffs asserted claims under the Ohio Pattern of Corrupt Activity statutes, which<br />
prohibit conduct similar to that prohibited by the federal RICO Act. Plaintiff alleged that<br />
defendant perpetuated a fraudulent “real estate/securities Ponzi scheme” by persuading<br />
unsophisticated persons to invest in Capital Investments and Great Miami Debentures, promising<br />
guaranteed rates of return and 100% guarantee of principal. The court noted that the Ohio antiracketeering<br />
law is broader than the federal RICO Act, such that a plaintiff could bring a claim<br />
under Ohio law where one of the predicate acts is securities fraud, so long as the plaintiff alleges<br />
“at least one predicate act that is not a form of securities fraud, mail or wire fraud, or the<br />
interstate transportation of stolen property or securities.” Defendant argued that plaintiffs’<br />
allegations—that defendant sold unregistered securities to unidentified purchasers, at unspecified<br />
dates and times—were simply insufficient to establish conduct that constitutes an indictable<br />
criminal offense under any Ohio statute that would form any “predicate offense” under Ohio’s<br />
RICO statute. In response, plaintiffs argued that the sales were sufficiently “related” to the<br />
alleged RICO enterprise, because defendant was involved in selling illegal securities, and was an<br />
agent and/or employed as a salesman by Capital Investments. The court concluded that the<br />
complaint failed to allege the predicate act of securities fraud, because it failed to allege that<br />
defendant sold any unregistered securities on any particular date to either any of the plaintiffs in<br />
the case, or to any other specific person. In addition, the court concluded that plaintiff failed to<br />
plead a second predicate act of money laundering because the defendant’s alleged deposit of<br />
monies from alleged securities fraud alone was not sufficient to establish money laundering.<br />
Jones v. U.S. Bank Nat’l Ass’n, No. 10 CV 0008, 2012 WL 899247 (N.D. Ill. Mar. 15, 2012).<br />
The Northern District of Illinois dismissed RICO claims brought by a pro se foreclosed<br />
homeowner against the lender for inadequate pleading. Plaintiff claimed that the lender made<br />
various fraudulent misrepresentations to plaintiff at the closing, during the loan securitization<br />
process, and during the foreclosure process, and that consequently the lender’s foreclosure on<br />
J.<br />
J.<br />
J.<br />
371
plaintiff’s home was fraudulent. To the extent that the alleged fraudulent activity involved the<br />
securitization of the mortgage note, the court found that such activity could not be the basis of a<br />
RICO claim because the Private Securities <strong>Litigation</strong> Reform Act bars plaintiffs from bringing<br />
securities fraud claims as RICO claims.<br />
MJK Partners, LLC v. Husman, 877 F.Supp.2d 596 (N.D. Ill. 2012).<br />
Investors brought an action against defendant, asserting a claim for violation of the RICO<br />
Act. Plaintiffs alleged that they invested money in various projects through defendant, and that<br />
defendant misappropriated funds that should have gone to them from each of the investments.<br />
Defendant moved for summary judgment, arguing that plaintiffs’ RICO claim was barred by the<br />
Private Securities <strong>Litigation</strong> Reform Act “(PSLRA”). The court granted defendant’s motion as<br />
to the RICO claim, finding that defendant’s conduct was actionable under the Securities<br />
Exchange Act, and thus plaintiffs’ RICO claims were barred by the PSLRA.<br />
Martinek v. Diaz, No. 11 C 7190, 2012 WL 2953183 (N.D. Ill Jul. 18, 2012).<br />
Plaintiffs alleged that defendant proposed to plaintiffs that they should join together to<br />
start a Vini’s Pizza in the Lincoln Park neighborhood of Chicago. Defendant told plaintiffs that<br />
Vini’s Pizza in Palatine was netting over $1 million per year, and sent a summary and<br />
projections for the Lincoln Park business to plaintiffs via mail. Plaintiffs alleged that this<br />
information was known to be false, and was provided with the intent to induce plaintiffs to invest<br />
with defendant. As a result of these misrepresentations, plaintiffs agreed to purchase securities.<br />
Plaintiffs filed a complaint alleging, among other things, violations of the Illinois Securities Act<br />
and violations of the RICO Act. The court concluded that plaintiffs’ RICO claim failed for<br />
several reasons: (1) plaintiffs proceeded under the “association-in-fact” enterprise theory, but<br />
failed to define the enterprise sufficiently or set out any type of organizational structure or<br />
hierarchy for the enterprise; (2) plaintiffs failed to plead the relationship and continuity prongs to<br />
satisfy the pattern of racketeering activity requirement of a RICO claim; (3) plaintiffs’<br />
allegations of fraud did not meet the particularized pleading standard of Rule 9(b) and (4) the<br />
Private Securities <strong>Litigation</strong> Reform Act barred plaintiffs’ RICO claims because plaintiffs, by<br />
their own admission, were purchasers of securities.<br />
Negrete v. Allianz Life Ins. Co. of N. Am., Nos. CV 05-6838 CAS (MANx), CV 05-8908 CAS<br />
(MANx), 2012 WL 6737390 (C.D. Cal. Dec. 28, 2012).<br />
Defendant moved to decertify a nationwide class as to plaintiffs’ RICO claim. In the<br />
complaint, plaintiffs alleged that defendant conspired with a network of field marketing<br />
organizations to induce class members to purchase deferred annuities issued by defendant based<br />
on misrepresentations and omissions regarding the value of those annuities. Addressing the<br />
J.<br />
J.<br />
J.<br />
372
predominance requirement of Rule 23(b)(3), the court noted that any RICO claim for damages<br />
also requires proof of an injury to “business or property by reason of a violation of section<br />
1962.” With respect to the statute’s “by reason of” language and causation, the court stated that<br />
direct proof of reliance by way of signed Statements of Understanding (“SOUs”) was<br />
insufficient, standing alone, to establish a causal link between the alleged misrepresentations<br />
which induced the purchase of annuities and the harm suffered by class members. While the<br />
SOUs were compelling evidence that all class members were exposed to them, standardized<br />
written presentations could establish proximate causation only when coupled with plaintiffs’<br />
allegations that the annuity products at issue were “far less valuable than other comparable<br />
products” or were worth far less than what class members paid for them. Plaintiffs also argued<br />
that causation could be demonstrated on a class-wide basis because reliance on defendant’s<br />
alleged misrepresentations was the “common sense” or “logical explanation” for class members’<br />
purchasing decisions. Importantly, plaintiffs alleged that “Allianz annuities are inferior in value<br />
and performance to alternative investment products” and that Allianz annuities are inferior to<br />
other investments even without the alleged misrepresentations at issue in the litigation. The<br />
court concluded that the alleged inferiority of Allianz annuities in value and performance gave<br />
rise to an inference that customers decided to purchase the “inferior” annuities because of the<br />
standardized marketing materials at issue in the litigation, “for they otherwise had no reason to<br />
do so.” Because proof that at least some class members relied on the alleged misrepresentations<br />
could be shown on a class-wide basis, the court held that plaintiffs could demonstrate that all<br />
class members were injured by defendant’s alleged misrepresentations through a price increase<br />
or overcharge, such that common issues predominated over individual issues. Accordingly, the<br />
court concluded that plaintiffs offered a method for demonstrating reliance and causation on a<br />
class-wide basis, and denied defendant’s motion to decertify the RICO class.<br />
Reyes v. WMC Mortgage Corp., No. C 11-01988 CW, 2012 WL 1067560 (N.D. Cal. Mar. 28,<br />
2012).<br />
Plaintiffs obtained two loans from defendant WMC Mortgage Corporation. Thereafter, a<br />
Notice of Default was recorded because plaintiffs were delinquent on their payments on the first<br />
mortgage. After a subsequent sale of the property, plaintiffs filed a complaint alleging that<br />
defendants did not fully disclose the terms of the loan, sold plaintiffs a loan they could not<br />
afford, defendants failed to draft and explain the loan to plaintiffs in their native language, and<br />
defendants fraudulently foreclosed on plaintiffs’ home. Plaintiffs asserted a claim under the<br />
RICO Act, alleging that defendants worked closely together and committed mail fraud, wire<br />
fraud and securities fraud. The court dismissed plaintiffs’ RICO claim with leave to amend<br />
because the complaint failed to distinguish among any of the defendants and to provide specific<br />
facts indicating how plaintiffs were defrauded by each defendant, and therefore failed to satisfy<br />
the heightened pleading requirements for a RICO claim based on fraudulent acts.<br />
J.<br />
373
Tapang v. Wells Fargo Bank, N.A., No. CV-12-02183-LHK, 2012 WL 3778965 (N.D. Cal. Aug.<br />
30, 2012).<br />
Plaintiff brought an action against defendants, asserting violation of the RICO Act,<br />
among other claims, in connection with defendants’ non judicial foreclosure of her home. The<br />
court granted defendants’ motion to dismiss the RICO claim, finding that although plaintiff<br />
generally alleged mail, wire, financial institution, and securities fraud as the predicate acts for<br />
her RICO claim, she failed to allege with particularity the time, place, and manner of even a<br />
single predicate act of fraud, let alone two, and therefore did not satisfy the heightened pleading<br />
requirements of Rule 9(b).<br />
Uthe Tech. Corp. v. Aetrium, Inc., No. C 95-02377 WHA, 2012 WL 4470536 (N.D. Cal. Sept.<br />
27, 2012).<br />
A manufacturer and distributor of semiconductor equipment sued another manufacturer<br />
of semiconductor equipment and its former officer, alleging that defendants conspired to create a<br />
new corporation to take over plaintiff’s wholly-owned subsidiary located in Asia. Defendants<br />
allegedly made several misrepresentations to plaintiff, concealed efforts to destroy plaintiff’s<br />
Asian operations, and contacted plaintiff’s customers asking them to terminate their relationships<br />
with plaintiff. As a result of defendants’ conduct, plaintiff allegedly was forced to sell its shares<br />
its subsidiary at a depressed price. Plaintiff alleged, among other things, securities fraud and<br />
civil RICO violations. Defendants moved to dismiss, arguing that plaintiff could not meet<br />
RICO’s pattern or enterprise continuity requirement. The court denied defendants’ motion to<br />
dismiss plaintiff’s RICO claims, finding that although defendants’ scheme was not alleged to<br />
have lasted more than six months, the Ninth Circuit has not adopted a bright-line rule as to what<br />
constitutes a “substantial period,” and it could not be determined at the pleading stage whether a<br />
six-month period constitutes a “substantial period” of time to establish a continuous pattern or<br />
enterprise under the RICO statute.<br />
Hardisty v. Moore, No. 11 CV 1591 AJB BLM, 2012 WL 1564533 (S.D. Cal. May 2, 2012).<br />
Plaintiff, a real estate developer, sued the defendants, members of a limited liability<br />
company established to acquire an interest in an apartment project, for securities fraud and RICO<br />
violations after defendants allegedly divested plaintiff of his interest through fraud. Plaintiff<br />
alleged that defendants tricked him into signing various documents that surrendered his interest<br />
in the LLC. The court dismissed plaintiff’s RICO claim, finding that a RICO claim requires that<br />
plaintiff allege a pattern or continued threat of criminal activity. Plaintiff’s alleged single<br />
instance of fraud did not amount to a pattern of criminal activity.<br />
J.<br />
J.<br />
J.<br />
374
J.<br />
Langley v. Jones, No. 11-CV-774-PK, 2012 WL 2019522 (D.Or. May 18, 2012).<br />
Self-represented plaintiffs brought action for elder abuse and related civil RICO<br />
violations in connection with the defendants’ alleged financial abuse of an elder. Plaintiffs<br />
alleged, among other things, that defendants had stolen plaintiffs’ property and arranged for a<br />
wind farm to be erected thereon. The court dismissed plaintiffs’ claim as unintelligible and for<br />
lack of jurisdiction over what appeared to be state law claims. The court further dismissed<br />
plaintiffs’ RICO claim for failure to plead a RICO enterprise and because, to the extent that<br />
plaintiffs relied on allegations of securities fraud to establish the RICO claim, securities fraud is<br />
not actionable under RICO.<br />
Nova Leasing, LLC v. Sun River Energy, Inc., No. 11-CV-00689-CMA-BNB, 2012 WL 3778332<br />
(D. Colo. Aug. 31, 2012).<br />
Plaintiff asserted claims for violations of the Colorado Securities Act (aiding and abetting<br />
securities fraud) and the Colorado Organized Crime Control Act (“COCCA”). Defendants<br />
argued that plaintiff failed to state a claim under COCCA because plaintiff had not “sufficiently<br />
alleged a pattern of racketeering activity.” The court found defendants’ position unpersuasive.<br />
Under the COCCA, a pattern of racketeering activity is defined as “engaging in at least two acts<br />
of racketeering which are related to the conduct of the enterprise, if at least one of such acts<br />
occurred in the state after July 1, 1981, and if the last of such acts occurred within ten years …<br />
after a prior act of racketeering activity.” The court noted that plaintiff alleged two or more acts<br />
of civil theft and a claim against defendants for aiding and abetting securities fraud, which<br />
constituted an additional predicate act under the COCCA.<br />
Boulware v. Baldwin, No. 11-CV-762 TS, 2012 WL 1412698 (D. Utah Apr. 23, 2012).<br />
Plaintiffs invested in two entities managed by defendant. Plaintiff alleged that he was<br />
defrauded during his relationship with both entities. Plaintiff alleged that SF5, one of the<br />
entities, was formed to purchase loans secured by real property. After acquiring the loans, SF5<br />
would seek to add to the loans by selling them, working out new terms with borrowers, attracting<br />
new tenants and/or foreclosing on the real property securing the loans. Plaintiff subsequently<br />
learned that SF5 had been using proceeds from the loans to pay down other loans and make<br />
distributions. After demanding all distributions owed, plaintiff did not receive any distributions.<br />
Plaintiff filed an action against defendants asserting a violation of the Federal RICO Act.<br />
Defendants argued that the Private Securities <strong>Litigation</strong> Reform Act “(PSLRA”) preempts<br />
plaintiffs’ RICO claim and that plaintiffs’ RICO claim was not sufficiently pleaded. The court<br />
found that the alleged acts underlying plaintiff’s RICO claim were taken in connection with the<br />
purchase of a security and thus could not support a RICO claim under the PSLRA.<br />
J.<br />
J.<br />
375
McGee v. S-Bay Dev., LLC, No. 11-CV-1091-T-27TGW, 2012 WL 760797 (M.D. Fla. Mar. 8<br />
2012).<br />
A Florida district court dismissed an action for RICO violations and securities fraud<br />
brought by the plaintiff purchasers of units in a condominium conversion project against the<br />
owners and developers of the property. Plaintiff alleged that defendant fraudulently<br />
misrepresented the legal status of the property as a condominium, the value of the condominium<br />
units, and various details regarding the condominium conversion and certain improvements to<br />
the property. The court held that plaintiffs failed to plead securities fraud and RICO with<br />
sufficient particularity under Rule 9(b) and that plaintiffs failed to establish that the purchase of<br />
the condominium units qualified as transaction in securities or an investment contract. However,<br />
the court rejected defendants’ argument that the RICO claims were subject to dismissal on the<br />
ground that plaintiffs failed to plead justifiable reliance, which is not an element of a RICO<br />
claim.<br />
Adams v. Rothstein, No. 11-61688-CIV, 2012 WL 1605098 (S.D. Fla. May 8, 2012).<br />
A Florida district court dismissed RICO claims brought by investors against a perpetrator<br />
of a large Ponzi scheme. Plaintiffs alleged that defendants sold interests in two Delaware limited<br />
partnerships that purportedly invested in structured settlements. However, the investment<br />
scheme and its returns were illusory and defendant was later convicted of securities fraud after<br />
the scheme collapsed. Plaintiffs alleged that they were defrauded in their purchase of structured<br />
settlements that did not exist, rather than in their purchase of interests in the funds. The court<br />
found that the plaintiffs’ limited partnership interests constituted securities and dismissed<br />
plaintiffs’ RICO claims as precluded under the Private Securities <strong>Litigation</strong> Reform Act. In<br />
doing so, the court rejected plaintiffs’ attempt to distinguish between the purchase of the<br />
structured settlements and plaintiffs’ purchase of securities in the funds.<br />
Robert L. Franklin Trustee of Global Liquidating Trust v. Consus Ethanol, LLC, No. 11-CV-<br />
4062-TWT, 2012 WL 3779093 (N.D. Ga. Aug. 29, 2012).<br />
Plaintiff filed a securities fraud action against an ethanol technology company and its<br />
board of directors, alleging that defendants made material misrepresentations that induced<br />
plaintiff to enter into two notes as part of plaintiff’s loan to the company, in violation of Georgia<br />
and federal RICO statutes. The court dismissed plaintiff’s federal RICO claim, finding that<br />
plaintiff failed to plead which subsection of § 1962 of the RICO Act defendants allegedly<br />
violated. The court also dismissed plaintiff’s Georgia RICO claim because plaintiff’s allegations<br />
of multiple misrepresentations constituted a single financing transaction rather than a “pattern of<br />
racketeering activity.”<br />
J.<br />
J.<br />
J.<br />
376
J.<br />
Eagletech Commc’ns, Inc. v. Bryn Mawr Inv. Group, Inc., 79 So. 3d 855 (Fla. App. 2012).<br />
A Florida appellate court affirmed the dismissal of a securities fraud and RICO complaint<br />
brought by a technology startup against its investors. Plaintiff Eagletech sought capital from the<br />
defendant investors to fund its business involving a proprietary telecommunications technology.<br />
The investors engaged in a series transactions to short the Eagletech stock either prior to<br />
acquisition or prior to conversion of other Eagletech securities. Eageltech sued the investors for,<br />
among other things, securities fraud and state RICO claims. The trial court dismissed the action<br />
and the appellate court affirmed, finding that Eagletech failed to establish that it has standing to<br />
bring the securities fraud claims as the purchaser or seller of the securities and that Eagletech<br />
failed to plead a sufficient number of criminal acts to establish “ongoing criminal behavior” by<br />
defendants under the Florida RICO statute.<br />
K. Damages and Other Relief in Private Actions<br />
1. Damages as Element of Claim<br />
K.1<br />
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).<br />
The district court granted Defendants’ motion to dismiss Plaintiff’s putative class action<br />
under the federal securities laws, which asserted claims based upon alleged false and misleading<br />
statements in 17 separate Prospectus Supplements pursuant to the same Shelf Registration<br />
Statement. The district court found that the lead Plaintiff lacked standing to assert claims on<br />
behalf of purchasers of securities different from the ones Plaintiff had purchased, and had failed<br />
to plead an out-of-pocket loss as required under Section 11 of the Securities Act of 1933. The<br />
Second Circuit affirmed in part and reversed in part. On the damages question, the court first<br />
noted that although a plaintiff need not plead damages under Section 11, the plaintiff must satisfy<br />
the court that it has suffered a cognizable injury. The court found that the term “value” in<br />
Section 11(e) means the security’s true value after the alleged misrepresentations are made<br />
public. In a market economy, when market value is available and reliable, market value will<br />
always be the primary gauge of worth, but “value” may not be equivalent to market price. The<br />
court found that Plaintiff had adequately pleaded a decline in value, and rejected Defendants’<br />
argument that a fixed income investor must miss an interest payment before his securities can be<br />
said to have declined in “value.” The revelation that borrowers of loans backing the securities at<br />
issue were less creditworthy than the offering documents represented affected the securities’<br />
“value” immediately, because it increased the securities’ credit risk profile. The Court of<br />
Appeals also rejected the district court’s conclusion that Plaintiff could not allege an injury based<br />
upon the hypothetical price of the securities on the secondary market because Plaintiff knew the<br />
securities might not be liquid. Section 11 presumes that any diminution in value is attributable to<br />
the alleged misrepresentations, and places the burden on defendants to disprove causation. The<br />
court also stated that the value of a security is not unascertainable simply because it trades in an<br />
illiquid market and therefore has no actual market price.<br />
377
K.1<br />
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).<br />
The district court granted summary judgment for Defendant on Plaintiff’s claim under the<br />
Arizona securities laws on the grounds that Plaintiff failed to produce evidence of damages. The<br />
Ninth Circuit reversed and remanded, finding that Arizona securities law, unlike federal law,<br />
does not require a showing of damages in a rescission suit.<br />
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 2012 WL 3584278 (S.D.N.Y. Aug.<br />
17, 2012).<br />
Plaintiffs asserted New York common law claims of fraud and negligent<br />
misrepresentation seeking to recover losses from the liquidation of notes issued by a structured<br />
investment vehicle. Defendants moved for summary judgment, arguing that some plaintiffs had<br />
no evidence of damages because they had exchanged their original notes for new notes that were<br />
backed by the same collateral that had backed their original notes. Defendants argued that<br />
because these plaintiffs continued to hold and receive payments on the new notes, their damages<br />
were speculative. The court rejected Defendants’ argument. The court found that the new notes<br />
were not a continuation of the original investment, but a new investment, and that the subsequent<br />
success or failure of the new investment would have no bearing on the measure of their damages<br />
on the original investment. The court further found that, although there is generally a<br />
presumption in securities cases that shares are purchased for the purpose of investment and their<br />
value to the investor is the price at which they may later be sold, this presumption did not apply<br />
here, where the plaintiffs had purchased the notes with the expectation that they would receive a<br />
stream of interest payments, and therefore their loss was not a decrease in market price, but a<br />
decrease in the amount of money returned to them over the course of the securitization.<br />
Applying this reasoning, the court held that the damages of the plaintiffs holding the new notes<br />
should be reduced by an approximation of the value of the new notes as of the day they acquired<br />
them in return for the original notes. The court delayed making that calculation until the close of<br />
expert discovery, but found plaintiffs had provided sufficient evidence to raise a disputed issue<br />
of fact, precluding summary judgment, as to whether plaintiffs had suffered damages.<br />
Freidus v. ING Group N.V., 2012 WL 4857543 (S.D.N.Y. Oct. 11, 2012).<br />
Plaintiff brought a purported class action under Sections 11, 12, and 15 of the Securities<br />
Act of 1933 to recover damages allegedly sustained in connection with its investments in<br />
securities of Defendant. Plaintiff purchased the securities for $10 million, then transferred them<br />
in exchange for an assumption of $10 million of Plaintiff’s liabilities. Plaintiff did not allege that<br />
the value of the securities at the time suit was brought was less than $10 million, and conceded<br />
that the price at which the securities were disposed of after suit was the same as the amount paid<br />
K.1<br />
K.1<br />
378
for them. Under these circumstances, the court found that Plaintiff could not recover because it<br />
had not alleged damages. The court rejected Plaintiff’s argument that Plaintiff did not “dispose”<br />
of the securities where Plaintiff had transferred them to a company under common ownership<br />
with Plaintiff.<br />
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).<br />
Defendants moved to dismiss Plaintiff’s complaint, which asserted state and federal<br />
securities fraud claims, actual fraud, and constructive fraud or negligent misrepresentation.<br />
Defendants argued that Plaintiff’s claims should be dismissed because Plaintiff had not alleged<br />
that he suffered any damages, where the complaint did not allege that Defendants had failed to<br />
make any payments due on the note that was the basis for Plaintiff’s claims. The court first<br />
noted that the measure of damages under Section 10(b) of the Securities and Exchange Act of<br />
1934 is the difference between the value of the consideration paid and the value of the securities<br />
received, and that the Virginia Securities Act allows a plaintiff to recover the consideration paid<br />
for a security, together with interest, costs, and attorneys’ fees, less the amount of any income<br />
received on the security, upon the tender of the security, or the substantial equivalent in damages<br />
if he no longer owns the security. The court held that, contrary to Defendants’ argument, the<br />
note need not mature and Defendants need not miss a payment for Plaintiff to have incurred<br />
damages. Rather, if the notes were worth less than represented at the time Plaintiff purchased<br />
them, he has suffered a cognizable injury that can support his claims. Moreover, Plaintiff need<br />
not realize losses before bringing claims. Accordingly, the court rejected Defendants’ argument<br />
on this point, while granting Defendants’ motion to dismiss on other grounds.<br />
Lopes v. Viera, 2012 WL 691665 (E.D. Cal. Mar. 2, 2012).<br />
Plaintiffs asserted a violation of California securities law, among other causes of action,<br />
based on Plaintiffs’ exchange of milk for equity interests in a corporation that was to<br />
manufacture cheese. The court determined that the “milk for equity” transaction constituted a<br />
sale of securities. The court further noted that the usual measure of damages for securities fraud<br />
is out-of-pocket loss, which is the difference between the value of what the plaintiff gave up and<br />
the value of what the plaintiff received. The court concluded that Plaintiffs were not precluded<br />
from pursuing a state securities fraud claim, but whether Plaintiffs could establish damages based<br />
on an exchange of milk for equity would depend upon factual determinations by the jury.<br />
Luciani v. Luciani, 2012 WL 4953110 (S.D. Cal. Oct. 17, 2012).<br />
Plaintiffs asserted claims for federal and state securities law violations, breach of<br />
fiduciary duty, and fraud, among others. Defendants argued that Plaintiffs failed to provide<br />
admissible evidence of damage because no evidence had been presented that Plaintiffs would<br />
K.1<br />
K.1<br />
K.1<br />
379
have been better off if not for Defendants’ actions. The court found this argument problematic,<br />
because Defendants appeared to be relying on the fact that the securities at issue were illiquid.<br />
The court stated that the fact that securities are not readily traded on the market does not<br />
preclude a plaintiff from demonstrating damages; otherwise, no cause of action for securities<br />
fraud could ever be brought for transactions involving illiquid securities. The court found that<br />
the expert testimony of Plaintiffs’ expert provided enough evidence as to damages to withstand<br />
summary judgment. The expert worked in a reliable field of expertise, based his findings on<br />
evidence relevant to the matter, and provided results that did not require the jury to extrapolate<br />
further.<br />
Jayhawk Capital Mgmt., LLC v. LSB Indus., Inc., 2012 WL 4210462 (D. Kan. Sept. 19, 2012).<br />
Plaintiff alleged that Defendant committed fraud, violated federal and state securities<br />
laws, and breached fiduciary duties when Defendant made allegedly false statements that<br />
induced Plaintiff to exchange half of its preferred shares for common stock during an exchange<br />
offer. The court entered judgment for Defendant after a bench trial. Among other reasons, the<br />
court found that Plaintiff’s claims based on fraud and breach of fiduciary duty failed because<br />
Plaintiff could not prove that it suffered damage as a result of Defendant’s alleged<br />
misrepresentations. Defendant had argued that if the exchange had not happened at all, Plaintiff<br />
would have been in an even worse position than it was as a result of exchanging half of its shares<br />
(the transaction that in fact happened). Plaintiff, however, argued that the one-off exchange<br />
offers that Defendant had made to select individual shareholders created a creeping tender offer<br />
that required Defendant to make an exchange offer to all preferred shareholders. The court<br />
found that Defendant was not required to make an exchange offer to all shareholders on an equal<br />
basis. Accordingly, Plaintiff was better off having exchanged half of its shares than it would<br />
have been exchanging none at all, and Plaintiff could not prove damages.<br />
Highland Capital Mgmt., L.P. v. Ryder Scott Co., 2012 WL 6082713 (Tex. App. Dec. 6, 2012).<br />
The trial court granted Defendants’ motions for summary judgment on Plaintiffs’ claims<br />
for violations of the Texas Securities Act, fraud, and negligent misrepresentation, and Plaintiffs<br />
appealed. With respect to damages, the trial court found that Plaintiffs had adduced no evidence<br />
with respect to this element of their fraud and negligent misrepresentation claims because there<br />
was no evidence of the value received by Plaintiffs. The Court of Appeals affirmed this portion<br />
of the trial court’s decision. Under either an out-of-pocket measure of damages or a benefit-ofthe-bargain<br />
measure of damages, there was no dispute that Plaintiffs were required to adduce<br />
evidence of the value received by Plaintiffs in the transactions. Specifically, the court held that<br />
Plaintiffs needed to adduce evidence regarding the fair market value of the investments at the<br />
time Plaintiffs purchased them. The court found that Plaintiffs’ evidence, which related to<br />
interest paid on the investments after their purchase, was not obviously probative of fair market<br />
value at the time of purchase. The court further found that testimony that the investments were<br />
K.1<br />
K.1<br />
380
later considered essentially worthless was not probative of their value at the time of purchase.<br />
Summary judgment was therefore appropriate on this issue.<br />
2. Measure of Damages<br />
K.2<br />
Acticon AG v. China North East Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012).<br />
Plaintiff asserted a putative class action, pursuant to the federal securities laws, alleging<br />
that Defendant misled investors about its reported earnings, oil reserves, and internal controls,<br />
and that in the trading days after Defendant revealed this information through a series of<br />
corrective disclosures, Defendant’s stock price dropped. Defendant argued that Plaintiff could<br />
not show an economic loss, because after the corrective disclosures Defendant’s stock had closed<br />
at a price higher than the price at which Plaintiff had purchased it. The district court agreed and<br />
granted Defendant’s motion to dismiss, but the Second Circuit vacated. The Second Circuit<br />
noted that, traditionally, economic loss has been determined by the “out-of-pocket” measure for<br />
damages, under which a defrauded buyer is entitled to recover only the excess of what he paid<br />
over the value of what he received. The court further noted that the Private Securities <strong>Litigation</strong><br />
Reform Act of 1995 had instituted a “bounce back” cap on the amount of damages available in a<br />
securities fraud action. The court found that the limitation upon damages imposed by the district<br />
court was inconsistent with both the traditional out-of-pocket measure and the bounce back cap.<br />
The court found it was improper to offset gains that a plaintiff recovers after fraud becomes<br />
known against losses caused by the revelation of the fraud because the stock could recover value<br />
for completely unrelated reasons. In the absence of fraud, the plaintiff would have purchased the<br />
security at an uninflated price and would also have benefitted from the unrelated gain in stock<br />
price. Because, without discovery, the court could not know whether the price rebounds<br />
represented the market’s reactions to the disclosure of the alleged fraud or whether they<br />
represented unrelated gains, the court could not know whether to offset the price recovery<br />
against Plaintiff’s losses, so the dismissal of the claim was vacated.<br />
Hickory Sec. Ltd. v. Republic of Argentina, 2012 WL 3291796 (2d Cir. Aug. 14, 2012).<br />
Argentina appealed the district court’s order granting aggregate class-wide relief to eight<br />
classes of plaintiff owners of beneficial interests in defaulted Argentine bonds. Argentina argued<br />
that the district court’s aggregate damage calculations failed to account for bonds purchased in<br />
the secondary market after the start of the class periods. The Second Circuit agreed and vacated<br />
the judgment, in part, with instructions for an evidentiary hearing on damages on remand. The<br />
court first noted that, although the amount of recoverable damages is a question of fact, the<br />
measure of damages upon which the factual computation is based is a question of law. Although<br />
aggregate class-wide damages are not per se unlawful, they must at least roughly reflect the<br />
aggregate amount owed to class members, which the Court of Appeals found the district court’s<br />
damages calculations did not, because they did not adequately account for bondholders who were<br />
not class members. The district court had not adequately addressed the volume of bonds<br />
K.2<br />
381
purchased in the secondary market after the class period began that were not tendered or were<br />
currently held by opt-outs or other litigants. The Court of Appeals directed that if the district<br />
court could not adequately address these issues so that the aggregate award roughly reflected the<br />
loss to each class, it must determine proceed with awarding damages on an individual basis.<br />
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).<br />
A jury found in favor of Plaintiffs on their federal securities claims and determined that<br />
rescission damages amounted to $7,700,723, but listed an award of only $1,777,909 on its<br />
verdict form. Both parties appealed. Defendants argued that the district court erred in<br />
instructing the jury on a rescissionary measure of damages (under which the original purchase is<br />
cancelled and Plaintiffs would recover the price paid for the securities plus interest), and argued<br />
that recovery should be limited to the economic losses actually caused by the misrepresentations.<br />
The Sixth Circuit disagreed, finding that the loss causation requirement of the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 does not preclude rescission damages and that nothing in the<br />
circumstances of the case made rescission damages inappropriate. The court emphasized that<br />
rescission is a fact-dependent remedy for Section 10(b) claims under the Securities Exchange<br />
Act of 1934 and is only appropriate in rare or unusual circumstances. Plaintiffs argued on appeal<br />
that they were entitled to the full rescission amount of $7,700,723 and that the jury’s award of<br />
$1,777,909 undercompensated them. The Sixth Circuit agreed with the trial court that Plaintiffs<br />
had waived this argument by failing to raise it in a Rule 49(b) motion prior to discharge of the<br />
jury.<br />
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).<br />
A jury awarded Plaintiff $1,404,769 on Plaintiff’s claims, which sought more than $3<br />
million in damages based on alleged violations of federal and state securities laws, common law<br />
fraud, breach of fiduciary duty, and breach of contract. The trial court reduced the award to<br />
$1,012,835.50, because this was the maximum amount not barred by the state-law statute of<br />
repose, upon which the jury had not been instructed. Both parties appealed, and the Sixth Circuit<br />
set aside the $1,012,835.50 award and directed the trial court to reinstate the award of $847,858<br />
that the jury had reached on Plaintiff’s federal securities law claims. The court found that it was<br />
error not to have instructed the jury on the state-law statute of repose, and that this error could<br />
not be cured by reducing the award to the maximum amount not barred by the statute of repose,<br />
because it appeared the jury had deliberately awarded Plaintiff an amount less than the full price<br />
paid by Plaintiff in the transaction. Because the jury’s award of $847,858 on Plaintiff’s federal<br />
securities law claims was not affected by the statute of repose, that award could be reinstated.<br />
K.2<br />
K.2<br />
382
K.2<br />
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).<br />
The district court granted summary judgment for Defendant on Plaintiff’s claim under<br />
Section 10(b) of the Securities Exchange Act of 1934 on the ground that Plaintiff failed to<br />
produce evidence of damages. On appeal, Plaintiff argued that he was not required to show<br />
economic loss because he sought rescission and not damages. The Ninth Circuit stated that it<br />
was not convinced that a suit seeking rescission under Section 10(b) obviates the need for<br />
proving economic loss and loss causation. The court noted that true rescission was not feasible<br />
in this case, but that even though true rescission was not warranted, the district court had<br />
discretion to consider a rescissionary measure of damages. A rescissionary measure of damages<br />
entitles the plaintiff to the return of the consideration paid less any value received on the<br />
investment. The Ninth Circuit remanded for consideration of the claim under a rescissionary<br />
measure of damages.<br />
Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713 (11th Cir. 2012).<br />
Plaintiffs brought a securities fraud class action under § 10(b) of the Securities Exchange<br />
Act of 1934 and SEC Rule 10b–5. Plaintiffs sought to prove at trial that Defendant had<br />
misrepresented the level of risk associated with commercial real estate loans held by its<br />
subsidiary. Plaintiffs’ only evidence of loss causation and damages was the expert testimony of<br />
a financial analyst who performed an event study to determine how much of the decline in<br />
Defendant’s stock was attributable to factors specific to Defendant rather than to general market<br />
or industry factors. The Eleventh Circuit affirmed the district court’s judgment as a matter of<br />
law in favor of Defendant, on the grounds that Plaintiffs failed to adequately separate losses<br />
caused by fraud from those caused by the collapse of the Florida real estate market. The court<br />
noted the importance of the distinction between loss causation and damages, stating that a<br />
plaintiff need not show that a misrepresentation was the sole reason for an investment’s decline<br />
in value to prove loss causation, but ultimately will only be allowed to recover damages actually<br />
caused by the misrepresentation. Noting that the proper of measure of damages is the out-ofpocket<br />
rule, the court stated that to allow a jury to award damages on that measure, Plaintiffs<br />
would have to separate the amount of the stock price decline attributable to the disclosure of<br />
facts that were known at the time of Defendant’s misstatements from the portion of the decline<br />
caused by the disclosure of new facts. However, because the court found that Plaintiffs failed to<br />
present evidence sufficient to support a finding of loss causation, it was unnecessary to reach the<br />
damages issue.<br />
Lenartz v. American Superconductor Corp., 879 F. Supp. 2d 167 (D. Mass. 2012).<br />
Plaintiffs asserted a purported securities class action alleging violations of Sections 10(b)<br />
and 20(A) of the Securities Exchange Act of 1934, Rule 10b-5, and Sections 11, 12(a)(2), and 15<br />
K.2<br />
K.2<br />
383
of the Securities Act of 1933. In the course of dismissing certain claims against certain<br />
defendants, the court noted that Plaintiffs were not entitled to more damages if they could show<br />
multiple misstatements or omissions in the Registration Statement. Instead, the measure of<br />
damages was limited to the amounts provided by statute.<br />
Levinson v. Westport Nat’l Bank, 2012 WL 4490432 (D. Conn. Sept. 28, 2012).<br />
Plaintiffs brought suit against Defendant bank, the custodian of their retirement<br />
investments, alleging breach of contract, breach of fiduciary duty, negligence, and other claims<br />
arising from Plaintiffs’ losses in the Bernard Madoff Ponzi scheme. On cross-motions for<br />
summary judgment, Defendant argued that Plaintiffs could not recover lost profits damages<br />
because such damages based on the fictitious profits reported by a Ponzi scheme are not legally<br />
cognizable. The court found that in Connecticut the default rule is that recovery of lost profits on<br />
a breach of contract claim is permissible unless they are too speculative and remote, whenever<br />
their loss arises directly from and as a natural consequence of the breach. The court noted that<br />
the Connecticut Supreme Court has endorsed a flexible approach to permit consideration of lost<br />
profits based on negligence and breach of fiduciary duty claims. The court agreed with<br />
Defendant that victims of fraud may not recover fictitious profits under the securities laws, but<br />
found no such restriction on contract or tort claims. The court found that Plaintiffs had asserted a<br />
non-speculative theory of lost profits damages predicated on Defendant’s failure to audit, which<br />
created an appropriate issue for the jury.<br />
Dorn v. Berson, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).<br />
Plaintiff asserted claims for violations of federal securities laws, breach of contract, civil<br />
RICO, common law fraud, and other common law claims. After entering a default judgment, the<br />
court referred the calculation of damages to the magistrate. According to the complaint,<br />
Defendant had presented Plaintiff with an opportunity to invest in what Defendant described as a<br />
private investment fund that generated guaranteed returns of twelve percent annually. Plaintiff<br />
invested in the fund through Defendant, but when Plaintiff sought to liquidate her investment,<br />
Defendant told her that there were not enough assets remaining in the fund for her to liquidate.<br />
As to Plaintiff’s civil RICO claim, the court found her claim was barred by the “RICO<br />
Amendment” enacted as part of the Private Securities <strong>Litigation</strong> Reform Act of 1995. On her<br />
breach of contract claim, the court stated that under New York law, the measure of damages is an<br />
amount sufficient to put the non-breaching party in as good a position as she would have been<br />
put by full performance of the contract. Thus, the court held that Plaintiff was entitled to a return<br />
of the amount she had invested, along with the promised annual return for the period during<br />
which she believed her money was invested. Because it was unclear exactly when Plaintiff<br />
would have wanted to liquidate her investment, the court used an approximate date to determine<br />
the period for which Plaintiff was entitled to twelve percent annual returns. As to Plaintiff’s<br />
securities fraud and other claims, the court found it unnecessary to determine the amount of<br />
damages, because a plaintiff seeking compensation for the same injury under different legal<br />
K.2<br />
K.2<br />
384
theories is only entitled to one recovery. Because the breach of contract claim was the only<br />
claim as to which Plaintiff was seeking the twelve percent return in addition to the amount<br />
invested, it yielded the highest recovery.<br />
In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012).<br />
In this securities class action, the court considered the parties’ proposed damages<br />
calculations. Defendant argued that Plaintiffs could only recover actual damages, representing<br />
the out-of-pocket economic loss caused by fraud. Defendant urged the court to “net” gains and<br />
losses when considering a class member’s compensable loss, by taking the actual amount of<br />
harm suffered as a result of buying shares at an inflated price and deducting the actual amount of<br />
gain accrued as a result of selling shares at an inflated price. Plaintiffs objected to netting by<br />
Defendant’s method, arguing that each transaction should be treated separately and losses from<br />
unprofitable transactions should not be offset with gains from profitable transactions. The court<br />
agreed with Plaintiffs that not all gains should or could be used to offset legally cognizable<br />
losses. Accordingly, the court adopted “partial netting,” under which only gains resulting from<br />
transactions occurring between the first materialization date and the end of the class period<br />
would be used to offset losses incurred during that same period. The court further considered<br />
whether to compute loss or gain under the “first in, first out” (“FIFO”) or “last in, first out”<br />
(“LIFO”) methods. The court, finding that LIFO takes into account gains that might have<br />
accrued to Plaintiffs during the class period due to the inflation of the stock price, adopted the<br />
LIFO approach.<br />
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y. Dec. 17, 2012).<br />
Plaintiffs asserted claims of breach of contract, federal securities fraud, common law<br />
fraud, and fraudulent conveyance arising out of a loan and securities purchase agreement. After<br />
recommending default judgment, the magistrate considered the amount of damages. The court<br />
noted that a plaintiff seeking compensation for the same injury under different legal theories is<br />
only entitled to one recovery, and that the proper measure of damages in such cases is the one<br />
that represents the greater recovery. The court noted that securities fraud damages are ordinarily<br />
based on out-of-pocket losses, which are calculated by the price paid for the security less the<br />
security’s value on the date of the transaction absent any fraud. The court further noted that outof-pocket<br />
losses is the rule for damages caused by common law fraud. However, the court noted<br />
that out-of-pocket damages are not the only permissible measure of recovery, and that courts<br />
have utilized their discretion to endorse several different compensatory damages theories,<br />
including gross economic loss and benefit-of-the-bargain damages. Gross economic loss or<br />
rescissionary damages are based on the difference between the price paid and the price received<br />
on resale, and benefit-of-the-bargain damages are based on the difference between the value of<br />
what was bargained for and the value of what was received at the time of transaction. Plaintiffs<br />
sought damages based on a liquidated damages provision in the parties’ contract, and the court<br />
found that this while this measure of damages might have been proper on a contract theory, there<br />
K.2<br />
K.2<br />
385
was no evidence that it was appropriate for fraud, and that without more evidence the court could<br />
not ascertain fraud damages with reasonable certainty.<br />
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D. Idaho July 12,<br />
2012).<br />
Plaintiffs brought a securities class action alleging that Defendant issued false statements<br />
regarding its business and that those statements artificially inflated Defendants’ securities prices.<br />
In considering which plaintiff to appoint as lead plaintiff, the court addressed the relative<br />
financial interest and losses of the competing plaintiffs. Two plaintiffs reached their claim<br />
amount by valuing call options at the entire price of the options, while a third plaintiff argued it<br />
was more accurate to employ the Black-Scholes Option Pricing Model (“BSOPM”). The court<br />
noted that BSOPM is a method of establishing damages, not financial interest, and that the<br />
necessary analysis at the plaintiff-appointment stage is different and far less exhaustive. The<br />
court found that neither analysis was necessarily accurate or easy to determine at this stage, and<br />
held that although it did not specifically adopt the BSOPM valuation, it was persuaded that the<br />
actual amount of recoverable damages for options was likely to be closer to the BSOPM<br />
valuation than the entire price of the options.<br />
In re Int’l Mgmt. Assocs., LLC, 2012 WL 2105908 (Bankr. N.D. Ga. Apr. 3, 2012).<br />
Plaintiff, the Plan Trustee under a Chapter 11 bankruptcy plan, sought coverage from<br />
Defendant under an investment management insurance policy. Defendant sought to exclude<br />
Plaintiff’s expert report, on the grounds (among others) that the report ignored the discretion that<br />
the bankrupt investment advisor had. The court rejected this argument, noting that an<br />
appropriate measure of damages when an investment advisor is liable for the improper<br />
management of an investor’s funds is the difference between what he would have had if the<br />
account had been handled legitimately and what he in fact had at the time the violation ended.<br />
The court further noted that the measure of damages is an approximation of trading losses<br />
sustained as a result of the improper investment activity, and that exact certitude is not required.<br />
The damages analysis must take into account what the performance of the investments would<br />
have been if investments had been proper, and a composite stock index provides a basis for<br />
making this calculation. Accordingly, the court denied Defendant’s motion to exclude the report.<br />
Wachovia Bank Nat’l Assoc. v. Beane, 725 S.E.2d 715 (S.C. App. 2012).<br />
A jury awarded individual account holders money damages of $198,395.17 on their<br />
counterclaim for negligent mismanagement of a securities account. The firm appealed, arguing<br />
that the only evidence of damages in the record as to the amount of damages was the account<br />
holders’ expert’s testimony that the account underperformed by $176,121. The Court of Appeals<br />
K.2<br />
K.2<br />
K.2<br />
386
held that the maximum award supported by the evidence was the amount of damages testified to<br />
by the expert, that the jury’s verdict (which also included attorney’s fees and forgiveness of a<br />
loan) was grossly excessive, and that the excessiveness of the verdict demonstrated that the jury<br />
acted on some basis other than the evidence presented. Under these circumstances, the trial court<br />
erred by not granting the firm’s motion for a new trial.<br />
3. Punitive Damages<br />
K.3<br />
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).<br />
Plaintiff buyer of auction rate securities (ARS) brought action against underwriter,<br />
underwriter’s parent company, and broker-dealer, alleging securities violations. Defendant<br />
underwriter moved to strike those portions of Plaintiff’s First Amended Complaint seeking<br />
punitive damages. The court, applying California law, held that punitive damages were not<br />
available to a buyer of ARS for a claim of breach of fiduciary duty, where buyer failed to state<br />
fraud claim based on broker-dealer’s failure to disclose alleged re-marketing agreement with<br />
underwriter to create a distribution channel for underwriter’s products. Furthermore, the court<br />
found that a claim for punitive damages under California law requires sufficient allegations of<br />
despicable conduct that is so vile, base, contemptible, miserable, wretched or loathsome that it<br />
would be looked down upon by ordinary, decent people.<br />
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 WL 5451188 (S.D.N.Y. Nov. 8, 2012).<br />
The Federal Housing Finance Agency (“FHFA”), as conservator for the Federal National<br />
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie<br />
Mac), stated a claim for punitive damages under New York law, alleging that Merrill Lynch and<br />
affiliated individuals acted recklessly by seeking to profit from risky mortgage lending while, at<br />
the same time, passing on the risk associated with this lending by selling securities to Fannie<br />
Mae and Freddie Mac. In deciding Merrill Lynch’s Motion to Dismiss, the Court stated that,<br />
under New York law, punitive damages are permitted on a fraud claim “only when the plaintiff<br />
can demonstrate exceptional misconduct, as when the wrongdoer has acted maliciously,<br />
wantonly, or with a recklessness that betokens an improper motive or vindictiveness or has<br />
engaged in outrageous or oppressive intentional misconduct or with reckless or wanton disregard<br />
of safety or rights.” The court held that FHFA’s allegations against Merrill Lynch were<br />
sufficient to meet this test, and denied Merrill Lynch’s Motion to Dismiss the portion of the<br />
Complaint seeking punitive damages.<br />
K.3<br />
387
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).<br />
Institutional investors brought action against note issuer and placement agent, alleging<br />
violations of § 10(b) of the Securities Exchange Act of 1934 and blue sky laws of various states,<br />
as well as various tort claims, in relation to investors’ purchase of nearly $2 billion in notes.<br />
Defendants moved for summary judgment on institutional investors’ punitive damages claim.<br />
The court, applying New York law, found that New York does not permit recovery of punitive<br />
damages in a case of ordinary fraud and that punitive damages are only permitted when a<br />
defendant’s wrongdoing is not simply intentional, but instead evinces a high degree of moral<br />
turpitude and demonstrates such wanton dishonesty as to imply a criminal indifference to civil<br />
obligations. Because genuine issues of material fact existed as to the Defendants’ knowledge of<br />
the fraud, the court was precluded from granting summary judgment on institutional investors’<br />
claim for punitive damages.<br />
K.3<br />
4. Attorneys’ Fees and Costs<br />
K.4<br />
Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).<br />
The Fourth Circuit affirmed the denial of a firm’s motion to vacate an arbitration award<br />
of fees and costs against it under South Carolina’s Frivolous Civil Proceedings Act (the<br />
“FCPA”). The court held that the arbitration panel was not required to follow the procedural<br />
requirements of the FCPA (in this case providing the firm with thirty days to respond to the fee<br />
request). The court also held that even if FCPA’s procedures applied in arbitration, there was no<br />
evidence that the panel intentionally engaged in misconduct or manifestly disregarded the law<br />
because the applicability of procedural requirements of the FCPA was debatable.<br />
Union Asset Mgmt. Holding A.G. v. Dell, Inc., 669 F.3d 632 (5th Cir. 2012).<br />
K.4<br />
The Fifth Circuit affirmed an attorneys’ fee award representing 18% of the settlement<br />
fund in a class action. The court found that the district court properly used the percentage<br />
method rather than the lodestar method in its calculation. The court noted that ample Fifth<br />
Circuit authority supports the use of the percentage method and the PSLRA itself contemplates<br />
employing such a calculation. The court also concluded that the district court did not abuse its<br />
discretion in setting the amount of fees, even though the case was dismissed prior to discovery.<br />
The court observed that the district court considered the amount and sources of discovery in<br />
determining that the fee amount compensated counsel while protecting the class’s interests. The<br />
court also affirmed the award of interest on the fee award, explaining that courts routinely award<br />
interest on attorneys’ fees and that the objecting class members cited no authority to support their<br />
argument to the contrary.<br />
388
Reuter v. Cutcliff (In re Reuter), 686 F.3d 511 (8th Cir. 2012).<br />
K.4<br />
The Eighth Circuit held that attorney’s fees incurred by five creditors to whom the debtor<br />
sold unregistered securities were non-dischargeable in bankruptcy. The bankruptcy court held<br />
that the debtor violated Missouri’s Securities Act, which allows successful plaintiffs to recover<br />
reasonable attorneys’ fees. The Eighth Circuit affirmed the bankruptcy court’s ruling that the<br />
debtor’s liability on the Securities Act claims, which included his liability for the creditors’<br />
attorneys’ fees, was non-dischargeable.<br />
Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012).<br />
K.4<br />
The Fifth Circuit reversed the district court’s order vacating an arbitration award and<br />
awarding attorneys’ fees to the firm. The Fifth Circuit held in part that since the district court<br />
erred in vacating the award, the firm was not entitled to recover its attorneys’ fees under the<br />
applicable client agreements.<br />
In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 2012 WL 6184269 (D. Mass. Dec.<br />
10, 2012).<br />
As part of its approval of the settlement of a securities class action, the court awarded<br />
lead plaintiffs’ counsel fees in the amount of $6,000,000 (representing 24% of the settlement<br />
fund) plus expenses of $798,277.56. The court held the award was reasonable given the<br />
substantial risk of non-recovery, the time and effort involved, and the result obtained and was<br />
fair and reasonable when cross-checked against counsel’s lodestar fee calculation.<br />
K.4<br />
In re Sturm, Ruger & Co. Sec. Litig., 2012 WL 3589610 (D. Conn. Aug. 20, 2012).<br />
K.4<br />
In the settlement of a securities class action, the court approved attorneys’ fees of<br />
$900,000.00 (representing 30% of the settlement value) and expenses of $45,537.12. The court<br />
considered the number of hours expended on the case; the complexity of securities litigation; the<br />
risk to attorneys of contingent fee representation; the high quality of the representation; the<br />
public policy of enforcing the federal securities laws; and that the requested fee was a multiplier<br />
of 1.26 of the lodestar amount.<br />
K.4<br />
Dorn v. Berson, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).<br />
In this civil securities fraud and RICO action, where the district court had entered a<br />
default judgment against the defendants, the Magistrate Judge recommended the denial of<br />
389
plaintiff’s request for attorneys’ fees. Although the RICO statute provides that a successful<br />
plaintiff may recover reasonable attorney fees, the magistrate judge found that the plaintiff had<br />
no remedy under RICO because the alleged predicate acts were specifically actionable as<br />
securities fraud. Moreover, attorneys’ fees are not awarded to prevailing parties in actions for<br />
violations of Section 10(b) of the Securities Exchange Act of 1934 and the plaintiff did not<br />
identify any contractual provision under which she was entitled to attorneys’ fees.<br />
Donoghue v. Morgan Stanley High Yield Fund, 2012 WL 6097654 (S.D.N.Y. Dec. 7, 2012).<br />
The court granted in part plaintiff’s motion for attorneys’ fees in a derivative action in<br />
which plaintiff brought claims under Section 16(b) of the Securities Exchange Act of 1934.<br />
Plaintiff sought fees representing 50% of the settlement amount. The court held that the request<br />
far exceeded a reasonable rate and that attorneys’ fees of one-third or less of the settlement<br />
amount were customarily found to be reasonable. The court awarded fees representing one-third<br />
of the settlement amount.<br />
K.4<br />
K.4<br />
In re Bear Stearns Cos. Sec., Derivative, and ERISA Litig., 2012 WL 5465381 (S.D.N.Y. Nov. 9,<br />
2012).<br />
As part of its approval of a class action settlement, the court approved attorneys’ fees of<br />
$35,388,000, representing12% of the settlement amount. The court determined that this award<br />
was reasonable under the factors set forth in Goldberger v. Integrated Resources, Inc., 209 F.3d<br />
43 (2d. Cir. 2000).<br />
In re IMAX Sec. Litig., 2012 WL 3133476 (S.D.N.Y. Aug. 1, 2012).<br />
K.4<br />
The court awarded attorneys’ fees representing 33% of the settlement amount in a<br />
securities class action. The action had several entities serve as both lead plaintiff’s counsel and<br />
lead plaintiff over nearly five years of litigation. The first appointed lead plaintiff lacked Article<br />
III standing, and it, as well as its counsel, was removed. The second lead plaintiff was an<br />
inadequate class representative because it was represented by an attorney not disclosed to the<br />
court. A third lead plaintiff and its counsel settled the litigation for $12,000,000.00.<br />
Plaintiffs’ counsel requested payment of $4,719,351.32 for nearly 10,000 hours of work<br />
and $1,719,351.32 in expenses, which the court concluded was excessive. The court concluded<br />
that the expenses were unusually high and unreasonable in relation to the recovery, particularly<br />
because the issues raised by the case were not overly complex and some recovery risks were<br />
apparent from the beginning. In addition, the court held that the fee award should be reduced for<br />
issues relating to the disqualification of the second lead plaintiff.<br />
390
K.4<br />
In re Wachovia Equity Sec. Litig., 2012 WL 2774969 (S.D.N.Y. June 12, 2012).<br />
In connection with the approval of a class action settlement, the court awarded plaintiff’s<br />
counsel attorneys’ fees (totaling approximately 5% of the settlement fund) and expenses. The<br />
court evaluated the attorneys’ fee request under the factors set out in Goldberger v. Integrated<br />
Resources, Inc., 209 F.3d 43 (2d Cir. 2000) and noted: (1) There were no substantive objections<br />
to the fee request, beyond very general concerns that the lawyers were being paid too much; (2)<br />
plaintiff’s counsel had spent a significant amount of time on the matter, and the requested fees<br />
were 1.65 times the lodestar; (3) plaintiffs would face substantial hurdles in establishing liability<br />
and damages in this action; (4) lead counsel litigated the case entirely on contingency; (5) the<br />
litigation was complex; (6) the 5% fee request was reasonable in relation to fee requests<br />
commonly made in other cases for 20-30% of the fund; and (7) lead counsel obtained a<br />
significant settlement for the class.<br />
Allstate Ins. Co. v. CitiMortgage Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012).<br />
The court denied plaintiffs’ request, pursuant to 28 U.S.C. § 1447(c), for attorneys’ fees<br />
in connection with defendants’ unsuccessful effort to remove this residential mortgage-backed<br />
securities case to federal court. The complaint alleged common law claims for fraud and<br />
negligent misrepresentation, as well as claims under the Securities Act of 1933. In granting the<br />
plaintiffs’ motion to remand, the court found unpersuasive the defendants’ arguments that federal<br />
jurisdiction existed because (1) the case “related to” the bankruptcy of one of the mortgage<br />
originators, and (2) the Edge Act conferred jurisdiction because the claims arose out of<br />
transactions involving territorial banking. Although the court was not persuaded by these<br />
arguments, it found that defendants had a good-faith basis for making them. Accordingly, the<br />
court denied plaintiffs’ request for fees.<br />
K.4<br />
In re Am. Int’l Grp., Inc. Sec. Litig., 2012 WL 345509 (S.D.N.Y. Feb. 2, 2012).<br />
In a class action case, after analyzing the factors set forth in Goldberger v. Integrated<br />
Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000), the court approved lead plaintiffs’ counsel’s<br />
motion seeking an award of attorneys’ fees equal to 13.25% of the amount of the settlement<br />
fund. The court determined that the amount of attorneys’ fees awarded was in line with awards<br />
permitted in similar cases, was appropriate based on the complexity of the case and lead<br />
counsel’s effort and experience, and promoted the valuable public policy interests at stake. In<br />
addition, the court awarded reimbursement of litigation expenses of $8,257,111.29, the amount<br />
sought by lead plaintiffs’ counsel.<br />
K.4<br />
391
In re Wachovia Preferred Sec. & Bond/Notes Litig., 2012 WL 2589230 (S.D.N.Y. Jan. 3, 2012).<br />
The court awarded plaintiffs’ counsel attorneys’ fees in the amount of $75,240,000.00<br />
(equal to 12% of the settlement fund) and reimbursement of litigation expenses in the amount of<br />
$860,877.47. Plaintiffs’ counsel had sought a fee award equal to 17.5% of the settlement<br />
amount. The court analyzed the factors set forth in Goldberger v. Integrated Resources, Inc.,<br />
209 F.3d 43, 50 (2d Cir. 2000) and determined that the attorneys’ fees awarded by it (1) were fair<br />
and reasonable under the circumstances; and (2) compensated plaintiffs’ counsel for their<br />
exemplary work while ensuring that class members maintained a significant portion of the<br />
settlement fund.<br />
Indus. Tech. Ventures LP v. Pleasant T. Rowland Revocable Trust, 2012 WL 777313 (W.D.N.Y.<br />
Mar. 8, 2012).<br />
The court denied the defendants’ motion for sanctions under Federal Rule of Civil<br />
Procedure 11, holding that the relevant allegations in the plaintiff’s complaint were not “utterly<br />
lacking” in support, and granted the plaintiff’s cross-motion for sanctions because the<br />
defendants’ Rule 11 motion was baseless. Plaintiff had produced a voluminous record in support<br />
of its claims for unjust enrichment, tortuous interference with business relationships, common<br />
law fraud, civil conspiracy, and violations of the Securities Exchange Act of 1934. In light of<br />
this evidence, which would have been sufficient to defeat a motion for summary judgment, the<br />
court found that defendants’ motion for sanctions was “utterly without support.” Thus, the court<br />
awarded plaintiff the attorneys’ fees and costs it incurred in defending against the Rule 11<br />
motion.<br />
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012).<br />
The court granted the plaintiffs’ motion to remand a putative class action to state court<br />
and denied the plaintiffs’ request for attorneys’ fees under 28 U.S.C. § 1447(c). The court found<br />
that it could not say that the removing defendants lacked an objectively reasonable basis for<br />
seeking removal despite the fact that the removal was untimely and the Securities <strong>Litigation</strong><br />
Uniform Standards Act did not provide a basis for removal.<br />
K.4<br />
K.4<br />
K.4<br />
Bajaj v. Fisher Asset Mgmt, LLC, 2012 WL 1293169 (D. Del. Apr. 10, 2012).<br />
K.4<br />
The court granted respondent’s request for an award of attorneys’ fees for defending<br />
against petitioner’s motion to vacate an arbitration award. The court found that the petitioner<br />
had no basis to resist the arbitration award and the petition to vacate had no chance to prevail.<br />
392
SEC v. Berlacher, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012).<br />
K.4<br />
The district court denied the defendants’ motion, pursuant to the Equal Access to Justice<br />
Act, for attorney fees and costs expended in defending against the SEC’s civil enforcement<br />
action. The court found that the SEC’s lawsuit alleging securities fraud and insider trading was<br />
substantially justified even though the defendants prevailed on some claims. The court also<br />
found that the SEC’s demand was not substantially in excess of the judgment it obtained.<br />
K.4<br />
SEC v. Kiselak Capital Grp., LLC, 2012 WL 369450 (N.D. Tex. Feb. 3, 2012).<br />
The court granted the receiver’s request, under Federal Rule of Civil Procedure<br />
37(b)(2)(c), for an order requiring the attorney for one of the defendants to pay the fees incurred<br />
by the receiver due to the defendant’s failure to comply with a discovery order. During postjudgment<br />
discovery, the defendant waited until one day after a court-imposed discovery deadline<br />
before he asserted for the first time a blanket objection to all discovery requests based on his<br />
Fifth Amendment privilege from self-incrimination. The court found that the attorney’s advice<br />
to the defendant to disregard the court’s order was not substantially justified, particularly because<br />
there was no true danger of self-incrimination and the assertion of the defendant’s Fifth<br />
Amendment privilege failed for lack of specificity. Moreover, the court found that the attorney’s<br />
delay tactics were evidence of bad faith and that there were no special circumstances making an<br />
award of reasonable fees unjust.<br />
K.4<br />
In re Northfield Labs., Inc. Sec. Litig., 2012 WL 2458445 (N.D. Ill. June 26, 2012).<br />
As part of its approval of the settlement of securities fraud class action the court approved<br />
attorneys’ fees representing 12.3% of the settlement fund. The court found that the award<br />
reasonably approximated market value. The court noted that while attorneys often sought higher<br />
percentages in fees, a lower percentage was appropriate in this case where the class was created<br />
by consolidating several individual actions – all with their own counsel.<br />
The court also held that expert witness fee expenses totaling approximately 27% of the<br />
fund, were reasonable because without the experts, the plaintiffs could not have prevailed in<br />
getting the class certified. The court denied, however, reimbursement for expenses for online<br />
legal research and also denied reimbursement of expenses in connection with press releases<br />
issued to the class members, as the court viewed this as a firm marketing expense.<br />
In re Apollo Grp., Inc., Sec. Litig., 2012 WL 4513608 (D. Ariz. Oct. 2, 2012).<br />
K.4<br />
The court denied a motion for attorneys’ fees brought by an objector to the proposed<br />
attorneys’ fee award in a class action settlement. The court noted that objectors are entitled to an<br />
award of attorneys’ fees when their actions substantially enhance the benefit to the class but held<br />
that the objection in this case provided no substantial benefit to the class.<br />
393
K.4<br />
Yenidunya Invs., Ltd. v. Magnum Seeds, Inc., 2012 WL 538263 (E.D. Cal. Feb. 17, 2012).<br />
In this action for declaratory relief and accounting based on defendants’ alleged violation<br />
of a shareholder’s rights, the court granted defendants’ motion for attorneys’ fees pursuant to the<br />
contractual clauses of a buy-out agreement, stock-purchase agreement, and promissory note.<br />
Applying California law regarding contractual obligations to award attorney fees, the court first<br />
held that the defendants were the “prevailing party” because the court had dismissed the<br />
complaint as barred by the applicable statute of limitations. The court also held that although the<br />
plaintiff did not seek to enforce the agreements, the action was still brought “on a contract” for<br />
purposes of California law.<br />
K.4<br />
R.Q. Constr., Inc. v. Ecolite Concrete U.S.A., Inc., 2012 WL 6091408 (S.D. Cal. Dec. 7, 2012).<br />
The court denied plaintiff’s motion for attorneys’ fees. The plaintiff asserted claims for<br />
securities fraud and negligent misrepresentation but was successful on only some of its claims.<br />
The plaintiff moved to recover all of its fees under a contractual attorneys’ fee provision. The<br />
court held that plaintiff’s fee submission left the court unable to determine how much time was<br />
spent on successful versus unsuccessful claims and that the plaintiff had failed to meet its burden<br />
to justify its fees relating to the claims on which it prevailed.<br />
I.B.E.W. Local 697 Pension Fund v. Int’l Game Tech., Inc., 2012 WL 5199742 (D. Nev. Oct. 19,<br />
2012).<br />
As part of its approval of a securities class action, the court approved attorneys’ fees in<br />
the amount of 25% of the settlement fund and costs of $196,134.16. The court determined that<br />
the amount of fees was reasonable given that plaintiffs’ counsel had litigated the case for over<br />
two years and had shouldered the risk of non-payment by taking the case on a contingency. The<br />
court also held that the 25% fee was reasonable when compared with the result under the lodestar<br />
method.<br />
K.4<br />
Szymborski v. Ormat Tech., Inc., 2012 WL 4960098 (D. Nev. Oct. 16, 2012).<br />
As part of its approval of a securities class action settlement, the court approved<br />
attorneys’ fees in the amount of 30% of the settlement fund and costs of $169,749. The court<br />
held that the requested fee was reasonable considering the skill of plaintiffs’ counsel, the<br />
complexity of the issues, the risk shouldered by plaintiffs’ counsel, and customary fees in similar<br />
cases. The court held that the requested fee was also reasonable when compared with the result<br />
under the lodestar method, which yielded a larger number.<br />
K.4<br />
394
K.4<br />
Finkel v. Am. Oil & Gas, Inc., 2012 WL 171038 (D. Colo. Jan. 20, 2012).<br />
The court granted in part and denied in part plaintiffs’ motion for attorneys’ fees in<br />
connection with the settlement of a class action suit where non-monetary benefits were conferred<br />
on the class. The court awarded attorneys’ fees and expenses in the amount of $200,000.00.<br />
Plaintiffs had requested $850,000.00 in fees and expenses. The court, applying Nevada law, held<br />
that the benefits conferred to shareholders, which consisted of supplemental disclosures to be<br />
included in a proxy statement, were “moderate at best” and “not very substantive.” Secondarily,<br />
the court focused on factors such as attorney time spent on the matter and fee awards in similar<br />
cases. The court determined that (1) the plaintiffs did not persuade the court that good billing<br />
judgment was exercised or that there was no duplication of efforts with respect to billing matters;<br />
and (2) the $200,000 awarded for fees and expenses was comparable to awards granted in similar<br />
cases.<br />
In re Thornburg Mortg., Inc. Sec. Litig., 2012 WL 6004176 (D.N.M. Nov. 26, 2012).<br />
The court approved an attorneys’ fee award of $400,000 and $243,145.93 (plus interest)<br />
in expenses as part of the settlement of a class action in which plaintiffs asserted federal<br />
securities law claims. The court held that the requested fee, which was 20% of the settlement<br />
value, was reasonable.<br />
Pub. Emps. Ret. Ass’n of N.M. v. Clearlend Secs., 2012 WL 2574819 (D.N.M. June 29, 2012).<br />
The court twice denied the plaintiff’s motion for attorneys’ fees under 28 U.S.C.<br />
§1447(c). The defendant removed the case twice before and after conducting discovery – both<br />
times on the ground that the plaintiff was not an arm of the state and was therefore a citizen of<br />
New Mexico for diversity purposes. The court granted both of the plaintiff’s motions for<br />
remand, but denied the plaintiff’s request for attorneys’ fees because it concluded that the<br />
defendants had an objectively reasonable basis for removal.<br />
Fornell v. Morgan Keegan & Co., 2012 WL 3155727 (M.D. Fla. Aug. 3, 2012).<br />
The court awarded sanctions in the form of attorneys’ fees incurred by the plaintiff after<br />
the defendant moved to vacate an arbitration award. The defendant alleged that one of the<br />
arbitrators failed to disclose two litigation matters in which he was involved and that this lack of<br />
disclosure established partiality and misbehavior. The court held that there was no evidence of<br />
actual conflict and that neither of the two matters would lead a reasonable person to believe a<br />
conflict existed.<br />
395<br />
K.4<br />
K.4<br />
K.4
K.4<br />
BCJJ, LLC v. Lefevre, 2012 WL 2590473 (M.D. Fla. July 3, 2012).<br />
The court granted the defendant bank’s motion for sanctions and ordered the plaintiff to<br />
pay the defendant’s reasonable attorneys’ fees and costs. The court had dismissed the plaintiff’s<br />
first amended complaint (which alleged state and federal securities and common law claims) and<br />
directed it to file an amended complaint including a more definite statement regarding the<br />
circumstances under which the appraisal at issue was provided to the plaintiff. The plaintiff did<br />
so, alleging that the appraisal was described to one of plaintiff’s representatives by a<br />
representative of the defendant. The representative’s deposition testimony refuted this<br />
allegation. The court concluded that even if the plaintiff did not “affirmatively fabricate” the<br />
allegations in its complaint, its failure to confirm the truth of its allegations with its<br />
representative before filing the complaint “evinces a failure to conduct reasonable inquiry into<br />
the evidentiary basis of [its] factual claims.”<br />
Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., 962 N.E.2d 221 (Mass. App. Ct.<br />
2012).<br />
The court reversed in part the lower court’s grant of a motion to dismiss the plaintiff<br />
investors’ challenge to the defendant investment management firm’s handling of a previous<br />
settlement agreement. Because the motion to dismiss was reversed in part, the court held that the<br />
defendant’s cross-motion request for Rule 11 sanctions was “absolutely foreclosed.”<br />
K.4<br />
Bear, Stearns & Co. v. Int’l Capital & Mgmt. Co., 952 N.Y.S.2d 106 (N.Y. App. Div. 2012).<br />
The court granted a request by a firm and its affiliates to confirm an arbitration award and<br />
denied the customer’s motion to vacate or modify the portion of the award granting attorneys’<br />
fees. The court found that the arbitration panel did not exceed its authority under FINRA rules<br />
by awarding attorneys’ fees, noting that the customer had demonstrated its consent to the<br />
imposition of fees on multiple occasions and did not withdraw its own fee request until closing<br />
statements.<br />
Stratton v. XTO Energy Inc., 2012 WL 407385 (Tex. App. Feb. 9, 2012).<br />
The Texas Court of Appeals affirmed the trial court’s award of nearly $4,000,000.00 in<br />
attorneys’ fees in a shareholder class action, but modified the award upward to $8.6 million after<br />
reviewing the lower court’s calculations regarding the lodestar amount and the application of a<br />
multiplier. The court concluded that the trial court’s lodestar amount was reasonable but that its<br />
396<br />
K.4<br />
K.4
efusal to apply a higher multiplier to the lodestar amount was error due to the complexity of<br />
securities cases, the exceptional results achieved by counsel, the high risk of trying a case with a<br />
contingency fee, the undesirability of the litigation, and the fact that the fee award requested was<br />
comparable to other class action awards. These factors were part of a mandatory test that the<br />
trial court did not undertake. The Court of Appeals affirmed the award of fees, applied the test<br />
(based on the undisputed record), and modified the award.<br />
Caruthers v. Underhill, 287 P.3d 807 (Ariz. Ct. App. 2012).<br />
The court held that A.R.S. § 12-341.01(A), which authorizes the award of attorneys’ fees<br />
in contract actions, applied to the plaintiffs’ fraudulent inducement claims. The court reasoned<br />
that the statute applied to plaintiffs’ claims that the defendant had fraudulently induced them to<br />
enter an agreement to sell their stock at a diminished value because the plaintiffs’ claims would<br />
not exist but for the fraudulently induced contract.<br />
Kool Radiators, Inc. v. Evans, 278 P.3d 310 (Ariz. Ct. App. 2012).<br />
The Arizona Court of Appeals vacated the trial court’s award of attorneys’ fees. The<br />
Court of Appeals held that the trial court erred when it dismissed the plaintiff’s complaint for<br />
lack of ripeness and further erred by awarding the defendant its attorneys’ fees and costs. The<br />
Court of Appeals overruled its prior decisions that it could review an award of attorneys’ fees<br />
entered after a dismissal without prejudice. Although the court lacked appellate jurisdiction to<br />
review the order awarding attorneys’ fees, it invoked its special action jurisdiction, appropriate<br />
when there is no equally plain, speedy, and adequate remedy by appeal, to review the award.<br />
Azure Ltd. v. I-Flow Corp., 143 Cal.Rptr.3d 136 (Cal. App. June 21, 2012).<br />
The court affirmed the trial court’s denial of attorneys’ fees pursuant to California’s<br />
private attorney general fee statute, Code of Civil Procedure section 1021.5. The plaintiff had<br />
acquired shares of defendant’s stock, which defendant wrongfully transferred to the state as<br />
escheated property. After several years of litigation, during which the California Supreme Court<br />
held that the defendant was not entitled to immunity under the state’s Unclaimed Property Law,<br />
the parties entered a stipulated entry of judgment. The plaintiff then sought attorneys’ fees under<br />
the California private attorney general statute. The court held that the defendant did not engage<br />
in conduct that could affect the rights of the public or a substantial number of people or<br />
otherwise adversely affect the public interest and that plaintiff therefore was not entitled to<br />
recover attorneys’ fees.<br />
K.4<br />
K.4<br />
K.4<br />
397
K.4<br />
Kaltenbacher v. Morgan Keegan & Co., 84 So. 3d 1127 (Fla. Dist. Ct. App. 2012).<br />
The court held that the defendant firm was entitled to recover its attorneys’ fees for<br />
successfully defending a motion to vacate an arbitration award. The firm’s client agreement<br />
stated that the client would pay the firm’s attorneys’ fees if the firm prevailed in an action<br />
brought by the client. The court reversed the lower court’s denial of the firm’s request for an<br />
award of attorneys’ fees on the motion to vacate. The court held that the arbitration panel’s<br />
denial of attorneys’ fees in the arbitration was not binding on the lower court in the separate<br />
action to vacate the arbitration award and that the firm was entitled to recover its attorneys’ fees<br />
pursuant to the contract between the parties.<br />
L. Contribution, Indemnification<br />
L.<br />
In re Med. Capital Sec. Litig., 842 F. Supp. 2d 1208 (C.D. Cal. 2012).<br />
The court dismissed with prejudice third-party equitable indemnification claims that<br />
banks, which were defendants in an underlying breach of contract action, asserted against broker<br />
dealers. The court reasoned that under California law, equitable indemnification may exist only<br />
among joint tortfeasors. Because the banks were sued in contract, they could not seek<br />
indemnification from the broker dealers in tort. The court also dismissed without prejudice the<br />
banks’ contribution claims against the broker dealers because under California law, the right of<br />
contribution ripens only after the issuance of a judgment and no judgment had been entered.<br />
Katz v. China Century Dragon Media, Inc., 2012 WL 6644353 (C.D. Cal. Dec. 18, 2012).<br />
Plaintiffs alleged that the defendants, in violation of the Securities Act of 1933, made<br />
false and incomplete statements in the prospectus and registration statement issued in connection<br />
with an IPO. Certain defendants who had assisted in the underwriting of the IPO brought a<br />
cross-claim against the former auditor for the IPO for indemnity and contribution. The auditor<br />
moved to dismiss. The court held that as a matter of law, there cannot be a claim for indemnity<br />
between or among co-defendants in an action brought against them under the Securities Act.<br />
The court also held that while the contribution claims were allowed between or among<br />
defendants in Securities Act cases, the underwriter’s claim was premature and would not accrue<br />
until the underwriter paid a judgment. The court granted the auditor’s motion to dismiss.<br />
L.<br />
398
L.<br />
Pastimes, LLC v. Clavin, 274 P.3d 714 (Mont. 2012).<br />
The Supreme Court of Montana reversed an award of attorney’s fees based on an<br />
indemnification clause in a limited liability company’s operating agreement. The court<br />
concluded that declaratory judgment action seeking a valuation of a deceased member’s interest<br />
in the LLC did not fall under the operating agreement’s indemnification provision that allowed<br />
for indemnification for any action brought “on behalf of the Company or in furtherance of the<br />
interests of the Company.”<br />
L.<br />
Wiederhorn v. Merkin, 952 N.Y.S.2d 478 (N.Y. App. Div. 2012).<br />
The court modified the trial court’s partial confirmation of an arbitration award but<br />
affirmed its denial of one appellant’s (a respondent in the arbitration proceeding) counterclaim<br />
for indemnification. The court rejected the appellant’s argument that because the arbitration<br />
panel dismissed the claims against it, it was a “prevailing party” in the arbitration and entitled to<br />
indemnity from the claimant under a fee-shifting clause in a subscription agreement.<br />
The court noted that although some of the arbitration claimant’s claims against one<br />
appellant were dismissed and his claims against the other appellant were dismissed in their<br />
entirety, the claimant succeeded in obtaining an arbitration award for the full value of his<br />
investments. The court noted that a party need not prevail on all its claims to be considered<br />
“prevailing.” The court also rejected the one appellant’s argument that it should be considered<br />
separately for the purpose of determining whether it prevailed in the arbitration. The court noted<br />
that the appellants mounted a joint defense and had maintained “absolute identity” in the<br />
arbitration and court proceedings. Furthermore, the record indicated that the cost of defense<br />
accrued to both appellants jointly, making it impossible to allocate expenses.<br />
Denenberg v. Rosen, 941 N.Y.S.2d 38 (N.Y. App. Div. 2012).<br />
In an action alleging wrongful establishment of a pension plan, the court affirmed the<br />
dismissal of an accountant’s cross claims for contribution and common-law indemnification<br />
against a bank that provided the insurance policies, the administrator of the pension plan, and the<br />
attorneys for the administrator. The court reasoned that the accountant did not receive<br />
professional advice from those parties and did not have a fiduciary or confidential relationship<br />
with them. The court also held that the accountant’s cross-claims for contribution and commonlaw<br />
indemnification against an insurance broker were not subject to dismissal because the broker<br />
owed a duty to the accountant to disclose information that was relevant to affairs entrusted to<br />
him.<br />
L.<br />
399
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Res., Inc., 47 A.3d 1 (App. Div.), cert<br />
denied, 56 A.3d 395 (N.J. 2012).<br />
The court affirmed an injunction prohibiting defendants from pursuing third-party<br />
FINRA arbitration claims for contribution and indemnification against a securities broker dealer.<br />
The court also upheld the denial of the defendants’ cross-motion to compel FINRA arbitration.<br />
The court held that the trial court had authority to determine whether the claims were<br />
substantively arbitrable, and that the claims were not arbitrable because there was no agreement<br />
to arbitrate the claims. The court also held that the claims were derivative in nature and not a<br />
covered, exchange-related dispute that would subject the claims to FINRA arbitration.<br />
L.<br />
M. Statute of Limitations<br />
1. Federal Securities Claims<br />
M.1<br />
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).<br />
The United States Supreme Court held that even if the two-year statute of limitations<br />
applicable to claims under Section 16(b) of the Securities Exchange Act of 1934 can be equitably<br />
tolled (an issue on which the Court divided), the limitations period is not tolled pending the filing<br />
of a Section 16(a) statement. The Court reasoned that Section 16(b) clearly states that the<br />
limitations period begins to run when the insider realizes a profit and says nothing about<br />
extending the period until a Section 16(a) statement is filed. The Court further reasoned that<br />
extending the limitations period in such a manner is inconsistent with the principles of equitable<br />
tolling because the tolling period could potentially be extended indefinitely where a plaintiff<br />
knows the facts giving rise to a Section 16(b) claim, yet no statement has been filed. The Court’s<br />
opinion abrogated the Ninth Circuit’s decision in Whittaker v. Whittaker Corp., 639 F.2d 516<br />
(9th Cir. 1981), which held that the limitations period is tolled until the insider discloses his<br />
transactions in a Section 16(a) filing regardless of whether the plaintiff knew or should have<br />
known of the transactions.<br />
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).<br />
The Sixth Circuit held that the two-year statute of limitations period for the plaintiffs’<br />
claims under Section 10(b) of the Securities Exchange Act of 1934 was equitably tolled because<br />
the defendant concealed its intent to deceive. The court found that the plaintiffs had been<br />
stymied from obtaining information from the defendant and that they were able to obtain<br />
information that made them aware of an alleged intent to deceive only after filing a state court<br />
action and pursuing discovery in that case.<br />
M.1<br />
400
The court held that the plaintiffs’ claims under Section 12(a)(1) of the Securities Act of<br />
1933 were time-barred, however, because they had not been brought within one year of the date<br />
of the alleged violation and were not subject to equitable tolling. Following the approach taken<br />
by a majority of federal courts and the interpretive canon expression unis est exclusion alterius,<br />
the court reasoned that the language of Section 12(a) plainly shows that Congress intended for<br />
the limitations period to run from the date of the violation irrespective of whether the plaintiff<br />
knew of the violation.<br />
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).<br />
The Ninth Circuit reversed the dismissal of investors’ claims under Section 10(b) of the<br />
Securities Exchange Act of 1934 as untimely where the district court applied the “inquiry notice”<br />
test to determine when the investors’ securities fraud claims accrued. The court explained that<br />
since the district court’s decision, the United States Supreme Court in Merck & Co. v. Reynolds,<br />
559 U.S. 633 (2010), abrogated the “inquiry notice” rule in favor of the “discovery” rule under<br />
which the limitations period begins to run when the plaintiff discovers, or a reasonably diligent<br />
plaintiff would have discovered, the facts constituting the violation. The court therefore<br />
remanded to allow the district court to apply the Merck standard to the statute of limitations<br />
determination.<br />
SEC v. Brown, 878 F. Supp. 2d 109 (D.D.C. 2012).<br />
In an SEC enforcement action against former corporates officers of a publicly held<br />
company who allegedly concealed the status of one of the officers, the court held that issues of<br />
material fact prevented summary judgment that the claims were time-barred under the five-year<br />
statute of limitations applicable to SEC civil penalties. The court first determined that the<br />
discovery rule did not toll the claims because the SEC’s complaint failed to allege facts that<br />
would establish that it exercised reasonable diligence in trying to uncover the defendants’<br />
wrongdoing, when the SEC discovered the claims, or that the SEC remained ignorant of the<br />
claims. Nevertheless, the court found that an issue of fact existed to whether the continuing<br />
violation doctrine tolled the limitations period because factual disputes existed as to when the<br />
alleged scheme to conceal the officer’s status arose and when (if ever) a duty to disclose the<br />
officer’s status arose. The court held that resolution of these disputes depended on a credibility<br />
determination that rests with the trier of fact.<br />
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2012 WL<br />
4480735 (D. Mass. Oct 1, 2012).<br />
The court held that the tolling doctrine announced in Am. Pipe Constr. Co. v. Utah, 414<br />
U.S. 538 (1974), tolled the limitations period for class members’ claims relating to a security<br />
401<br />
M.1<br />
M.1<br />
M.1
even though the class representative lacked standing as to that security. The plaintiff pension<br />
fund brought a putative class action against the issuers and underwriters of certain mortgagebacked<br />
securities, alleging violations of the federal securities laws.<br />
The fund lacked standing, however, with respect to its claims pertaining to a security it<br />
did not purchase. Two other plaintiffs had standing but did not bring their claims until after the<br />
applicable one-year statute of limitations had expired. The court held that the American Pipe<br />
doctrine (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) applied to the claims and tolled the limitations period.<br />
M.1<br />
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012).<br />
In a class action arising from the Bernard Madoff Ponzi scheme, the court held that the<br />
plaintiffs’ claims under the Securities Exchange Act of 1934 were not barred by the Exchange<br />
Act’s five-year statute of repose. The court held that a defendant asset management firm was<br />
under a continuing duty to disclose its true concerns regarding Madoff so as to render its prior<br />
statements of opinion not misleading.<br />
M.1<br />
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.<br />
2012).<br />
In a putative class action brought by investors in residential mortgage-backed securities<br />
pass-through certificates, the court held that plaintiffs’ claims arising under Sections 11, 12(a)(2)<br />
and 15 of the Securities Act of 1933 were timely under the Security Act’s one-year statute of<br />
limitations and three-year statute of repose. The court held that the plaintiffs’ Securities Act<br />
claims were subject to the discovery standard in Merck & Co. v. Reynolds, 559 U.S. 633 (2010),<br />
rather than the inquiry notice standard. The court found that the plaintiffs’ knowledge of news<br />
articles, reports, lawsuits, and news conferences was insufficient to trigger the one-year statute of<br />
limitations applicable to the Securities Act claims. The court reasoned that it was not clear that a<br />
complaint supported solely by that body of information would survive a motion to dismiss<br />
because that information related only generally to the industry and market, rather than to the<br />
particular certificates held by the plaintiffs.<br />
The court also held that the Securities Act’s three-year statute of repose did not bar the<br />
plaintiffs’ claims. Relying on its holding in In re Morgan Stanley Mortg.Pass-Through<br />
Certificates Litig., 810 F. Supp. 2d 650 (S.D.N.Y. 2011), the court explained that the<br />
commencement of this class action tolled the statute of limitations for all members of the<br />
putative class, including where the original named plaintiffs lacked standing to bring some of the<br />
claims. Because each of the plaintiffs asserted claims on behalf of purchasers of certificates less<br />
than three years after each of the offerings’ issuance, the claims were not barred by the statute of<br />
repose.<br />
402
M.1<br />
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012).<br />
In a putative class action, the court held that a proposed intervenor’s claims relating to the<br />
defendants’ alleged failure to disclose risks associated with certain exchange-traded funds were<br />
time-barred and not subject to either relation-back tolling under Am. Pipe & Constr. Co. v. Utah,<br />
414 U.S. 538 (1974), or equitable tolling. The court found that the relation-back doctrine did not<br />
apply because the intervenor’s claims had been voluntarily dismissed by amendment of the<br />
complaint. Thus, under the operative version of the complaint, no plaintiff currently had<br />
standing to bring the claims that the intervenor sought to assert. The court likewise concluded<br />
that the American Pipe doctrine did not suspend the statute of limitations because the intervenor<br />
was not an asserted member of the putative class and was aware of information sufficient to put<br />
him on notice that his claims were not part of the putative class and his interest was not<br />
protected. Finally, the court held that the intervenor’s claims were not subject to equitable<br />
tolling because he failed to act with diligence to protect his claims and there were no<br />
extraordinary circumstances that prevented him from timely filing his motion.<br />
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).<br />
The court held that a three-year statute of limitations in the Housing and Economic<br />
Recovery Act (“HERA”) governed the timeliness of claims that the Federal Housing Finance<br />
Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, asserted under the<br />
Securities Act of 1933. FHFA brought the claims against financial institutions that packaged,<br />
marketed, and sold residential mortgage-backed securities. The court rejected the financial<br />
institutions’ argument that HERA has no effect on the Securities Act’s three-year statute of<br />
repose. The court also rejected the financial institutions’ claim that HERA’s limitation provision<br />
applies only to state law claims and not federal claims.<br />
The court also held that the claims at issue were not time-barred under the Securities Act<br />
when FHFA’s conservatorship began. The court held that Securities Act claims are subject to<br />
the discovery standard in Merck & Co. v. Reynolds, 559 U.S. 633 (2010). The court further<br />
reasoned that the information Fannie Mae and Freddie Mac received (such as news articles,<br />
lawsuits, and government investigations) may have signaled general problems in the residential<br />
mortgage-backed securities market, but did not give them sufficient information to adequately<br />
plead a violation of the Securities Act.<br />
Pa. Pub. Sch. Emps.’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y. 2012).<br />
The court dismissed a pension fund’s claims under Section 11 of the Securities Act of<br />
1933 as time barred under the Act’s one-year statute of limitations. The court held that<br />
irrespective of whether Merck & Co. v. Reynolds, 559 U.S. 633 (2010), abrogated the inquiry<br />
notice standard for Securities Act violations, the Securities Act claims were time-barred because<br />
403<br />
M.1<br />
M.1
the company disclosed various lawsuits that not only put the plaintiff on inquiry notice of the<br />
facts underlying its claims, but also allowed a diligent plaintiff to plead facts constituting the<br />
violation. The court also rejected the pension fund’s argument that management’s reliable words<br />
of comfort excused its failure to inquire because the statements were material to the company<br />
and did not discuss how the company would avoid future problems. Finally, the court concluded<br />
that the limitations period was triggered even if the plaintiff did not have notice of all of the<br />
misconduct it alleged, so long as it was on notice of the issues central to its complaint.<br />
In re Vivendi Universal, S.A. Sec. Litig., 281 F.R.D. 165 (S.D.N.Y. 2012).<br />
The court held that the Sarbanes-Oxley Act’s two-year statute of limitations applied to<br />
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 that were asserted<br />
against a former corporate officer by shareholders who were excluded as class members from a<br />
putative class action against the officer. The class action was filed prior to the effective date of<br />
the Sarbanes-Oxley Act. The court rejected the defendant-officer’s argument that the<br />
shareholders’ claims were duplicative of the class action and thus governed by the one-year, pre-<br />
Act limitations period. The court determined that even though the putative class action was filed<br />
before the effective date of the Act, the shareholders’ individual claims were distinct and new<br />
proceedings because they had been excluded from the existing class proceedings by court order.<br />
The court also held that tolling under Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538<br />
(1974), extended through the Federal Rule of Civil Procedure 23(f) appeals process. Noting that<br />
courts are split on whether American Pipe tolling ceases upon the denial of class certification or<br />
the exhaustion of the Rule 23(f) appeals process, the court held that it is reasonable for putative<br />
class members to rely on a class action as a means of redressing their individual claims during<br />
the appeal and that because a Rule 23(f) appeal is swift, tolling the limitations period imposes no<br />
undue hardship on defendants.<br />
In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012).<br />
In a securities fraud class action, the court denied the class’s motion to amend the class<br />
definition to include putative class members that were excluded from the class when it was<br />
initially certified. The court held that the claims of the excluded class members were time-barred<br />
because they did not file complaints within one or two years of the order certifying the class<br />
(under the one-year statute of limitation applicable to pre-July 30, 2002 fraudulent activity or the<br />
two-year statute of limitation for post-July 30, 2002 fraud).<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 6584524 (S.D.N.Y. Dec. 18, 2012).<br />
In a case involving claims under Section 11 of the Securities Act of 1933, two groups of<br />
defendants moved to dismiss claims as time-barred under the Securities Act’s three-year statute<br />
404<br />
M.1<br />
M.1<br />
M.1
of repose. The court denied without prejudice the first group of defendants’ motion pending<br />
resolution of an appellate issue. The court denied the other motion to dismiss on the grounds that<br />
the defendant and plaintiff had entered into a tolling agreement and the defendant was estopped<br />
from raising the statute of repose.<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 4866504 (S.D.N.Y. Oct. 15, 2012).<br />
The court dismissed as untimely certain plaintiffs’ claims under Sections 11 and 15 of the<br />
Securities Act of 1933. The claims related to purchases that took place more than three years<br />
after the securities at issue were “bona fide offered to the public” under Section 13 of the<br />
Securities Act’s three-year statute of repose. The court held that the repose period began to run<br />
on the effective date of the registration statements for the securities at issue and rejected the<br />
plaintiffs’ argument that subsequent pricing supplements reset the running of the statute of<br />
repose.<br />
M.1<br />
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2012 WL 6840532 (D. N.J. Dec. 20, 2012).<br />
The court denied defendant’s motion to dismiss plaintiffs’ claim under Section 10(b) of<br />
the Securities Exchange Act of 1934. Defendants argued that the claim was time-barred under<br />
the applicable five-year statute of repose in 28 U.S.C. § 1658. The court held that the tolling<br />
doctrine articulated in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) applied to statutes<br />
of repose as well as statutes of limitation and that an initial timely-filed securities fraud class<br />
action tolled the statutory repose period.<br />
M.1<br />
In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., 876 F. Supp. 2d 616 (D. Md. 2012).<br />
The court held that investors’ claims for violations of Sections 11, 12(a)(2), and 15 of the<br />
Securities Act of 1933 were not time-barred under the Securities Act’s one-year statute of<br />
limitations. Applying Merck & Co. v. Reynolds, 559 U.S. 633 (2010), the court reasoned that<br />
even though the company had announced a large-scale restatement of its financial statements<br />
more than one year before the plaintiffs filed their complaint, the announcement alone was<br />
insufficient to provide the plaintiffs with sufficient information to adequately plead Securities<br />
Act violations. The court also rejected the defendants’ contention that only statements made<br />
around the time that the securities were offered for sale were relevant to the inquiry, explaining<br />
that the relevant date for limitations purposes is not the date that actionable statements are made,<br />
but rather when a reasonably diligent plaintiff would have information to state a plausible claim.<br />
The court also held that a separate claim for a violation of Section 11 of the Securities<br />
Act was time-barred under the Securities Act’s three-year statute of repose. The court rejected<br />
the investors’ argument that the repose period was triggered by the date that the shares were first<br />
available for sale and instead concluded that the period begins to run upon the effective date of<br />
the allegedly false registration statement.<br />
M.1<br />
405
M.1<br />
Szulik v. TAG Virgin Islands, Inc., 858 F. Supp. 2d 532 (E.D.N.C. 2012).<br />
The court held that investors’ claims under Section 10(b) of the Securities Exchange Act<br />
of 1934 and Rule 10b-5 based on an alleged kickback arrangement were timely under the twoyear<br />
statute of limitations applicable to such claims. Applying Merck & Co. v. Reynolds, 559<br />
U.S. 633 (2010), the court held that the defendants failed to show that the investors had<br />
knowledge of the kickback arrangement or that a reasonably diligent plaintiff would have known<br />
about it more than two years prior to filing suit. The court noted that the pleadings confirmed<br />
that the investors were repeatedly thwarted in their attempts to investigate their portfolio and that<br />
it was not until approximately seven months prior to their filing of the complaint that they were<br />
able to uncover the facts constituting the alleged violations.<br />
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).<br />
The court held that the continuing fraud exception does not apply to the five-year statute<br />
of repose governing claims under Section 10(b) of the Securities Exchange Act of 1934. The<br />
court reasoned that such an exception is akin to a continuing violation or fraudulent concealment<br />
theory based on equitable tolling, which is inconsistent with United States Supreme Court<br />
decisions holding that the statute of repose is not subject to equitable tolling. Thus, plaintiff’s<br />
claim was untimely to the extent it was based on purchases that took place outside the period of<br />
repose.<br />
The court rejected the defendant’s argument that the plaintiff’s Section 10(b) claims were<br />
barred under the two-year statute of limitations. The court reasoned that it was not apparent<br />
from the face of the complaint that the plaintiff discovered or that a reasonably diligent plaintiff<br />
would have discovered the facts constituting a Section 10(b) violation. The court also<br />
recognized that poor performance of an investment alone is insufficient to commence the<br />
limitations period.<br />
SEC v. Jackson, 2012 WL 6137551 (S.D. Tex. Dec 11, 2012).<br />
The court granted in part and denied in part the defendants’ motion to dismiss a civil<br />
enforcement action brought by the SEC. The court held that the SEC’s complaint against<br />
officers of an off-shore drilling company sufficiently alleged that the defendants concealed their<br />
wrongdoing as was required to state a claim for fraudulent concealment and toll the five-year<br />
statute of limitations for enforcement of civil penalties for violations of the Securities Exchange<br />
Act of 1934. The court held, however, that the SEC failed to plead facts to support the inference<br />
that it acted diligently in bringing the complaint and granted leave to amend the complaint to<br />
plead such facts. The court also held that although the complaint failed to state a claim for<br />
aiding and abetting within the limitations period, the continuing violation doctrine could apply to<br />
the claims at issue should the SEC plead appropriate facts in an amended complaint.<br />
406<br />
M.1<br />
M.1
La. Mun. Police Emps.’ Ret. Sys. v. KPMG, <strong>LLP</strong>, 2012 WL 3780344 (N.D. Ohio Aug. 31, 2012).<br />
The court granted plaintiffs’ motion for reconsideration. The court had previously<br />
ordered plaintiffs to file an amended complaint that did not include any allegations outside the<br />
statute of repose applicable to plaintiffs’ federal securities fraud claims. On reconsideration, the<br />
court noted that that a statute of limitations or repose does not bar factual evidence supporting a<br />
timely claim. The court amended its earlier order to permit plaintiffs to allege facts outside the<br />
period of repose.<br />
M.1<br />
M.1<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).<br />
The court dismissed claims for violations of the Securities Act of 1933 brought by a<br />
purchaser of residential mortgage-backed securities certificates as untimely under the Securities<br />
Act’s three-year statute of repose. The court held that a series of state court actions involving<br />
similar but not identical certificates did not toll the statute of repose under Am. Pipe & Constr.<br />
Co. v. Utah, 414 U.S. 538 (1974), because the plaintiffs in those actions lacked standing to<br />
pursue the claims at issue in this case.<br />
The court also dismissed the plaintiff’s claims for violations of the Securities Exchange<br />
Act of 1934 as untimely under the Exchange Act’s two-year statute of limitations, holding that a<br />
reasonable investor should have discovered facts sufficient to state every element of a claim<br />
more than two years prior to the filing of the complaint. The court also concluded that the<br />
pendency of the state court actions did not toll the limitations period under American Pipe<br />
because the claims in the state cases were Securities Act claims and thus involved fundamentally<br />
different elements.<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal. 2012).<br />
The court held that claims under Sections 11 and 12(a)(2) of the Securities Act of 1933<br />
brought by purchasers of residential mortgage-backed securities were time-barred under the<br />
Securities Act’s three-year statute of repose. Explaining that the statute of repose begins to run<br />
for Section 11 claims when the security is bona fide offered to the public and for Section<br />
12(a)(2) claims on the first day of sale, the court concluded that because plaintiffs’ complaint<br />
was filed more than three years after each of the certificates at issue in the case was bona fide<br />
offered to the public and purchased by the plaintiffs, the claims were time-barred. Citing Allstate<br />
Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011), the court also<br />
rejected the plaintiffs’ argument assertion that the Securities Act claims were subject to tolling.<br />
M.1<br />
407
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 2012 WL 5275327 (C.D. Cal. Oct. 18,<br />
2012).<br />
The court denied defendants’ motion to dismiss the Federal Housing Finance Agency’s<br />
(“FHFA”) claims under the Securities Act of 1933. Defendants argued that the securities at issue<br />
were purchased more than three years before the filing of the action and that the FHFA’s claim<br />
was untimely under the three-year statute of repose in Section 13 of the Securities Act. The<br />
court held that a provision of the Housing and Economic Recovery Act extending “statutes of<br />
limitation” for certain actions brought by the FHFA also applied to statutes of repose and that the<br />
FHFA’s Securities Act claims were therefore timely.<br />
M.1<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).<br />
The court held that the issue of whether articles and press reports put investors on inquiry<br />
notice to trigger the one-year limitations period for violations of Sections 11 and 12(a)(2) of the<br />
Securities Act of 1933 was not suitable for resolution on a motion to dismiss. The court<br />
reasoned that even if the plaintiffs had read the articles and some of the articles had triggered<br />
inquiry notice, the articles could not be said to have provided all the facts required for a<br />
reasonably diligent investor to discover the alleged materially misleading nature of the<br />
defendants’ statements. The court also rejected the defendants’ argument that the plaintiffs<br />
received disclosures placing them on notice of material facts, holding that the plaintiffs<br />
adequately alleged that the prospectuses and registration statements were misleading.<br />
M.1<br />
2. State Securities Claims<br />
M.2<br />
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).<br />
The Sixth Circuit held that an investor’s claims under the Ohio’s Blue Sky Law were<br />
governed by a five-year statute of repose rather than the four-year statue of repose that was in<br />
effect at the time the plaintiff purchased the investments. The court rejected the defendants’<br />
argument that applying the five-year statute of repose violated Ohio’s prohibition on ex post<br />
facto amendments affecting substantive rights. The court reasoned that the substantive right for<br />
a statue of repose begins when the limitations period has run. When the Ohio legislature<br />
changed the period from four to five years, the period for plaintiff to bring its claims had not<br />
expired.<br />
M.2<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239 (6th Cir. 2012).<br />
The Sixth Circuit affirmed the lower court’s dismissal of a suit alleging fraud, negligent<br />
misrepresentation, and violations of Kentucky’s Blue Sky Law. The Sixth Circuit affirmed the<br />
trial court’s conclusion that the five-year statute of limitations for fraud actions began to run no<br />
408
later than a few months after the defendant company issued a public prospectus. The court<br />
concluded that “ordinary vigilance and attention” demanded that the plaintiff read the public<br />
prospectus “long before” five years before filing suit. The court also held that plaintiffs’ Blue<br />
Sky Law claims were subject to dismissal in part because any claims that were based on<br />
mortgage pass-through certificates issued in 2003 were untimely under the Blue Sky Law’s<br />
three-year statute of limitations.<br />
M.2<br />
Anderson v. AON Corp., 674 F.3d 895 (7th Cir. 2012).<br />
The Seventh Circuit upheld the dismissal of an investor’s “holder” claims under<br />
California law. The court first noted that plaintiff could not establish causation because he did<br />
not attempt to show how he could have avoided a loss on the shares he held if the defendant had<br />
made earlier disclosures regarding mismanagement. The court rejected the investor’s attempt to<br />
base causation on a related options transaction. The court held that the sale of the option was<br />
distinct from the plaintiff’s “holder” claims and was untimely. The plaintiff did not challenge<br />
the district court’s earlier decision that the option claim was untimely.<br />
M.2<br />
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass. 2012).<br />
The court held that newspaper articles, industry publications, and government reports<br />
were not sufficient to put the plaintiff, a purchaser of residential mortgage-backed securities<br />
certificates, on inquiry notice of its claims under section 410(a) of the Massachusetts Uniform<br />
Securities Act. The court reasoned that the articles and publications provided only generalized<br />
reports on the industry, did not discuss the defendants’ practices specifically, and did not alert<br />
the plaintiff to potential fraud in any particular certificate it had purchased. The court also found<br />
that monthly loan data reports that showed an increase in loan defaults and offering documents<br />
for certain certificates that warned of increasing loan defaults, depreciation of appraisal values,<br />
and problems with loan originators were insufficient to put the plaintiff on inquiry notice of<br />
potential violations. The court concluded that although those reports and warnings may have<br />
indicated that the loans were performing poorly, they did not put the plaintiff on notice that<br />
representations concerning specific underwriting and appraisal processes were false. The court<br />
further concluded that because the reports and warnings related to a small subset of<br />
securitizations, the plaintiff could not have been alerted to the alleged wholesale abandonment of<br />
guidelines.<br />
M.2<br />
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).<br />
The court held that the plaintiff-investor’s fraud and constructive fraud claims under<br />
Virginia law were not subject to dismissal under Virginia’s two-year statute of limitations.<br />
Recognizing that the limitations period accrues when the fraud is discovered or should have been<br />
discovered by the exercise of reasonable diligence, the court determined this was an issue of fact<br />
that was not appropriate for determination on a motion to dismiss.<br />
409
The court also held that the plaintiff’s claim for violations of the Virginia Securities Act<br />
was barred by the Act’s two-year statute of limitations to the extent that the claim was based on<br />
notes he purchased more than two years before filing the complaint. The court explained that<br />
Virginia’s Blue Sky Law imposes an absolute bar on claims two years after the transaction on<br />
which the claims are based.<br />
M.2<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).<br />
In a case arising out of the plaintiffs’ purchase of residential mortgage-backed securities<br />
certificates, the court dismissed various plaintiffs’ state law claims as untimely. The court<br />
dismissed claims for violations of the Connecticut Uniform Securities Act as untimely under the<br />
applicable statute of limitations. The court also dismissed another plaintiff’s common law claims<br />
as untimely under Oklahoma law and all but one of a third plaintiff’s claims as untimely under<br />
the Illinois Securities Law.<br />
M.2<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal. 2012).<br />
In a multi-district litigation action involving residential mortgage-backed securities, the<br />
court dismissed as time-barred certain state-law fraud and negligent misrepresentation claims<br />
brought by 22 separate corporate plaintiffs. The court had previously held that a reasonable<br />
investor was on inquiry notice of claims relating to the defendant’s loan-origination practices by<br />
February 14, 2008. Stichting Pensionenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d<br />
1125, 1140 (C.D. Cal. 2011). The complaint in this case was filed on August 8, 2011.<br />
Accordingly, the court held that with the exception of certain claims that were subject to a tolling<br />
agreement, all fraud and negligent misrepresentation claims under Arizona, California, and<br />
Tennessee law and negligent misrepresentation claims under Texas law were time-barred under<br />
these states’ two or three-year limitations periods. The court declined to dismiss the fraud claims<br />
under Texas law (which were subject to a four-year limitations period) or the other claims that<br />
were subject to the tolling agreement. The court held that it could not at this stage of the case<br />
determine whether the plaintiffs were on inquiry notice at such time as would render those<br />
claims untimely.<br />
M.2<br />
Bank Hapoalim B.M. v. Bank of Am. Corp., 2012 WL 6814194 (C.D. Cal. Dec. 21, 2012).<br />
The court dismissed the majority of one plaintiff’s state law claims as untimely. The<br />
court applied Iowa’s five-year statute of limitations to the plaintiff’s fraud and misrepresentation<br />
claims and determined that the plaintiff purchased all but five of the securities at issue outside<br />
the statute of limitations. The court rejected the plaintiff’s argument that defendants were<br />
estopped from raising the statute of limitations because the plaintiff did not show any affirmative<br />
act by the defendants to conceal their alleged fraud. The court also held that Iowa’s statutory<br />
discovery rule, Iowa Code § 614.4, applied only to actions at equity and not where, as here, the<br />
plaintiff sought monetary relief.<br />
410
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 2012 WL 5275327 (C.D. Cal. Oct. 18,<br />
2012).<br />
The court denied defendants’ motion to dismiss the Federal Housing Finance Agency’s<br />
(FHFA) claims under the Virginia and District of Columbia Securities Acts. Defendants argued<br />
that the securities at issue were purchased more than three years before the filing of the action<br />
and that the FHFA’s claim was untimely under both of the Acts’ statutes of repose. The court<br />
held that a provision of the Housing and Economic Recovery Act extending “statutes of<br />
limitation” for certain actions brought by the FHFA also applied to statutes of repose and that the<br />
FHFA’s claims were therefore timely.<br />
M.2<br />
Wiand v. Lee, 2012 WL 6923664 (M.D. Fla. Dec. 13. 2012).<br />
The Magistrate Judge recommended that the District Court deny the defendants’ motion<br />
for summary judgment. The plaintiff, a receiver, brought a “clawback” action against the<br />
defendants alleging claims under Florida’s Uniform Fraudulent Transfer Act, Fla. Stat. §§<br />
726.01, et seq. and unjust enrichment. The Magistrate Judge found that the claims at issue,<br />
which were added in an amended complaint, were timely because they related back to the<br />
original complaint and because the amended complaint was filed within the one-year discovery<br />
period that began upon the receiver’s appointment.<br />
M.2<br />
Oxbow Calcining USA Inc. v. Am. Indus. Partners, 96 A.D.3d 646 (N.Y. App. Div. 2012).<br />
The court held that for purposes of New York’s borrowing statute, which requires that<br />
nonresident plaintiffs show that claims they assert that accrued outside of New York are timely<br />
under both the laws of New York and the other state, a corporation is deemed to reside in New<br />
York if it is incorporated or maintains its principal place of business there. Reversing the trial<br />
court’s order which had dismissed the plaintiff’s claim as time-barred, the court held that the<br />
plaintiff had alleged facts sufficient to show that its principal place of business at the time its<br />
claim arose was in New York. If true, this allegation would mean that the plaintiff was a resident<br />
of New York, that the claim accrued in the state of New York, and only New York’s statute of<br />
limitations would apply. The court also held that allegations of fraud were essential to the<br />
plaintiff’s breach of fiduciary duty claim. Thus, if New York law applied, the claim would be<br />
subject to New York’s six-year statute of limitations.<br />
M.2<br />
Dunn v. Dunn, 281 P.3d 540 (Kan. Ct. App. 2012).<br />
The court affirmed the grant of summary judgment in favor of a firm and broker and held<br />
that the plaintiffs’ action was time-barred under Kansas law. The firm and broker acted as sales<br />
and servicing agent on a variable annuity account sold to the plaintiffs’ stepmother. The court<br />
found that the broker and firm were not equitably estopped from raising the statute of limitations<br />
defense to claims of breach of fiduciary duty and that no ongoing fiduciary relationship existed<br />
between the plaintiffs’ and the broker or the firm, as neither the firm nor the broker had any<br />
411<br />
M.2
contact with the plaintiffs between the time the annuity was purchased in 1994 and when the suit<br />
was filed fourteen years later. The court found no evidence that the broker intended to deceive<br />
or mislead the plaintiffs so as to justify application of equitable estoppel. For the same reasons,<br />
the court also rejected the plaintiffs’ argument that the doctrine of continuing representation<br />
tolled the limitations period.<br />
M.2<br />
Stichting Pensioenfonds ABP v. Credit Suisse Grp. AG, 2012 WL 6929336 (N.Y. Sup. Nov. 30,<br />
2012).<br />
The court denied the defendants’ motion to dismiss plaintiff’s claims as untimely under<br />
Dutch law. The plaintiff, a Dutch pension fund, asserted common law claims against the<br />
defendants arising from the plaintiff’s purchase of residential mortgage-backed securities. The<br />
court held that Dutch law applied and that under the applicable Dutch statute of limitations; a<br />
buyer was required to give “prompt notice” of its claim. The court held that this standard is<br />
highly fact specific and could not be determined on a motion to dismiss.<br />
3. RICO<br />
M.3<br />
Pitkin v. Ocwen Fin. Corp., 2012 WL 5986480 (D. Md. Nov. 27, 2012).<br />
The court dismissed the plaintiff’s federal RICO claim as time-barred. The plaintiff<br />
entered into the transaction at issue approximately seven years before filing the complaint.<br />
Plaintiff’s claim was therefore untimely under RICO’s four-year statute of limitations for private<br />
enforcement actions.<br />
4. SRO Rules<br />
Andrade v. Ewanouski, 962 N.E.2d 245 (Mass. App. Ct. 2012).<br />
The court affirmed the lower court’s confirmation of an arbitration award in favor of the<br />
defendants. The arbitration panel had held that many of the plaintiffs’ claims were barred for<br />
lack of jurisdiction under the six-year limitations period of FINRA Code of Arbitration Rule<br />
12206(a). The court noted that its ability to disturb an arbitration award was narrow and rejected<br />
the plaintiffs’ argument that the arbitration panel exceeded its authority.<br />
M.4<br />
412
M.4<br />
Nee v. Fin. Indus. Regulatory Auth., Inc., 2012 WL 832665 (Mass. Super. Feb. 17, 2012).<br />
The court dismissed the plaintiff’s complaint against FINRA, because the complaint—<br />
which sought expungement from FINRA’s Central Registration Depository (“CRD”) database of<br />
an arbitration award issued six and a half years before the complaint was filed—was untimely.<br />
The court found the action both untimely under a Massachusetts statute that required an<br />
application to vacate an arbitration award be made within 30 days after delivery of the award and<br />
barred by the doctrines of res judicata and issue preclusion. The court rejected the plaintiff’s<br />
argument that FINRA Rule 2080, which sets out a procedure internal to FINRA by which<br />
information concerning a broker may be expunged from the CRD, provides an exception to the<br />
statutory procedure for vacatur of an award or provides a substantive right that overrides<br />
principles of res judicata.<br />
N. Arbitration<br />
1. Scope<br />
N.1<br />
Compucredit Corp., et al., v. Greenwood, 132 S. Ct. 665 (2012).<br />
Plaintiffs sought to avoid an agreement to arbitrate in a new credit card application,<br />
arguing that Congress intended to preclude claims under Credit Repair Organizations Act<br />
(CROA), 15 U.S.C. § 1679 et seq., when it stated that a credit repair organization must provide<br />
disclosures that advise the consumer of their “right to sue” for a violation of the CROA. The U.S.<br />
Supreme Court held that pursuant to the Federal Arbitration Act (FAA) a court must enforce an<br />
arbitration agreement according to its terms, even where the claims at issue are federal statutory<br />
claims, unless the FAA’s mandate is overridden by contrary congressional command. The<br />
language in the CROA does not rise to the level of the congressional command necessary to infer<br />
an intent to preclude arbitration of claims under the CROA.<br />
Filho v. Safra Nat’l Bank, 2012 U.S App. LEXIS 15309 (2d Cir. July 25, 2012)<br />
N.1<br />
Defendants sought to compel arbitration arguing Plaintiffs constructively received, and<br />
therefore were bound by, an agreement to arbitrate. In 2002, Plaintiffs executed a customer<br />
agreement which did not contain an arbitration provision; however, it contained a provision<br />
where the customer expressly accepted that rather than actual notice, the bank would hold all<br />
mail related to his account, and that he agreed to be bound by announcements in the documents<br />
without explicit agreement. The Second Circuit held that Defendant did not meet the burden to<br />
show constructive notice by a preponderance of the evidence of when the subsequent agreement<br />
was mailed to customers, and if so, when it was placed in Plaintiff’s held mail.<br />
413
Schneider v. Kingdom of Thailand, 688 F.3d 68 (2d Cir. 2012)<br />
N.1<br />
Plaintiff initiated arbitration against Thailand claiming it had interfered with investments<br />
made in the country. An arbitrational tribunal was convened and representatives from both<br />
parties agreed to Terms of Reference incorporating the United Nations Commission on<br />
International Trade Law (UNCITRAL) Arbitration Rules. Thailand objected to the jurisdiction of<br />
the panel on the ground that the dispute did not concern “approved investments.” The Second<br />
Circuit held that the question of the scope of the claims in this instance was to be decided by the<br />
tribunal because the parties incorporated UNCITRAL Rules of Procedure, which includes Article<br />
21, providing that the tribunal has the authority to decided questions of arbitrability. Where the<br />
parties explicitly incorporate rules empowering the arbitrator to decide arbitrability, there is clear<br />
intent to delegate such issues to the arbitrator.<br />
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9, 2012)<br />
Plaintiff sought to enjoin an arbitration proceeding instituted before the Financial<br />
Industry Regulatory Authority (FINRA) arguing Defendant was not a “customer” within the<br />
scope of FINRA Rule 12200 and therefore not entitled to arbitration because there was otherwise<br />
no agreement to arbitrate. FINRA Rule 12200 provides that a “customer” may institute an<br />
arbitration proceeding against a FINRA member. The court found that Defendant did not present<br />
any evidence to counter Plaintiff’s showing that he was not a “customer.”<br />
Waterford Inv. Serv., Inc., v. Bosco, 682 F.3d 348 (4th Cir. 2012)<br />
Investors instituted arbitration proceedings against their financial advisor, the firm the<br />
advisor was employed with when the claims arose, Community Bankers, and the investment firm<br />
the financial advisor was later employed with, Weatherford, pursuant to Rule 12200 of the<br />
Financial Industry Regulatory Authority (FINRA). Weatherford sought to enjoin the arbitration<br />
proceedings arguing that the advisor was not an “associate person” of Waterford during the<br />
events in question. A person associated with a member is a natural person engaged in the<br />
investment banking or securities business directly or indirectly controlling or controlled by a<br />
member. The Fourth Circuit found that Rule 12200 is susceptible to the meaning that the advisor<br />
was an associated person of Waterford because the two investments firms had significant<br />
personnel and resource overlap and therefore, the investors’ dispute is within the scope of Rule<br />
12200.<br />
N.1<br />
Grant v. Houser, 2012 U.S. App. LEXIS 6060 (5th Cir. Mar. 23, 2012)<br />
Plaintiff signed a securities brokerage account with Brecek & Young Advisors, Inc.<br />
(BYA) containing an arbitration clause which compelled any controversy between them and<br />
BYA, or its registered representatives, employees, or agents to arbitration. BYA was acquired by<br />
414<br />
N.1<br />
N.1
Securities America, which maintained Plaintiff’s account. Securities America argued it could<br />
enforce the arbitration agreement. The Fifth Circuit held that a declaration submitted by<br />
Securities America’s Vice President, stating that based on his personal knowledge, in acquiring<br />
BYA, Securities America inherited all contractual rights and obligations associated with BYA’s<br />
accounts, including Plaintiff’s account, was sufficient evidence to establish an assignment for<br />
purposes of a Motion to Compel Arbitration.<br />
N.1<br />
Dottore v. Huntington Nat’l Bank, 2012 U.S. App. LEXIS 9185 (6th Cir. May 4, 2012)<br />
An investment fund manager operated a ponzi scheme. The receiver for the fund alleged<br />
the defendant bank, with whom the original fund manager opened fund accounts, breached its<br />
duty to the fund investors by aiding the fraud. Defendant moved to compel arbitration, but the<br />
Sixth Circuit rejected Defendant’s argument that there was a valid agreement to arbitrate. The<br />
initial agreements in 2001 governing the accounts did not contain an arbitration clause. In 2003 a<br />
notice was sent to all bank customers containing amendments to the account documents,<br />
including an arbitration provision. However, in 2005, a representative of the investment fund<br />
signed and filed a change of signature, substituting himself for the initial fund manager on the<br />
account. This change of signature document contained a terms and condition portion governing<br />
the account, it did not have an arbitration clause. The 2005 agreement governed the account<br />
because it was complete on its face, and therefore no analysis of the 2003 notice was necessary.<br />
N.1<br />
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012)<br />
Investors moved to compel arbitration pursuant to Rule 12200 of the Financial Industry<br />
Regulatory Authority (FINRA) Code of Arbitration Procedure arguing they were customers of a<br />
broker dealer which was a managing dealer for a private placement memoranda offering. A<br />
“customer” in the Eighth Circuit refers to one involved in a business relationship with a FINRA<br />
member that is related directly to investment or brokerage services provided to the customer.<br />
Here, the Court found no customer relationship existed because merely being the managing<br />
broker for the offering was not sufficient direct rendition of investment of brokerage services to<br />
the Investors.<br />
N.1<br />
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012)<br />
An investor instituted a second arbitration against a broker dealer alleging malicious<br />
prosecution and abuse of process after the broker dealer unsuccessfully sought to vacate the<br />
arbitration award to the investor in the first arbitration. The client agreement clause compels<br />
arbitration of “all controversies” between the parties which may arise from any account or for<br />
any cause whatsoever. The court found the arbitration clause applies to these claims because they<br />
arise from litigation between the parties over account related activity.<br />
415
N.1<br />
Garcia v. Wachovia Corp., 699 F.3d 1273 (11th Cir. 2012)<br />
The arbitration clause at issue provided that any dispute or claim concerning [the<br />
customer’s] account or relationship with the bank would be decided by arbitration. However, the<br />
provision restricted the availability of bringing the claims as a class action. Defendants argued<br />
they did not waive their right to compel by waiting until the U.S. Supreme Court decided the<br />
issue in AT&T Mobility LLC., v. Concepcion, 131 S.Ct. 1740 (2011) to compel arbitration<br />
because the state laws governing the agreements precluded enforcement of the arbitration<br />
agreement to arbitrate on an individual basis. The Eleventh Circuit rejected the Defendants’<br />
argument because it would not have been futile because the arbitration was at least arguably<br />
enforceable prior to Concepcion.<br />
N.1<br />
In Re Checking Account Overdraft Litig., 685 F.3d 1269 (11th Cir. 2012).<br />
Plaintiff opposed Defendant’s motion to compel arbitration on the ground that a cost and<br />
fee shifting provision in the customer agreement providing for Defendant’s recovery of expenses<br />
regardless of whether Plaintiff prevails was unconscionable under South Carolina law. The<br />
Eleventh Circuit found the cost and fee shifting provision unconscionable because nothing in the<br />
arbitration clause notifies the reader of its potential application in arbitration. However, the court<br />
found the provision severable from the arbitration clause, so it reversed and remanded with<br />
instructions to compel arbitration.<br />
N.1<br />
In Re Checking Account Overdraft Litig., 674 F.3d 1252 (11th Circ. 2012)<br />
The arbitration agreement provided that any issue regarding whether a particular dispute<br />
or controversy is subject to arbitration will be decided by the arbitrator. The Eleventh Circuit<br />
found that this delegation provision was clear and unmistakable evidence that the parties<br />
intended to arbitrate the issue of whether Plaintiffs’ claims were within the scope of the<br />
arbitration agreement. Furthermore, Plaintiff’s argument that the agreement was procedurally<br />
unconscionable was not directed specifically to the delegation provision, and therefore pursuant<br />
to Rent-A-Center, W., Inc., v. Jackson, 130 S. Ct. 2772 (2010), the decision as to whether the<br />
claims were within the scope of arbitration was for the arbitrator.<br />
N.1<br />
In Re Checking Account Overdraft Litig., 2012 U.S. App. LEXIS 15781 (11th Cir. Mar. 11,<br />
2012)<br />
The Eleventh Circuit held that pursuant to North Carolina law, a cost-and-fee shifting<br />
provision in a customer agreement providing for the payment of the defendant’s costs regardless<br />
of Plaintiff prevailing was unconscionable. However, the court found the cost-and-fee shifting<br />
provision was severable and therefore the arbitration provision in the customer agreement was<br />
enforceable.<br />
416
Plaintiffs’ S’holders Corp., v. Southern Farm Bureau Life Ins. Co., 2012 U.S. App. LEXIS<br />
16713 (11th Cir. Aug. 10, 2012)<br />
Plaintiff opposed Defendants’ Motion to Compel Arbitration arguing that the filing of the<br />
second amended complaint did not revive Defendants’ right to compel arbitration which had<br />
been waived. Defendants argued that because the agreement to arbitrate was an agreement to<br />
arbitrate waiver claims by incorporation of the rules of the American Arbitration Association,<br />
specifically 7(a), which gives an arbitrator the power to rule on their jurisdiction. The Eleventh<br />
Circuit rejected this argument because absent clear and unmistakable evidence of an agreement<br />
to arbitrate questions regarding waiver, the courts decide these matters.<br />
N.1<br />
Solymar Inv., Ltd., v. Banco Santander S.A., 672 F.3d 981 (11th Cir. 2012)<br />
Plaintiffs executed a partial settlement agreement, with the intention to execute a more<br />
comprehensive settlement, containing an agreement to arbitrate “all controversies between the<br />
client and the bank or the bank parties arising out of or relating to this agreement or matters<br />
related thereto” for losses relating to investments in funds exposed to Madoff. When the<br />
settlement negotiations fell through, Plaintiffs argued their claims alleging causes of action for<br />
breach of fiduciary duty, negligence, claims under the Securities and Exchange Act, and state<br />
statutory claims were outside the scope of the arbitration clause because they were based on<br />
different investments. The court rejected this argument because the pleadings focused on the<br />
investments with Madoff as the source of the losses sustained.<br />
N.1<br />
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass. Mar. 8, 2012)<br />
N.1<br />
Plaintiffs are trustees who received investment advisory and brokerage services from the<br />
Defendant. In connection with the account opening, Plaintiffs entered into an agreement to<br />
arbitrate and signed as trustees. Plaintiffs seek to avoid a counterclaim filed by the Defendant to<br />
the arbitration Plaintiff’s instituted in the Financial Industry Regulatory Authority (FINRA),<br />
arguing they did not sign the arbitration agreement in their individual capacity, only as trustees,<br />
and because the counterclaim is asserted against them in their individual capacity it is not<br />
brought against a signatory to the arbitration agreement. The court rejected this argument finding<br />
no basis to conclude the counterclaim was asserted against them individually, as opposed to in<br />
their capacity as trustees.<br />
N.1<br />
Barros v. UBS Trust Co. of P.R., 2012 U.S. Dist. LEXIS 133233 (D.P.R. Sept. 17, 2012)<br />
Plaintiffs brought suit against Defendant alleging breach of fiduciary duty in connection<br />
with the management of Plaintiffs’ trust. Plaintiff argues the dispute is not within the scope of<br />
the arbitration agreement executed with Plaintiffs brokerage account opening because “(1) her<br />
relationship with UBS-Trust is not an "Agreement" within the meaning of the Individual<br />
Account Agreement, (2) she never intended to arbitrate any disputes with UBS-Trust, and (3) the<br />
417
terms of the Individual Account Agreement only affect disputes related to the brokerage<br />
account.” The court rejected the argument, and applied a broad reading to the agreement taking<br />
note of the use of the disjunctive, holding that a breach-of-fiduciary-duty claim is a<br />
"controversy" that has arisen concerning a "dispute" with UBS-Trust, an affiliate of UBS-<br />
Financial.<br />
N.1<br />
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist. LEXIS 30988<br />
(E.D.N.Y. Mar. 8, 2012)<br />
Plaintiff is a Canadian Corporation. Its predecessor corporation was a Massachusetts<br />
corporation registered with the Securities and Exchange Commission (SEC) and the Financial<br />
Industry Regulatory Authority (FINRA) as a broker dealer. Plaintiff's predecessor surrendered its<br />
corporate existence in the State of Massachusetts and ceased to do business as a U.S. broker<br />
dealer. Plaintiff argues that it is not a member for purposes of FINRA Rule 13200 and therefore<br />
cannot be compelled to arbitrate. The court rejected the argument and compelled arbitration<br />
because “Section 13100(o) of the FINRA code defines the term "member" to include any broker<br />
or dealer admitted to membership in FINRA, whether or not the membership has been<br />
terminated or cancelled.” Both parties were FINRA members at the time of the Agreement. The<br />
subsequent cancellation of Plaintiff's broker dealer status did not change the court's conclusion.<br />
Ayco Co., L.P. v. Frisch, 2012 U.S. Dist. LEXIS 2112 (N.D.N.Y Jan. 9, 2012)<br />
Plaintiff, a non Financial Industry Regulatory Authority (FINRA) member firm, filed a<br />
Complaint against Defendants, individual brokers, who resigned and became employed by a<br />
competitor investment services firm. Defendants moved to compel arbitration based on the<br />
Uniform Application for Securities Industry Registration Form U4 signed by Defendants,<br />
arguing Plaintiff’s should be bound despite not being signatories, pursuant to FINRA rules and<br />
on the common law theories of agency, veil-piercing/alter ego, and estoppel. The Court denied<br />
the motion to compel.<br />
N.1<br />
Peyser v. Kirshbaum, 2012 U.S. Dist. LEXIS 176873 (S.D.N.Y. Dec. 11, 2012<br />
Plaintiff filed a motion to compel arbitration against a Financial Industry Regulatory<br />
Authority (FINRA) member firm of the disputes relating the brokers recommendation to<br />
purchase Tax Advantaged Stock Loans as a “customer” of the firm and the dispute related to the<br />
business activities of the member firm under FINRA Rule 12200. The court found the dispute<br />
fell within the scope of “business activities” and compelled arbitration.<br />
N.1<br />
French v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 18233 (D. Vt. Feb. 14, 2012)<br />
Plaintiff was a financial advisor, employed by Defendant’s predecessor and Defendant,<br />
but was ultimately terminated by Defendant. Defendant moved to compel arbitration of<br />
Plaintiff’s dispute which alleged bad faith termination pursuant to the arbitration agreement in<br />
418<br />
N.1
the Uniform Application for Securities Industry Registration or Transfer Form U4, which<br />
requires arbitration in compliance with the rules of the Financial Industry Regulatory Authority<br />
(FINRA). The court found the dispute fell within FINRA Rule 13200(a), "a dispute must be<br />
arbitrated . . . if the dispute arises out of the business activities of a member or an associated<br />
person and is between or among: . . . Members and Associated Persons." The term "business<br />
activities" encompassed a dispute arising from the employment or termination of an associated<br />
person.<br />
N.1<br />
Erichsen v. RBC Capital Mkts., LLC, 2012 U.S. Dist. LEXIS 93641 (E.D.N.C. July 5, 2012)<br />
A securities trader filed suit against an investment firm and alleged that Defendant could<br />
not enforce an arbitration agreement assigned to it by the predecessor signatory. The court<br />
rejected Plaintiff’s argument, and found that there was a valid assignment to the entity and the<br />
assignee, under principles of equitable estoppel, which it could enforce against the trader even<br />
as a nonsignatory.<br />
N.1<br />
Benezra v. Zacks Inv. Research, Inc., 2012 U.S. Dist. LEXIS 47769 (M.D.N.C. Mar. 30, 2012)<br />
Investor executed an account opening agreement, which included an arbitration<br />
agreement. However the agreement did not contain a signature by a representative of the<br />
investment firm. The court found a valid agreement existed because by the Investor’s signature<br />
and delivery of investment funds to the investment firm, manifested a clear intent to enter into<br />
the agreement and to be bound by it; and the firm, by accepting the funds and investing them, did<br />
so as well. Thus, the parties mutually assented.<br />
N.1<br />
Estate of Campana v. Comerica Bank & Trust, N.A., 2012 U.S. Dist. LEXIS 1490 (N.D. W. Va.<br />
Jan. 4, 2012).<br />
Defendant trustee moved to compel arbitration of a Complaint brought by an estate and<br />
its beneficiaries, alleging mismanagement of the trust property. Defendant alleged Plaintiffs<br />
entered into arbitration agreements related to the opening of the trust account and between the<br />
beneficiary of the estate and a financial services company, for an unrelated brokerage account,<br />
the trustee retained to provide investment advice for the trust. Plaintiff argues that because the<br />
beneficiary of the trust did not sign the agreements she cannot be bound to arbitrate the claims.<br />
The court rejected Plaintiffs argument, holding that the dispute over management and execution<br />
of the Trust agreements clearly falls within the broad "any and all controversies" language of the<br />
arbitration clauses. Furthermore, to the extent that the application of these clauses to trust<br />
beneficiaries is ambiguous, "ambiguities as to the scope of the arbitration clause itself are<br />
resolved in favor of arbitration."<br />
N.1<br />
Harding v. Midsouth Bank N A, 2012 U.S. Dist. LEXIS 143984 (W.D. La. Oct. 3, 2012)<br />
Plaintiff opened a checking account containing an arbitration agreement to submit “any<br />
controversy or claim involving more than $25,000 that arises out of, or relates to, this agreement,<br />
419
or your deposit relationship with us,” to arbitration. The court found that this was a broad<br />
arbitration clause and compelled arbitration of the dispute. Determining whether a dispute falls<br />
within the scope of an arbitration clause requires the court to characterize the arbitration clauses<br />
as "broad" or "narrow." Narrow arbitration clauses require arbitration only of disputes "arising<br />
out of" the contract, while broad clauses are those that cover all disputes that "relate to" or "are<br />
connected with" the contract. Also, the use of the disjunctive “or” evinced an intent to have a<br />
broader scope of claims.<br />
N.1<br />
Taylor v. Cmty. Bankers Sec., LLC, 2012 U.S. Dist. LEXIS 179266 (S.D. Tex. Dec. 19, 2012)<br />
Defendants moved to compel arbitration arguing that the appointed receiver, who brings<br />
this action on behalf of a class of investors, was bound to arbitrate the claims because the<br />
Noteholders are customers of the firms who offered the notes at issue to the investors and entered<br />
into customer agreements containing arbitration agreements. The court denied Defendants’<br />
motion because they did not show which of the investors represented by the receiver had signed<br />
the agreements, and furthermore, did not proffer a reason as to why the Noteholders who had not<br />
executed the agreements should also be compelled to arbitrate.<br />
N.1<br />
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 74288 (N.D. Ill. May 30, 2012)<br />
Plaintiff, a Financial Industry Regulatory Authority (FINRA) member firm argued<br />
Defendant, who only dealt with an independent third party financial advisor, could not institute<br />
an arbitration proceeding against Plaintiff pursuant to FINRA Rule 12200 because the Defendant<br />
was not Plaintiff’s “customer.” The Court found Plaintiff was not a customer. To allow an overly<br />
broad definition of "customer" under FINRA would not accurately recognize the relationship<br />
between FINRA members and other parties, and would not accord FINRA members with the<br />
terms that they should have reasonably expected to exist when joining FINRA<br />
N.1<br />
Ireland v. Lear Capital, Inc., 2012 U.S. Dist. LEXIS 171544 (D. Minn. Dec. 4, 2012)<br />
An investor filed a complaint alleging breach of fiduciary duty, misrepresentations, fraud,<br />
violations of the Minnesota Consumer Protection act in connection with the purchase of gold<br />
coins. The arbitration agreement stated the parties would be conducted in accordance with the<br />
rules of the American Arbitration Association (AAA). AAA Rule 7, provides in relevant part that<br />
arbitrators determine their own jurisdiction, including "the existence, scope or validity of the<br />
arbitration agreement. The Court found that the incorporation of the AAA rules was a sufficient<br />
manifestation of a clear and unmistakable intent to submit the gateway question of arbitrability<br />
of a dispute to the arbitrator and compelled arbitration of a dispute.<br />
420
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 15,<br />
2012)<br />
Investor initiated an arbitration proceeding before the Financial Industry Regulatory<br />
Authority (FINRA) under Rule 12200 arguing they are Plaintiff’s “customer” and therefore<br />
entitled to compel arbitration against a FINRA member. Plaintiff moved for a preliminary<br />
injunction of the arbitration proceeding arguing the Investor was not a “customer.” The Investor<br />
filed a motion to dismiss the injunction proceeding, arguing the question of whether the Investor<br />
is a “customer” is an issue for the FINRA arbitrator to decide. The Court rejected the Investors<br />
argument, and agreed with the prevailing view that FINRA rules do not “clearly and<br />
unmistakably” grant arbitrators the authority to determine questions of arbitrability, and therefore<br />
was for the court to decide.<br />
Alakozai v. Chase Inv. Servs. Corp., 2012 U.S. Dist. LEXIS 30759 (C.D. Cal. Mar. 1, 2012)<br />
Financial Advisors brought suit against a securities brokerage firm alleging various<br />
causes of action related to nonpayment of overtime and other wages owed. The securities<br />
brokerage firm filed a motion to compel arbitration against the individual financial advisors<br />
pursuant to the arbitration agreement contained in the employment agreement executed by each.<br />
The arbitration clause prevented the institution of arbitration proceedings as a class. However,<br />
the court denied the motion to compel arbitration, because Rule 13200 of the Financial Industry<br />
Regulatory Authority prevents a member of associated person from enforcing an arbitration<br />
agreement against a member of a certified or putative class action until certification is denied, the<br />
class is decertified, the member is excluded from the class by the court, or the member elects not<br />
to participate in the class action. None of the requirements to enforce the arbitration agreement<br />
had occurred.<br />
Holland v. TD Ameritrade, Inc., 2012 U.S. Dist. LEXIS 22470 (E.D. Cal. Feb. 22, 2012)<br />
Plaintiff alleged that defendant engaged in a fraud violating the California Consumers<br />
Legal Remedies Act (CLRA) by operating a self directed trading platform. Defendants’ motion<br />
to dismiss the claims was granted. The Court found the Plaintiff did not meet the heightened<br />
pleading requirements to state a claim for fraud, nor did the placement of an arbitration provision<br />
in the contract violate the CLRA.<br />
N.1<br />
Johannsen v. Morgan Stanley Credit Corp., 2012 U.S. Dist. LEXIS 5367 (E.D. Cal. Jan. 11,<br />
2012)<br />
Plaintiff signed an agreement in connection with her receipt of financing for a real estate<br />
purchase by a lending affiliate of the securities brokerage firm she held her account with. The<br />
agreement gave the lending affiliate a security interest in her brokerage account. Both her<br />
421<br />
N.1<br />
N.1<br />
N.1
okerage account and the financing agreement contained and agreement to arbitrate all<br />
controversies between her and agents, principals or affiliated corporations of the securities<br />
brokerage firm, arising out of or concerning any of your accounts, order or transactions, or the<br />
construction, performance, or breach of this or any other agreement between the parties. Plaintiff<br />
defaulted on the loan and sought to declare the security interest void, alleging that the lending<br />
affiliate could not have a security interest in both the property and brokerage account, and that<br />
the brokerage firm mismanaged her investment account The court granted the lending affiliates<br />
motion to compel arbitration because the language “any claim” is considered to be broad in<br />
scope, and it extended to affiliates of the brokerage firm.<br />
NDX Advisors, Inc. v. Advisory Fin. Consultants, Inc., 2012 U.S. Dist. LEXIS 176977 (N.D. Cal.<br />
Dec. 12, 2012)<br />
NDX, a Financial Industry Regulatory Authority (FINRA) member brokerage firm,<br />
sought to avoid an arbitration initiated by AFN, another FINRA member firm, pursuant to Rule<br />
13200 by arguing that the dispute did not “arise out of the business activities” between them as<br />
required by the rule. For a dispute to fall within the purview of Rule 13200, it need only "pertain<br />
to matters with some nexus to the activity [of the member or associated person] actually<br />
regulated by FINRA." The court found sufficient nexus because the dispute centers around<br />
commissions owed to AFN by the predecessor NDX, who received all the accounts when the<br />
predecessor went out of business.<br />
N.1<br />
Ross Sinclaire & Assoc., v. Premier Senior Living, LLC, et al., 2012 WL 2501115 (N.D. Cal.<br />
June 27, 2012)<br />
The court found that Defendants (PSL) were “customers” of the brokerage firm and could<br />
initiate arbitration under Rule 12200 of the Financial Industry Regulatory Authority (FINRA).<br />
The parties entered into a letter agreement where the brokerage firm would assist PSL in<br />
refinancing mortgages and raising capital, resulting in the issuance variable rate bonds. PSA filed<br />
a claim in arbitration with FINRA alleging the firm failed to disclose the risks in issuance of the<br />
debt. The term customer is not to be narrowly construed, nor is a direct customer relationship<br />
necessary so long as there is some nexus between the purported customer and the FINRA<br />
member. PSL was a customer of the brokerage firm as it had purchased investment advice and<br />
financial services in connection with the creation and sale of securities, furthermore, the<br />
brokerage firm structured the transaction and acted as underwriter, remarketing agent, and<br />
advisor.<br />
N.1<br />
Safadi v. Citibank, N.A., 2012 U.S. Dist. LEXIS 142773 (N.D. Cal. Oct. 2, 2012)<br />
Customer opened a deposit account which contained an agreement to arbitrate any<br />
disputes relating to the account, and a provision which granted the arbitrator the authority to<br />
determine the arbitrability of the dispute. The agreement also included a prohibition on class<br />
action litigation. As part of the promotion, customer received 30,000 airline miles, which was<br />
422<br />
N.1
eported by the bank to the IRS, who assessed a tax liability for the receipt. Customer sought to<br />
certify a class alleging violation of consumer protection statutes, breach of contract, and unjust<br />
enrichment, and the bank moved to compel arbitration of the customer’s claims. Where the<br />
gateway issue of arbitrability has been delegated to the arbitrator a court’s review is limited to<br />
the consideration of the validity of the contract and the enforceability of the delegation provision.<br />
Here there was no specific challenge to the arbitration provision and therefore, the court<br />
compelled arbitration.<br />
N.1<br />
White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19, 2012)<br />
Plaintiff sought to enjoin an arbitration initiated by the defendants against it and its<br />
financial advisor employee, arguing Defendant was not entitled to arbitrate pursuant to Rule<br />
12200 of the Financial Industry Regulatory Authority because Plaintiff was unaware of the<br />
particular fund the employee was marketing and therefore Defendant was not a “customer.” The<br />
court rejected the argument. There is no exception from the obligation to arbitrate based on an<br />
assertion that the activities of the associated person were unknown to the firm or outside the<br />
scope of the relationship.<br />
N.1<br />
Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012)<br />
An employee alleged violations of federal and state employment antidiscrimination<br />
statutes and non-statutory claims for wrongful termination on the basis of religious<br />
discrimination. Defendant moved to compel arbitration of the dispute pursuant to the arbitration<br />
agreements in the promissory notes and Uniform Application for Securities Industry Registration<br />
or Transfer Form U4. The Court compelled arbitration of the non-statutory claims, but not for the<br />
statutory claims because the arbitration agreements do not demonstrate the employee knowingly<br />
waived their right to a jury trial on a claim based on statutory employment discrimination.<br />
Bixler v. Next Fin. Group, Inc., 858 F. Supp. 2d 1136 (D. Mont. 2012)<br />
Plaintiff argued its claims related to the purchase of a variable annuity could not be<br />
compelled to arbitration pursuant to Montana law, Mont. Code Ann. § 27-5-114 excludes<br />
disputes over annuity contracts from arbitration. The Court rejected the Plaintiff’s argument<br />
because the U.S Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (Apr. 27,<br />
2011), held that a state law that stands as an obstacle to the purpose of Congress in enacting the<br />
[Federal Arbitration Act] (FAA), cannot be used to override arbitration agreements. "When state<br />
law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:<br />
The conflicting rule is displaced by the FAA." Therefore, the FAA preempted the Montana<br />
Statute.<br />
N.1<br />
423
N.1<br />
Goldman v. City of Reno, 2012 U.S. Dist. LEXIS 167902 (D. Nev. Nov. 26, 2012)<br />
Goldman Sachs sought to enjoin an arbitration proceeding instituted by Defendant<br />
pursuant to Rule 12200 of the Financial Industry Regulatory Authority in connection with the<br />
issuance of Auction Rate Securities (ARS) on the basis that ARS are Municipal Securities<br />
governed by the Municipal Securities Rulemaking Board, and the Defendant was not a<br />
“customer.” The Court rejected Goldman Sachs’ argument and applied the Second Circuit test<br />
from UBS Financial Services, Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011) to<br />
determine whether a party is a customer. “[A]s in UBS, the FINRA member has provided more<br />
than financial advice, but rather has provided services directly related to the securities, i.e.,<br />
facilitation of auctions of the securities themselves. The Court finds this to be sufficiently related<br />
to the broker – dealer function for the City to fall under the definition of customer.”<br />
D-J Eng'g Inc. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 6678 (D. Kan. Jan. 20, 2012)<br />
Defendant moved to compel arbitration of the claims brought by Plaintiff pursuant to an<br />
agreement to arbitrate all controversies between the parties in a brokerage agreement. This is a<br />
broad and comprehensive arbitration clause and clearly encompasses the claims in this lawsuit.<br />
Osborne v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 100205 (M.D. Fla. July 19,<br />
2012)<br />
N.1<br />
N.1<br />
Defendant moved to compel arbitration of a dispute with a former associated person<br />
related to two promissory notes executed between them based on the language of the Uniform<br />
Application for Securities Industry Registration or Transfer Form U4 agreement and Rule 13200<br />
of the Financial Industry Regulatory Authority. The court rejected the former associated persons<br />
argument that a dispute regarding the promissory notes is outside the scope of the “business<br />
activities” of a member firm and an associated person as a personal loan.<br />
MTA, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 Ala. LEXIS 167 (Ala. Dec. 7,<br />
2012)<br />
Trustee opened a brokerage account with Defendant to manage the assets of the trust. The<br />
account-authorization form stated that it was entered into by Merrill Lynch and the Trustee on<br />
behalf of the Trust. Plaintiff, the grantor of the trust, filed a third-party complaint against the<br />
trustee and Defendant, asserting claims for indemnification and alleging breach of fiduciary duty,<br />
negligence, and wantonness. The Court denied Defendant’s motion to compel arbitration because<br />
the arbitration provisions in the identified contracts are broad in the sense that they apply to "any<br />
controversies" and "all controversies," but narrow in the sense that they apply only to<br />
424<br />
N.1
controversies between "the parties," "the customer" and Defendant, or "the client" and<br />
Defendant. The contracts containing the arbitration provisions do not define the terms "the<br />
customer" or "the client" in such a way that would encompass Plaintiff. Regardless of Plaintiff’s<br />
involvement in establishing or funding the trust, it is neither the trust nor the trustee and is<br />
accordingly a nonsignatory to the contracts and does not fall within any of the exceptions to the<br />
enforcement of arbitration agreements against nonsignatories.<br />
Gomez v Brill Sec., Inc., 95 A.D.3d 32 (N.Y. App. Div. 1st Dep't 2012)<br />
Plaintiffs, registered representatives of a securities firm, brought a class action alleging<br />
wage and overtime violations. Defendants moved to compel arbitration pursuant to the<br />
arbitration agreement in the Form U4, which states “you agree to arbitrate any dispute, claim or<br />
controversy that may arise between me and my firm . . . that is required to be arbitrated under the<br />
rules . . . of [the Financial Industry Regulatory Authority (FINRA)].” FINRA Rule 13204(d)<br />
prohibits arbitration of class action claims unless certain conditions are met, of which none<br />
existed in this case. The court denied the motion to compel arbitration because the requisite<br />
conditions were not met under FINRA rules.<br />
Brashear v Pelto, 94 A.D.3d 1189 (N.Y. App. Div. 3d Dep't 2012)<br />
N.1<br />
N.1<br />
Plaintiff opened a brokerage account with Defendant TD Ameritrade, Inc. and signed a<br />
limited trading authorization allowing his brother-in-law, Defendant Pelto, to act as his agent to<br />
trade securities in the account. By signing the limited trading authorization, the parties agreed to<br />
be bound by an arbitration clause in the client agreement originally entered into between plaintiff<br />
and TD Ameritrade. As a result of investment losses, Plaintiff sought to compel arbitration of his<br />
claims against Pelto, and TD Ameritrade moved to compel arbitration of plaintiff's claims<br />
against it. The Court granted TD Ameritrade’s motion because the arbitration agreement<br />
included all disputes between TD Ameritrade and plaintiff or between TD Ameritrade and<br />
plaintiff's agent. However, in the limited trading authorization, Pelto agreed to arbitrate only his,<br />
or his principal's, disputes with TD Ameritrade. Pelto cannot be compelled to arbitrate disputes<br />
between himself and plaintiff without an express, unequivocal agreement to do so.<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45<br />
(App.Div. 2012)<br />
N.1<br />
Defendants, associated persons of Cantone Research, a member firm of the Financial<br />
Industry Regulatory Authority (FINRA), sought to compel arbitration of its third party claims for<br />
contribution and indemnification against Merrill Lynch pursuant to FINRA Rule 13200. The<br />
claims for contribution and indemnification were based on possible liability in a pending FINRA<br />
425
arbitration initiated by customers of Cantone. The Court found that these were derivative claims<br />
and not arbitrations exclusively between industry members and therefore Merrill Lynch was not<br />
obligated to arbitrate them pursuant to the FINRA Rule 13200 of the Industry Code.<br />
Carter v. TD Ameritrade Holding Corp., 721 S.E.2d 256 (N.C. Ct. App. 2012)<br />
Defendants moved to compel arbitration of Plaintiffs’ claims for North Carolina<br />
Securities Fraud, common law fraud, conversion, breach of contract, breach of fiduciary duty,<br />
gross negligence arise from investment losses sustained in an Individual Retirement Account<br />
(IRA). The IRA agreement contained an agreement to arbitrate “all claims and disputes of every<br />
type and matter between the Account Owner and [Defendant], including but not limited to claims<br />
in contract, tort, common law claims or alleged statutory violations.” The court compelled<br />
arbitration finding the claims were based on duties created by the contract, and the transactions<br />
formed the factual foundations of the claims.<br />
Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490 (S.C. Ct. App. July 11,<br />
2012)<br />
The Court found an arbitration provision in an acquisition loan agreement unenforceable<br />
under South Carolina law. The arbitration notice provision does not comply with S.C. Code Ann.<br />
§ 15-48-10(a) (2005) because the clause was not fully underlined.<br />
Palazzo v. Fifth Third Bank, 2012 Ky. App. Unpub. LEXIS 585 (Ky. Ct. App. Aug. 17, 2012)<br />
Plaintiff was an investment advisor jointly employed by related entities, Fifth Third<br />
Securities and the bank. Plaintiff admitted that she was employed by both entities, and she<br />
treated them, for purposes of her complaint, as one entity. The court found that Fifth Third<br />
Securities and the Bank could both compel arbitration pursuant to the arbitration agreement in<br />
Plaintiff’s Form U4.<br />
N.1<br />
Anthony v. Princeton Trading Group, Inc., 2012 Ohio 1834 (Ohio Ct. App., Cuyahoga County<br />
Apr. 26, 2012)<br />
Plaintiff brought an action stemming from investment losses from a precious metal<br />
broker. The broker moved to compel arbitration pursuant to a customer account agreement, in<br />
which the investor provided information to the broker. The court denied the motion to compel<br />
arbitration because the customer account document was only for the purpose of collecting<br />
information about potential customers and was not an account opening document, or other<br />
investment agreement.<br />
N.1<br />
N.1<br />
N.1<br />
426
Musikantow v. Deutsche Bank AG, 2012 Ill. App. Unpub. LEXIS 1108 (Ill. App. Ct. 1st Dist.<br />
May 11, 2012)<br />
Plaintiffs sought damages for Deutsche Bank's financial advice related to the<br />
implementation of a tax shelter that ultimately caused Plaintiffs to owe back taxes. Defendants<br />
moved to stay the action pending arbitration. Plaintiffs argue the arbitration provision covered<br />
only "accounts," "agreements," or "transactions" between the parties and their claims against<br />
Deutsche Bank did not fall within any of the three categories. The provision before the court<br />
expressly provided that Plaintiffs "agree to arbitrate with [Deutsche Bank] any controversies<br />
which may arise." The court rejected Plaintiff’s argument and compelled arbitration.<br />
Griffin v. Morgan Stanley Smith Barney, LLC, 2012 Ill. App. Unpub. LEXIS 2297 (Ill. App. Ct.<br />
1st Dist. Sept. 19, 2012)<br />
Plaintiff is the agent of an accountholder who entered into an agreement to arbitrate any<br />
disputes with Defendant and its employees arising from the handling of any of his accounts or<br />
any duty arising from Morgan Stanley Smith Barney’s (MSSB) business. Plaintiff signed an<br />
agency agreement, which made this arbitration agreement applicable to claims she might bring.<br />
Plaintiff alleged that MSSB, through its registered representative, mishandled the customer’s<br />
account and breached a duty to the customer arising from MSSB's business. The court found the<br />
dispute in the customer’s contract, incorporated by reference into the agency agreement, gave<br />
MSSB and its employee, the right to arbitrate Plaintiff’s claims.<br />
Rathje v. Horlbeck Capital Mgmt., LLC, 2012 Ill. App. Unpub. LEXIS 1794 (Ill. App. Ct. 2d<br />
Dist. July 26, 2012)<br />
Plaintiff entered into a subscription agreement with the partnership in which he agreed to<br />
make a capital contribution in exchange for a partnership interest. The subscription agreement<br />
required Plaintiff to open an investor account at with an investment firm and to deposit into the<br />
account an amount equal to his capital contribution to the partnership. Plaintiff executed an<br />
arbitration agreement in connection with the account opening. Plaintiff brought suit against the<br />
partnership and named the investment firm and the investment advisor for inaccuracies related to<br />
accountings received of the value of the contributions to the partnership. Arbitration clauses that<br />
provide that all claims "arising out of" or "relating to" an agreement shall be decided by<br />
arbitration are categorized as generic arbitration clauses. Defendants allege the nexus lies in that<br />
opening the investment account was required to acquire the partnership interest. The Court<br />
rejected the argument, holding Defendants did not demonstrate that the instant controversy arose<br />
out of the investment-account agreements and not out of partnership agreements.<br />
N.1<br />
N.1<br />
N.1<br />
427
N.1<br />
Mastick v. TD Ameritrade, Inc., 209 Cal. App. 4th 1258 (Cal. App. 2d Dist. 2012)<br />
The client alleged she had been given bad advice about the tax consequences of an<br />
investment transaction. She signed two investment management agreements containing<br />
arbitration clauses that specified different arbitration rules. One of the agreements provided that<br />
it was governed by California law, while the other agreement was governed by Nebraska law.<br />
The court held that the Federal Arbitration Act (FAA), did not preempt the application of Cal.<br />
Stat. § 1281.2, which allowed a court to deny a motion to compel if multiple litigations exist and<br />
there is a risk of conflicting rulings because the parties agreed to apply state law, even though the<br />
contract involved interstate commerce. A general choice-of-law provision was sufficient to<br />
invoke California's arbitration rules. As to the agreement governed by Nebraska law, however,<br />
arbitration had to be compelled because Nebraska's statute governing petitions to compel<br />
arbitration did not authorize a trial court to deny a petition to compel arbitration based on a<br />
potential for conflicting rulings.<br />
Thomas v. Westlake, 204 Cal. App. 4th 605 (Cal. App. 4th Dist. 2012)<br />
Plaintiff’s action named as defendants some parties that were not signatories to any<br />
arbitration agreement executed by Plaintiff in connection with investment account openings. The<br />
complaint alleged that each defendant acted as an agent of each other defendant in connection<br />
with Plaintiff’s transactions. The allegations of an agency relationship sufficed to allow the<br />
alleged agents to invoke the arbitration agreement even though the agents were not parties to it.<br />
Equity would not allow one-sided application of agency principles, in accordance with Civ.<br />
Code, § 3521. Arbitration was available under Rule 12200 of the Financial Industry Regulatory<br />
Authority (FINRA) as to alleged agents of FINRA members.<br />
N.1<br />
MV Ins. Consultants, LLC v. NAFH Nat'l Bank, 87 So. 3d 96 (Fla. Dist. Ct. App. 3d Dist. 2012)<br />
A collateral assignment of termination payments and economic interests agreement, a<br />
promissory note, a collateral assignment of agency agreement, and a guaranty were all executed<br />
on the same date regarding the same loan transaction. The borrower in the transaction asserted<br />
that arbitration was to be compelled because of an arbitration provision in the collateral<br />
assignment of termination payments and economic interests agreement. The court construed the<br />
documents as a single contract. Because the parties evidenced an intent that the arbitration<br />
provision applied to all the loan documents, the bank's separate claims regarding each of the loan<br />
documents were to be arbitrated.<br />
N.1<br />
428
Bedard v. Brewer Fin. Servs., LLC, 2012 Mass. Super. LEXIS 258 (Mass. Super. Ct. July 2,<br />
2012)<br />
Plaintiffs argue their complaint against a broker dealer and its investment representative<br />
should not be compelled to arbitration because the broker dealer is no longer a member of the<br />
Financial Industry Regulatory Authority (FINRA). The court rejected Plaintiff’s argument, but<br />
held that despite arbitration not being available through FINRA, the agreement gives the<br />
customer the choice of forum within a specified range of permissible choices. Therefore,<br />
Plaintiffs may choose the arbitration forum subject only to the choice being commercially<br />
reasonable.<br />
Cheng v David Learner Assoc., Inc., 35 Misc. 3d 1238A (N.Y. Sup. Ct. 2012)<br />
Plaintiffs David and Amy Cheng entered into an agreement to open an investment<br />
account with Defendant David Lerner Associates (DLA) containing an agreement to arbitrate<br />
any controversy concerning their account, or any transaction. Plaintiffs argued the entire contract<br />
was induced through fraud and therefore, no valid agreement to arbitrate exists between the<br />
parties on which to compel arbitration. Relying on Prima Paint Corp v Flood & Conklin Mfg.<br />
Co., 87 S. Ct. 1801 (1967), the court compelled arbitration holding that a challenge to the<br />
contract as a whole is treated differently than challenges to the arbitration clause itself. Because<br />
Plaintiff's challenge is not to arbitration clause itself, it is proper to compel arbitration, and is for<br />
the arbitrator to consider the issue of the contract's validity as a whole.<br />
Mitchell v. Cantor Fitzgerald, L.P., 2012 N.Y. Misc. LEXIS 5418 (N.Y. Sup. Ct. Nov. 21, 2012)<br />
Defendant, Plaintiff’s employer, filed motion to stay or dismiss Plaintiff’s action for<br />
breach of an oral employment contract, defamation and employment discrimination in favor of<br />
arbitration pursuant to the arbitration agreement in Plaintiff’s Uniform Application for Securities<br />
Industry Registration Form U4, and an arbitration agreement in his employment contract with<br />
Defendant. This agreement complements the mandatory arbitration clause in Form U4. Though<br />
claims of employment discrimination are not subject to mandatory FINRA arbitration, they may<br />
be arbitrated by FINRA, if parties agree to do so, as they did in the Arbitration Agreement. The<br />
court compelled arbitration of all claims because they were within the scope of the two<br />
agreements.<br />
Soloway v Morgan Stanley Smith Barney, LLC, 34 Misc. 3d 1217A (N.Y. Sup. Ct. 2012)<br />
Plaintiff brought an action for conversion of funds in her brokerage accounts when<br />
Defendant refused to return the proceeds of the accounts because Plaintiff’s son, who had a<br />
power of attorney, claimed Plaintiff was incompetent. Defendant moved to compel arbitration<br />
429<br />
N.1<br />
N.1<br />
N.1<br />
N.1
pursuant to an agreement to arbitrate all claims "concerning or arising" from the two brokerage<br />
accounts. The Court rejected Plaintiff’s argument because the causes of action, which stem from<br />
defendant's failure to follow her instructions, involve the issues typically arbitrated, such as<br />
issues of money management, investment advice, or disputes over commissions.<br />
2. Eligibility/Limitations<br />
Abeyrama v. J.P. Morgan Chase Bank, 2012 U.S. Dist. LEXIS 87847 (C.D. Cal. July 22, 2012)<br />
Defendant moved to compel arbitration of Plaintiff’s claims. The Court rejected<br />
Plaintiff’s argument that the agreement “requiring an employee to "give notice of arbitration<br />
within 'the statute of limitations otherwise applicable under law” was unconscionable because it<br />
limited relief available in court by creating its own statute of limitations.<br />
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12, 2012)<br />
<strong>Broker</strong> sought to vacate an arbitration award awarding damages to investors who claimed<br />
the broker breached his fiduciary duty by inducing them to loan money to a startup company on<br />
April 6, 2001. The Statement of Claim was filed in the Financial Industry Regulatory Authority<br />
(FINRA) July 23, 2008. <strong>Broker</strong> argued the award should be reversed because the claims were<br />
barred by the six-year Eligibility Rule. The court rejected the broker’s argument that the<br />
triggering date was the date of purchase, because the Panel was free to interpret Rule 12206 as it<br />
saw fit, in particular the "occurrence or event giving rise to the claim.”<br />
Baker Hughes Inc. v. BNY Mellon Capital Mkts. LLC, 2012 U.S. Dist. LEXIS 162796 (S.D. Tex.<br />
Nov. 14, 2012)<br />
On December 18, 2008 and February 24, 2009, the parties filed their dispute before the<br />
Financial Regulatory Authority (FINRA). Baker Hughes (BHI) alleged causes of action for: (a)<br />
breach of fiduciary duty; (b) promissory estoppel; (c) violation of the New York Common Law<br />
(fraud); (d) violation of Texas' Blue Sky Laws; and (e) violation of the Securities Exchange Act<br />
of 1934 and Rules 10b-5. On August 1, 2011, the FINRA Arbitration Panel entered its award,<br />
dismissing with prejudice each of BHI claims against BNY Mellon (BNY). BHI filed a<br />
complaint alleging the negligence claim was not within the scope of the agreement to arbitrate,<br />
the arbitration proceeding tolled the Statute of Limitations, and the doctrine of "equitable tolling"<br />
should apply and save its negligence claim. The Court granted BNY’s motion for summary<br />
judgment, holding that equitable tolling does not apply because there is no evidence that BNY<br />
actively misled BHI or prevented it from asserting its claim in a court of law while<br />
simultaneously proceeding with arbitration. A demand or agreement to arbitrate claims does not<br />
N.2<br />
N.2<br />
N.2<br />
430
y itself toll a statute of limitations. The Court did not want to exercise its discretion absent<br />
inequitable conduct on the part of BNY.<br />
Andrade v. Ewanouski, 2012 Mass. App. Unpub. LEXIS 236 (Mass. App. Ct. Mar. 1, 2012)<br />
Investors appealed the confirmation of an arbitration award alleging the arbitration panel<br />
improperly declared claims ineligible under the Financial Industry Regulatory Authority<br />
(FINRA) six year Eligibility Rule 12206. The court rejected that argument, noting the arbitration<br />
proceedings’ record shows the panel found no facts to support tolling the statute of limitations.<br />
The Court further held that the panel’s dismissal of the ineligible claims does not preclude the<br />
Investors from pursuing them in court pursuant to Rule 12206(b) of the Financial Industry<br />
Regulatory Authority Code of Arbitration Procedure.<br />
Susman v Commerzbank Capital Mkts. Corp., 95 A.D.3d 589 (N.Y. App. Div. 1st Dep't 2012)<br />
Plaintiff brought an action alleging wrongful termination. The Court rejected Plaintiff’s<br />
contention that the arbitration proceeding previously instituted to recover his unreimbursed<br />
business expenses tolled the two year statute of limitations on his claims. To toll the statute of<br />
limitations, the arbitration must have been instituted by the parties in order to resolve the present<br />
controversy and the issues raised in the case are distinct from the issue in the arbitration.<br />
Hantz Fin. Servs. v. Monroe, 2012 Mich. App. LEXIS 147 (Mich. Ct. App. Jan. 24, 2012)<br />
Financial Services firm appealed the confirmation of an arbitration award on the grounds<br />
that the Financial Industry Regulatory Authority (FINRA) panel erroneously concluded the<br />
claims were within the FINRA six-year Eligibility Rule 12206. They argued the date of purchase<br />
of the investments is the event that gives rise to a claim and therefore is when the limitations<br />
period should run from. The Court rejected the argument because the investor seeking arbitration<br />
alleged wrongful acts that occurred after the date of the initial investment, such as bogus account<br />
statements and fraudulent misrepresentations.<br />
N.2<br />
N.2<br />
N.2<br />
3. Jurisdiction/Estoppel<br />
Wootten v. Fisher Invs., 688 F.3d 487 (8 th Cir. 2012).<br />
N.3<br />
A client initiated an arbitration against his former investment advisor. During the<br />
arbitration, the investment advisor moved to dismiss the client’s Missouri statutory claims based<br />
on the arbitration agreement’s Delaware choice-of-law provision, which the arbitrators granted<br />
and sua sponte prohibited the client from adding a federal securities law claim. The client<br />
431
subsequently filed a civil action against the investment advisor in federal court, re-alleging the<br />
Missouri statutory and federal securities claims, seeking a declaration that the arbitration<br />
agreement was void, and seeking to enjoin the arbitration. The district court dismissed the<br />
client’s claims without prejudice on the grounds of the complete arbitration doctrine, which<br />
required the client to complete the arbitration before pursuing remedies in federal court. The<br />
client appealed on the grounds that (1) the district court had jurisdiction to address his claims; (2)<br />
the arbitrator limited the scope of the arbitration agreement to only Delaware claims, allowing<br />
him to bring non-Delaware claims in federal court; (3) the arbitrator’s interpretation of the<br />
arbitration provision rendered it void; (4) the investment advisor waived its right to arbitrate; (5)<br />
the arbitration agreement was unenforceable; (6) the client did not waive his right to challenge<br />
the arbitration agreement; and (7) the provisional remedies in the Letter of Agreement (LOA)<br />
between the parties voided the LOA’s arbitration provisions. The Eighth Circuit affirmed on the<br />
grounds that: (1) it did not have jurisdiction to adjudicate the claims due to the complete<br />
arbitration rule; (2) the complete arbitration rule precluded the Court from reviewing the<br />
arbitrator’s decision regarding a dispute covered by the arbitration agreement; (3) while the<br />
client might have had valid federal claims, the complete arbitration rule applied and he needed to<br />
complete arbitration before a court could hear those claims; (4) the investment advisor did not<br />
act inconsistently with the right to arbitrate and therefore did not waive arbitration claims; (5) the<br />
issue of arbitrability was to be left to the arbitrator under the LOA and the district court did not<br />
err in declining to rule on the issue; (6) because the arbitrator had not yet decided whether the<br />
LOA’s arbitration provision was enforceable, the client’s challenge in federal court was<br />
premature; and (7) the district court did not err in refusing the interpret the LOA’s provisional<br />
remedies provision to override the express language requiring the arbitrator to decide the<br />
agreement’s enforceability.<br />
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2012 U.S. App. LEXIS 24847 (11th Cir. Dec. 4,<br />
2012).<br />
The district court granted summary judgment in favor of the defendant holding<br />
companies based on res judicata and collateral estoppel resulting from a prior arbitration award<br />
and the plaintiff investor appealed. The Eleventh Circuit affirmed on the grounds that the factual<br />
issues raised in the court proceeding were actually litigated in the prior arbitration, were a critical<br />
and necessary part of the arbitration decision, and there was no suggestion that the investor did<br />
not have every opportunity to litigate such issues in that forum.<br />
Lobaito v. Chase Bank, 2012 U.S. Dist. LEXIS 107344 (S.D.N.Y. July 30, 2012).<br />
A former employee filed suit in federal court against his former brokerage firm employer<br />
alleging that he was wrongfully terminated and that an arbitration decision rejecting his claims<br />
was the product of fraud and conspiracy. The brokerage firm moved to dismiss the complaint on<br />
the basis of res judicata. The Court granted the motion to dismiss on the grounds that the former<br />
employee was seeking to re-litigate the causes of action set forth in the arbitration action and<br />
N.3<br />
N.3<br />
432
therefore res judicata applied. The Court also noted that to the extent the complaint might be<br />
construed as a motion to vacate the arbitration award, it was time-barred.<br />
Sher v. Goldman Sachs, 2012 U.S. Dist. LEXIS 56596 (D. Md. Apr. 19, 2012).<br />
A Chapter 11 Trustee for a company filed suit against a financial institution for claims<br />
arising from a repurchase agreement between the parties relating to the financing of the<br />
company’s acquisition of mortgage-backed securities. The financial institution moved to compel<br />
arbitration, and to stay or dismiss the action, or in the alternative, dismiss the complaint filed.<br />
The Court granted the financial institution’s motion to compel arbitration and declined to make a<br />
determination as to the arbitrability of the plaintiff’s claim, finding that the arbitration provision<br />
in the agreement between the parties was valid and sufficiently evinced the parties' intent to<br />
submit the question of arbitrability to the arbitrator.<br />
Baker Hughes Inc. v. BNY Mellon Capital Mkts. LLC, 2012 U.S. Dist. LEXIS 162796 (S.D. Tex.<br />
Nov. 14, 2012).<br />
A claimant brought a Financial Industry Regulatory Authority (FINRA) action against a<br />
securities dealer regarding auction rate securities (ARS). During the arbitration, it was<br />
determined that the claimant’s negligence claim was not within the scope of the parties’<br />
arbitration agreement and the securities dealer refused to expand the scope of the arbitration<br />
when the claimant sought to add the claim in the arbitration action. As a result, the arbitrators<br />
ruled that they lacked jurisdiction over that claim. The arbitration panel dismissed the remainder<br />
of claimant’s claims and the award was confirmed by a court of competent jurisdiction. The<br />
claimant subsequently filed a negligence action in federal court against the securities dealer. The<br />
securities dealer argued that the negligence claims were barred by res judicata and the applicable<br />
statute of limitations. The Court granted summary judgment on the grounds that because the<br />
claim of negligence arose out of the same nucleus of operative facts as the claims submitted to<br />
arbitration, res judicata barred the claimant’s negligence claims.<br />
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 14,<br />
2012).<br />
A claimant brought a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against respondent securities firms asserting that he was the victim of identity fraud, that<br />
someone stole his identity, opened an account with respondents using false information, and<br />
authorized the selling of securities without his knowledge. The respondent securities firms filed<br />
an action in federal court requesting a preliminary and permanent injunction, as well as<br />
declaratory relief, to prohibit a claimant from pursuing arbitration claims with the Financial<br />
Industry Regulatory Authority (FINRA) on the grounds that the claimant was not a customer of<br />
the respondents and the parties did not sign an arbitration agreement. The court determined that<br />
433<br />
N.3<br />
N.3<br />
N.3
the issue of arbitrability was properly before it and granted the preliminary injunction. In doing<br />
so, the Court noted that while the Ninth Circuit Court of Appeals had not yet addressed the issue<br />
directly, a majority of circuit courts have held FINRA's rules do not evidence a clear and<br />
unmistakable intent that the issue of arbitrability should be submitted to an arbitrator, and, as a<br />
result, the court decided the question of arbitrability and granted the preliminary injunction.<br />
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31, 2012).<br />
An issuer of auction rate securities (ARS) brought a Financial Industry Regulatory<br />
Authority (FINRA) claim against the underwriter of the ARS securities at issue. The underwriter<br />
filed a complaint against the issuer in federal court requesting declaratory and injunctive relief<br />
precluding the issuer from arbitrating the claims against it on the basis that (1) the parties were<br />
not in a relationship that came within the scope of FINRA’s jurisdiction because the issuer was<br />
not a “customer”; and (2) the underwriter did not consent to arbitrate claims with the issuer. The<br />
Court determined that the issuer was likely a customer of the underwriter because it hired the<br />
underwriter to perform the underwriting services on both of its ARS offerings, that the claims<br />
were likely suitable for arbitration, and therefore the underwriter could not meet the requirements<br />
for entry of a temporary injunction.<br />
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367, 7-8 (N.D. Cal. June 12, 2012).<br />
A financial advisor moved to vacate an arbitration award on the grounds that, among<br />
other things, the panel manifestly disregarded the law by acting without jurisdiction over the<br />
claimant’s claims, which were barred by the six year eligibility rule under the Financial Industry<br />
Regulatory Authority (FINRA) rules. The Court denied the motion to vacate on the grounds<br />
that, among other things, it was within the panel’s jurisdiction to make eligibility determinations<br />
under the FINRA rules.<br />
UTHE Tech. Corp. v. Aetrium, Inc., 2012 U.S. Dist. LEXIS 139538 (N.D. Cal. Sept. 27, 2012).<br />
Defendants in a securities fraud dispute moved to dismiss the claims against them on a<br />
number of grounds, including that one claim was barred by the single recovery rule and collateral<br />
estoppel because, as a result of an arbitration in Singapore, the plaintiff was already awarded<br />
compensatory damages. Although the plaintiff argued that it was entitled to additional damages<br />
under the law in the Court’s jurisdiction such as consequential damages, the plaintiff failed to<br />
make any reference to such damages in its second amended complaint and, as a result, could not<br />
use such damages as an avenue for avoiding preclusion of his claim. As such, the Court<br />
dismissed this count.<br />
N.3<br />
N.3<br />
N.3<br />
434
In re Oppenheimer Champion Fund Sec. Fraud Class Actions, 2012 U.S. Dist. LEXIS 35243 (D.<br />
Colo. Mar. 15, 2012).<br />
Claimant was a class member in a securities fraud class action involving funds in which<br />
she invested and simultaneously engaged in a Financial Industry Regulatory Authority (FINRA)<br />
arbitration with the securities firm that had recommended her investment in the funds. The class<br />
action settled and claimant did not opt out of the settlement, believing that her arbitration claims<br />
were distinct from the claims brought on behalf of the class. The securities firm sought to<br />
enforce the class action settlement and enjoin further prosecution of claimant’s FINRA claims.<br />
The Court determined that it had jurisdiction to determine whether claimant’s arbitration claims<br />
fell within the scope of the class action settlement release because where the settlement<br />
agreement goes beyond mere disposition of a class action to govern rights and obligations after<br />
settlement, a court’s retention of jurisdiction over a surviving settlement agreement requires the<br />
court to consider whether arbitration rights survive.<br />
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012).<br />
Claimants in an underlying arbitration action appealed confirmation of arbitration award<br />
in favor of the respondent brokerage firm on the grounds that the panel exceeded its authority by<br />
recording findings on ineligible matters. The appellate court affirmed the lower court’s<br />
confirmation of the award. During the arbitration hearing, the panel found that many of the<br />
claimants’ claims were barred for lack of jurisdiction. The Court determined that although the<br />
panel expounded in the award on matters that were not eligible for arbitration, they did not<br />
exceed the scope of their authority because the plaintiffs brought the ineligible claims, thereby<br />
giving the panel the power to discuss its dismissal of those matters.<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45, 50<br />
(App.Div. 2012).<br />
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against several respondent broker-dealers. The claims against one broker-dealer were dismissed<br />
by the Court on the grounds that the claimants were not customers of that broker-dealer. One of<br />
the remaining respondents subsequently filed a third party claim against the broker-dealer in the<br />
arbitration and the broker-dealer moved to enjoin the claims, which the lower court granted. The<br />
respondent subsequently appealed the four orders enjoining them from pursuing their third party<br />
arbitration claims for contribution and indemnification against the broker-dealer arguing in part<br />
that that the judge who previously ruled on the motions lacked authority to interpret FINRA’s<br />
customer and industry code and that such interpretation was delegated to the arbitrators. The<br />
Court determined that the court was the correct venue to pursue a determination as to whether the<br />
parties agreed to arbitrate the dispute, especially in the absence of an express agreement to<br />
arbitrate such claims and affirmed the orders.<br />
435<br />
N.3<br />
N.3<br />
N.3
4. Motions to Vacate or to Enjoin<br />
a. Punitive Damages<br />
N.4.a<br />
Davey v. First Command Fin. Servs., 2012 U.S. Dist. LEXIS 11481 (N.D. Tex. Jan. 31, 2012).<br />
A respondent in Financial Industry Regulatory Authority (FINRA) arbitration sought to<br />
vacate the arbitration award rendered against it on the grounds that (1) the arbitrators lacked<br />
authority to award punitive damages because the arbitration agreement specifically prohibited<br />
such damages; and (2) the claimant abandoned his request for costs and an award of costs should<br />
not stand. The Court vacated the award with respect to punitive damages on the ground that such<br />
damages were precluded pursuant to the parties’ contract, the FINRA submission agreement did<br />
not nullify such provision, and the award did not provide the Court with any reason to ignore the<br />
arbitration clause’s prohibition on punitive damages. The Court did find, however, that the issue<br />
of costs had been submitted to the panel and vacatur of that portion of the award was denied.<br />
b. Attorneys’ Fees<br />
Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).<br />
N.4.b<br />
A former employer sought vacatur of an arbitration award in favor of former employees<br />
on their Wage Act claims and attorney’s fees under the South Carolina Frivolous Civil<br />
Proceedings Act (FCPA). The employer argued that vacatur was warranted because the panel<br />
manifestly disregarded the law by awarding sanctions for ignoring FCPA’s conditions precedent<br />
and because the panel deprived the employer of a fundamentally fair hearing by denying it the<br />
procedural safeguards under the FCPA and by not allowing it to review or rebut critical evidence<br />
that the employees submitted to the panel in support of their fee claim. The district court denied<br />
the motion and the Fourth Circuit affirmed on the grounds that (1) the panel was not compelled<br />
to follow the FCPA’s procedural mandates in the arbitration; (2) the employer alleged no<br />
arbitrator misconduct; (3) the hearing on the attorney’s fees issue was cut short by the employer,<br />
who declined to submit additional briefs, not the arbitrators; and (4) and the Court could not<br />
conclude that the arbitrators manifestly disregarded the law in awarding attorney’s fees to the<br />
employees under FCPA.<br />
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012).<br />
N.4.b<br />
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)<br />
arbitration award regarding a promissory note between her and her former broker-dealer<br />
employer on the basis that, among other things, the promissory note, including its provision<br />
regarding attorney’s fees, was unenforceable. The Court denied vacatur of the award because,<br />
436
among other things, the promissory note was not an illegal contract, and the attorney’s fees<br />
provision in the promissory note was enforceable.<br />
Fid. <strong>Broker</strong>age Servs. LLC v. Brown, 2012 U.S. Dist. LEXIS 141960 (S.D. Cal. Sept. 28, 2012).<br />
N.4.b<br />
A brokerage firm sought modification and/or vacatur of an award of attorney’s fees<br />
against it on the grounds that the arbitration panel had no authority to make such an award. The<br />
district court denied the brokerage firm’s motion because it found that the issue of attorney’s fees<br />
was submitted to arbitration. The Court determined that (1) the arbitration panel “plainly<br />
believed” the issue was submitted for their decision; (2) the panel received evidence regarding<br />
each party’s attorney’s fees; (3) and the panel held a special session regarding the issue of<br />
attorneys’ fees, allowed argument that permitted the brokerage firm to set forth its legal position,<br />
and the brokerage firm made no objection during this time.<br />
N.4.b<br />
Morgan Stanley & Co., LLC v. The Core Fund, 2012 U.S. Dist. LEXIS 115760 (M.D. Fla. July<br />
11, 2012).<br />
A brokerage firm filed a motion to vacate the portion of an arbitration award denying its<br />
attorney’s fees on the grounds that the parties did not submit the issue of attorney’s fees to<br />
arbitration. The brokerage firm additionally requested that the Court enter an order awarding its<br />
fees. The Court denied the motion, finding that the parties had mutually agreed to submit the<br />
issue of attorney’s fees to the panel by virtue of their pleadings and other filings and that there<br />
was no mutual withdrawal of the attorney’s fees issue from arbitration.<br />
N.4.b<br />
Matter of Bear, Stearns & Co., Inc. v. Int’l Capital & Mgt. Co. LLC, 99 A.D.3d 402 (N.Y. App.<br />
Div. 1st Dep't 2012).<br />
The Court determined that the arbitration panel did not exceed its powers or violate<br />
public policy by awarding attorney’s fees for discovery sanctions to respondents in an underlying<br />
arbitration action because the claimant in the arbitration demonstrated its consent to the<br />
imposition of attorney’s fees relating to discovery matters on multiple occasions throughout the<br />
arbitration, sought an award of attorneys’ fees in both its initial pleadings and in an amended<br />
pleading it filed two years later, and agreed to arbitration pursuant to the Financial Industry and<br />
Regulatory Authority (FINRA) rules, which specifically permit an award of attorneys’ fees as a<br />
sanction for discovery abuse. Additionally, during pre-hearing discovery, the claimant twice<br />
complied without objection to the panel’s direction that it pay the respondents’ attorney’s fees<br />
and during the final hearing, the claimant failed to object to respondents’ repeated request for<br />
fees or to withdraw its own fee request. The Court further found that the claimant’s last minute<br />
attempt to withdraw consent of the fee issue in its closing statement at the final hearing was<br />
ineffectual to remove the issue from the arbitrators.<br />
437
c. Other<br />
N.4.c<br />
Bonnant v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 467 Fed. Appx. 4 (2d Cir. 2012).<br />
An attorney opened an account with a broker-dealer on behalf of a client company and<br />
executed the relevant customer agreements as the president, director, and representative of the<br />
company. The company subsequently filed a Financial Industry Regulatory Authority (FINRA)<br />
arbitration action against the broker-dealer for unsuitability and unauthorized trading and the<br />
broker-dealer named the attorney as a third party defendant and asserted claims against him<br />
personally for indemnification on the basis that the attorney authorized the transactions in the<br />
account. The attorney subsequently filed an action in the district court seeking to enjoin the<br />
broker-dealer from bringing him into the arbitration on the grounds that he was not personally a<br />
party to the arbitration agreement and executed the account opening documents for the company<br />
in a purely representative capacity. The district court denied the attorney’s motion, finding that<br />
the attorney’s second signature on the account document as a separate account holder indicated<br />
that he opened the account in both a representative and personal capacity. The Second Circuit<br />
vacated district court’s judgment, finding that the district court relied on theories that were based<br />
on a misreading or misinterpretation of the contract or legal precedents. The Court determined<br />
that New York law did not support the proposition that a corporate representative rendered<br />
himself personally liable on a corporation’s contract merely by signing it twice.<br />
438<br />
N.4.c<br />
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors' Comm. of Bayou<br />
Group, LLC, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012).<br />
A clearing and prime broker for hedge funds run as a Ponzi scheme unsuccessfully<br />
sought to vacate an arbitration award in favor of an unsecured creditors’ committee on the<br />
grounds that arbitrators manifestly disregarded the law when they determined that the clearing<br />
and prime broker was an “initial transferee” under 11 U.S.C. § 550(a), from whom the<br />
committee could recover for fraudulent transfers under 11 U.S.C. § 548. The Second Circuit<br />
affirmed the district court’s denial of vacatur on the grounds that under the factual circumstances<br />
and prevailing legal authorities, it could not conclude that the arbitrators manifestly disregarded<br />
the law in imposing transferee liability onto the clearing and prime broker.<br />
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9, 2012).<br />
N.4.c<br />
A claimant filed a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against a brokerage firm asserting claims arising from his investment, through his nominee, in a<br />
fund. The brokerage firm sought to preliminarily enjoin the FINRA arbitration, arguing that the<br />
claimant was not a “customer” within the meaning of FINRA arbitration rules. The Second<br />
Circuit affirmed the district court’s denial of the brokerage firm’s motion to enjoin, finding that<br />
the district court’s ruling was not clearly erroneous because the brokerage failed to present any
evidence contradicting the claimant’s showing that he was a customer and the brokerage firm<br />
could not demonstrate that it was likely to succeed on the issue of arbitrability of the claims.<br />
439<br />
N.4.c<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Schwarzwaelder, 2012 U.S. App. LEXIS 16845<br />
(3d Cir. Aug. 13, 2012).<br />
An employee sought to vacate an arbitration award against her on grounds that arbitrators<br />
exceeded their powers by concluding that a release executed as part of a prior Employee<br />
Retirement Income Security Act (ERISA) settlement barred her from claiming an offset to her<br />
liability to her former employer on a promissory note. Although the district court vacated the<br />
award, the Third Circuit reversed, finding that the arbitrators’ reading of the settlement<br />
agreement was not irrational and they did not exceed their powers under the Federal Arbitration<br />
Act in determining that the employee had released her claims as to the compensation she sought<br />
as offset.<br />
Waterford Inv. Servs. v. Bosco, 682 F.3d 348 (4th Cir. 2012).<br />
N.4.c<br />
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against a financial advisor, his current firm, and his former firm asserting claims regarding his<br />
investment in Ponzi scheme securities. Although separate corporate entities, the current and<br />
former firms had a significant degree of overlap in terms of their majority owner, officers and<br />
directors, and shared resources. The financial advisor’s current firm sought to enjoin the<br />
arbitration proceedings and to have a declaratory judgment entered stating that it did not need to<br />
arbitrate the claimants’ claims because the financial advisor was not an “associated person” of<br />
the firm. The district court determined that the financial advisor was an “associated person” at<br />
his current firm during the events in question, and as such, the current firm had to arbitrate the<br />
Claimants’ claims. The Fourth Circuit affirmed, finding that as a result of the overlap between<br />
the current and former firms and the evidence to that effect, the current firm had the power to<br />
influence and indirectly control the financial advisor, rendering him an “associated person”<br />
within the context of the FINRA rules.<br />
Morgan Keegan & Co. v. Garrett, 2012 U.S. App. LEXIS 22057 (5th Cir. Oct. 23, 2012).<br />
N.4.c<br />
Upon a brokerage firm’s motion, the district court vacated an arbitration award and<br />
granted the brokerage firm its attorney’s fees and expenses on the grounds that the arbitration<br />
panel exceeded its authority by hearing from two claimants with whom the brokerage firm had<br />
no agreement to arbitrate. The district court additionally found that the claims were derivative<br />
and therefore not subject to Financial Industry Regulatory Authority (FINRA) arbitration. The<br />
district court alternatively vacated the award on the ground that it was procured by fraud because<br />
claimants’ expert knowingly testified to incorrect numbers and the panel based its damages<br />
calculations on the expert’s knowingly false testimony. The Fifth Circuit, however, reversed the
vacatur with instructions to enter judgment enforcing the arbitration award on the grounds that:<br />
(1) the panel did not exceed its authority to interpret and determine the applicability of FINRA’s<br />
rules and was entitled to make the determination as to whether the claims were derivative and<br />
whether the two claimants at issue qualified as “customers” under such rules; and (2) the<br />
brokerage firm could not meet the burden of proof to vacate based on fraud because the grounds<br />
for fraud were discoverable by due diligence before and/or during the arbitration.<br />
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012).<br />
440<br />
N.4.c<br />
A brokerage firm obtained a preliminary injunction enjoining claimants from proceeding<br />
with their Financial Industry Regulatory Authority (FINRA) claims on the grounds that the<br />
claimants were not “customers” under FINRA’s rules. The brokerage firm served as the<br />
managing broker-dealer for the offering of the securities at issue in the arbitration, which were<br />
issued by a group of limited liability companies. As managing broker-dealer, the brokerage firm<br />
assembled a group of FINRA registered broker-dealers who in turn offered the securities to their<br />
own customers, including claimants. The district court granted the preliminary injunction and<br />
the Eighth Circuit affirmed on the grounds that the claimants had no contact with the brokerage<br />
firm in the course of investing in the securities at issue, there was no relationship between the<br />
claimants and the brokerage firm, and the brokerage firm did not provide investment or<br />
brokerage related services to the claimants.<br />
McCrary v. Stifel, Nicolaus & Co., 687 F.3d 1052 (8th Cir. 2012).<br />
N.4.c<br />
A client filed a Financial Industry and Regulatory Authority (FINRA) arbitration action<br />
against a broker-dealer alleging various violations of state and federal securities law committed<br />
by two financial advisors. A class action was subsequently filed against the broker-dealer and<br />
the client was added as a named plaintiff. The class action plaintiffs sought to enjoin the client’s<br />
FINRA arbitration, which was denied by the district court. The Eighth Circuit affirmed the<br />
district court’s decision on the grounds that plaintiffs failed to provide any legal support for their<br />
request to stay the arbitration in light of the individual claimant’s agreement to be bound by the<br />
arbitration panel’s decision.<br />
Wootten v. Fisher Invs., 688 F.3d 487 (8th Cir. 2012).<br />
N.4.c<br />
A client initiated an arbitration against his former investment advisor. During the<br />
arbitration, the investment advisor moved to dismiss the client’s Missouri statutory claims based<br />
on the arbitration agreement’s Delaware choice-of-law provision, which the arbitrators granted<br />
and sua sponte prohibited the client from adding a federal securities law claim. The client<br />
subsequently filed a civil action against the investment advisor in federal court, re-alleging the<br />
Missouri statutory and federal securities claims, seeking a declaration that the arbitration<br />
agreement was void, and seeking to enjoin the arbitration. The district court dismissed the
client’s claims without prejudice on the grounds of the complete arbitration doctrine, which<br />
required the client to complete the arbitration before pursuing remedies in federal court. The<br />
client appealed on the grounds that (1) the district court had jurisdiction to address his claims; (2)<br />
the arbitrator limited the scope of the arbitration agreement to only Delaware claims, allowing<br />
him to bring non-Delaware claims in federal court; (3) the arbitrator’s interpretation of the<br />
arbitration provision rendered it void; (4) the investment advisor waived its right to arbitrate; (5)<br />
the arbitration agreement was unenforceable; (6) the client did not waive his right to challenge<br />
the arbitration agreement; and (7) the provisional remedies in the Letter of Agreement (LOA)<br />
between the parties voided the LOA’s arbitration provisions. The Eighth Circuit affirmed on the<br />
grounds that: (1) it did not have jurisdiction to adjudicate the claims due to the complete<br />
arbitration rule; (2) the complete arbitration rule precluded the Court from reviewing the<br />
arbitrator’s decision regarding a dispute covered by the arbitration agreement; (3) while the<br />
client might have had valid federal claims, the complete arbitration rule applied and he needed to<br />
complete arbitration before a court could hear those claims; (4) the investment advisor did not<br />
act inconsistently with the right to arbitrate and therefore did not waive arbitration claims; (5) the<br />
issue of arbitrability was to be left to the arbitrator under the LOA and the district court did not<br />
err in declining to rule on the issue; (6) because the arbitrator had not yet decided whether the<br />
LOA’s arbitration provision was enforceable, the client’s challenge in federal court was<br />
premature; and (7) the district court did not err in refusing the interpret the LOA’s provisional<br />
remedies provision to override the express language requiring the arbitrator to decide the<br />
agreement’s enforceability.<br />
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22492 (9th Cir. Oct. 25, 2012).<br />
N.4.c<br />
A broker-dealer sought to vacate an arbitration award of $1.45 million against it in favor<br />
of the investor claimants on the grounds that (1) one arbitrator failed to disclose facts that would<br />
create and impression of bias; (2) the arbitrators prejudged the outcome of the case and denied<br />
the broker-dealer a fundamentally fair hearing; and (3) the arbitrators exceeded their powers in<br />
setting the size of the award. The Ninth Circuit affirmed the district court’s denial of the motion.<br />
With respect to one arbitrator’s failure to make disclosures, the broker-dealer argued that the<br />
arbitrator was biased in favor of the claimant because (1) he sometimes represented investors<br />
against their brokers and (2) the arbitrator’s website advertised his knowledge of the securities at<br />
issue in the case and solicited investors to sue over losses related to such securities. The Ninth<br />
Circuit, however, determined that the arbitrator’s practice was disclosed in his initial disclosure<br />
report and that the portion of his website at issue only appeared on the website months after the<br />
hearing and did not specify how long he had been practicing in the area. As for the grounds set<br />
forth argument regarding prejudgment of the case, the broker-dealer relied on an inadvertently<br />
recorded conversation among the arbitrators in the hearing in which they referred to the<br />
securities at issue as “crap” and a “sucker play.” The Court found that such recording was not<br />
grounds for vacating the award for “other misbehavior” under 9 U.S.C. § 10(a)(3) and merely<br />
suggested that the arbitrators had begun to form some opinions based on the evidence presented<br />
thus far—not that that they were unwilling to consider the broker-dealer’s evidence. Finally, the<br />
Ninth Circuit determined that the $1.45 million award was authorized under a benefit-of-thebargain<br />
damages theory for fraud committed by one owing fiduciary duties.<br />
441
N.4.c<br />
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012).<br />
A broker-dealer unsuccessfully sought to vacate a $1.45 million arbitration award against<br />
it and appealed the district court’s denial of its motion to vacate. While that appeal was pending,<br />
the claimant in the underlying arbitration claim filed a second arbitration claim against the<br />
broker-dealer alleging malicious prosecution and abuse of process in conjunction with the first<br />
arbitration action. The broker-dealer sued the claimant in district court, alleging that the second<br />
arbitration action was not arbitrable and sought an injunction to stop the second arbitration from<br />
proceeding prior to the resolution of the appeal in the underlying arbitration action. The district<br />
court granted the claimant’s motion to compel arbitration, denied the broker-dealer’s request for<br />
a preliminary injunction as moot, and dismissed the case. The Ninth Circuit affirmed, finding<br />
that the claims set forth in the second arbitration were not restricted by the Federal Arbitration<br />
Act (FAA) because they were not seeking to attack or change the award in the first arbitration<br />
and that such claims fell within the arbitration clause in the client agreement between the parties.<br />
Wierzba v. E*Trade Fin. LLC, 471 Fed. Appx. 709 (9th Cir. 2012).<br />
442<br />
N.4.c<br />
A pro se claimant moved to vacate an arbitration award entered against him. The district<br />
court denied the motion and the Ninth Circuit affirmed because the claimant’s allegations of<br />
arbitrator incompetence and his disagreements with the arbitration process and result failed to<br />
demonstrate any of the statutory grounds for vacating an award.<br />
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass. Mar. 8, 2012).<br />
N.4.c<br />
Claimants sought to enjoin a brokerage firm from pursuing a counterclaim against them<br />
in an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA) on the<br />
grounds that the brokerage firm was seeking to recover from them individually and personally,<br />
as opposed to in their capacity as trustees of the plan at issue, and that the counterclaim was<br />
improper under FINRA rules. The Court denied the request to enjoin on and found that the<br />
record reasonably permitted that the counterclaim was brought against the claimants in their<br />
capacity as trustees and was proper under FINRA’s rules.<br />
N.4.c<br />
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist. LEXIS 30988<br />
(E.D.N.Y. Mar. 8, 2012).<br />
A brokerage firm initiated a Financial Industry Regulatory Authority (FINRA)<br />
proceeding against a company seeking to recover a debt owed to it under the customer agreement<br />
between the parties. The company sought to enjoin the action on the basis that it was not subject<br />
to arbitration by virtue of a forum selection clause in the agreement between the parties. The
okerage firm moved to dismiss the action to enjoin, or in the alternative, to stay the action.<br />
The Court denied the brokerage firm’s motion on the grounds that the forum selection clause in<br />
the customer agreement, which indicated that the state and federal courts shall have exclusive<br />
jurisdiction, was of a mandatory nature and did not allow for the possibility of arbitration.<br />
N.4.c<br />
Freedom Investors Corp. v. Kahal Shomrei Hadath, 2012 U.S. Dist. LEXIS 15129 (S.D.N.Y.<br />
Feb. 7, 2012).<br />
A request to vacate an arbitration award was denied where the claimants in the<br />
underlying arbitration merely raised arguments considered and rejected by the panel and did not<br />
show that the panel intentionally defied the law. The Court also denied the request to vacate on<br />
the grounds that the plaintiff could not raise a credible argument of evident partiality based on an<br />
arbitrator’s service on the Financial Industry Regulatory Authority’s board of governors.<br />
N.4.c<br />
In re Lehman Bros. Secs. & Erisa Litig., 2012 U.S. Dist. LEXIS 90796 (S.D.N.Y. June 29,<br />
2012).<br />
Claimant banks commenced an arbitration proceeding before the Financial Industry<br />
Regulatory Authority (FINRA) against respondent brokerage firms seeking to recover losses<br />
stemming from certain investments, including shares in Lehman Brothers securities. The<br />
claimants were also members of the plaintiff class in a class action that had been partially settled<br />
regarding such securities. As a result, the respondent brokerage firms sought to enjoin the<br />
claimants from making certain claims in the FINRA arbitration on the grounds that such claims<br />
were barred by the class action settlement agreement. The Court denied the motion on the<br />
grounds that it could not conclude that the FINRA claims involved the identical factual predicate<br />
as the claims in the class action complaints.<br />
Bajaj v. Fisher Asset Mgmt., LLC, 2012 U.S. Dist. LEXIS 50524 (D. Del. Apr. 10, 2012).<br />
N.4.c<br />
A claimant sought to vacate an arbitration award on grounds that: (1) the respondents<br />
procured the award by fraud by introducing fraudulent notes and phone records into evidence at<br />
the hearing; (2) the arbitrator committed misconduct when he refused to consider cell phone<br />
records introduced by the claimant; and (3) the arbitrator refused to rule on claimant’s discovery<br />
requests for documents and admissions during a conference call, thereby prejudicing her right to<br />
a fair hearing. The Court denied the motion to vacate and found that (1) the petitioner failed to<br />
prove that the notes or phone records were fraudulent and their introduction into evidence could<br />
not support a vacatur; (2) the fact that the arbitrator was not persuaded by the claimant’s<br />
evidence did not warrant vacatur; and (3) the claimant failed to identify the nature of the<br />
allegedly key documents and admissions, did not explain how they would have helped her case,<br />
and did not raise this issue at the hearing.<br />
443
N.4.c<br />
Cerone v. Bank of Am., 2012 U.S. Dist. LEXIS 76952 (D.N.J. June 4, 2012).<br />
Where a claimant sought vacatur of an arbitration award and simply reasserted the claims<br />
addressed at the arbitration without pleading more, the high standard necessary for vacating an<br />
arbitration award was not met and the Court denied vacatur.<br />
Stone v. Bear, Stearns & Co., 872 F. Supp. 2d 435 (E.D. Pa. 2012).<br />
444<br />
N.4.c<br />
A claimant’s petition to vacate a Financial Industry Regulatory Authority (FINRA) award<br />
was denied because the fact that one arbitrator failed to disclose her husband’s ties to the<br />
securities industry did not establish evident partiality since the arbitrator twice tried to disclose<br />
the information, and because the husband’s relationship with a particular securities investment<br />
firm was too tenuous to show partiality.<br />
N.4.c<br />
Morgan Keegan & Co. v. Louise Silverman Trust, 2012 U.S. Dist. LEXIS 3870 (D. Md. Jan. 12,<br />
2012).<br />
A brokerage firm sought to enjoin an arbitration action on the grounds that the claimants<br />
purchased the funds at issue through an unrelated third-party broker-dealer and never had any<br />
contractual or other relationship with the brokerage firm. The Court determined that there was<br />
no arbitration agreement, business relationship, or any other relationship between the parties and,<br />
finding that the brokerage firm met all of the necessary legal requirements, granted the<br />
preliminary injunction.<br />
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012).<br />
N.4.c<br />
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)<br />
arbitration award regarding a promissory note between him and his former employer brokerage<br />
firm on the grounds that (1) the award was procured by fraud and undue means as a result of the<br />
brokerage firm’s refusal to comply with discovery orders and making of intentional<br />
misrepresentations as to the availability of certain evidence; (2) the panel was partial in favor of<br />
the brokerage firm; (3) the panel denied the employee a fundamentally fair hearing by depriving<br />
him of access to material evidence exclusively controlled by the brokerage firm; and (4) the<br />
panel manifestly disregarded the law by failing to enforce the governing rules of arbitration and<br />
its own orders and by ignoring uncontroverted evidence of breach of contract. The employee<br />
also argued that the promissory note, including its provision regarding attorney’s fees, was<br />
unenforceable. The Court denied vacatur of the award on the grounds that there was no evidence<br />
to support the employee’s allegations, the promissory note was not an illegal contract, and the<br />
attorney’s fees provision in the promissory note was enforceable.
UBS Fin. Servs. v. Carilion Clinic, 2012 U.S. Dist. LEXIS 106120 (E.D. Va. July 30, 2012).<br />
445<br />
N.4.c<br />
Respondent brokerage firms sought to enjoin a Financial Industry Regulatory Authority<br />
(FINRA) arbitration against them on the grounds that the claimant was not their customer and<br />
therefore had no right to arbitrate before FINRA, and because the claimant effectively waived its<br />
right to arbitration by agreeing to a mandatory forum selection clause requiring the dispute to be<br />
litigated in the United States District Court for the Southern District of New York. The Court<br />
denied the motion based on its determination that (1) the claimant was a customer based on the<br />
various services it purchased from the respondents in exchange for compensation; (2) the forum<br />
selection clause did not act as a waiver of the claimant’s right to arbitrate due to the language of<br />
the agreement, the federal preference in favor of arbitration, and the respondents’ knowledge of<br />
FINRA’s policy for choosing the site of arbitration; and (3) the respondents were unlikely to<br />
succeed on the merits and failed to show that they would suffer irreparable harm.<br />
N.4.c<br />
Morgan Keegan & Co. v. Sturdivant, 2012 U.S. Dist. LEXIS 120295 (S.D. Miss. Aug. 24, 2012).<br />
Claimants sought to vacate an arbitration award in favor of a brokerage firm on the<br />
grounds that one of the three arbitrators was evidently partial to the brokerage firm because he<br />
had extensive involvement with mortgage backed securities like those at issue but failed to<br />
disclose such involvement, and on the grounds that the panel engaged in misconduct by (1) being<br />
unprepared for the evidentiary hearing; (2) making inappropriate comments and posing improper<br />
questions to a witness; and (3) improperly excluding evidence offered by the claimants. The<br />
Court denied the motion to vacate. The Court found that claimants failed to establish any<br />
evident partiality, as the arbitrator had disclosed the information in question and the claimants<br />
had knowledge of such information and failed to object to his presence on the panel, effectively<br />
waiving their argument as to his participation. Additionally, the claimants failed to demonstrate<br />
any alleged unpreparedness on behalf of the panel, there was nothing objectionable about the<br />
questions complained of to the witness, and the Court could not say that refusing to let the<br />
claimants present certain evidence deprived them of a fair hearing.<br />
N.4.c<br />
Wealth Rescue Strategies, Inc. v. Thompson, 2012 U.S. Dist. LEXIS 157355 (S.D. Tex. Nov. 2,<br />
2012).<br />
An investment advisor sought to vacate an arbitration award on the grounds that the<br />
panel’s erroneous failure to transfer venue substantially prejudiced his right to present evidence<br />
and cross-examine witnesses. The Court denied the motion on the grounds that vacatur would be<br />
appropriate under those circumstances only where the non-prevailing party was denied a fair<br />
hearing. The investment advisor, however, did not argue that the arbitrators did not admit certain<br />
evidence, but instead argued that live testimony would have had greater force. The Court found<br />
that although that might be true, the financial advisor had not demonstrated that the arbitrators
did not consider the evidence he presented, and even if the transfer would have facilitated greater<br />
witness participation, he failed to demonstrate that retention of venue in California substantially<br />
prejudiced his rights.<br />
Questar Capital Corp. v. Gorter, 2012 U.S. Dist. LEXIS 163380 (W.D. Ky. Nov. 14, 2012).<br />
N.4.c<br />
A brokerage firm filed a petition to vacate an arbitration award in favor of a former<br />
employee on the grounds that the arbitration panel chair failed to disclose that he had arbitrated<br />
cases in which the former employee’s former union was a party. The petition to vacate was<br />
denied on the grounds that the brokerage firm waived its objection to the chair’s partiality by<br />
failing to raise that objection at the hearing, and nonetheless failed to establish evident partiality<br />
because (1) the brokerage firm established no specific facts showing that the chair had an<br />
improper motive; (2) the former employee’s relationship with the union had ceased more than 30<br />
years prior; and (3) the brokerage firm failed to establish why the connection between the chair<br />
and the former union would lead a reasonable person to conclude that the chair was partial to the<br />
former employee.<br />
Fisher Asset Mgmt., LLC v. Rider, 2012 U.S. Dist. LEXIS 20703 (S.D. Ohio Feb. 17, 2012).<br />
N.4.c<br />
Pursuant to a client agreement between a brokerage firm and its customers, any claims<br />
were required to be brought in arbitration and could not be joined with the claims of any other<br />
individual or entity. Two customers jointly submitted a demand for arbitration and a statement<br />
of claim to the Judicial Arbitration and Mediation Service (JAMS). The firm requested that the<br />
JAMS panel make an administrative determination that the claims could not be joined in a single<br />
action pursuant to the agreement between the parties. The arbitrators ruled that the claims should<br />
be separated and decided that the appropriate procedural remedy was to assign a separate case<br />
number to each claim, hear and judge each claim separately, and render separate decisions. The<br />
firm sought to enjoin the hearings on the grounds that the panel’s ruling was in error because the<br />
claims should have been dismissed and re-filed instead of heard separately. The Court denied<br />
the request to enjoin and found that the arbitrator did not err in severing the cases, as opposed to<br />
requiring the re-filing of one, and that the firm did not meet the burden required for injunctive<br />
relief.<br />
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 4955 (N.D. Ill. Jan. 17, 2012).<br />
N.4.c<br />
A respondent in a Financial Industry Regulatory Authority (FINRA) arbitration sought to<br />
enjoin the action on the grounds that it did not enter into any arbitration agreement with the<br />
claimant, did not have a customer relationship with claimant, and was not required to arbitrate<br />
the claims in the proceeding. The Court found that the respondent had met the requirements for<br />
a temporary injunction and noted that whether an entity was a customer under the FINRA code<br />
446
involved a fact intensive inquiry, and that the parties would be able to more fully brief the issue<br />
at the summary judgment stage.<br />
447<br />
N.4.c<br />
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 14,<br />
2012).<br />
A claimant brought a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against respondent securities firms asserting that he was the victim of identity fraud, that<br />
someone stole his identity, opened an account with respondents using false information, and<br />
authorized the selling of securities without his knowledge. The respondent securities firms filed<br />
an action in federal court requesting a preliminary and permanent injunction, as well as<br />
declaratory relief, to prohibit a claimant from pursuing arbitration claims with the Financial<br />
Industry Regulatory Authority (FINRA) on the grounds that the claimant was not a customer of<br />
the respondents and the parties did not sign an arbitration agreement. The court determined that<br />
the issue of arbitrability was properly before it and granted the preliminary injunction. In doing<br />
so, the Court noted that while the Ninth Circuit Court of Appeals had not yet addressed the issue<br />
directly, a majority of circuit courts have held FINRA's rules do not evidence a clear and<br />
unmistakable intent that the issue of arbitrability should be submitted to an arbitrator, and, as a<br />
result, the court decided the question of arbitrability and granted the preliminary injunction.<br />
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31, 2012).<br />
N.4.c<br />
An issuer of auction rate securities (ARS) brought a Financial Industry Regulatory<br />
Authority (FINRA) claim against the underwriter of the ARS securities at issue. The underwriter<br />
filed a complaint against the issuer in federal court requesting declaratory and injunctive relief<br />
precluding the issuer from arbitrating the claims against it on the basis that (1) the parties were<br />
not in a relationship that came within the scope of FINRA’s jurisdiction because the issuer was<br />
not a “customer”; and (2) the underwriter did not consent to arbitrate claims with the issuer. The<br />
Court determined that the issuer was likely a customer of the underwriter because it hired the<br />
underwriter to perform the underwriting services on both of its ARS offerings, that the claims<br />
were likely suitable for arbitration, and therefore the underwriter could not meet the requirements<br />
for entry of a temporary injunction.<br />
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12, 2012).<br />
N.4.c<br />
A financial advisor moved to vacate an arbitration award on the grounds that: (1) the<br />
chairman of the panel failed to disclose information that might preclude him from being<br />
impartial; (2) the panel manifestly disregarded the law by acting without jurisdiction over the<br />
claimants’ claims, which were barred by the six year eligibility rule under the Financial Industry<br />
Regulatory Authority (FINRA) rules; (3) the breach of fiduciary duty claim was barred by the<br />
statute of limitations under California law; and (4) the claimants failed to establish the elements
of various claims. The court denied the motion to vacate on the grounds that: (1) the alleged<br />
conflict occurred more than two decades prior to the arbitration, was unrelated to the subject of<br />
the arbitration, and would not cause a person to reasonable entertain doubt that the arbitrator<br />
would be impartial; (2) that the panel did not manifestly disregard the law in making the<br />
eligibility and other claim determinations.<br />
White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19, 2012).<br />
448<br />
N.4.c<br />
A respondent brokerage firm in a Financial Industry Regulatory Authority (FINRA)<br />
arbitration action brought filed suit injunctive and declaratory relief against the claimants in the<br />
arbitration action to prevent them from continuing with their FINRA arbitration proceeding on<br />
the grounds that the respondent could not be compelled to arbitrate the claims because the<br />
claimants never entered into any arbitration agreement with the respondent and were not<br />
“customers” of the respondent within the meaning of the FINRA rules. Although the claimants<br />
invested with a broker that worked for the respondent, the respondent claimed that: (1) it did not<br />
have any knowledge of the investments at issue, that the claimants never opened or maintained<br />
accounts with the respondent; (2) it was never the broker-dealer of record for the investments at<br />
issue; (3) it never participated in, supervised, or received compensation or commissions related<br />
to the investment; and (4) the investment activities complained of were independent of the<br />
respondent’s relationship with the broker. The Court denied the request for a preliminary<br />
injunction on the grounds that the broker was an associated person of the respondent and there<br />
was no authority presented to counter the argument that a customer of respondent’s associated<br />
person is a “customer” of respondent. As such, the Court concluded that the respondent failed to<br />
establish a likelihood of success on the merits.<br />
Latour v. Citigroup Global Mkts., Inc., 2012 U.S. Dist. LEXIS 35976 (S.D. Cal. Mar. 15, 2012).<br />
N.4.c<br />
A former employee sought to vacate an arbitration award against her on the grounds that<br />
the panel majority’ decision was made in manifest disregard of the law and the dissenting<br />
arbitrator was correct in stating that because the brokerage firm was not a holder of the<br />
promissory note at issue, under New York law, it was not entitled to enforce it. The Court<br />
denied the motion on the grounds that the majority’s decision was well founded in the business<br />
realities of the transaction, and the former employee had not shown that she brought to the<br />
panel’s attention any controlling authority or even argument that would have prevented the panel<br />
from reaching its conclusion.<br />
Sawyer v. Horwitz & Assocs., 2012 U.S. Dist. LEXIS 11850 (S.D. Cal. Jan. 30, 2012).<br />
N.4.c<br />
A claimant moved to vacate an arbitration award dismissing all of her claims on the<br />
grounds that: (1) the panel’s refusal to grant expungement of the Central Depository Records of<br />
her financial advisor necessarily meant that her claims were meritorious; (2) her financial advisor
had been sanctioned by his employer brokerage firm in connection with the allegations involving<br />
the claimant; (3) the panel’s decision was not unanimous; (4) the undisputed evidence showed<br />
that the claimant’s financial advisor breached his fiduciary duties to the claimant; and (5) the<br />
panel refused to hear pertinent and material evidence that was favorable to the claimant’s case.<br />
The Court denied the motion to vacate on the grounds that claimant’s allegations in (1) through<br />
(3) above did not support vacatur of an award, the claimant failed to show that it was completely<br />
irrational for the panel to reach the conclusion that it did, and there was no prejudice or<br />
affirmative misconduct as a result of the panel’s exclusion of particular evidence.<br />
Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012).<br />
N.4.c<br />
A former employee respondent in a Financial Industry Regulatory Authority (FINRA)<br />
arbitration action sought a preliminary injunction preventing his former employer brokerage firm<br />
from pursuing the FINRA action against him for alleged violations of certain contracts between<br />
the parties on the grounds that the former employee was not required to arbitrate under the<br />
agreements. The Court denied the injunction because it determined that the contracts at issue<br />
contained valid arbitration provisions and the former employee therefore could not establish that<br />
he was likely to prevail on the merits of his challenge to the arbitration.<br />
Stanchart Secs. Int'l, Inc. v. Galvadon, 2012 U.S. Dist. LEXIS 153046 (S.D. Cal. Oct. 24, 2012).<br />
N.4.c<br />
Respondent securities firms filed an emergency application for a temporary restraining<br />
order (TRO) and noticed a motion for a preliminary injunction before the district court with the<br />
immediate objective of avoiding an evidentiary merits hearing before a Financial Industry<br />
Regulatory Authority (FINRA) arbitration panel. The securities firms argued that the TRO<br />
should be entered because only one of the firms was a FINRA member, the claimants in the<br />
underlying arbitration were not customers within the meaning of FINRA, and the claimants’<br />
claims arose before the on FINRA member firm became a FINRA member. The Court denied<br />
the TRO on the grounds that the securities firms could not meet the criteria necessary for its<br />
entry, especially considering that the securities firms voluntarily continued to participate in the<br />
arbitration process and only filed their TRO motion three days before the evidentiary hearing.<br />
Stanchart Secs. Int'l v. Gavaldon, 2012 U.S. Dist. LEXIS 163631 (S.D. Cal. Nov. 9, 2012).<br />
449<br />
N.4.c<br />
Defendant securities firms sought a preliminary injunction, seeking to have the Court to<br />
enjoin the claimants from going forward with an arbitration evidentiary hearing scheduled on<br />
October 25, 2012, three days after the motion was filed, despite the fact that the arbitration had<br />
been ongoing since January 2011. The Court denied the preliminary injunction on the grounds<br />
that (1) based on the filings, the only anticipated event the Court could enjoin would be the<br />
arbitration panel’s decision and the Court could not enjoin such decision because the panel was
not a party to the litigation; and (2) because the only event remaining in the arbitration was the<br />
panel’s issuance of a decision, the defendants could not show irreparable harm.<br />
Waveland Capital Partners, LLC v. Tommerup, 840 F. Supp. 2d 1243 (D. Mont. 2012).<br />
N.4.c<br />
A respondent in a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
filed a motion for a temporary restraining order (TRO) to halt an arbitration hearing on the<br />
grounds that the claim was not arbitrable and that that claimants were not customers within the<br />
meaning of the FINRA rules. The respondent signed a submission agreement, participated in a<br />
pre-hearing conference and discovery prior to filing a motion to dismiss with FINRA, arguing in<br />
part that the dispute was not arbitrable. The Court found that although the respondent may have<br />
wanted to renounce its decision to submit the dispute to arbitration, it could not subsequently<br />
claim that the agreement was void or that it reserved its right to contest the arbitrability in the<br />
courts. The Court additionally determined that the respondent had not met the criteria necessary<br />
for entry of a TRO, including likelihood of success on the customer issue, and as a result, denied<br />
the motion for a TRO.<br />
Collins v. Chi. Inv. Group, LLC, 2012 U.S. Dist. LEXIS 37217 (D. Nev. Mar. 19, 2012).<br />
N.4.c<br />
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)<br />
award on the grounds that (1) the arbitrator abused his discretion in granting the employer’s<br />
motion to change the arbitral venue; (2) the arbitrator came to the wrong substantive decision;<br />
(3) the arbitrator erroneously characterized the sum alleged due and owing as a loan; and (4) the<br />
employer owed the employee payment for her services during a specific time period. The Court<br />
denied the motion on the grounds that the former employee was simply seeking to re-litigate the<br />
issues decided by the arbitrator, failed to provide an appropriate basis for vacatur, and there was<br />
no basis to conclude that the award was completely irrational.<br />
Sunrise Trust v. Morgan Stanley & Co., 2012 U.S. Dist. LEXIS 148485 (D. Nev. Oct. 16, 2012).<br />
N.4.c<br />
A customer trust sought to vacate an arbitration award in favor of a brokerage firm on the<br />
grounds that the arbitration panel engaged in misconduct by refusing to postpone the hearing and<br />
because the panel reached the incorrect conclusion based on the facts. The district court denied<br />
vacatur because the refusal to stay the arbitration proceedings did not prejudice the trust and<br />
because the panel applied the correct law in the arbitration.<br />
450
N.4.c<br />
Tuminello v. Richards, 2012 U.S. Dist. LEXIS 30827 (W.D. Wash. Mar. 8, 2012).<br />
A brokerage firm and financial advisor sought to enjoin a Financial Industry Regulatory<br />
Authority (FINRA) arbitration initiated by a claimant in connection with investment accounts in<br />
Switzerland held with an affiliate of the brokerage firm on the grounds that the claimant signed<br />
account agreements with a Swiss affiliate that did not contain arbitration provisions, but rather a<br />
forum selection clause, and that it was the Swiss accounts that sustained the losses alleged in the<br />
statement of claim. At the outset of their relationship, the parties entered into a master account<br />
agreement, which contained a broad and valid arbitration clause. The claimant subsequently<br />
opened the Swiss accounts under a company he created and, in his capacity as manager of the<br />
company, the claimant signed the Swiss account agreements. The Court denied the request to<br />
enjoin the arbitration and found that the arbitration clause in the master account agreement was<br />
enforceable.<br />
Morgan Keegan & Co. v. Pessel, 2012 U.S. Dist. LEXIS 60465 (D. Colo. May 1, 2012).<br />
451<br />
N.4.c<br />
A brokerage firm sought vacatur of a Financial Industry Regulatory Authority (FINRA)<br />
award on the grounds that the arbitration panel exceeded its authority in rendering the award<br />
because there was no business relationship between the brokerage firm and the claimants. The<br />
court denied the motion to vacate on the grounds that the issue raised presented questions of fact<br />
and law and that the statement of claim filed by the claimants contained many factual allegations<br />
that would support a claim of liability. The Court determined, therefore, that it was not<br />
empowered to vacate the award on the basis of a disagreement with the view of the law<br />
apparently taken by the arbitration panel.<br />
Ohlfs v. Charles Schwab & Co., 2012 U.S. Dist. LEXIS 7737 (D. Colo. Jan. 24, 2012).<br />
N.4.c<br />
A claimant sought to vacate a Financial Industry Regulatory Authority (FINRA)<br />
arbitration award on the grounds that (1) the arbitration panel exceeded its powers by failing to<br />
allow a stenographer to record the arbitration proceedings; (2) the panel was unfair to the<br />
claimant and partial to the respondent in many respects; (3) the award violated the wellestablished<br />
policy of the Uniformed Services Employment and Reemployment Rights Act<br />
(USERRA); and (4) the panel manifestly disregarded the law. The Court denied vacatur of the<br />
award on the grounds that: (1) denial of a request for a stenographer could not serve as a basis<br />
for vacatur; (2) the claimant could not establish that any unfairness or partiality on behalf of the<br />
arbitrators and failed to object to certain disclosures made by the arbitrators prior to moving to<br />
vacate; (3) the panel necessarily had to consider the merits of the claimant’s USERRA claims to<br />
reach its decision and plaintiff could therefore not show a violation of the public policy behind<br />
USERRA; and (4) in absence of an explanation for the award, the plaintiff could not demonstrate<br />
that the panel manifestly disregarded the law under USERRA based on the fact that it found for<br />
the respondent on the claims.
Fisher v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 179691 (D. Kan. Dec. 17, 2012).<br />
452<br />
N.4.c<br />
A claimant sought vacatur of a Financial Industry Regulatory Authority (FINRA)<br />
arbitration award on the grounds that the arbitrators exceeded their powers under the FINRA<br />
rules and conducted the hearing in such a way as to substantially prejudice the rights of the<br />
claimant by allowing the respondent to present certain documents at the hearing that were not<br />
produced to the claimant in accordance with FINRA’s rules. The Court denied the motion for<br />
vacatur and found that the panel had not engaged in any behavior that would warrant vacatur and<br />
the claimant offered little more than unsupported allegations of potentially incorrect discovery<br />
decisions as support for his request to vacate.<br />
N.4.c<br />
Butterworth v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 140209 (N.D. Ala. Sept. 28,<br />
2012).<br />
A brokerage firm sought to vacate an arbitration award on the grounds that the arbitrators<br />
exceeded their powers because (1) they considered derivative claims in violation of an internal<br />
Financial Industry Regulatory Authority (FINRA) rule; (2) they heard claims of certain plaintiffs<br />
who failed to comply with FINRA discovery rules; and (3) they made an alleged mistake in<br />
calculating one of the individual awards. The Court denied the motion to vacate, finding that the<br />
claimants’ statement of claim and the brokerage firms’ pre-hearing motions could be construed<br />
as evincing that not only were the claimants’ claims direct as opposed to derivative, but that the<br />
brokerage firm urged such position in the arbitration. The Court found that to say now that the<br />
claims were derivative when there was evidence before the arbitrators that the claims were<br />
direct, could not serve as a valid basis for vacatur. The Court additionally found there to be no<br />
authority indicating that failure to enforce a motion to compel or aide by a FINRA discovery rule<br />
can constitute a basis to vacate an award and determined that the award in the case did not evince<br />
a patently obvious miscalculation such that it should be vacated.<br />
Fornell v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 108677 (M.D. Fla. Aug. 3, 2012).<br />
N.4.c<br />
A brokerage firm sought vacatur of an arbitration award on the grounds that the arbitrator<br />
chairperson failed to disclose two litigation matters in which he was involved and that this lack<br />
of disclosure established partiality and misbehavior under the relevant statutory provisions. The<br />
Court denied the motion to vacate because (1) the brokerage firm did not establish a basis for<br />
concluding that the arbitrator was partial, corrupt, or engaged in misbehavior by not disclosing<br />
the cases; (2) there was no evidence of an actual conflict; and (3) neither of the two matters<br />
constituted information which would lead a reasonable person to believe that a potential conflict<br />
exists. The Court also granted a motion for sanctions against the brokerage firm for filing a<br />
baseless motion to vacate on the grounds they did not in good faith have an objectively<br />
reasonable basis for challenging the award.
N.4.c<br />
Citigroup Global Mkts., Inc. v. Berghorst, 2012 U.S. Dist. LEXIS 76459 (S.D. Fla. Jan. 20,<br />
2012).<br />
A brokerage firm sought to vacate an arbitration award against it on the basis of the<br />
evident partiality of one of the arbitrators. The arbitrator at issue failed to disclose that after<br />
being appointed to the panel, he initiated an arbitration proceeding against his employer<br />
brokerage firm relating to investments in his individual retirement account. He also failed to<br />
disclose that shortly thereafter, his employer brokerage firm terminated him for failure to follow<br />
management directives and firm policy. The arbitrator subsequently amended his arbitration<br />
action against his employer brokerage firm to assert new claims for retaliatory termination of<br />
employment and defamation and sought $20 million in damages. The arbitrator failed to<br />
disclose any of this information to the parties, despite making other selective disclosures to his<br />
Financial Industry Regulatory Authority (FINRA) database profile. The arbitrator also<br />
affirmatively stated that he had no additional disclosures to make at the outset of the final<br />
arbitration hearing. The Court granted the motion to vacate and found that the facts at the very<br />
least demonstrated an appearance of partiality and that the arbitrator’s failure to disclose his<br />
conflicts of interest was directly prejudicial to the brokerage firm’s right to seek his recusal.<br />
N.4.c<br />
Gerardo Gerson & Rivadavia, S.A. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 128128 (S.D. Fla.<br />
Sept. 10, 2012).<br />
Claimants sought to vacate an arbitration award in favor of a brokerage firm on the<br />
grounds that (1) the panel engaged in a pattern of procedural irregularities and aberrations that<br />
deprived the claimants of any ability to have notice of the arbitration procedure in advance,<br />
which violated the Panama Convention and (2) that the pre-hearing discussions with the<br />
brokerage firm regarding the order and presentation of witnesses constituted a binding<br />
agreement, though not signed in writing, and had the claimants known that the panel was going<br />
to grant a directed verdict, they would have proposed a different witness list. The Court denied<br />
the request to vacate and found that none of the claimants’ contentions satisfied the heavy burden<br />
required to vacate the award, that claimants agreed to be bound by FINRA’s by-laws prior to the<br />
hearing, and that the claimants did not cite to any specific FINRA rules that the panel actually<br />
departed from during the hearing. The Court additionally found that even assuming there was an<br />
agreement as to the order and presentation of witnesses, there was no evidence of an agreement<br />
that the brokerage firm would not raise any motions in response to evidence that the claimants<br />
may have raised at the hearing.<br />
453
454<br />
N.4.c<br />
Merrill Lynch, Pierce, Fenner & Smith v. Smolchek, 2012 U.S. Dist. LEXIS 134089 (S.D. Fla.<br />
Sept. 17, 2012).<br />
A respondent brokerage firm sought to vacate an arbitration award on the grounds that (1)<br />
the chairwoman of the arbitration panel failed to disclose the nature of her husband’s law<br />
practice, the sizeable award he earned against the respondent in another case six years prior, or<br />
comments that her husband made to a newspaper after the award to the effect that he was<br />
particularly satisfied at having obtained an award against the respondent, which resulted in<br />
evident partiality; (2) the panel engaged in misconduct in its decision to limit the respondent’s<br />
presentation of its and case and in its decision impose sanctions against the respondent; and (3)<br />
the panel exceeded its authority in imposing sanctions because it did not allow the respondent<br />
sufficient notice or an opportunity to be heard. The district court denied the motion to vacate.<br />
With respect to the partiality issue, the court determined that the brokerage firm had prior<br />
knowledge of the information it alleged had not been disclosed and accepted the panel’s<br />
composition nonetheless. With respect to the evidence limitations and sanctions award, the<br />
Court further found that the panel had at least some reasonable basis for the actions it took and<br />
while the decisions were in some cases detrimental to the respondent, the respondent had not<br />
demonstrated that it was unfairly prejudiced to the point of being denied a fundamentally fair<br />
hearing.<br />
N.4.c<br />
Spungin v. GenSpring Family Offices, LLC, 2012 U.S. Dist. LEXIS 113962 (S.D. Fla. May 25,<br />
2012).<br />
Three investors petitioned to vacate an arbitration award against them on the grounds that<br />
the investors’ claim was dismissed without holding an evidentiary hearing and that the arbitrator<br />
refused to hear the investors’ evidence regarding the intent of the parties when they executed a<br />
prior settlement agreement. The district court denied the motion, finding that the arbitrator did<br />
not exceed his powers by dismissing the claim without holding an evidentiary hearing because<br />
the Judicial Arbitration and Mediation Services (JAMS) discovery protocols anticipate that<br />
dispositive motions are sometimes appropriate and do not indicate that such motions are limited<br />
to post-discovery, and the arbitrator did not engage in misconduct because he should not have<br />
considered parol evidence if he found that the settlement agreement at issue was not ambiguous.<br />
N.4.c<br />
Abdelnour v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 29 Mass. L. Rep. 540 (Mass. Super.<br />
Ct. 2012).<br />
Claimants sought to vacate a Financial Industry Regulatory Authority (FINRA) award<br />
against them on the grounds that FINRA engaged in misconduct and exhibits bias towards the<br />
respondents, a financial adviser and brokerage firm. The claimants claimed that the arbitrators<br />
and counsel for the defendants conspired through ex parte communications to cover up the<br />
partial destruction of an audio recording of one morning of the proceedings, and that the
arbitrators violated their right to a speedy hearing under FINRA procedural rules by failing to act<br />
on their request to expedite the evidentiary hearing. The Court denied the claimants’ motion to<br />
vacate on the grounds that the claimants’ assertions were without merit, the claimants did not<br />
suffer any prejudice, and the claimants’ argument that the panel seriously prejudiced their right<br />
to a fair arbitration hearing by not conducting it sooner was undermined by the claimants’ own<br />
delays in providing discovery and their express agreement that, as a result, hearing dates had to<br />
be adjourned.<br />
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012).<br />
455<br />
N.4.c<br />
Claimants in an underlying arbitration action appealed confirmation of arbitration award<br />
in favor of the respondent brokerage firm on the grounds that the panel exceeded its authority by<br />
recording findings on ineligible matters. The appellate court affirmed the lower court’s<br />
confirmation of the award. During the arbitration hearing, the panel found that many of the<br />
claimants’ claims were barred for lack of jurisdiction. The Court determined that although the<br />
panel expounded in the award on matters that were not eligible for arbitration, they did not<br />
exceed the scope of their authority because the plaintiffs brought the ineligible claims, thereby<br />
giving the panel the power to discuss its dismissal of those matters.<br />
N.4.c<br />
Messier v. Merrill Lynch Int'l Fin., Inc., 2012 Conn. Super. LEXIS 3140 (Conn. Super. Ct. Dec.<br />
28, 2012).<br />
A former employee sought to vacate a Financial Industry Regulatory Authority (FINRA)<br />
award against him regarding a promissory note between him and his former brokerage firm<br />
employer on the grounds that the award denied his right to receive earned wages in contravention<br />
of Connecticut public policy, as reflected in the state’s statutes. Although the Court stated that<br />
the wage withholding complained of by the employee constituted an area of clear public policy<br />
and the allegation of a violation of such policy carried with it the right to judicial review<br />
notwithstanding an unrestricted referral to arbitration, the court was placed in the position of<br />
speculating as to the rationale for the arbitrator’s decision. As such, the Court remanded the<br />
matter to the arbitrator for an articulation of the basis for his rejection of the employee’s claim<br />
for wages.<br />
N.4.c<br />
Baker v Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 N.Y. Misc. LEXIS 1123 (N.Y. Sup.<br />
Ct. Mar. 9, 2012).<br />
A brokerage firm sought to vacate an arbitration award on the grounds that the arbitration<br />
panel engaged in prejudicial misconduct by ruling that all evidence following the claimants’<br />
filing of their statement of claim on December 1, 2009 was irrelevant, including evidence as to<br />
claimants’ later investments. The brokerage firm further asserted the fact that the arbitrators, and<br />
one arbitrator in particular, repeatedly fell asleep during the hearing over the parties’ objections.
The Court denied the motion to vacate because the arbitrators were within their authority to limit<br />
the evidence to that which was relevant to the disputes and the brokerage firm failed to provide<br />
clear and convincing evidence that the arbitrator habitually or repeatedly fell asleep during the<br />
hearing.<br />
456<br />
N.4.c<br />
Longfield v Financial Tech. Partners, 2012 N.Y. Misc. LEXIS 5497 (N.Y. Sup. Ct. Nov. 28,<br />
2012).<br />
A former employee of an investment firm sought to vacate an arbitration award on the<br />
grounds that the arbitrator acted with manifest disregard of the law when he made a specific<br />
finding that the former employee resigned and that as an at-will employee she was entitled to<br />
resign at any time, yet subsequently determined that she was terminated by her former employer<br />
for cause. The Court denied the motion to vacate on the grounds that the award was not totally<br />
irrational and that a colorable basis for the award had been stated. The Court further determined<br />
that while the former employee’s at-will right to resign was provided for in the agreement<br />
between the parties, there was also language in the agreement which could specifically be found<br />
applicable to the compensation due to a resigning employee, when the resignation was not made<br />
for acceptable reasons, and where the employer reasonably found cause for termination of the<br />
employee's right to certain compensation.<br />
N.4.c<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45, 50<br />
(App.Div. 2012).<br />
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action<br />
against several respondent broker-dealers. The claims against one broker-dealer were dismissed<br />
by the Court on the grounds that the claimants were not customers of that broker-dealer. One of<br />
the remaining respondents subsequently filed a third party claim against the broker-dealer in the<br />
arbitration and the broker-dealer moved to enjoin the claims, which the lower court granted. The<br />
respondent subsequently appealed the four orders enjoining them from pursuing their third party<br />
arbitration claims for contribution and indemnification against the broker-dealer. The court<br />
affirmed the orders on the grounds that the respondents could not be compelled to arbitration<br />
absent an agreement or a covered, exchange-related transaction with the claimants. The account<br />
with respondents was used by claimants as a personal depository of funds and claimants failed to<br />
demonstrate that respondents acted in any way as a broker-dealer for any of the parties or that it<br />
engaged in a covered, exchange-related transaction with claimants.<br />
Schwarz v. Wells Fargo Advisors, LLC, 2012 PA Super 265 (Pa. Super. Ct. 2012).<br />
N.4.c<br />
After a plaintiff client filed suit, a defendant brokerage firm moved to compel arbitration.<br />
The plaintiff denied the existence of an arbitration agreement, the trial court judge proceeded<br />
summarily to determine whether an agreement existed, and upon finding the existence of such an
agreement, compelled the parties to arbitration. The plaintiff received a nominal award from the<br />
arbitration panel and moved to vacate the award on the grounds that there was no agreement to<br />
arbitrate. The trial court judge vacated the award, concluding that the parties did not enter into<br />
an agreement to arbitrate and the judge who ruled on the initial motion to compel failed to afford<br />
the plaintiff a hearing on the issue. The appellate court found that the trial court did not have the<br />
statutory authority to vacate the award and that at the time the plaintiff sought to vacate, the issue<br />
of whether an arbitration agreement existed had already been adversely determined in court<br />
proceedings.<br />
Carter v. Holdman, 95 So. 3d 560, 562 (La.App. 4 Cir. 2012).<br />
457<br />
N.4.c<br />
A respondent firm unsuccessfully sought to vacate a Financial Industry Regulatory<br />
Authority (FINRA) award on the grounds that the arbitration panel manifestly disregarded the<br />
law of causation by awarding the claimant his total damages despite undisputed evidence that the<br />
declining stock market contributed to his losses, and on the bases that the arbitration panel<br />
disregarded Texas law by holding the responsible parties jointly and severally liable rather than<br />
apportioning fault among them. The appellate court affirmed the district court’s denial of the<br />
motion to vacate on the grounds that the evidence presented clearly supported the arbitration<br />
panel’s majority decision and the fact that the dissenting arbitrator would have attributed some<br />
liability to the claimant and reduced the total damages based on the stock market decline was not<br />
a basis to vacate the award. Additionally, nothing in the record indicated that the arbitration<br />
panel failed to apply Texas law as required under terms of the customer agreement between the<br />
parties.<br />
N.4.c<br />
Hansalik v. Wells Fargo Advisors, 2012 Cal. App. Unpub. LEXIS 3145 (Cal. App. 2d Dist. Apr.<br />
25, 2012).<br />
A brokerage firm filed an arbitration action against a former employee regarding a<br />
promissory note. After the former employee failed to appear or otherwise respond, the Financial<br />
Industry Regulatory Authority (FINRA) entered a default award against the employee. The<br />
employee filed a motion to vacate the award on the grounds that he had never received notice of<br />
the arbitration action. The trial court granted the vacatur and found that the employee was not<br />
properly served under the FINRA rules and was therefore denied due process. The appellate<br />
court confirmed the vacatur and determined that the arbitrator’s determination as to proper<br />
service was not dispositive, the arbitrator exceeded its authority by denying the employee a fair<br />
hearing, and the award was properly vacated by the lower court.<br />
Pemberton v. Citigroup Global Mkts., Inc., 268 P.3d 11 (Kan. Ct. App. 2012).<br />
N.4.c<br />
The appellate court affirmed denial of a former employee’s motion to vacate an<br />
arbitration award on the grounds that (1) there was no evidence that the agreement to arbitrate
was procured by undue means; (2) the former employee had not shown that the arbitration<br />
hearing was unfair; (3) there was no authority supporting the former employee’s argument that<br />
the attorney for the employer and two of the arbitrators who were attorneys were required to be<br />
licensed in Kansas in order to participate in the arbitration proceeding; and (4) there was no<br />
evidence that the district court should have vacated the arbitration award for public policy<br />
reasons under a Kansas statute prohibiting arbitration provisions in employment contracts.<br />
O. Practice and Procedure<br />
1. Rule 9(b) of the Fed. R. Civ. P.<br />
O.1<br />
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98, 108 (2d Cir. 2012)<br />
Shareholder brought action against broker-dealer for offerings of auction rate securities<br />
(ARS), and against agencies that assigned credit ratings to the ARS, asserting claims under<br />
federal and state law for market manipulation, control person liability, fraud, and negligent<br />
misrepresentation. After action was transferred from California to New York by Judicial Panel<br />
on Multidistrict <strong>Litigation</strong>, defendants moved to dismiss. The United States District Court for the<br />
Southern District of New York granted motions. Shareholder appealed. In affirming the 2nd<br />
Circuit held that a complaint alleging securities fraud must also satisfy the heightened pleading<br />
requirements set forth in Federal Rule of Civil Procedure 9(b) and the Private Securities<br />
<strong>Litigation</strong> Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u–4(b). Rule 9(b) requires that<br />
averments of fraud be “state[d] with particularity.” Fed.R.Civ.P. 9(b). To satisfy this requirement<br />
the plaintiff must “(1) specify the statements that the plaintiff contends were fraudulent, (2)<br />
identify the speaker, (3) state where and when the statements were made, and (4) explain why the<br />
statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.2004) (internal<br />
quotation marks omitted). The PSLRA expanded on the Rule 9(b) standard, requiring that<br />
“securities fraud complaints ‘specify’ each misleading statement; that they set forth the facts ‘on<br />
which [a] belief’ that a statement is misleading was ‘formed’; and that they ‘state with<br />
particularity facts giving rise to a strong inference that the defendant acted with the required state<br />
of mind.’ ” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627, 161 L.Ed.2d 577<br />
(2005) (quoting 15 U.S.C. § 78u–4(b)(1), (2)).<br />
Panther Partners Inc. v. Ikanos Communications, Inc., 681 F.3d 114 (2d Cir. 2012)<br />
In securities fraud class action alleging that disclosures in semiconductor company's<br />
offering statements for initial public offering (IPO) and secondary offering were inadequate, the<br />
United States District Court for the Southern District of New York, dismissed complaint for<br />
failure to state a claim, denied plaintiffs leave to amend, and denied motion for reconsideration<br />
of that denial. After appeal and remand, plaintiff again appealed dismissal. The 2d Circuit, held<br />
that complaint stated claim for inadequate disclosures in registration statement and prospectus<br />
and vacated and remanded with instructions to grant leave to amend. In doing so the court held<br />
458<br />
O.1.
that neither scienter, reliance, nor loss causation is an element of claim for false or misleading<br />
registration statement or prospectus under Securities Act, which, unless they are premised on<br />
allegations of fraud, need not satisfy heightened particularity requirements of Fed. R. Civ. P.<br />
9(b).<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. 2012).<br />
Investor filed action against brokerage, its parent companies, and employee for fraud,<br />
negligent misrepresentation, and violations of Kentucky's Blue Sky Law. Defendants moved to<br />
dismiss. The United States District Court for the Western District of Kentucky granted the<br />
motion and the Investor appealed. The 6th Cir. held although conditions of a person's mind may<br />
be alleged generally, under the rule Fed. R. Civ. P. 9(b) the plaintiff still must plead facts about<br />
the defendant's mental state, which, accepted as true, make the state-of-mind allegation plausible<br />
on its face. Moreover, under Rule 9(b), investor's allegations that brokerage firm failed to inform<br />
it that substantial number of loans underlying mortgage pass-through certificates had been made<br />
without regard for “prudent underwriting standards” were not sufficiently particular to state a<br />
claim of fraud by omission, where investor failed to specify the “who, what, when, where, and<br />
how”; investor's allegations that brokerage firm omitted to state, first, that the loan originators<br />
did not follow their own underwriting standards in making a substantial number of the mortgage<br />
loans that back the certificates, and, second, that a substantial number of the mortgage loans<br />
backing the certificates were inadequately secured because of inaccurate property valuations,<br />
were not sufficiently particular to state a claim of fraud by omission, where claims involved only<br />
probabilities; and, investor's allegations that broker made false representations that certificates<br />
were reasonably safe investment products backed by mortgage loans made according to<br />
reasonably prudent underwriting standards were not sufficiently particular to state a claim of<br />
fraud, where investor failed to indicate when, where, or to whom the alleged misstatement was<br />
made.<br />
Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972 (8th Cir. 2012).<br />
Investors brought class action against pharmaceutical company and its officers alleging<br />
that company issued false and misleading statements regarding its compliance with Food and<br />
Drug Administration (FDA) regulations and its financial condition, in violation of federal<br />
securities laws. The United States District Court for the Eastern District of Missouri, granted<br />
defendants' motions to dismiss, and the same court, subsequently denied investors' motions for<br />
relief from judgment and to amend complaint. On appeal, the 8th Circuit held the investors who<br />
alleged that chief administrative officer (CAO) and president of pharmaceutical company<br />
“employed devices, schemes, and artifices to defraud” and “engaged in transactions, practices<br />
and a course of conduct that operated as a fraud and deceit” upon purchasers of company's<br />
securities, in violation of securities regulations, failed to allege with sufficient particularity how<br />
scheme operated and how CAO and president were actually involved, and thus failed to state<br />
scheme liability claim. 17 C.F.R. § 240.10b–5(a, c); Fed .R. Civ. R. P 9(b).<br />
O.1.<br />
O.1.<br />
459
O.1.<br />
In re Rigel Pharmaceuticals, Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012)<br />
Investor brought a securities fraud action individually and on behalf of all other persons<br />
who purchased or otherwise acquired the common stock of issuer during a designated period.<br />
Investor also brought claims on behalf of itself and persons who purchased stock traceable to the<br />
registration statement and prospectus issued in connection with issuer's 2008 stock offering. The<br />
United States District Court for the Northern District of California granted defendants' motion to<br />
dismiss the complaint, and investor appealed. In affirming the decision the 9th Cir held that<br />
Investor's claim under Securities Act provision creating liability for misstatements in registration<br />
statements was grounded in fraud, and therefore subject to particularity requirements for<br />
pleading fraud generally. This did not mean, as Plaintiff contends, that it may not plead<br />
alternative theories of liability; it merely means that, with both the section 10(b) and the section<br />
11 claims, Plaintiff must meet the pleading requirements of Rule 9(b). Plaintiff failed to meet<br />
Rule 9(b)'s pleading requirements with respect to pleading a false or misleading statement.<br />
In re China Valves Tech. Sec. Litig., 2012 WL 4039852 (S.D.N.Y. Sept. 12, 2012).<br />
This putative class action arose from purchases of China Valves Technology, Inc. stock<br />
between December 1, 2009 and January 13, 2011. Lead plaintiff alleged that China Valves, its<br />
named officers and directors, and its auditor failed to disclose material adverse facts about two of<br />
the company's acquisitions, including their related party nature, and materially overstated China<br />
Valves' financial results in the registration statement made effective on December 14, 2009 and<br />
in the January prospectus supplement in violation of the Securities Act of 1933 and Section 10(b)<br />
and Section 20(a) of the Securities Exchange Act of 1934. Defendants moved for the securities<br />
law claims to be dismissed for failure to sufficiently allege facts pursuant to Fed. Rule Civ. P.<br />
9(b) and Private Securities <strong>Litigation</strong> Reform Act. The Court held that Plaintiffs’ Section 10(b)<br />
claims failed to satisfy the Rule 9(b) and the PSLRA standards, because when a securities fraud<br />
claim is based on discrepancies between AIC and SEC filings, the plaintiff must allege at least<br />
some facts to support that (1) the SEC figures, and not the AIC filings, are false, and (2) any<br />
variation is not attributable to variations in reporting rules or accounting standards. The Court<br />
further noted that Plaintiffs noted discrepancy in figures are much smaller than other cases that<br />
survived motions to dismiss, and that they allege only that differences exist in the SEC and AIC<br />
filings and assume or conclude the SEC filings must therefore be false. Additionally, the Court<br />
dismissed Plaintiffs’ claims related to related party transactions and failure to disclose an<br />
acquisition’s possible FCPA violations because the amount of the payment to a related party was<br />
disclosed and under $120,000 threshold and Plaintiffs’ fails to allege sufficient allegations that<br />
any of the purported omissions were material when Plaintiffs bought the shares of China Valves.<br />
The Court further dismissed the Securities Act claims because they sounded in fraud and not<br />
negligence as Plaintiffs’ contended; therefore, they failed to meet the more stringent Rule 9(b)<br />
pleading requirements. Moreover, Plaintiffs assert a Section 15 claim for control person liability<br />
against the individual defendants. However, as the complaint fails to allege a primary violation<br />
O.1.<br />
460
of the Securities Act, no control person liability can exist under Section 15. Therefore, the claim<br />
is dismissed.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.<br />
Sept. 27, 2012).<br />
Plaintiffs’ brought this action in connection with their purchases of shares of Elixir<br />
Gaming Technologies, Inc. Plaintiffs sue under Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934 and Rule 10b–5 thereunder, the Nevada Uniform Securities Act, and on<br />
various common law theories. They claim that the defendants made material misrepresentations<br />
that (1) inflated EGT's share price, (2) caused them to purchase and hold EGT shares at that<br />
inflated price, and (3) injured them when the truth was made public and led to a decline in EGT's<br />
share price. Defendants moved to dismiss for failure to state a claim and/or sufficiently allege a<br />
cause of action under Fed. R. Civ. P. 9(b). Defendants asserted that the Exchange Act claims<br />
should be dismissed because many of the alleged misstatements were “forward-looking<br />
statements” that fell within the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform<br />
Act and that plaintiffs fail adequately to allege materiality, scienter, and loss causation. They<br />
argue that the Nevada Uniform Securities Act claims should be dismissed for substantially the<br />
same reasons. The Court held, in part, that (1) the shareholders failed to adequately allege loss<br />
causation, as required to state § 10(b) securities fraud claim; (2) certain of defendants forwardlooking<br />
statements fell within Private Securities <strong>Litigation</strong> Reform Act safe-harbor provision;<br />
and (3) shareholders failed to adequately allege that statements regarding number of electronic<br />
gambling machines that corporation placed in Asian gaming venues were false, as required to<br />
state § 10(b) securities fraud claim. Specifically, as to holdings (1) and (2), the Court noted that<br />
none of the risk complain of in the action were concealed by the alleged inaccuracy of the $125<br />
net-win figure. Indeed, the statements about the $125 net-win rate were forward-looking<br />
statements that included cautionary language. Moreover, in its SEC filings and conference calls,<br />
defendants repeatedly warned of risks that projections—including the $125 net-win rate—would<br />
not be met. The Court further dismissed Plaintiffs’ claim under Nevada Revised Statutes—<br />
Section 90.570, which parallels Rule 10b-5 claims, because the Court’s dismissal of Plaintiffs’<br />
Rule 10b-5 claim was dispositive.<br />
Dobina v. Weatherford Int’l Ltd., 2012 WL 5458148 (S.D.N.Y. Nov. 7, 2012).<br />
This suit arises out of statements regarding the internal controls and accounting practices<br />
of Weatherford International Ltd., after Weatherford announced in 2011 that it had understated<br />
its tax expenses from 2007 through 2010 by over $500 million. Lead plaintiff American<br />
Federation of Musicians and Employer's Pension Fund alleged that Weatherford and certain of<br />
its officers, as well as its auditor Ernst & Young <strong>LLP</strong>, violated Sections 10(b) and 20(a) of the<br />
Securities Exchange Act of 1934 and Rule 10b–5 by knowingly issuing materially false<br />
statements regarding the company's tax accounting for the relevant time period and omitting to<br />
state facts necessary to make the statements that were made not misleading. Weatherford moved<br />
O.1.<br />
O.1.<br />
461
to dismiss for failure to allege sufficient facts under Fed. R. Civ. P. 9(b) and lead plaintiff moved<br />
for leave to supplement amended complaint. The Court held that (1) allegations that corporate<br />
officers delivered personally-held shares of corporation's stock back to corporation did not<br />
sufficiently allege motive to commit fraud in support of scienter element of securities fraud<br />
claim; (2) the complaint adequately alleged scienter with respect to statements made about<br />
corporation's internal controls by corporation and its chief financial officer; (3) the complaint did<br />
not adequately allege intentional scheme to manipulate corporation's tax expenses; (4) the<br />
magnitude of tax expense understatement and focus on corporation's tax rates did not<br />
demonstrate recklessness in making associated statements supporting inference of scienter; (5)<br />
allegations that deficiencies in corporation's internal tax controls should have been revealed by<br />
reasonable audit did not give rise to strong inference of scienter required to state claim against<br />
auditor based on its statements regarding effectiveness of internal controls; (6) the complaint<br />
stated claim for control person liability; and (7) denied lead plaintiff’s motion to supplement<br />
complaint, as futile.<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.<br />
Sept. 27, 2012).<br />
Plaintiffs’ brought this action in connection with their purchases of shares of Elixir<br />
Gaming Technologies, Inc. Plaintiffs sue under Sections 10(b) and 20(a) of the Securities<br />
Exchange Act of 1934 and Rule 10b–5 thereunder, the Nevada Uniform Securities Act, and on<br />
various common law theories. They claim that the defendants made material misrepresentations<br />
that (1) inflated EGT's share price, (2) caused them to purchase and hold EGT shares at that<br />
inflated price, and (3) injured them when the truth was made public and led to a decline in EGT's<br />
share price. Defendants moved to dismiss for failure to state a claim and/or sufficiently allege a<br />
cause of action under Fed. R. Civ. P. 9(b). Defendants asserted that the Exchange Act claims<br />
should be dismissed because many of the alleged misstatements were “forward-looking<br />
statements” that fell within the safe harbor provision of the Private Securities <strong>Litigation</strong> Reform<br />
Act and that plaintiffs fail adequately to allege materiality, scienter, and loss causation. They<br />
argue that the Nevada Uniform Securities Act claims should be dismissed for substantially the<br />
same reasons. The Court held, in part, that (1) the shareholders failed to adequately allege loss<br />
causation, as required to state § 10(b) securities fraud claim; (2) certain of defendants forwardlooking<br />
statements fell within Private Securities <strong>Litigation</strong> Reform Act safe-harbor provision;<br />
and (3) shareholders failed to adequately allege that statements regarding number of electronic<br />
gambling machines that corporation placed in Asian gaming venues were false, as required to<br />
state § 10(b) securities fraud claim. Specifically, as to holdings (1) and (2), the Court noted that<br />
none of the risk complain of in the action were concealed by the alleged inaccuracy of the $125<br />
net-win figure. Indeed, the statements about the $125 net-win rate were forward-looking<br />
statements that included cautionary language. Moreover, in its SEC filings and conference calls,<br />
defendants repeatedly warned of risks that projections—including the $125 net-win rate—would<br />
not be met. The Court further dismissed Plaintiffs’ claim under Nevada Revised Statutes—<br />
Section 90.570, which parallels Rule 10b-5 claims, because the Court’s dismissal of Plaintiffs’<br />
Rule 10b-5 claim was dispositive.<br />
O.1.<br />
462
O.1.<br />
In re Heckmann Corp. Sec. Litig., 869 F. Supp.2d 519 (D. Del. 2012).<br />
Shareholder brought securities fraud class action against Heckmann Corporation and<br />
officers on behalf of all shareholders who held stock in corporation and were entitled to vote on<br />
merger with China Water and Drinks, Inc., and on behalf of investors who acquired securities in<br />
corporation during class period, alleging fraud, recklessness, and materially false and misleading<br />
statements. Defendants moved to dismiss for failure to adequately plead the securities fraud<br />
allegations. In denying the motion to dismiss, the court held that the shareholder stated a claim<br />
for false and misleading proxy statements proxy statements. The court reasoned that the<br />
company’s statements reassuring investors that it was comfortable with possible misstatements<br />
in China Water’s accounting were false and misleading, because the company admitted in a prior<br />
litigation that it knew of red flags and indicators of fraud prior to and after the shareholder vote.<br />
The court further noted that the company’s statement that its due diligence was extensive was<br />
shown to be false by it not confirming the veracity of China Water’s operating results and<br />
financial positions. Since the misstatements were contained in the management’s proxy<br />
solicitation, the court held that each director was considered to be soliciting proxies, unless the<br />
director formally dissented or dissociated himself from the solicitation; thus, each director was<br />
liable for misstatements contained in the proxy materials.<br />
Bruce v. Gore, et al., 2012 WL 987556, N.D. Tex. Mar. 22, 2012).<br />
Bruce claimed that Defendants schemed to falsely market an investment named<br />
“HotelGuide,” sell unregistered securities in this investment, and then bankrupt the investment<br />
after stripping all equity from it. Defendants moved to dismiss the complaint for failure to<br />
adequately plead under Fed. R. Civ. P. 9(b), or, in the alternative, Defendants move for a more<br />
definite statement. The court granted Defendants’ motion for a more definite statement, but<br />
denied its motion to dismiss. The court reasoned that the statements supporting its securities<br />
fraud claims were vague even under the minimal Rule 8(a)’s requirements because they do not<br />
provide enough information for the Defendants’ to adequately respond. Furthermore, the court<br />
held that although Rule 10(c) authorizes adoption by reference in later proceedings, Bruce did<br />
not do so with sufficient clarity which enabled the Defendants to ascertain the nature and extent<br />
of the incorporation by merely stating that the third-party complaint incorporates “all or part” of<br />
the eighty eight paragraph complaint.<br />
U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., 2012 WL 3100778 (N.D. Tex. July 31, 2012).<br />
This suit arises out of Verizon’s spin-off of its on-line directories business into an<br />
independent stand-alone company, Idearc, Inc. Idearc subsequently filed for Chapter 11<br />
bankruptcy and U.S. Bank National Association was appointed litigation trustee to pursue any<br />
possible causes of action related to the alleged “scheme” devised by Verizon to “obtain<br />
O.1.<br />
O.1.<br />
463
approximately $9.5 billion-not in the marketplace, but through the use of lawyers and Wall Street<br />
investment bankers.” The Trustee asserted numerous claims against Verizon and its affiliates,<br />
including one for fraudulent transfer. Defendants moved to dismiss the fraudulent transfer claim<br />
for failure to state a claim because it did not satisfy the Fed. R. Civ. P. 9(b) pleading<br />
requirements. In denying Defendants’ motion to dismiss, the Court acknowledged that the 5 th<br />
Circuit had yet to address whether the heightened Rule 9(b) pleading requirement applied to<br />
fraudulent transfer. The Court held that the heightened pleading requirement does not apply to<br />
fraudulent transfer because fraud is not an aspect of a fraudulent transfer claim. In a fraud claim,<br />
the plaintiff must show that the defendant had both “knowledge” of the fraud and an “intention to<br />
induce reliance.” In contrast, in a fraudulent transfer claim, the defendant's intent or conduct is<br />
irrelevant. Finally, the policies behind the heightened pleading requirements for fraud claims do<br />
not apply in the fraudulent transfer context. Unlike fraud claims, fraudulent transfer claims are<br />
unlikely to cause defendants significant “harm to their reputation and goodwill .” Moreover,<br />
fraudulent transfer claims are not subject to abusive use in “strike suits” and are unlikely to help<br />
a plaintiff “in an attempt to discover unknown wrongs.”<br />
In re BP P.L.C. Securities Litig., 853 F. Supp.2d 767 (S.D. Tex. 2012).<br />
Purchasers of the oil company’s American Depository Shares brought a consolidated<br />
class action asserting various securities fraud claims on behalf of themselves and similarly<br />
situated purchasers of the company’s American Depository Receipts against British Petroleum<br />
and certain directors following the largest oil spill in the nation’s history. The purchasers<br />
claimed that BP’s repeated positive public statements concerning its process safety programs, its<br />
risk management infrastructure, its spill response capabilities, and the company’s prioritization<br />
of safety in the Gulf contained misrepresentations and omissions that were calculated to conceal<br />
the true state of BP’s safety programs and its risk exposure in order to keep the value of BP’s<br />
ADS’s artificially inflated. BP moved to dismiss the securities fraud allegations because the<br />
statements in plaintiffs’ complaint did not satisfy the heighted pleading requirements of Fed. R.<br />
Civ. P. 9(b). The court held that when pleading fraud claims against individuals under Section<br />
10(b) and Rule 10b-5, plaintiffs must distinguish among the defendants and allege the role of<br />
each. The court further held that plaintiffs pleaded with sufficient particularity the alleged falsity<br />
of BP’s public statements regarding its operating management (“OMS”) systems because during<br />
oral argument Defendants conceded that its statement that the OMS was fully implemented in<br />
2008, was in fact still in its infancy in 2009-2010. Plaintiff also sufficiently pleaded facts to<br />
demonstrate that BP materially misrepresented the size of the oil spill it was prepared to respond<br />
to, which became apparent when BP was incapable of containing a spill amount only a fraction<br />
of what was represented when the Deepwater Horizon spill occurred. However, numerous<br />
statements were held to not be sufficiently plead, including the falsity of BP’s statement that<br />
there was an identifiable reduction in the number of oil spills.<br />
O.1.<br />
464
Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, 2012 WL 5389734 (N.D. Ill. Nov. 2,<br />
2012).<br />
Based off the repeated advice and representations from Defendants Last Atlantis Capital<br />
Management, LLC and others, Plaintiff Alpha Management Incorporated transferred its entire<br />
investment to another class of investment with Defendant Last Atlantis. After Plaintiff was lead<br />
to believe that the new class of investment stopped trading it requested redemption from<br />
Defendant Last Atlantis, which led Plaintiff to file suit against Defendants alleging violations of<br />
§ 10(b) of the Securities Exchange Act of 1934, as well as, other federal and state securities laws.<br />
Defendants, with the exception of a former employee, moved to dismiss for failure to allege<br />
sufficient facts under Fed. R. Civ. P. 9(b) and Plaintiff filed an amended complaint in response.<br />
The court dismissed the federal securities law claims, but gave Plaintiff leave to replead the §<br />
10(b) claim. The Court held that the § 10(b) claim did not raise sufficient facts under Fed. R.<br />
Civ. P. 9(b) because the amended complaint never actually comes out and says any particular<br />
statement was false or misleading. Further, because it is unclear whether subject matter<br />
jurisdiction lies over the state law claims, the court will reserved judgment as to whether those<br />
claims can survive dismissal.<br />
Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D. Cal. Aug. 29, 2012).<br />
Investors brought several putative class actions against corporation, its subsidiary, and its<br />
officers and directors, alleging securities fraud and control person liability claims. Following<br />
consolidation of the actions, and automatic stay of the actions as to corporation upon its<br />
bankruptcy filing, defendants moved to dismiss. The court held that at the pleading stage, a<br />
complaint stating claims under section 10(b) and Rule 10b–5 must satisfy the dual pleading<br />
requirements of Fed. R. Civ. P. 9(b) and the Private Securities <strong>Litigation</strong> Reform Act<br />
(“PSLRA”). Under the PSLRA, actions based on allegations of material misstatements or<br />
omissions must “specify each statement alleged to have been misleading, the reason or reasons<br />
why the statement is misleading, and, if an allegation regarding the statement or omission is<br />
made on information and belief, the complaint shall state with particularity all facts on which<br />
that belief is formed.” 15 U.S.C. § 78u–4(b)(1). The Court held the investors sufficiently alleged<br />
particularized facts to support a strong inference of scienter with respect to corporation's former<br />
CEO but failed to allege sufficient facts to support a strong inference of scienter with respect to<br />
remaining officers and directors. Investors stated a securities fraud claim against subsidiary.<br />
Investors stated a claim for control person liability against certain officers; but failed to state a<br />
control person liability claim against corporation's first vice president and retail product<br />
manager, and investors stated a control person liability claim against directors who signed<br />
statements which contained alleged misrepresentations.<br />
O.1.<br />
O.1.<br />
465
O.1.<br />
Bamert v. Pulte Home Corp., 2012 WL 3292397 (M.D. Fla. June 11, 2012).<br />
This suit arose out of Plaintiffs purchase of at least one condominium from Pulte Home<br />
Corporation and entered into a separate management agreement with Osceola Management &<br />
Consulting, Inc. Plaintiffs' allege that the Defendants committed securities fraud in conjunction<br />
with the sale of investment contracts, which include the Plaintiffs' purchase of condominium<br />
units and the subsequent inclusion of the units as part of an investment program where the units<br />
could be rented on a short-term basis permitting investors to earn income from their investments.<br />
Plaintiffs allege is the entire program offered by Defendant constitutes the investment contract.<br />
Plaintiffs raise claim under the Securities Act of 1933, the Securities Exchange Act of 1934, as<br />
well as, parallel Florida statutes found in Section 517, et seq., among other claims. Defendants<br />
moved for a broad dismissal of the claims for various reasons, including the dismissal of<br />
Plaintiffs' Rule 10b–5 claims because they fail to comply with the pleading requirements of Fed.<br />
R. Civ. P. 9(b) and/or the Private Securities <strong>Litigation</strong> Reform Act. Defendants’ further move to<br />
dismiss Plaintiffs' Florida securities fraud, common law fraud, fraud in the inducement, negligent<br />
misrepresentation, and Florida's Deceptive and Unfair Trade Practices Act claims because they<br />
are not pled with requisite specificity as required by Rule 9(b). Plaintiffs contend the heightened<br />
pleading requirements of the PSLRA do not apply to individual private actions for securities<br />
fraud. However, the Court found that the heightened pleading requirements apply for three<br />
principal reasons: (1) the plain language of the statute; (2) the United States Supreme Court,<br />
while not directly ruling upon the issue, has stated that the heightened pleading requirements of<br />
the PSLRA apply in “ ‘any private action’ arising from the Securities Exchange Act;” and (3) the<br />
District Courts that have directly addressed the issue have found that the PSLRA's heightened<br />
pleading requirements apply to individual actions. Since this is an individual action by<br />
numerous plaintiffs, and not a class action, the failure in any section to allege with particularity<br />
the specific misrepresentations made, by whom, when, and in what manner as to each Plaintiff<br />
and an explanation as to why each such statement is false is a fundamental flaw. Therefore, the<br />
Court held that the federal and state securities law claims failed to meet the requisite specificity<br />
of Rule 9(b), and in some instances Rule 8.<br />
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug. 28, 2012).<br />
Investor brought putative class action against bank, its accountant, and related<br />
defendants, alleging securities violations in connection with bank's issuance of preferred<br />
securities. Defendants moved for reconsideration of order denying their motions to dismiss. On<br />
reconsideration, the court granted the accountant’s motion to dismiss, holding a plaintiff in a<br />
securities fraud action who asserts claims against an accountant based on the accountant's audit<br />
opinions is required to allege, with particularity, that the opinions issued were subjectively<br />
false—that is that the accountants did not actually believe their opinions when they were issued.<br />
The scant allegations in Plaintiff's Amended Complaint fail to state a claim that the E & Y audit<br />
opinions were subjectively false when issued and fail to satisfy the requirements of Fed. R. Civ.<br />
O.1.<br />
466
P. 9(b) by failing to specify the who, what, where, when, and how regarding the development<br />
and falsity of E & Y's audit opinions.<br />
2. Rule 11 of the Fed. R. Civ. P.<br />
Ly v. Solin, Inc., 2012 WL 6561557 (D.D.C. Dec. 17, 2012).<br />
Shareholders brought action against corporations and their officers, asserting various<br />
state law claims and violations of the Racketeer Influenced and Corrupt Organizations Act<br />
(RICO). Plaintiff voluntarily dismissed the corporations, but former defendant LPK, Inc.,<br />
opposed plaintiffs' voluntary dismissal of their claims against it, arguing for the imposition of<br />
Fed. R. Civ. P. 11 sanctions against plaintiffs. LPK argued that plaintiffs' complaint was brought<br />
in bad faith and in violation of Rule 11 by alleging diversity jurisdiction where none existed and<br />
by raising frivolous RICO claims to establish federal subject matter jurisdiction. The court held<br />
that LPK’s motion did not meet the requirements of Rule 11 because it did not make a separate<br />
motion, serve it on plaintiffs, and allow 21 days before filing the motion with the Court.<br />
Nevertheless, the court raised the issue of Rule 11 sua sponte because diversity between the<br />
parties was so clearly lacking that even the most cursory of legal inquiries would have uncovered<br />
the error. The court entered an order affording an opportunity for counsel for plaintiffs to show<br />
cause why sanctions pursuant to Rule 11 should not be issued.<br />
Dunleavy v. Gannon, 2012 WL 259382 (D. N.J. Jan. 26, 2012).<br />
Dunleavy's claims stem from the allegation that he lost personal funds that were being<br />
wrongfully handled by the Defendants as an investment. Plaintiff alleged that Defendants<br />
fraudulently persuaded him to invest $25,000 in what Plaintiff believed to be a “health insurance<br />
claims company,” but the invested funds were incorrectly or wrongfully deposited in another<br />
account and then “fraudulently and clandestinely funneled to pay debts for a strip club in Florida.<br />
Dunleavy has filed a multitude of lawsuits arising out of the same factual allegations, as well as,<br />
grievances against the attorneys’ defending against his lawsuits. After Dunleavy’s claims were<br />
dismissed again in the present lawsuit and his motion for reconsideration was denied, the only<br />
remaining issues are Defendant’s claims for sanctions. The court granted Defendants’ request<br />
for sanctions, awarding Defendants’ their respective attorneys’ fees and costs from the inception<br />
of the first lawsuit. The court further enjoined Dunleavy sua sponte from filing any further<br />
lawsuits without court approval.<br />
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug. 28, 2012).<br />
Investor brought putative class action against bank, its accountant, and related<br />
defendants, alleging securities violations in connection with bank's issuance of preferred<br />
467<br />
O.2<br />
O.2<br />
O.2
securities. Defendants moved for reconsideration of order denying their motions to dismiss and<br />
bank defendants and accountant also moved for sanctions against investor and its counsel for<br />
purposely including misleading information in its Amended Complaint. The Private Securities<br />
<strong>Litigation</strong> Reform Act (PSLRA) requires that: “In any private action arising under this chapter,<br />
upon final adjudication of the action, the court shall include in the record specific findings<br />
regarding compliance by each party and each attorney representing any party with each<br />
requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint,<br />
responsive pleading, or dispositive motion.” 15 U.S.C. § 78u–4(c). If a party is determined to<br />
have violated Rule 11, the PSLRA requires that sanctions be imposed after giving “such party or<br />
attorney notice and an opportunity to respond.” Id. The court found that the positions Plaintiff<br />
took in its Amended Complaint were misleading or, at least, unsupported. Yet, despite a close<br />
and reluctant call, the Court was not able to conclude on the facts here that Plaintiff's conduct<br />
violated Rule 11 or rises to the level of bad faith such that sanctions are appropriate.<br />
3. Rule 23 of the Fed. R. Civ. P.<br />
O.3<br />
City of Bristol Pension Fund v. Vertex Pharmaceuticals, 2012 WL 6681907 (D. Mass. Dec. 21,<br />
2012).<br />
The City of Bristol Pension Fund (“CBPF”) brought suit, on behalf of a class of similarly<br />
situated persons, against Vertex Pharmaceuticals, Inc., and a number of Vertex employees.<br />
Plaintiff contends that class members were harmed when they purchased Vertex's common stock<br />
at prices that were artificially inflated by the company's false and misleading statements about its<br />
products. Plaintiff also contends that a number of Vertex executives personally profited by<br />
selling millions of dollars of Vertex stock while the stock's value was artificially inflated. The<br />
court granted CBPF motions for (1) appointment as lead plaintiff and (2) approval of its selection<br />
of Scott+Scott <strong>LLP</strong> as lead counsel. Under the PSLRA, the Court must presume that the lead<br />
plaintiff is the person, or group of persons, who (1) filed the complaint or made a motion to be<br />
lead plaintiff, (2) has the largest financial interest in the relief sought, and (3) otherwise satisfies<br />
Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 78u–4(a)(3) (B)(iii)(I). CBFP<br />
otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure, because<br />
(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions<br />
of law or fact common to the class; (3) the claims or defenses of the representative parties are<br />
typical of the claims or defenses of the class; and (4) the representative parties will fairly and<br />
adequately protect the interests of the class. Fed.R.Civ.P. 23(a).<br />
In re Facebook, Inc. IPO Securities and Derivative <strong>Litigation</strong>, 2012 WL 6061862 (S.D.N.Y.<br />
Dec. 6, 2012).<br />
In several class actions, investors alleged that social networking corporation and certain<br />
of its officers violated Securities Act and Securities Exchange Act, and they alleged that owner<br />
of stock exchange violated federal securities laws and committed negligence, with all of those<br />
claims arising from corporation's initial public offering (IPO). Following transfer order from<br />
468<br />
O.3
United States Judicial Panel on Multidistrict <strong>Litigation</strong> (MDL Panel), 2012 WL 4748325, motion<br />
was made to separately consolidate actions and to appoint and approve lead counsel in<br />
consolidated action. The court held that per Fed. R. Civ. 42, consolidating claims against<br />
corporation and its officers was warranted consolidating securities and negligence claims against<br />
stock exchange owner was warranted, and per Fed. R. Civ. P. 23, institutional investor group was<br />
appropriately named lead plaintiff in consolidated action against corporation and its officers, law<br />
firms selected by group was appropriately named as co–lead counsel, appointing claimant group<br />
and negligence plaintiff as co–lead plaintiffs was warranted, and law firms representing claimant<br />
class and negligence plaintiffs were appropriately named co–lead counsel.<br />
In re Indymac Mortg.-Backed Sec. Litg., 286 F.R.D. 226 (S.D.N.Y. 2012).<br />
Investors in mortgage pass-through certificates filed putative class action against issuer,<br />
former officers and directors, and underwriters alleging materially misleading offering<br />
documents in violation of Securities Act. Plaintiffs moved for class certification. The court held<br />
that per Fed. R. Civ. P. 23, putative class of 714 members met numerosity requirement, common<br />
questions predominated, and class action was superior method of resolving claims, even though<br />
some members were from foreign countries. However, named plaintiffs did not have standing to<br />
pursue Securities Act of 1933 claim for misleading prospectus based on purchase which had<br />
occurred in secondary market.<br />
Hohenstein v. Behringer Harvard REIT 1, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20, 2012).<br />
Plaintiff filed a putative securities class action on behalf of all persons and entities that<br />
purchased or otherwise acquired BH REIT securities during the period between February 19,<br />
2003 to the present. Plaintiff moved to appoint the Weiss Group as lead plaintiff, and Block &<br />
Leviton <strong>LLP</strong> as lead counsel, in accord with the rules set forth in the Private Securities <strong>Litigation</strong><br />
Reform Act of 1995 (“PSLRA”). Fed. R. Civ. P. 23(a) generally provides that a class action may<br />
proceed if the following four requirements are satisfied: (1) the class is so numerous that joinder<br />
of all members is impracticable; (2) there are questions of law or fact common to the class; (3)<br />
the claims or defenses of the representative parties are typical of the claims or defenses of the<br />
class; and (4) the representative parties will fairly and adequately protect the interests of the<br />
class. In making its determination that a proposed Lead Plaintiff satisfies the requirements of<br />
Rule 23, a court need not raise its inquiry to the level required in ruling on a motion for class<br />
certification; instead a prima facie showing that the movant satisfies the requirements of Rule 23<br />
is sufficient. The court granted both motions.<br />
O.3<br />
O.3<br />
469
O.3<br />
In re Apollo Group Inc. Securities Litig., 2012 WL 1378677 (D. Ariz. Apr. 20, 2012).<br />
In a consolidated class action proceeding, wherein lead Plaintiff, on behalf of a class of<br />
persons who purchased Apollo common stock between February 27, 2004 and September 14,<br />
2004, alleged that Defendants violated section 10(b) of the Securities and Exchange Act of 1934<br />
and Securities and Exchange Commission Rule 10(b)–5. On January 16, 2008, a jury verdict was<br />
entered in favor of lead Plaintiff. (Doc. 490). On August 4, 2008, this Court granted Defendants'<br />
motion for judgment as a matter of law and entered judgment in favor of Defendants. (Doc. 560).<br />
On June 23, 2010, the Ninth Circuit Court of Appeals reversed the judgment in favor of<br />
Defendants and remanded with instructions that this Court enter judgment in accordance with the<br />
jury's verdict. (Doc. 679–1). On April 6, 2011, this Court entered that judgment. (Doc. 695). The<br />
Parties then engaged in mediation in an attempt to resolve outstanding disputes regarding claims<br />
administration procedures. As a result of this mediation, the Parties ultimately agreed to a<br />
settlement. Rule 23(e) provides that a class action shall not be dismissed or compromised<br />
without court approval following “a hearing and on finding that the [the compromise] is fair,<br />
reasonable, and adequate.” Fed.R.Civ.P. 23(e). On this basis the court granted the settlement.<br />
F.D.I.C. v. Countrywide Fin. Corp., 2012 WL 5900973 (C.D. Cal. Nov. 21, 2012).<br />
F.D.I.C. as receiver for Strategic Capital Bank (“SCB”) brought the instant lawsuit on<br />
May 18, 2012 alleging that the registration statements and prospectuses filed with the Securities<br />
and Exchange Commission regarding four residential mortgage-backed securities included<br />
untrue and misleading statements of material fact, and that SCB has suffered a loss on the<br />
certificates, in violation of Section 11 of the Securities Act of 1933. However, the court held the<br />
FDIC's claim is time-barred. The FDIC cannot rely on tolling per American Pipe & Constr. Co.<br />
v. Utah, 414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974) (“The commencement of a class<br />
action suspends the applicable statute of limitations as to all asserted members of the class who<br />
would have been parties had the suit been permitted to continue as a class action) becauase the<br />
named plaintiff in the class action cited to in the Amended Complaint did not purchase any of the<br />
same tranches that SCB purchased. As a result, the FDIC's claims had expired when it took<br />
receivership on May 22, 2009, and tolling does not render its claims timely.<br />
Katz v. China Century Dragon Media, Inc., 2012 WL 6644353 (C.D. Cal. Dec. 18, 2012).<br />
Shareholders brought putative class action against corporation, certain of its former<br />
officers and directors, its former auditor, and underwriters of its initial public offering (IPO),<br />
alleging that defendants made false and incomplete statements about corporation's revenues,<br />
income, and cash position in the prospectus and registration statement issued in connection with<br />
the IPO. Shareholders moved for class certification, and auditor moved to dismiss underwriters'<br />
cross-claims for indemnity and contribution. Per Fed. R. Civ. P. 23(a)(1), the court held that<br />
O.3<br />
O.3<br />
470
underwriters were not entitled to indemnity for their own alleged violations of the Securities Act,<br />
underwriters' contribution claim was premature; numerosity prerequisite for class certification<br />
was met; commonality prerequisite for class certification was met; typicality prerequisite for<br />
class certification was met; questions of law or fact common to class members predominated<br />
over any questions affecting only individual members; and class action was superior to other<br />
available methods for adjudicating the controversy.<br />
In re Thornburg Mortg., Inc. Sec. Litig., 2012 WL 6004176 (D.N.M. Nov. 26, 2012).<br />
Investors brought consolidated class action against corporation, officers, directors, and<br />
underwriters, alleging violation of the Securities Exchange Act and the Securities Act. Investors<br />
moved for final approval of proposed settlement, plan of allocation, and certification of class for<br />
settlement purposes, and counsel sought award of attorneys' fees and expenses. Court certified<br />
the class for settlement per Fed. R. Civ. P. 23.<br />
Compsource Okla., Bd. of Tr. of the Elec. Workers Local No. 26 Pension Trust Fund v. BNY<br />
Mellon, N.A., 2012 WL 6864701 (E.D. Okla. Oct. 25, 2012).<br />
The parties entered into a stipulation of settlement that provides for payment of<br />
$280,000,000 and a complete dismissal with prejudice of the claims asserted against Defendant.<br />
The Court found that the prerequisites for a class action under Federal Rules of Civil Procedure<br />
23(a) and (b)(3) have been satisfied in that: the number of Class Members is so numerous that<br />
joinder of all Class Members is impracticable; there are questions of law and fact common to the<br />
Class; the claims of the Named Plaintiffs are typical of the claims of the Class they seek to<br />
represent; the Named Plaintiffs and Class Counsel have at all times fairly and adequately<br />
represented the interests of the Class; and a class action is superior to other available methods for<br />
the fair and efficient adjudication of the controversy. Pursuant to Federal Rule of Civil<br />
Procedure 23(b)(3), the Court has certified, for settlement purposes only the class.<br />
O.3<br />
O.3<br />
4. Venue, Pendent Jurisdiction Removal and Other Issues<br />
Allstate Ins. Co. v. CitiMortgage, Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012).<br />
O.4<br />
Plaintiffs commenced the lawsuit in New York state court alleging fraud and negligent<br />
misrepresentation claims as well as claims under the Securities Act of 1933. Following removal<br />
to federal court pursuant to 28 U.S.C. § 1334(b), defendants later amended their notice of<br />
removal to add the Edge Act as an alternative basis for jurisdiction. Plaintiffs moved to remand.<br />
According to the Court, while one of the defendant trusts may be liable to plaintiffs with respect<br />
to some of the securitizations, it would not be liable based on the securitization that the parties<br />
have identified that includes mortgages in a foreign territory. Accordingly, the court found that a<br />
nationally chartered bank must have potential liability on claims arising out of transactions<br />
471
involving international or foreign banking, or banking in a dependency or insular possession of<br />
the United States in order to support jurisdiction under the Edge Act. Because the trust was not<br />
involved in any territorial banking transactions relating to the litigation, the Edge Act did not<br />
apply.<br />
Young v. Pacific Biosciences of Cal., Inc., Fed. Sec. L. Rep. P 96,800, 2012 WL 851509<br />
(N.D.Cal. Mar. 13, 2012).<br />
In related securities actions alleging claims under the Securities Act of 1933, two<br />
plaintiffs moved to remand their cases to state court. Defendants countered that removal was<br />
proper because the district court has original jurisdiction pursuant to 15 U.S.C. §§ 77v(a) and<br />
77v(c). The two moving plaintiffs’ complaints each raised a federal question considering only<br />
violations of federal securities laws. Accordingly, plaintiffs contend that their claims may not be<br />
removed form state court due to the express restriction on removal contained in § 77v.<br />
Defendants countered that the language of § 77b vested federal courts with exclusive jurisdiction<br />
over “covered class actions” and the moving plaintiffs’ cases allow for their removal.<br />
Recognizing that the issue has eluded definitive resolution by the appellate courts, the plaintiffs’<br />
actions do not rely on state law they are not the type of covered class actions capable of being<br />
removed pursuant to § 77p and therefore are prohibited from removal pursuant to § 77v.<br />
Because defendant removed the two actions in contravention of these sections, the court granted<br />
the motions to remand.<br />
Desyatnikov v. Credit Suisse Group, Inc., Fed. Sec. L. Rep. P 96,777, 2012 WL 1019990<br />
(E.D.N.Y. March 26, 2012).<br />
An individual investor brought suit against an investment bank located in Switzerland<br />
alleging various violations of federal securities law and New York state law arising out of a<br />
purchase of securities transaction. The defendant bank moved to dismiss for lack of personal<br />
jurisdiction. Plaintiff pleaded personal jurisdiction “upon information and belief” which the<br />
court found to be deficient. The court further found the defendant presented sufficient credible<br />
evidence to support finding that the exercise of jurisdiction over the defendant would be<br />
improper. For example, the bank was located in Switzerland with its headquarters in Zurich and<br />
it did not have a place of business located in the United States. In fact, plaintiff opened the<br />
account with the bank’s Singapore branch and certified that he was not a resident of the United<br />
States at the time of the account’s opening. Finally, the court dismissed for the additional reason<br />
that the forum selection clause found in the asset management agreement between the parties<br />
required litigation of all disputes in Singapore.<br />
O.4<br />
O.4<br />
472
O.4<br />
Brady v. Kosmos Energy, 2012 WL 6204247 (N.D.Tex. July 10, 2012).<br />
Plaintiff brought a putative class action asserting violations of the Securities Act of 1933<br />
and no causes of action based on state law. Before the court was plaintiff’s motion to remand.<br />
The complaint asserted claims on behalf of all purchasers of defendant’s common stock. The<br />
question at issue was whether removal of the case from state court was proper under the 1933<br />
Act, the PSLRA and the SLUSA because the parties disputed whether purported class actions<br />
brought in state court but solely asserting claims under the 1933 Act are removable to federal<br />
court under the SLUSA. Noting the question had been analyzed extensively by various courts<br />
without consensus or a clear majority, the court found convincing the authorities finding that<br />
removal is proper. In support, the court noted that this interpretation of the SLUSA is consistent<br />
with Congress’s broad goal of making federal court the exclusive venue for the bulk of securities<br />
class actions.<br />
FDIC v. Banc of America Securities LLC, 2012 WL 2904310 (D. Nev. July 16, 2012).<br />
Before the court was plaintiff FDIC’s motion for remand. Alleging violations of the<br />
Nevada Securities Act and the Securities Act of 1933, the FDIC contended defendants made<br />
several false statements in connection with the sale of pooled mortgage backed securities to<br />
Seriurity Savings Bank with FDIC acting as a receiver. Defendant filed a motion for removal<br />
arguing that the court had federal question jurisdiction as well as related-to bankruptcy<br />
jurisdiction over the FDIC’s claims. Citing § 22(a) of the 1933 Act, the FDIC argued that<br />
removal was inappropriate because that section provides that no case arising under the 1933 Act<br />
and brought in a state court of competent jurisdiction shall be removed to any federal court. The<br />
court disagreed with the FDIC finding remand inappropriate as a result of the plain text of the<br />
statute. In addition, the court found it was proper to exercise related-to-bankruptcy jurisdiction<br />
because defendants claim to have indemnity rights that could affect the rights or liabilities of<br />
certain originators that are currently in bankruptcy proceedings. Rejecting the FDIC’s argument<br />
that the defendants did not have direct indemnification rights against any bankruptcy debtors, the<br />
court found that related-to-bankruptcy jurisdiction existed as an alternative basis for removal.<br />
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012).<br />
In this putative class action brought exclusively under the Securities Act of 1933,<br />
plaintiffs moved to remand the case to state court. The issue at bar was whether, in light of the<br />
1998 amendments to the SLUSA, class actions arising under the 1933 Act are now removable.<br />
Pointing out neither the Supreme Court nor any Circuit Court of Appeals have examined the<br />
issue, the court first analyzed other district courts reaching different conclusions. The Court<br />
concluded that the effect of the amendments is that the non-removal provision in § 77v(a) no<br />
O.4<br />
O.4<br />
473
longer applies to a covered class action alleging claims under the 1933 Act and, consequently, a<br />
class action brought under the 1933 Act is removable pursuant to 28 U.S.C. § 1441(a).<br />
Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., No. 652996/2011, 2012 WL<br />
5187653 (N.Y. Sup. Ct., N.Y. County Oct. 18, 2012).<br />
This securities action arises from allegedly false and misleading statements made by<br />
defendant to plaintiff leading to the sale of a security based upon a CDO arising from subprime<br />
residential mortgages and two credit default swaps. After evaluating the factors considered in<br />
evaluating a motion to dismiss for forum non conveniens, the court concluded defendants did not<br />
meet their burden. Specifically, the court found defendant did not demonstrate that it would<br />
suffer undue hardship by litigating the case in the e court. Important to the court was the fact<br />
that the underlying transactions involved international companies and defendant’s headquarters<br />
was located in the county of the court as are many of defendant’s witnesses. Under wellestablished<br />
precedent, the ruling in the dismissed federal action had no bearing on whether New<br />
York was an appropriate venue because the fact the underlying transactions were not considered<br />
domestic securities transactions for the purposes of federal securities law.<br />
Grail Semiconductor, Inc. v. Stern, 2012 WL 5903817 (S.D.Fla. Nov.26, 2012).<br />
The lawsuit filed in Florida federal court arose from defendant’s attempts to transfer or<br />
sell restricted stock shares in plaintiff to third parties. Plaintiff filed suit alleging defendant’s<br />
attempted sales and transfers violated the Securities Act of 1933 and the Securities Exchange Act<br />
of 1934. Defendant was a California citizen while plaintiff was a California corporation with its<br />
principle place of business in Florida. Defendant never lived or worked in Florida nor owned<br />
property in Florida. Defendant sought dismissal of the claim for lack of personal jurisdiction.<br />
The court stressed that because the federal securities laws provided for worldwide service of<br />
process, the applicable forum for personal jurisdiction purposes is the United States as a whole,<br />
not Florida. Following an analysis of the defendant’s aggregate contacts with the nation as a<br />
whole rather than his contacts with the forum state, the Court found that this was not one of the<br />
highly unusual cases where inconvenience rose to a constitutional concern and therefore the<br />
court denied defendant’s motion to dismiss. However, the plaintiff’s pendent state law claims<br />
were dismissed because they had nothing to do with defendant’s allegedly unlawful stock<br />
transfers.<br />
Viking Global Equities LP et al. v. Porsche Automobil Holding SE et al., No. 650435/11, 2012<br />
WL 6699216 (N.Y. App. Div., 1st Dep't Dec. 27, 2012).<br />
In an action brought by plaintiff hedge funds for fraud and unjust enrichment against a<br />
defendant company in which plaintiffs invested funds, defendants moved to dismiss the<br />
O.4<br />
O.4<br />
O.4<br />
474
complaint on the ground of forum non conveniens. The only connections between the action and<br />
the forum New York were phone calls between the plaintiffs in New York and a representative<br />
of defendants located in Germany. The court also cited emails sent to plaintiffs in New York but<br />
were generally disseminated to parties elsewhere, which allegedly contained the<br />
misrepresentations of defendants’ intent to acquire a company. The court concluded that those<br />
contentions failed to create the necessary substantial nexus with New York, given that the events<br />
of the underlying transaction occurred entirely in a foreign jurisdiction. In addition, the court<br />
noted that defendants’ stock was only traded on foreign exchanges and defendants’ witnesses<br />
and documents were located in Germany.<br />
Prudential Ins. Co. v. J.P. Morgan Securities, LLC, 2012 WL 6771977 (D.N.J. Dec. 20, 2012).<br />
Plaintiffs moved to remand their state and federal law causes of action to New Jersey<br />
state court. Their claims include state claims of common law fraud, fraudulent inducement,<br />
aiding and abetting fraud, negligent misrepresentations as well as federal claims under the 1933<br />
Securities Act. Defendants contended the action was removable because it is “related to”<br />
pending bankruptcy proceedings arising out of the United States Code. Defendants further urged<br />
the court to deny the plaintiff’s motion arguing there is jurisdiction under the Edge Act as the<br />
suit arises out of international or foreign financial operations. Several of the $523 million in<br />
residential mortgage backed securities purchased by plaintiffs were backed by entities that have<br />
filed bankruptcy petitions. The court rejected defendants’ argument, reasoning the suit before<br />
the court involved alleged untrue statements by the defendants; it did not involve alleged untrue<br />
statements by the bankrupt originators. In addition, the court held the legal expense<br />
indemnification agreements did not confer “related-to” jurisdiction. Finally, the court held that<br />
abstention was inappropriate under the facts at issue because state law issues predominated and<br />
also because the New Jersey RICO count was significantly different than the comparable federal<br />
RICO statute.<br />
O.4<br />
5. Discovery<br />
O.5<br />
Brown v. China Integrated Energy, Inc., 2012 WL 1129909 (C.D. Cal. April 2, 2012).<br />
In a putative securities fraud class action brought under the Securities Exchange Act of<br />
1934, the court consolidated a number of state and federal court actions filed by plaintiffs<br />
seeking to represent individuals who purchased defendant’s common stock. Defendant<br />
subsequently moved to stay discovery in three derivative state court lawsuits pending in the<br />
Delaware Court of Chancery pursuant to the Securities <strong>Litigation</strong> Uniform Standards Act<br />
(SLUSA). Plaintiffs opposed the stay, contending the focus of the state derivative action was<br />
different than the federal action because the federal action was based upon fraudulent statements<br />
concerning the sales of securities while the state derivative action focused on allegations of<br />
breach of fiduciary duty, waste and unjust enrichment by the company’s officers and directors.<br />
475
The court held that allowing discovery to proceed in the state court action would create<br />
an unacceptable risk that the federal plaintiffs will obtain discovery before the court determines<br />
the sufficiency of the pending motion to dismiss. The court first noted that some courts have<br />
entered a stay even if the state plaintiffs are members of the putative federal class. The court<br />
found plaintiffs’ argument unpersuasive because the gravamen of the statement and federal<br />
allegations was the same: defendants misled investors about its financial stability and production<br />
capacity and those investors suffered damage when the company’s decision was uncovered.<br />
Accordingly, the court ordered that a stay should be granted because of the strong factual overlap<br />
between the cases without ultimately opining on the burden of state court discovery factor<br />
finding that it was not able to evaluate the risk of burdensome discovery the state court actions<br />
pose at this time.<br />
Gardner v. Major Automotive Companies, 2012 WL 1230135 (E.D.N.Y. April 12, 2012).<br />
The plaintiffs brought claims alleging violations of the Securities Exchange Act of 1934<br />
arising out of an allegedly improper management buyout transaction of a publicly traded<br />
company defendant. Plaintiffs filed a motion to compel defendants to produce documents and<br />
respond to interrogatories while defendants cross-moved to stay discovery pending resolution of<br />
their motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil<br />
Procedure. The issue at hand was whether the automatic stay provision of the PSLRA mandates<br />
a stay of discovery pending the defendants’ dispositive motion. Plaintiffs argued that a stay was<br />
inappropriate because the automatic stay provision of the PSLRA applies only to pre-answer<br />
motions to dismiss and not to post-answer motions for judgment on the pleadings. Defendants in<br />
turn argued that a motion for judgment on the pleadings is in essence a motion to dismiss.<br />
Following an analysis of the dispute and the goals of the PSLRA, the court determined that the<br />
automatic stay does apply to each of plaintiffs’ claims under the plain language of the statute.<br />
In re MGM Mirage Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. June 21, 2008).<br />
Plaintiffs alleging violations of the Securities Exchange Act of 1934 sought an order to<br />
permit the lead plaintiffs to conduct limited disocovery concerning defendants’ alleged destroyed<br />
documents. The plaintiffs asserted defendants knew about 500 boxes of highly relevant evidence<br />
that was destroyed. Because of the destroyed evidence, plaintiffs claimed they were concerned<br />
with the safety of the remaining relevant documents and accordingly moved the court for an<br />
order lifting the mandatory stay under the PSLRA. Following an examination of the PSLRA<br />
factors, the court found that lifting the stay was unwarranted. According to the court, plaintiffs’<br />
proposed discovery plan was unspecified in scope and open-ended. Reasoning that destroyed<br />
evidence cannot be undone by discovery, the court found the plaintiffs were not prejudiced by<br />
the destruction in a manner that could be cured by conducting discovery at the stage of the case.<br />
O.5<br />
O.5<br />
476
O.5<br />
SEC v. Bankatlantic Bancorp, 285 F.R.D. 661 (S.D. Florida June 26, 2012).<br />
In a SEC enforcement action against a bank, its holding company and the chief executive<br />
officer alleging false statements and omissions concerning the treatment of a real estate loan<br />
portfolio, defendants moved to compel production of documents from the SEC. Defendants<br />
sought discovery geared towards identifying any disclosure requirements that the SEC might<br />
have in place regarding downgrading of individual loans and whether the SEC treats entities<br />
receiving funds from the federal government differently than institutions such as the defendant<br />
bank which accepted no such funds. The court concluded that those documents were not<br />
relevant to the allegations against the defendants and thus the SEC was not required to produce<br />
because none of the documents bore on the issue of materiality of any alleged omissions and<br />
statements. According to the Court, unless the defendants knew of the SEC’s internal policies<br />
and investigations and relied upon them in deciding to omit the information about the allegedly<br />
known trend of downgrades of commercial loans, the SEC’s internal policies and investigation of<br />
other entities had no bearing on the issue of scienter. And only the defendants—not the SEC—<br />
can identify what they relied upon in making disclosure decisions relevant to the matter.<br />
In re Dot Hill Sys. Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. Sept. 2, 2008).<br />
In a securities putative class action brought by a shareholder against a corporation and its<br />
officers, the defendants moved to stay discovery as to a state court derivative action under the<br />
Securities <strong>Litigation</strong> Uniform Standards Act (SLUSA). The court first discussed how the<br />
SLUSA amended the federal securities laws to empower a federal court to stay such discovery<br />
proceedings in any private action in a state court. Recognizing Congress’s intent for a liberal<br />
application of the SLUSA’s discovery stay provision, the court concluded a stay of the statecourt<br />
derivative action was necessary. Although represented by different counsel in state and<br />
federal court, the derivative plaintiffs were members of the putative federal class and therefore<br />
their receipt of discovery would violate the PSLRA. Rejecting plaintiffs’ “undue prejudice”<br />
argument, the Court ordered that the stay remain in effect until the court ruled on the pending<br />
motion to dismiss. The court specifically noted that although the derivative plaintiffs owed a<br />
fiduciary duty to the defendant and would not necessarily intend to circumvent the PSLRA, the<br />
court remained concerned that some form of discovery would reach plaintiffs before this court<br />
has decided the dismissal motion.<br />
Louisiana Pacific Corp. v. Money Market 1 Institutional Investment <strong>Dealer</strong>, 285 F.R.D. 481<br />
(N.D. Cal. Sept. 10, 2012).<br />
In case where plaintiff investor brought suit against investment banks and a broker-dealer<br />
alleging violations of federal and state securities laws in connection with Dutch auctions of<br />
auction rate securities, defendants moved for a protective order and for an order requiring<br />
O.5<br />
O.5<br />
477
investor to adequately respond to discovery. Among other things, defendants moved to compel<br />
answers to contention interrogatories served upon plaintiff. The court ordered supplemental<br />
responses to contention interrogatories rejecting plaintiff’s claims that there was fact discovery<br />
outstanding which should allow plaintiff more time to respond to the contention interrogatories.<br />
The court further ruled on a number of disputes regarding the plaintiff’s designation of<br />
confidential documents under the parties’ protective order.<br />
SEC v. Kovzan, 2012 WL 4819011 (D. Kan. Oct. 10, 2012).<br />
Resolving a discovery dispute, the district court rejected a magistrate judge’s ruling and<br />
granted the defendants’ motion to compel. Through the motion in this SEC enforcement action,<br />
defendant sought documents concerning the interpretation of and SEC interpretive guidance<br />
regarding Item 402 of Regulation S-K, 17 C.F.R. § 229.402 which provides detailed instructions<br />
for the disclosure of executive compensation in reports filed with the SEC. Defendants also<br />
sought to compel a response to document requests suggesting any internal controls related to the<br />
documentation of expenses that had no impact on the ability of a company to incorporate those<br />
expenses into its financial statements. After producing several purportedly responsive<br />
documents, the SEC refused to undertake any additional search. In rejecting the magistrate’s<br />
initial ruling the district court found the documents sought would be relevant evidence to the<br />
applicable standard of care in the industry. The court further ordered production of documents<br />
relating to defendants’ fair notice defense.<br />
In re GMR Securities <strong>Litigation</strong>, 2012 WL 5457534 (S.D.N.Y. Nov. 8, 2012).<br />
The plaintiffs moved to lift the Private Securities <strong>Litigation</strong> Reform Act of 1995<br />
discovery stay in order to access certain of defendants’ documents. Plaintiffs contended that<br />
absent the lifting of the stay, they would be the only stakeholders without access to the relevant<br />
documents. According to the court, whether other individuals had access to the documents<br />
sought was not, however, controlling for purposes of determining prejudice to plaintiffs. Instead,<br />
plaintiffs must demonstrate that claimants in other ongoing proceedings possessed the documents<br />
placing them at a marked disadvantage in the litigation. Here, however, the court found no<br />
prejudice because there were no other claimants competing with the plaintiffs’ claims and thus<br />
the automatic stay was not prejudicial.<br />
O.5<br />
O.5<br />
478
P. Failure to Supervise<br />
1. SEC Enforcement Actions<br />
P.1<br />
In re Application of World Trade Financial Corp., Release No. 66114, 2012 SEC LEXIS 56<br />
(Jan. 6, 2012).<br />
Applicants World Trade Financial Corporation, Michel, its president, and Adams, its<br />
trade desk supervisor, appealed from a FINRA disciplinary action, which sanctioned them for<br />
supervisory violations arising from the sale of securities without registration or an available<br />
exemption in violation of Section 5 of the Securities Act of 1933 and NASD Conduct Rule 2110.<br />
FINRA found that World Trade, Michel, and Adams failed reasonably to supervise one of the<br />
firm’s registered representatives, and that World Trade and Michel failed to maintain adequate<br />
written supervisory procedures in violation of NASD Conduct Rules 3010 and 2110. FINRA<br />
fined World Trade $30,000, fined Michel $30,000 and suspended him for 45 calendar days, and<br />
fined Adams $20,000 and suspended him for 30 business days.<br />
There was no dispute that Michel and Adams shared responsibility for supervising the<br />
Firm’s registered representatives’ trading activities, and that, as the firm’s president, Michel was<br />
responsible for developing the Firm’s written procedures. The SEC found that Applicants<br />
“ignored key ‘red flags’ that should have prompted them to investigate” whether the<br />
representative was participating in distribution of unregistered securities. Applicants were in<br />
possession of information which should have prompted them to inquire further, but none did.<br />
The SEC found that the firm’s written procedures were also deficient. Even though a large<br />
portion of the firm’s business comprised unregistered stock sales on the Pink Sheets, the Firm’s<br />
procedures were not sufficiently designed to supervise this type of business. The Supervisory<br />
Manual lacked meaningful guidance setting forth “reasonable inquiry” procedures for registered<br />
representatives to follow when customers sought to sell large amounts of an unknown stock to<br />
the public without registration. Although World Trade had minimal procedures in place for<br />
selling “control” or “restricted” stock, these procedures erroneously assumed that such stock<br />
could be easily identified by checking whether the stock certificate bore a restrictive legend. The<br />
SEC sustained the result and the sanctions entered by FINRA without modification.<br />
In re Axa Advisors, LLC, Release No. 34-66206, 2012 SEC LEXIS 206 (Jan. 20, 2012).<br />
The SEC charged the firm with failing reasonably to supervise one of its registered<br />
representatives with a view to preventing and detecting his violations of the federal securities<br />
laws during a four year period. The representative fraudulently induced customers to redeem<br />
securities held at the firm under the false representation that the proceeds from such redemptions<br />
would be invested in other securities. Instead, the representative misappropriated the funds.<br />
This conduct was criminal, in that the representative pleaded guilty to mail fraud, wire fraud, and<br />
money laundering and was sentenced to 46 months in prison followed by three years of<br />
supervised probation. The SEC found that the firm did not establish adequate procedures for the<br />
479<br />
P.1
eview of redemptions of variable annuities occurring in the accounts of the representative’s<br />
customers, particularly in light of the fact that the redemptions were partial redemptions.<br />
Further, the firm failed to have reasonable procedures to supervise registered representatives who<br />
were on leave for an extended period of time, including absences due to disability. The<br />
representative at issue was “disabled” several times during the period the scheme was operating,<br />
during which times he was not in the office.<br />
In settlement of the matter, the firm consented to a censure and a civil penalty of<br />
$100,000. The firm also represented that it had retained an Independent Compliance Consultant<br />
having substantial regulatory and industry experience to evaluate and recommend enhancements<br />
to its supervisory and compliance practices. The SEC noted that in considering the settlement, it<br />
considered the remedial acts undertaken by Respondent to make improvements to its supervisory<br />
system. The SEC also considered the cooperation afforded to its staff and criminal authorities in<br />
their investigation of this matter and the firm’s prompt reimbursement of all customer losses.<br />
Indeed, shortly after the representative was terminated, the firm contacted all the representative’s<br />
clients to assure that no other substantive concerns were identified.<br />
In re Application of Midas Sec., LLC, Release No. 34-66200, 2012 SEC LEXIS 199 (Jan. 20,<br />
2012).<br />
Applicants Midas Securities and Lee, the firm’s president and CEO, appealed from a<br />
FINRA disciplinary finding that the firm violated Section 5 of the Securities Act and NASD<br />
Conduct Rule 2110 by unlawfully selling securities without a registration statement in effect or<br />
an available exemption. FINRA also found that Applicants violated NASD Conduct Rules 3010<br />
and 2110 by failing to maintain adequate written supervisory procedures and to supervise<br />
reasonably the firm’s registered representatives who engaged in unregistered sales. FINRA fined<br />
Midas $80,000, fined Lee $50,000, and suspended Lee in all principal capacities for two years.<br />
The Commission agreed with FINRA’s determination that Midas lacked an adequate<br />
supervisory system. Midas’s system of supervision consisted solely of relying on transfer agents<br />
and clearing firms to ensure that its unregistered sales complied with the Securities Act, which<br />
was unreasonable. The Commission emphasized that the representatives who sold the<br />
unregistered stock had minimal experience in the securities industry and therefore should have<br />
been “under close surveillance.” Further, although dealing with unregistered securities sales in<br />
the over-the-counter markets made up a significant amount of the firm’s business, Midas’s<br />
written procedures were “poorly designed” to deter and detect violations of the Securities Act’s<br />
registration requirements. The procedures lacked a listing of specific risk factors that might have<br />
assisted registered representatives in recognizing an unlawful distribution or guidance to<br />
determine whether any exemptions from registration requirements applied. The procedures also<br />
failed to enable supervisors to identify sales that should be investigated or halted.<br />
Respondent Lee claimed he delegated his authority with respect to supervision of trading<br />
and registered representatives to another employee. The SEC found that the record did not<br />
support a finding that he effectively or reasonably so delegated his authority, in light of, among<br />
P.1<br />
480
other things, credible testimony from the other employee that he was not the responsible<br />
supervisor and clear identification in the firm’s Supervisory Manual that Lee, not the other<br />
employee, was reasonable for supervising the trading department and approving transactions in<br />
restricted securities. The firm withdrew its membership from FINRA. The SEC found that<br />
FINRA’s two-year suspension of Lee “in all principal capacities” was not excessive or<br />
oppressive. As such, FINRA’s action was sustained in all respects.<br />
In re 1st Discount <strong>Broker</strong>age, Inc., Release No. 33-66212A, 2012 SEC LEXIS 220 (Jan. 23,<br />
2012).<br />
The SEC charged the firm and Fisher, the firm’s executive vice president, with failing<br />
reasonably to supervise one of the firm’s representatives with a view to preventing and detecting<br />
a fraudulent Ponzi scheme. The SEC found that the firm did not have policies and procedures<br />
reasonably designed to detect and prevent violations of the securities laws by its registered<br />
representatives. Specifically, the representative maintained a “doing business as” account, which<br />
he used to collect money from customers of the firm, and through which he operated his Ponzi<br />
scheme. The representative also had a history of insufficient or absent signage associating his<br />
place of business with the firm. The firm, however, did not require compliance auditors to<br />
review work papers and reports of previous audits, from which they might have identified the<br />
recurring issue with signage, which reflected the representative’s desire to conceal from his<br />
customers his association with the firm to prevent customer complaints to the firm. Further,<br />
while the firm did have procedures calling for unannounced audits, it failed to conduct any in the<br />
office where the representative resided.<br />
Fisher was responsible for having a system to implement the firm’s policies and<br />
procedures regarding the periodic review of all activities of the firm’s registered representatives.<br />
The SEC found that such a system was not developed and that if it had been, the Committee<br />
would have found the red flags discussed above, together with a customer complaint of<br />
unauthorized trading and a history of declining commissions, that would have prompted further<br />
investigation into the representative’s business. Thus, Fisher failed reasonably to supervise the<br />
representative with a view to preventing and detecting his violative conduct. In settlement of the<br />
charges, the firm consented to a censure and agreed to pay a civil penalty of $40,000. Fisher<br />
consented to a suspension from association in a supervisory capacity with any broker, dealer, or<br />
investment adviser with the right to reapply for association in a supervisory capacity after nine<br />
months, and agreed to pay a civil penalty of $10,000.<br />
In re Urban, Release No. 34-66259, 2012 SEC LEXIS 346 (Jan. 26, 2012).<br />
The Division of Enforcement appealed an initial decision by an ALJ dismissing failure to<br />
supervise charges against Urban. While the ALJ determined that Urban was a supervisor, she<br />
dismissed the proceeding against Urban because she found that Urban did not fail to exercise that<br />
supervision reasonably. On appeal to the Commission, the two Commissioners hearing the case<br />
P.1<br />
P.1<br />
481
were evenly divided, with three not participating in the decision, as to whether the allegations in<br />
the Order Instituting Proceedings against Urban had been proven. As such, the initial decision<br />
was deemed to be of no effect, as part the Commission’s Rules of Practice, and the case against<br />
Urban was dismissed.<br />
P.1<br />
In re Brown, Release No. 34-66469, 2012 SEC LEXIS 636 (Feb. 27, 2012).<br />
Respondents appealed the decision of an ALJ, which found, among other things, that a<br />
Respondent Collins, who was not a primary violator, failed reasonably to supervise sales<br />
activities of another salesperson by allowing him to sell variable annuities with a suspended<br />
license. He was also found to be the cause of the salesman’s antifraud violations and aided and<br />
abetted the firm’s books and records violations by falsifying customer account forms. The ALJ<br />
found that it was in the public interest to bar Collins with a right to reapply in a non-supervisory<br />
capacity after two years, to impose a cease and desist order, a civil penalty of $310,000, and<br />
disgorgement. On appeal the SEC noted that Collins allowed the other salesperson to conceal<br />
and circumvent Florida’s licensing restrictions by falsifying customer account forms to indicate<br />
that he, not the unlicensed salesperson, was the customers’ account representative. Moreover,<br />
the SEC argued Collins, whose sole supervisory obligation was over the salesperson, continued<br />
to allow the salesperson to sell variable annuities even upon learning first of a “mishap” with his<br />
Massachusetts license, and later that Florida had suspended his license for an unauthorized<br />
transaction and misrepresentations. The evidence established that there were insufficient<br />
documents in the office, including missing files, from which adequate supervision could be<br />
conducted. In sum, the SEC stated that Collins “was in a position to stop Brown’s misconduct,<br />
but his complete failure to supervise Brown, including falsifying documents that misled his<br />
employer and the issuing insurance companies about what Brown was doing, created an<br />
environment where Brown could defraud his clients with impunity.” The Commission imposed<br />
the sanctions recommended by the ALJ.<br />
In re Rizzo, Release No. 34-67479, 2012 SEC LEXIS 2299 (July 20, 2012).<br />
P.1<br />
The SEC charged Respondents Rizzo and Hornbogen with failing reasonably to supervise<br />
a representative who, while acting as an investment advisor, misappropriated $7 million from<br />
fifteen clients. The SEC alleged that Respondents failed to investigate numerous red flags which<br />
would have indicated misconduct. Specifically, Respondents were alerted to suspicious<br />
transactions in the representative’s client accounts, including a forged client signature.<br />
Respondents received daily emails from the firm’s operations department listing large<br />
withdrawals from client accounts, but did not investigate or follow-up. At one point, after being<br />
contacted about certain customer transactions being initiated by the representative, Rizzo<br />
developed concerns that the representative might be operating a Ponzi scheme, but took<br />
insufficient steps to investigate the matter. When Respondents received advice from the firm’s<br />
attorney to contact all clients whose accounts contained the suspicious transactions, they did not<br />
follow the advice. As characterized by the SEC, Respondents “did virtually nothing” to follow<br />
up on the red flags and other indications of fraud for more than 5 years, permitting the<br />
482
epresentative’s fraud to continue. In settlement of the charges, Respondents consented to be<br />
barred from associating in a supervisory capacity with any broker, dealer, investment adviser,<br />
municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical<br />
rating organization. Rizzo agreed to pay disgorgement of $35,079, prejudgment interest of<br />
$7,731, and civil penalties of $130,000. Hornbogen agreed to pay disgorgement of $15,592,<br />
prejudgment interest of $3,467, and civil penalties of $25,000 (her financial obligations having<br />
been limited by her demonstrated inability to pay).<br />
In re JP Turner & Co., LLC, Release No. 34-67808, 2012 SEC LEXIS 2852 (Sept. 10, 2012).<br />
The firm and Mello, its then president, were charged with failing reasonably to supervise<br />
three registered representatives with a view to preventing and detecting their violations of federal<br />
securities laws. The SEC alleged that during a two year period, the registered representatives<br />
“churned” the accounts of seven customers by engaging in excessive trading. Mello, as the<br />
firm’s president, was ultimately responsible for establishing the firm’s supervisory policies and<br />
procedures, and a system to implement these policies and procedures designed to prevent and<br />
detect violations. While the firm had a monitoring system to identify actively traded accounts<br />
based primarily on the level of fees and commissions as a percentage of account equity, the<br />
system did not adequately provide for the methods by which supervisors would recognize or<br />
address anomalies or take meaningful action to investigate the trading activity.<br />
In settlement of the charges, the firm consented to a censure and agreed to pay $200,000<br />
in disgorgement and a $200,000 civil penalty. The firm also agreed to retain an independent<br />
consultant to review the firm’s written supervisory policies and procedures designed to prevent<br />
and detect churning, including review of the firm’s monitoring system for actively traded<br />
accounts and related procedures. Mello consented to a suspension from association in a<br />
supervisory capacity with any broker, dealer, or investment adviser for a period of five months,<br />
and agreed to pay a civil penalty of $45,000.<br />
In re Advanced Equities, Inc., Release No. 34-67878, 2012 SEC LEXIS 2958 (Sept. 18, 2012).<br />
Keith Daubenspeck was charged with a failure to respond to red flags that indicated that<br />
certain of the firm’s principals and brokers were making misstatements to investors in<br />
connection with private equity offerings, and therefore failed reasonably to supervise with a view<br />
toward preventing and detecting their violations of federal securities laws. The underlying<br />
conduct involved misstatements regarding financial information and business prospects of the<br />
issuer company. The SEC found that Daubenspeck supervised the principal who was at the<br />
center of the misstatements and had the ability and authority to affect his conduct, including<br />
hiring and firing authority. Daubenspeck also had final approval for all management decisions<br />
within the firm, and directly supervised the firm’s investment bankers/brokers. Because<br />
Daubenspeck was also involved with communications with the issuers in connection with due<br />
diligence on the offerings, he was in a position to know the true facts regarding the companies’<br />
P.1<br />
P.1<br />
483
finances and performance. Thus, when he participated in internal sales calls he was in a position<br />
to recognize misstatements, which constituted a red flag that such information might be<br />
disseminated further to investors. Daubenspeck, however, did not take reasonable steps to<br />
correct the misstatements or prevent such statements from being repeated. Had he responded to<br />
the red flags, it was likely that he could have prevented and detected certain of the violations of<br />
the antifraud provisions.<br />
Although the firm was not charged with failure to supervise, it consented to retain an<br />
independent consultant to review and recommend changes to procedures regarding sales<br />
practices, due diligence practices, and supervision. For other violations, the firm consented to a<br />
civil penalty of $1,000,000. Daubenspeck consented to a suspension from association in a<br />
supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer or<br />
transfer agent for a period of twelve months, and agreed to pay a $50,000 civil penalty.<br />
In re Hold Brothers On-Line Inv. Servs., LLC, Release No. 34-67924, 2012 SEC LEXIS 3029<br />
(Sept. 25, 2012).<br />
This settled administrative proceeding against respondent Hold Brothers and various<br />
individual employees and officers of the firm arose from the SEC’s allegation that the firm was<br />
engaged in a manipulative trading strategy typically referred to as “layering” or “spoofing.” The<br />
SEC alleged that the firm and Steve Hold, its president, failed adequately to supervise, and in the<br />
case of red flags, investigate, the manipulative trading by the firm’s overseas traders.<br />
Specifically, three individual Respondents, Steve Hold, Vallone, and Tobias, became aware of<br />
red flags, including several emails, suggesting that the overseas traders who traded through Hold<br />
Brothers were engaging in manipulative trading. The SEC found that these individual<br />
Respondents recklessly continued to provide traders with buying power and/or access to the U.S.<br />
markets, and failed to conduct adequate follow-up despite these warnings.<br />
In settlement of the charges, Steve Hold consented to be barred from association with any<br />
broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent,<br />
or nationally recognized statistical rating organization; prohibited from serving or acting as an<br />
employee, officer, director, member of an advisory board, investment adviser or depositor of, or<br />
principal underwriter for, a registered investment company or affiliated person of such<br />
investment adviser, depositor, or principal underwriter; and barred from participating in any<br />
offering of penny stock, including: acting as a promoter, finder, consultant, agent or other person<br />
who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in<br />
any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock<br />
with the right to apply for reentry after two years. Steve Hold also consented to be barred 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. Steve Hold also agreed to pay a<br />
civil penalty of $75,000. For all its violations, including underlying violations not described<br />
here, the firm consented to a censure and agreed to pay disgorgement of over $600,000, plus a<br />
civil penalty of $1,896,785.22, including interest.<br />
P.1<br />
484
P.1<br />
In re Biremis Corp., Release No. 34-68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).<br />
The SEC charged Respondents Beck, the firm’s President and CEO, and Kim, the firm’s<br />
vice president, with failing reasonably to supervise certain of the firm’s associated persons who<br />
engaged in a manipulative trading practice known as “layering” on U.S. securities markets. The<br />
associated persons were day traders who repeatedly used the firm’s order management system to<br />
trade. The SEC alleged that despite receiving indications that layering was occurring, which<br />
constituted “red flags” of the misconduct, Beck and Kim failed to establish procedures or a<br />
system for applying procedures that would reasonably be expected to prevent and detect the<br />
traders’ manipulative trading, and despite having supervisory authority over the associated<br />
persons, failed to respond to the red flags. In settlement of the charges, Beck and Kim consented<br />
to be barred from association with any broker, dealer, investment adviser, municipal securities<br />
dealer, or transfer agent, and barred from participating in any offering of a penny stock,<br />
including: acting as a promoter, finder, consultant, agent or other person who engages in<br />
activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny<br />
stock, or inducing or attempting to induce the purchase or sale of any penny stock. In addition,<br />
Beck and Kim agreed to each pay a civil penalty of $250,000.<br />
2. FINRA Enforcement Actions<br />
P.2<br />
Department of Enforcement v. Daniel James Gallagher, Complaint No. 2008011701203, 2012<br />
FINRA Discip. LEXIS 61 (Nat’l Adj. Council, Dec. 12, 2012).<br />
Gallagher appealed a hearing panel decision issued in 2011, which determined that he<br />
violated various FINRA rules, including acting as an unregistered principal, failing to respond to<br />
questions during on-the-record testimony, failing to disclose a complaint and judgment on his<br />
Form U-4, circumventing heightened supervision requirements, and failing to adopt a<br />
supervisory control system and conduct an annual certification of the supervisory control system.<br />
For the most severe of his violations, Gallagher was barred. The panel, however, noted that<br />
sanctions of less than a bar would have been attributable to lesser violations, including his failure<br />
to adopt and certify the supervisory system.<br />
The National Adjudicatory Council (“NAC”) generally upheld the panel’s decision. With<br />
respect to the supervisory violations, the NAC affirmed the panel’s finding that Gallagher failed<br />
to adopt a supervisory control system for the member firm he controlled as its president, and<br />
failed to conduct an annual certification of such system. Specifically, the NAC found that the<br />
record supported the finding that the firm did not have any policies or procedures in place to<br />
monitor, review or supervise the firm’s managers, producing mangers or supervisors.<br />
485
The NAC rejected Gallagher’s argument that he did not control or manage the firm,<br />
finding that from his assumption of the title of “president” he was responsible for executing or<br />
delegating supervisory functions.<br />
P.2<br />
Department of Enforcement v. Hedge Fund Capital Partners, LLC, and Howard G. Jahre,<br />
Complaint No. 2006004122402, 2012 FINRA Discip. LEXIS 42 (Nat’l Adj. Council, May 1,<br />
2012).<br />
Respondents appealed a hearing panel decision issued in 2011, which found that the firm<br />
and Jahre, its president and majority owner, violated various FINRA Rules and provisions of the<br />
Securities Exchange Act of 1934, in connection with the dissemination of exaggerated,<br />
misleading and unbalanced sales material, as well as registration, recordkeeping, and supervisory<br />
violations. The panel expelled the firm and barred Jahre in all capacities.<br />
With respect to supervisory violations, the panel had found that respondents failed to<br />
establish and maintain an adequate supervisory system with respect to retention of email and<br />
instance message retention, and by failing to hold annual compliance meetings. The NAC<br />
upheld the panel’s findings, noting that although the firm had provisions in its written<br />
supervisory procedures regarding the retention of email and instant messages, the firm had no<br />
actual retention system in place for a period of more than a year, and that no one at the firm<br />
performed a semi-annual review of the firm’s email and message archiving process as required<br />
by the procedures. Moreover, Jahre had knowledge that a retention system was required, and as<br />
the firm’s president was responsible for supervision, in the absence of any effective delegation of<br />
that responsibility to someone else.<br />
Department of Enforcement v. Hugh Vincent Murray III, Discip. Proc. No. 2008016437801,<br />
2012 FINRA Discip. LEXIS 64 (Office of Hearing Officers, Oct. 25, 2012).<br />
Murray, the president and compliance officer of Forsyth Securities, Inc. was charged with<br />
failing to supervise three registered representatives – two in connection with failure to file<br />
required amendments to their Forms U4, and the third with respect to allegedly excessive trading<br />
in discretionary accounts.<br />
The hearing panel found that Murray failed to supervise the first representative, who had<br />
plead guilty to a criminal charge of failing to pay child support. The panel rejected Murray’s<br />
argument that he misunderstood the nature of the guilty plea as not being a felony, noting that he<br />
should have investigated further, but in any event, he later learned definitively that the conviction<br />
was a felony and still waited months to ensure that the Form U4 was updated.<br />
The hearing panel found that Murray also failed to supervise the second representative,<br />
who was charged with felony DUI, and which charge should have been reported on an amended<br />
Form U4 within 30 days. The panel rejected Murray’s argument that the representative was not<br />
forthcoming regarding information about the status of the matter, because Murray was, in fact,<br />
familiar with the existence of the arrest and should have taken “more decisive measures” to keep<br />
486<br />
P.2
current on the status, and in any event, neglected to report for nearly a month even after he<br />
received a copy of the representative’s arraignment record.<br />
The hearing panel, however, found that Murray adequately supervised the discretionary<br />
trading by the third representative. The panel disagreed with the staff’s view that the frequency<br />
of trading in the accounts was a red flag. Rather, the panel found that Murray monitored both<br />
accounts closely. Notably, the panel pointed out that a decline in value in one of the accounts,<br />
during a declining market, did not demonstrate that trading was excessive.<br />
Murray was suspended in all supervisory capacities for 90 days and ordered to re-qualify<br />
by examination as a principal before serving in any supervisory capacity. He was also required<br />
to pay costs of $4,600, but was not fined.<br />
Matters of Citigroup Global Markets, Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC,<br />
Merrill Lynch, Pierce , Fenner & Smith, Inc., Morgan Stanley & Co., FINRA Press Release,<br />
available at: http://www.finra.org/Newsroom/NewsReleases/2012/P197554 (Dec. 27, 2012).<br />
FINRA reported that it entered into Letters of Acceptance, Waiver and Consent with five<br />
member firms, fining them a total of more than $3.35 million for allegedly unfairly obtaining the<br />
reimbursement of fees they paid to the California Public Securities Association (Cal PSA) from<br />
the proceeds of municipal and state bond offerings. According to FINRA, the firms violated<br />
MSRB rules regarding fair dealing and supervision in connection with obtaining reimbursement<br />
for such voluntary payments to pay the lobbying group. The firms were also required to pay a<br />
total of $1.13 million in restitution to certain issuers in California.<br />
Without admitting nor denying the allegations, the firms were sanctioned in the following<br />
amounts:<br />
• Citigroup – $888,000 fine and $391,106 in restitution<br />
• Goldman Sachs – $568,000 fine and $115,997 in restitution<br />
• JP Morgan – $465,700 fine and $166,676 in restitution<br />
• Merrill Lynch – $787,000 fine and $287,200 in restitution<br />
• Morgan Stanley – $647,700 fine and $170,054 in restitution<br />
According to FINRA, the firms failed to establish reasonable procedures to govern the<br />
conduct of their employees with respect to such reimbursements. In addition, four of the firms,<br />
Citigroup, Goldman, Merrill Lynch and Morgan Stanley, were cited for failing to have adequate<br />
systems and written supervisory procedures reasonably designed to monitor how municipal<br />
securities associations used the funds that the firms paid.<br />
P.2<br />
487
P.2<br />
Matter of Pruco Securities, LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P197541 (Dec. 26, 2012).<br />
FINRA reported that it entered into a Letter of Acceptance, Waiver and Consent with<br />
Pruco Securities, LLC, in connection with conduct surrounding pricing of mutual fund orders<br />
that were placed by facsimile or mail and received inferior prices. FINRA alleged that the firm<br />
had an inadequate supervisory system and written procedures to ensure that the orders received<br />
the correct price. According to FINRA, Pruco’s employees believed, mistakenly, that they could<br />
use “best efforts” of up to two business days to process mutual fund paper orders. In addition to<br />
findings regarding the supervisory systems and procedures, FINRA noted that Pruco failed to<br />
provide its employees with any training or training materials regarding paper mutual fund pricing<br />
requirements. Without admitting or denying the charges, Pruco consented to pay $10.7 million<br />
in restitution, plus interest, to customers, together with a $550,000 fine. Notably, in determining<br />
the sanction, FINRA took into consideration that the pricing issue was self-reported by the firm<br />
after an internal review, and that the firm revised its policies and procedures and made restitution<br />
to the affected customers.<br />
Department of Enforcement v. Wedbush Securities, Inc. and Edward William Wedbush, Discip.<br />
Proc. No. 20070094044, 2012 FINRA Discip. LEXIS 59 (Office of Hearing Officers, Aug, 2,<br />
2012).<br />
The firm was charged with failure to file, late filing and inaccurate registration filings<br />
(i.e., forms U-4, U-5, RE-3 and statistical reports) with FINRA and NYSE. The firm and<br />
Edward Wedbush, the firm’s president, were charged with failure to supervise the registration<br />
filings. After a hearing, the hearing panel found that both the firm and Edward Wedbush had<br />
failed to supervise. It found that the fact that reporting problems persisted over several years was<br />
“sufficient to establish that supervision of the reporting process was inadequate.” It also cited<br />
Edward Wedbush’s role as head of the compliance department for about a year, and as president<br />
of the firm thereafter, in finding that he failed to supervise.<br />
The firm was fined $100,000 for its supervisory violations, the hearing panel having<br />
found that the violations were “egregious.” Edward Wedbush was fined $25,000 and suspended<br />
from all supervisory activities, other than the supervision of trading and order entry, for 31 days.<br />
Department of Market Regulation v. Robert N. Drake, Discip. Proc. No. 20060053785-02, 2012<br />
FINRA Discip. LEXIS 48 (Office of Hearing Officers, May 3, 2012).<br />
Respondent, who was Chief Compliance Officer of Kuhns Brothers Securities<br />
Corporation, was charged with failure to supervise in connection with excessive markups and<br />
markdowns on corporate bond transactions and the firm’s failure to file timely and accurate trade<br />
reporting of such transactions. After a hearing, Respondent was found to have violated NASD<br />
488<br />
P.2<br />
P.2
Rule 3010 and 2001, by failing to prevent the firm from charging excessive and unfair markups<br />
and markdowns in 30 corporate bond transactions. In addition, he was deemed responsible for<br />
the failure to establish, maintain and enforce written supervisory procedures to comply with<br />
reporting obligations on TRACE. The hearing panel noted that the trader who charged the<br />
markups and markdowns had a prior disciplinary history and should have been subject to greater<br />
oversight, but none of his orders were reviewed before they were executed. Further, the firm had<br />
the same markup policy for equity and debt, incorrectly presuming that markups of 5% or less<br />
were within a safe harbor. With respect to the lack of TRACE reporting, the panel found that the<br />
firm lacked any procedures for TRACE reporting, and rejected Respondent’s excuse that the firm<br />
had purchased "boilerplate" procedures from a company that it eventually fired.<br />
As a result, Respondent was barred from association with a member firm in a supervisory<br />
capacity.<br />
Matter of Hudson Valley Capital Management, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P196921 (Nov. 8, 2012).<br />
FINRA announced that it expelled member firm Hudson Valley Capital Management and<br />
barred its Chief Executive Officer, Mark Gillis, for defrauding Hudson’s clearing firm and its<br />
customers by using their funds and securities to cover losses caused by Gillis' manipulative day<br />
trading. Specifically, Gillis used the firm’s average price account to day trade; when he made<br />
profits he withdrew the proceeds and when he incurred losses, he covered them by making<br />
unauthorized trades in customer accounts. According to FINRA, Gillis lied to his customers and<br />
FINRA staff in an attempt to conceal his conduct. FINRA charged the firm with failing to<br />
supervise Gillis' trading at the firm, thereby enabling his fraudulent trading scheme.<br />
Matter of David Lerner Associates, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P191729 (Oct. 22, 2012).<br />
David Lerner Associates, Inc. and its founder, president and CEO David Lerner<br />
submitted in Offer of Settlement in a pending disciplinary proceeding before FINRA’s Office of<br />
Hearing Officers to resolve charges that they engaged in misrepresentations, unsuitable sales<br />
transactions and excessive markups in connection with the sales of shares in a non-traded REIT,<br />
as well as charging unfair prices on municipal bonds and collateralized mortgage obligations. In<br />
addition, the firm and Lerner were charged with supervisory violations.<br />
In settling the matter, the firm agreed to pay $12 million in restitution to affected<br />
customers and paid a fine of $2.3 million. Lerner agreed to pay a fine of $250,000, and accepted<br />
a one-year suspension from the securities industry, followed by a two-year suspension from<br />
association in a principal capacity.<br />
The firm agreed to retain an independent consultants to review and propose changes to its<br />
supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and<br />
489<br />
P.2<br />
P.2
municipal bonds. The firm also agreed to revise its advertising procedures, and for a period of<br />
three years will videotape sales seminars attended by 50 or more people and will pre-file all<br />
advertisements and sales literature with FINRA at least 10 days prior to use.<br />
Matter of Guggenheim Securities, LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P187302 (Oct. 11, 2012).<br />
FINRA charged Guggenheim Securities, LLC with failing to supervise two traders who<br />
engaged in activities to hide a trading loss in collateralized loan obligations (“CLOs”). FINRA<br />
determined that the traders deceived their customer and supported their scheme through the use<br />
of inaccurate books and records. Specifically, as a result of a failed trade, the firm’s CDO desk<br />
acquired a large quantity of CLOs, which it could not sell. The firm’s traders convinced a hedge<br />
fund customer to buy the position at a significantly higher price than the customer had agreed to<br />
pay, by making certain false representations, including falsifying order tickets to conceal the true<br />
price of the position. The traders thereafter engaged in an elaborate system of misrepresentations<br />
and falsification of records to satisfy the customer’s questions regarding seemingly anomalous<br />
prices and assuage other suspicions. FINRA found that the firm had failed to supervise in that it<br />
did not adequately review the CDO desk's trades, as well as documentation of the transactions,<br />
and the traders' email communications.<br />
The firm concluded the settlement by accepting a fine of $800,000. The firm also agreed<br />
to retain an independent consultant to review and make recommendations concerning the<br />
adequacy of the firm’s supervisory procedures.<br />
Matter of Hold Brothers On-Line Investment Services, LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P178687 (Sept. 25, 2012).<br />
FINRA announced a joint settlement, together with NYSE Arca, Inc., The NASDAQ<br />
Stock Market LLC, NASDAQ OMX BX, Inc., and BATS Exchange, Inc. with Hold Brothers<br />
On-Line Investment Services, LLC in connection with charges that the firm engaged in<br />
manipulative trading and failing to comply with anti-money laundering rules. The charges<br />
stemmed from the firm having allowed a significant volume of overseas day trading to pass<br />
through its systems on a regular basis without supervising the business properly. According to<br />
FINRA, the firm “was actively involved in running the operations of these foreign entities, yet<br />
turned a blind eye to their manipulative trading activities.” Certain of the firm’s affiliates used<br />
sponsored access relationships with the firm to connect to exchanges in the U.S. and manipulate<br />
the prices of securities, using such techniques as “spoofing” and “layering” to induce other<br />
market participants to provide favorable executions that would not have been available in the<br />
absence of the manipulative activities. FINRA also found thousands of instances where the<br />
traders engaged in pre-arranged trades and wash sales.<br />
FINRA charged the firm with a failure to establish and maintain a supervisory system and<br />
written procedures that were reasonably designed to supervise the firm's trading activities.<br />
490<br />
P.2<br />
P.2
FINRA noted that numerous "red flags" indicating suspicious trading existed, but were not<br />
detected or investigated. FINRA also noted that the firm’s AML policies, procedures and<br />
controls were inadequate, including the fact that they failed to trigger reporting of suspicious<br />
activity. Despite a high volume of trading, the firm’s monitoring for suspicious trading for AML<br />
trading was not automated. Moreover, in certain instances where suspicious or manipulative<br />
trading was identified by the firm’s compliance department, the activity was not brought to the<br />
attention of the firm’s AML compliance officer, and therefore the firm never considered filing a<br />
suspicious activity report.<br />
As part of the disciplinary action, FINRA and the exchanges also ordered Hold Brothers<br />
to retain an independent consultant to conduct a comprehensive review of the adequacy of the<br />
firm's policies, systems and procedures, and training related to AML, trading, day trading,<br />
compliance with SEC Rule 15c3-5, and the use of foreign traders. The firm consented to a fine<br />
of $5.9 million.<br />
Matter of Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P177007 (Sept. 24, 2012).<br />
Merrill Lynch consented to a fine of $500,000 for supervisory failures in connection with<br />
the firm’s failure to make required reports and disclosures regarding customer complaints and<br />
arbitration claims. FINRA found that the deficiencies lasted for several years. Specifically,<br />
FINRA found that the firm failed to adequately train and supervise its personnel who were<br />
responsible for customer complaint tracking and reporting, and lacked systems to identify the<br />
high volume of customer complaints that were not being acknowledged or reported as required.<br />
Matter of Rodman & Renshaw LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P154856 (Aug. 22, 2012).<br />
FINRA announced that it reached a settlement with Rodman & Renshaw LLC, and its<br />
former CCO, William A. Iommi Sr., for supervisory and other violations related to the<br />
compliance with rules governing the scope of permissible interaction between the firm's research<br />
and investment banking functions. Specifically, the firm’s supervisory system was found to be<br />
inadequate in that it permitted at least two incidents to occur where a research analyst was<br />
permitted to participate in solicitation of investment banking services. In addition, FINRA found<br />
that the firm had compensated a research analyst for his contribution to the firm's investment<br />
banking business and failed to prevent the firm’s CEO from simultaneously engaging in<br />
investment banking activities, while having influence or control over research analysts'<br />
evaluations and compensation. The firm consented to a fine of $315,000, and Rodman's was<br />
fined $15,000, suspended from acting in a principal capacity for 90 days and must re-qualify as a<br />
general securities principal.<br />
P.2<br />
P.2<br />
491
Matter of Biremis Corp. f/k/a Swift Trade Securities USA, Inc., FINRA Press Release, available<br />
at: http://www.finra.org/Newsroom/NewsReleases/2012/P127253 (July 31, 2012).<br />
FINRA announced that it reached a settlement with Biremis, Corp., formerly known as<br />
Swift Trade Securities USA, Inc., and barred its President and Chief Executive Officer, Peter<br />
Beck, for supervisory violations related to their failure to detect and prevent manipulative trading<br />
activities and their failure to implement an adequate anti-money laundering program, as well as<br />
other violations.<br />
Specifically, FINRA found that, among other things, the firm failed to have policies and<br />
procedures designed to detect and prevent layering and other manipulative activity designed to<br />
affect the closing price of securities traded on U.S. markets. Even though the firm’s only<br />
business was to execute transactions on behalf of day traders around the world, the firm and<br />
Beck also failed to implement an adequate anti-money laundering program, failing to detect<br />
suspicious activities and file suspicious activity reports. In addition, the individual supervising<br />
the firm’s AML compliance program was unqualified and untrained and the firm failed to<br />
adequately train its employees regarding AML obligations.<br />
Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P127129 (June 21, 2012).<br />
FINRA announced a settlement with Merrill Lynch, Pierce, Fenner & Smith, Inc. in<br />
connection with supervisory failures that resulted in overcharging customers for fees in advisory<br />
accounts, and for failing to provide timely confirmations, accurate confirmations and account<br />
statements with respect to the firm’s capacity as either principal or agent. The firm was also<br />
cited for failing to deliver proxy and voting materials, margin risk disclosure statements and<br />
business continuity plans.<br />
FINRA found that over an eight and a half year period, Merrill Lynch failed to have an<br />
adequate supervisory system to ensure that customers in certain investment advisory programs<br />
were charged fees consistent with contract and disclosure documents. 95,000 customer accounts<br />
were involved and the overcharges amounted to approximately $32 million, which was refunded<br />
to the affected customers.<br />
In settlement of the matter, Merrill Lynch consented to a fine of $2.8 million.<br />
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P126482 (May 22, 2012).<br />
Citigroup Global Markets, Inc. settled failure to supervise charges stemming form its<br />
provision of inaccurate mortgage performance information to investors in connection with<br />
492<br />
P.2<br />
P.2<br />
P.2
subprime residential mortgage-backed securitizations (RMBS). FINRA noted that “Citigroup<br />
posted data for its RMBS deals that it should have known was inaccurate; and even after they<br />
learned that the data was inaccurate, Citigroup did not correct the problem until years later.<br />
Investors use this data to inform their decisions and in this case, for over six years, investors<br />
potentially used faulty data to assess the value of the RMBS." According to FINRA, the<br />
inaccurate information was disseminated over a 22 month period, and remained posted on the<br />
firm’s website for nearly five years, despite notice that the information was inaccurate. FINRA<br />
noted that Citigroup failed to supervise mortgage-backed securities pricing in that the firm did<br />
not have procedures to verify the pricing of these securities and did not document sufficiently the<br />
steps taken to assess the reasonableness of traders' prices.<br />
For all its violations, the firm consented to a fine of $3.5 million, but FINRA did not<br />
specify the portion of the fine attributable to failure to supervise.<br />
Matter of Goldman, Sachs & Co., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125974 (April 12, 2012).<br />
FINRA announced that it concluded a settlement, in conjunction with the SEC, with<br />
Goldman, Sachs & Co. pertaining to the firm’s failure to supervise equity research analyst<br />
communications with traders and clients and its failure to review adequately trading by analysts<br />
prior to publication of research changes in order to detect and prevent possible information<br />
breaches by the analysts. The conduct in question stemmed form a business process at Goldman<br />
known as "trading huddles," by which research analysts were permitted to meet on a weekly<br />
basis to share trading ideas with the firm's traders, who – in turn -- interfaced with the firm’s<br />
clients and equity salespersons. During these meetings, analysts would discuss specific<br />
securities at times during which they were considering making changes to the rating and/or other<br />
opinions regarding the security. Clients could access the meetings directly, and certain highpriority<br />
clients would receive information directly from the analysts. FINRA found that<br />
Goldman did not have adequate controls in place to monitor communications during the trading<br />
huddles themselves and the further dissemination of the information by analysts thereafter.<br />
FINRA also found that Goldman had not established an adequate system to monitor for<br />
possible trading in advance of research rating or “conviction list” changes in employee or<br />
proprietary trading, institutional customer, or market-making and client-facilitation accounts.<br />
FINRA noted that as a result the firm was not in a position to notice spikes in trading volume or<br />
other atypical trading that might have preceded a change in rating or the addition of securities to<br />
the firm’s “conviction list.”<br />
In concluding this settlement, Goldman neither admitted nor denied the charges, but<br />
consented to the entry of the SEC's and FINRA's findings and agreed to pay $11 million to the<br />
SEC and $11 million to FINRA.<br />
P.2<br />
493
P.2<br />
Matter of Citi International Financial Services LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125821 (March 19, 2012).<br />
Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., reached a<br />
settlement with FINAR arising allegedly excessive markups and markdowns on corporate and<br />
agency bond transactions. The firm also settled charges that it failed to supervise with respect to<br />
such activity.<br />
FINRA found that during a period of approximately three years, the firm charged<br />
excessive markups and markdowns on corporate and agency bond transactions, ranging from<br />
2.73 percent to over 10 percent. In addition, FINRA found that during a different three month<br />
period, the firm failed to use reasonable diligence to buy or sell corporate bonds so that the<br />
resulting price to its customers was as favorable as possible under prevailing market conditions.<br />
FINRA noted certain deficiencies in the firm’s supervisory system, including the reliance on a<br />
5% threshold for review of markups, and the use of a pricing grid for markups that was based on<br />
par value rather than the actual value of the bonds.<br />
The firm consented to a fine of $600,000 and undertaking to provided $648,000 in<br />
restitution and interest to more than 3,600 customers. The firm also undertook to revise its<br />
written supervisory procedures regarding markups and markdowns, as well as best execution in<br />
fixed income transactions with customers.<br />
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125369 (Jan. 18, 2012).<br />
Citigroup Global Markets, Inc. settled charges stemming from its failure to disclose<br />
conflicts of interest in its research reports and in connection with public appearances by its<br />
analysts during approximately a four year period. The missing disclosures included the fact that<br />
Citigroup and/or its affiliates managed or co-managed public securities offerings, received<br />
investment banking or other revenue from, made a market in the securities of and/or had a 1<br />
percent or greater beneficial ownership in covered companies.<br />
FINRA found that the firm’s failures were caused by the database it used to identify and<br />
create the disclosures, which was inaccurate and/or incomplete due primarily to technical<br />
deficiencies. FINRA also charged the firm with failing to have reasonable supervisory<br />
procedures in place to ensure that the firm was populating its research reports with required<br />
disclosures.<br />
In concluding this settlement, the firm neither admitted nor denied the charges, but<br />
consented to the entry of FINRA's findings. In settlement of all violations, the firm consented to<br />
a fine of $725,000.<br />
P.2<br />
494
3. NYSE Enforcement Actions<br />
P.3<br />
In re Murphy & Durieu, FINRA Proc. No. 20110270062, NYSE Disc. Action 2012-9, 2012<br />
NYSE Disc. Action LEXIS 9 (Oct. 15, 2012).<br />
The firm settled underling charges stemming from the firm’s failure to create records of<br />
arbitrage orders received on the floor of the exchange from off the floor, recordkeeping and other<br />
violations regarding transactions in the firm’s error account, failing to mark agency orders “held”<br />
or “not held,” and other trade reporting violations. The firm also settled charges that it violated<br />
NYSE Rule 342 in that the firm failed reasonably to supervise, including a failure to adopt a<br />
separate system of follow-up and review, reasonably designed to achieve compliance with SEC<br />
and NYSE Rules pertaining to the underlying violations, and specifically with respect to<br />
documenting arbitrage orders, processing and documenting error transactions, and refraining<br />
from using its error account to give its customers executions. The firm consented to a censure<br />
and a $45,000 fine.<br />
In re Hold Brother Execution Services, LLC, FINRA Proc. Nos. 20110270318, 20110270169,<br />
and 20110297129, NYSE Disc. Action 2012-8, 2012 NYSE Disc. Action LEXIS 8 (Oct. 5,<br />
2012).<br />
The firm settled underlying charges in connection with its failure to comply with<br />
requirements for entering and cancelling of market-on-close and limit-on-close orders and<br />
executing short sales in financial institution stocks in violation of the temporary rule forbidding<br />
same. The NYSE also alleged that the firm violated Rule 342 in that it lacked written<br />
supervisory procedures, did not have a reasonable system of follow-up and review, and did not<br />
delegate supervisory authority to qualified individuals. To settle all of the charges, the firm<br />
consented to a censure and a $100,000 fine.<br />
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Proc. No. 20110270034, NYSE Disc.<br />
Action 2012-7, 2012 NYSE Disc. Action LEXIS 7 (Sept. 13, 2012).<br />
NYSE charged the firm with various trading violations, including trading ahead of a<br />
customer order, failing to document trade along permission, and failing to comply with<br />
requirements regarding entry and cancelation of market-on-close and limit-on-close orders. The<br />
firm’s supervisory violations, however, were limited to failing reasonably to supervise and<br />
implement adequate controls, including a separate system of follow-up and review, with respect<br />
to cancellation of certain market-on-close and limit-on-close orders after prescribed cutoff times.<br />
Specifically, the NYSE found that while the firm had in place adequate policies and procedures<br />
during a prior review period, during the more recent period, the firm failed to adequately<br />
supervise certain system upgrades, which resulted in the firm’s failure to recognize violative<br />
cancellations when conducting its reviews. The firm settled all the charges by consenting to a<br />
censure and a $150,000 fine.<br />
495<br />
P.3<br />
P.3
P.3<br />
In re Morgan Stanley & Co., LLC, FINRA Proceeding No. 20110270171, 2012 NYSE Disc.<br />
Action LEXIS 6 (Aug. 10, 2012).<br />
NYSE charged the firm with underling charges stemming from entering and cancelling<br />
market-on-close, limit-on-close and closing offset orders, in violation of NYSE Rule 123C. The<br />
firm was also charged with violations of Rule 342 in connection with its lack of adequate<br />
controls designed to achieve compliance with the requirements for such orders. Specifically,<br />
NYSE found that the firm’s written procedures were not sufficiently clear, causing a<br />
misunderstanding regarding whether market-on-close and limit-on-close orders could be used to<br />
offset imbalances subject to mandatory publication. Further, NYSE also found that during a<br />
particular period of time, the firm did not have any mechanism in place to prevent late entry of<br />
market-on-close and limit-on-close orders. Finally, NYSE found that at a certain point in time<br />
the firm became aware that it has been entering or cancelling market-on-close and limit-on-close<br />
orders after prescribed deadlines, both through the firm’s own discovery through exception<br />
reports, and the receipt of regulatory inquiries. In response, the firm attempted to prevent future<br />
late entries and cancelations, but the measured employed were insufficient to prevent subsequent<br />
violations. In settlement of all charges, the firm consented to a censure and a $150,000 fine,<br />
which was imposed jointly by NYSE and NYSE MKT LLC.<br />
In re Goldman Sachs Execution & Clearing, L.P., FINRA Proc. No. 20110270059, 2012 NYSE<br />
Disc. Action LEXIS 5 (July 23, 2012).<br />
The firm settled charges that it violated NYSE Rule 342 in that it failed to maintain<br />
supervisory procedures and controls, including a system of follow-up and review, that were<br />
reasonably designed to detect and prevent potentially manipulative trading activity through the<br />
transmission of orders to the NYSE at or near the close of the market. NYSE found that a<br />
customer of the firm purchased shares of two particular stocks on 21 trade dates over a four<br />
month period at or near the close, by using the firm’s electronic order entry and routing system.<br />
These order, NYSE noted, had the “potential to artificially impact the stock’s closing price (i.e.,<br />
‘mark the close’).”<br />
While the firm had written policies and procedures to address marking-the-close activity,<br />
and surveillance programs designed to detect such activity by customers using its electronic<br />
order entry and routing system with respect to small cap and over-the-counter stocks, the<br />
surveillance program did not extend to trading by customers on the NYSE. Subsequent to<br />
receipt of the inquiry letter from the NYSE, the firm expanded its surveillance system to include<br />
trading in NYSE securities.<br />
In settlement of the failure to supervise charge, the firm consented to a censure and a<br />
$75,000 fine.<br />
P.3<br />
496
In re Electronic <strong>Broker</strong>age Systems, LLC, FINRA Proc. Nos. 20110270289 (ARCA), and<br />
20110302093 and 20110270122 (NYSE), NYSE Disc. Action 2012-4, 2012 NYSE Disc. Action<br />
LEXIS 4 (May 1, 2012).<br />
NYSE alleged that the firm committed 162 underlying violations of the SEC’s emergency<br />
order prohibiting short-sales in certain financial stocks. The NYSE also charged the firm with<br />
failing to preserve memoranda of over 32 million brokerage orders and cancellations.<br />
With respect to supervisory violations, NYSE charged the firm with failing to supervise<br />
marking the close and wash sales activity. Specifically, NYSE noted that during a particular<br />
period of time, the firm did not have a specific surveillance report to monitor for marking the<br />
close activity, as the firm only reviewed the activity of its traders, not the activity of its brokerdealer<br />
clients who made up 95% of its order flow activity. The firm also failed to have written<br />
supervisory period during the same period of time with respect to supervision of its sponsored<br />
access participants for marking the close activity.<br />
With respect to wash sales activity, the NYSE found that during a second period of time,<br />
the firm had a report to identify potential wash sales, but was unable to provide evidence that it<br />
reviewed the report or conducted appropriate follow-up. Rather, the firm relied upon its<br />
awareness of its customers’ and broker-dealer clients’ trading strategies to supervise for wash<br />
sales and matched orders, which the NYSE found to be insufficient.<br />
Moreover, NYSE noted that the firm improperly relied upon an “Electronic Execution<br />
Agreement” with its broker-dealer clients as the basis for the firm’s position that the brokerdealer<br />
clients, not the firm, were solely responsible for compliance with respect to orders routed<br />
to ArcaEx using the firm’s order handling, routing and execution system. Citing RBE-07-01,<br />
NYSE noted that a firm must have a supervisory system in place with respect to any access it<br />
offers to ArcaEx designed, at a minimum, to prevent erroneous orders and review all trading for<br />
“manipulative or improper trading practices.” Subsequent to the supervisory failures, the firm<br />
changed its business model, terminated relationships with certain customers, and developed no<br />
surveillance and pre-trade systems.<br />
In settlement of all charges, the firm accepted a censure and fines of $185,000 by NYSE<br />
Arca and $65,000 by NYSE.<br />
In re Goldman, Sachs & Co., FINRA Proceeding No. 20110270394, NYSE Disc. Action 2012-<br />
12; 2012 NYSE Disc. Action LEXIS 3 (April 4, 2012).<br />
The firm consented to a censure and fine of $85,000 to settled charges that it failed to<br />
establish and maintain supervisory procedures, including a system of follow-up and review,<br />
reasonably designed to detect and prevent potentially violative wash trades executed on the<br />
NYSE. The trades at issue were generated from SLP orders by the firm’s “Quant Cash” desk,<br />
P.3<br />
P.3<br />
497
which was a proprietary algorithmic trading desk conducting the firm’s SLP trading on the<br />
NYSE.<br />
The NYSE found that during the review period, 250,000 SLP orders entered by Quant<br />
Cash resulted in executions against other SLP orders entered by Quant Cash, representing less<br />
than 1% of the overall trading volume executed by Quant Cash during the period. The firm<br />
maintained a daily report that identified potential self-trades, which was reviewed the next day<br />
by a supervisor. Later in the period, the firm developed three additional reports to identify<br />
potential wash trades. NYSE, however, found that the reports were not capable of reasonably<br />
detecting or preventing violative SLP trades. For example, one of the reports was too<br />
discriminatory and, therefore, failed to detect many potential self-trades. NYSE also cited the<br />
firm’s failure to utilize “the DBK Link Identifier,” an identifier provided by the NYSE to assist<br />
SLP firms in identifying contra parties, until a year into the review period, when it was available<br />
the entire time.<br />
Notably, the firm was not charged with an underling wash sale violation. NYSE noted<br />
that it took into consideration that the firm had made technological changes to prevent routing<br />
orders that might result in self-trades, and that the firm agreed to implement self-trade prevention<br />
tools, once they are made available by the NYSE.<br />
In re Goldman, Sachs & Co., FINRA Proceeding Nos. 20110270256, 20110270345,<br />
20110270250, NYSE Disc. Action 2012-1, 2012 NYSE Disc. Action LEXIS 1 (Jan. 9, 2012).<br />
In a joint settlement of a FINRA investigation pertaining to violations of NYSE Arca and<br />
NYSE Rules, Goldman Sachs consented to charges that, among other things, it failed to maintain<br />
an adequate supervisory system and failed to supervise in connection with Regulation M and<br />
certain notification requirements to NYSE while managing an offering and with respect to<br />
securities for which its affiliated Direct Market Manager was registered.<br />
As to the supervisory failures pertaining to Regulation M, Goldman Sachs was found to<br />
have had surveillance in place to detect potential violations, but at a certain point reprogrammed<br />
those systems to reflect changes in the Rule. The firm’s technology staff made a programming<br />
error such that the system would only detect short sales or short positions on the day of pricing<br />
rather than for the entire five-day restricted period. While the firm corrected the mistake less<br />
than a year later, the erroneous system was found to violated NYSE Arca Rule 6.18(b), which<br />
requires the establishment of supervisory systems by member firms. For the underlying and<br />
supervisory violations, NYSE Arca censured the firm and fined it $40,000.<br />
With respect to failure to supervise the notification requirements, while Goldman Sachs<br />
was found to have had written policies and procedure in place with respect to notification<br />
requirements, it did not have a reasonable system of follow up or review to determine that its<br />
policies and procedures were followed, in violation of Exchange Rule 342. For the underlying<br />
and supervisory violations, NYSE censured the firm and fined it $10,000.<br />
P.3<br />
498
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 />
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012).<br />
The Commission accepted an offer of settlement from Comeaux, president and executive<br />
director of Stanford Group Company, a former dually registered broker-dealer and investment<br />
adviser. The Firm was a wholly-owned subsidiary of Stanford Group Holdings, Inc. (“SGH”),<br />
which was controlled by Allen Stanford, who also controlled Stanford International Bank, a<br />
private international bank (“SIB”). The Commission alleged that Comeaux, together with the<br />
registered representatives he supervised, recommended and sold certificates of deposits (“CDs”)<br />
that SIB had issued without a reasonable basis for making those recommendations. Additionally,<br />
the Commission alleged that Comeaux and the registered representatives made materially false<br />
and misleading representations concerning the CDs and failed to disclose material conflicts of<br />
interest. The Commission ordered Comeaux to cease and desist from future violations of Section<br />
17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.<br />
It further barred him from association and from participating in any penny stock offering, and<br />
prohibited him from serving or acting as an employee, officer, director, member of an advisory<br />
board, investment adviser or depositor of, or principal underwriter for, a registered investment<br />
company or affiliated person of such investment adviser, depositor or principal underwriter.<br />
Comeaux agreed to additional proceedings to determine disgorgement and civil penalties and to<br />
cooperate with the Commission in further related proceedings or investigations.<br />
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012).<br />
Q.1.a<br />
The Commission accepted an offer of settlement from Martinez, the owner, CEO, and<br />
chief compliance officer of a former registered broker-dealer and state registered investment<br />
adviser. In a related civil action brought by the Commission, a federal district court entered a<br />
judgment by consent against Martinez, permanently enjoining him from violating Section 17(a)<br />
of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule<br />
10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisors Act of 1940. The<br />
Commission’s complaint alleged that Martinez knowingly and recklessly misrepresented to the<br />
Firm’s advisory clients the safety and liquidity of a real estate fund, and further used his<br />
discretionary authority to invest substantial client assets into the fund. In total, Martinez and his<br />
co-defendant invested approximately $10.3 million of their advisory clients’ funds into the fund,<br />
in breach of their fiduciary duty given the unsuitability of the investment for their clients. The<br />
Commission barred Martinez from association and from participating in any penny stock<br />
offering.<br />
499
Q.1.a<br />
In re Wells Fargo Sec., LLC, Release No. 67649, 2012 SEC LEXIS 2626 (Aug. 14, 2012).<br />
The Commission accepted an offer of settlement from Well Fargo Securities, LLC, a<br />
registered broker-dealer, and McMurtry, a vice president and registered representative with the<br />
Firm. The Commission alleged that the Firm and certain of its registered representatives<br />
including McMurtry recommended and sold complex forms of asset-backed commercial paper<br />
issued by Structured Investment Vehicles (“SIV”) to institutional customers without<br />
understanding the nature and risk of these products. Additionally, the Commission alleged that<br />
the Firm failed to establish any procedures to ensure that its personnel adequately reviewed and<br />
understood the nature and risks of these products. The Commission alleged that McMurtry<br />
exercised discretionary authority in the account of one municipal customer, in violation of the<br />
Firm’s internal policy requiring express written authorization to do so, and purchased for that<br />
customer a SIV-issued commercial paper program backed by mortgage-backed securities<br />
(“MBS”) and related high-risk mortgage-backed derivatives. Internal records for the customer’s<br />
account stated that the account should not invest in MBS, and applicable state law prohibited<br />
municipal entities such as the customer from investing in certain high-risk MBS. The<br />
Commission further alleged that Respondents were, at a minimum, negligent in recommending<br />
the relevant products without obtaining adequate information about them to form a reasonable<br />
basis for recommending them and without disclosing the material risks of these products.<br />
The Commission ordered Respondents to cease and desist from violating Sections<br />
17(a)(2) and 17(a)(3) of the Securities Act of 1933. The Commission censured the Firm and<br />
ordered it to pay disgorgement of $65,000 plus prejudgment interest of $16,572 and a $6,500,000<br />
penalty. The Commission ordered McMurtry to pay a $25,000 penalty, suspended him from<br />
association and from participating in any penny stock offering, and prohibited him from serving<br />
as an employee, officer, director, board member, investment adviser, depositor or principal<br />
underwriter for a registered investment company or affiliated person of such investment adviser,<br />
depositor, or principal underwriter for six months.<br />
b. Unfair/Fraudulent Markups or Commissions<br />
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012).<br />
500<br />
Q.1.b<br />
The Commission accepted an offer of settlement from Finger, the CEO and majority<br />
owner of a registered broker-dealer and former registered representative of several other brokerdealers.<br />
In a related criminal proceeding, Finger pleaded guilty to one count of wire fraud. The<br />
federal district court sentenced him to 54 months in prison and three years of supervised release.<br />
The criminal indictment alleged that Finger caused significant trading losses in accounts that he<br />
managed and diverted funds to his personal benefit by charging excessive commissions. Finger<br />
concealed the losses and excessive commissions through falsified customer account statements.<br />
The Commission barred Finger from association and from participating in any penny stock<br />
offering.
c. Other Fraudulent Practices<br />
(i)<br />
Misappropriation<br />
Q.1.c.(i)<br />
In re Allen, Release No. 67744, 2012 SEC LEXIS 2775 (Aug. 12, 2012).<br />
The Commission accepted an offer of settlement from Allen, a former registered<br />
representative of a registered broker-dealer and former chief executive officer of a limited<br />
liability company (the “Company”). In a related action brought by the Commission, a federal<br />
district court entered a final judgment against Allen, enjoining him from future violations of<br />
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 thereunder. In a related criminal action, Allen pleaded<br />
guilty to conspiracy to commit wire and mail fraud and conspiracy to launder money. The<br />
Commission’s complaint alleged that Allen and his business partner raised approximately $14.8<br />
million through the offer and sale of unregistered promissory notes issued by the Company and<br />
several related entities to at least 100 investors. The complaint alleged that Allen knowingly<br />
made misrepresentations to investors and used investor funds to operate a Ponzi scheme and pay<br />
personal expenses. The Commission barred Allen from association and from participating in any<br />
penny stock offering.<br />
In re Barriger, Release No. 66142, 2012 SEC LEXIS 105 (Jan. 26, 2012).<br />
Q.1.c.(i)<br />
The Commission accepted an offer of settlement from Barriger, a registered<br />
representative, chairman, CEO, and principal of Barriger & Barriger, Inc., a registered brokerdealer.<br />
Barringer was also an unregistered investment adviser who was the president of an<br />
unregistered investment company (the “Fund”); the principal shareholder, director and officer of<br />
the Fund’s managing member and sole common shareholder; the sole owner of the purported<br />
investment manager to the Fund; and an indirect owner of the entity that underwrote and<br />
serviced the Fund’s loans. In an earlier action brought by the Commission in federal court, the<br />
court entered a consent judgment against Barriger, permanently enjoining him from future<br />
violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of<br />
the Investment Advisers Act of 1940. The Commission’s complaint alleged that Barriger<br />
fraudulently offered and sold unregistered securities in two upstate New York real estate funds<br />
he managed and defrauded the funds themselves by misusing fund assets, including paying cash<br />
distributions not justified by the Fund’s performance, and redeeming investors at inflated values.<br />
The Commission barred Barriger from association and from participating in any offering of<br />
penny stock.<br />
501
Q.1.c.(i)<br />
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012).<br />
The Commission accepted an offer of settlement from Blankenship, a former registered<br />
representative of a registered broker-dealer and investment adviser. In a related criminal action,<br />
Blankenship pleaded guilty to one count of mail fraud and one count of securities fraud. The<br />
criminal indictment alleged that Blankenship raised approximately $800,000 from customers and<br />
misrepresented that the funds would be used to purchase certain securities, when instead he<br />
diverted the funds to pay for personal and business expenses. Additionally, to hide his<br />
misconduct, Blankenship sent fraudulent account statements to customers. The Commission<br />
barred Blankenship from association and from participating in any penny stock offering.<br />
In re Campbell, Release No. 67770, 2012 SEC LEXIS 2790 (Aug. 31, 2012).<br />
Q.1.c.(i)<br />
An administrative law judge entered a default order against Campbell, a former associated<br />
person of a registered broker-dealer and a registered investment adviser and managing director of<br />
a subsidiary of a bank that used the services of the broker-dealer and investment advisor. In a<br />
related action, a federal district court convicted Campbell of mail fraud, sentenced him to six<br />
months in prison and three years of supervised release, and ordered him to pay restitution of<br />
$300,758 and to forfeit $571,105. The Commission alleged that Campbell caused commission<br />
checks, owed by the broker-dealer and investment adviser to the bank subsidiary, to be paid<br />
directly to him and that he diverted the funds to his own personal bank account. The ALJ barred<br />
Campbell from association.<br />
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012).<br />
Q.1.c.(i)<br />
The Commission accepted an offer of settlement from Eschbach, a former registered<br />
representative of a dually registered broker-dealer and investment adviser. In an earlier<br />
proceeding brought by the Commission, a federal district court entered a final judgment by<br />
consent against Eschbach, permanently enjoining her from future violations of the antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that Eschbach<br />
misappropriated over $3 million from several clients, concealed her misappropriation by issuing<br />
and mailing false and misleading account statements, and effected transactions in securities<br />
without the knowledge and outside the supervision or control of the broker-dealer with which she<br />
was associated. The Commission barred Eschbach from association and prohibited her from<br />
participating in any penny stock offering.<br />
502
Q.1.c.(i)<br />
In re Labineri, Release No. 66318, 2012 SEC LEXIS 404 (Feb. 3, 2012).<br />
The Commission accepted an offer of settlement from Labineri, a former registered<br />
representative of several registered broker-dealers. In a previous action brought by the<br />
Commission, a federal district court entered judgment against Labineri, permanently enjoining<br />
him from future violations of the antifraud provisions of the federal securities laws and from<br />
participating in offerings of penny stock. In a subsequent criminal proceedings in federal district<br />
court, Labineri pleaded guilty to mail fraud and conspiracy to commit securities, mail and wire<br />
fraud. The criminal indictment alleged that Labineri and his co-defendant defrauded investors in<br />
purported private offerings of securities by misrepresenting the use of the offering proceeds,<br />
most of which they used for their own benefit. The Commission’s complaint made similar<br />
allegations and further alleged that Labineri failed to disclose his disciplinary history. The<br />
Commission barred Labineri from association.<br />
In re Passaro, Release No. 68477, 2012 SEC LEXIS 4023 (Dec. 19, 2012).<br />
Q.1.c.(i)<br />
The Commission accepted an offer of settlement from Passaro, a former registered<br />
representative of two registered broker-dealers. In an earlier proceeding in federal district court,<br />
Passaro pleaded guilty to wire fraud, mail fraud and securities fraud, as well as conspiracy to<br />
commit wire fraud, mail fraud, and fraud in connection with the purchase or sale of securities.<br />
As of the date of the release, Passaro’s sentencing was pending. The criminal indictment alleged<br />
that Passaro and others participated in a securities fraud scheme through the two broker-dealers<br />
by soliciting millions of dollars from investors under false pretenses, thereby raising<br />
approximately $140 million. It further alleged that Passaro and others failed to use investors’<br />
funds as promised, misappropriated and converted investors’ funds without their knowledge, and<br />
manipulated the market for certain affiliated companies’ stocks. The Commission barred<br />
Passaro from association.<br />
In re Ramsey, Release No. 66744, 2012 SEC LEXIS 1117 (Apr. 5, 2012).<br />
Q.1.c.(i)<br />
The Commission accepted an offer of settlement from Ramsey, a former registered<br />
representative associated with a dually registered broker-dealer and investment adviser. In an<br />
earlier criminal proceeding in federal court, Ramsey pleaded guilty to one count of mail fraud<br />
and was sentenced to 50 months in prison followed by three years of supervised release and<br />
ordered to make restitution of $494,000. According to the allegations in the criminal action,<br />
from June 2005 to January 2008, Ramsey knowingly and willfully defrauded and<br />
misappropriated more than $400,000 from a customer. The Commission barred Ramsey from<br />
association and from participating in any penny stock offering.<br />
503
Q.1.c.(i)<br />
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012).<br />
The Commission accepted an offer of settlement from Sekaran, a manager and control<br />
person of an unregistered investment adviser and former associated person of a registered<br />
broker-dealer. In a related action brought by the Commission, a federal district court entered a<br />
judgment by consent against Sekaran, permanently enjoining him from future violations of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections<br />
206(1) and 206(2) of the Investment Advisers Act of 1940. In related criminal proceedings in<br />
federal district court, Sekaran pleaded guilty to one count of securities fraud. The Commission’s<br />
complaint alleged that Sekaran made material misrepresentations to clients, provided fabricated<br />
and misleading account statements to clients, and misappropriated client funds. The<br />
Commission barred Sekaran from association and from participating in any penny stock offering.<br />
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012).<br />
Q.1.c.(i)<br />
The Commission accepted an offer of settlement from Slowey, a former registered<br />
representative of a registered broker-dealer. In a related action brought by the Commission, a<br />
federal district court entered a judgment by consent against Slowey, permanently enjoining him<br />
from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section<br />
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission<br />
alleged that Slowey made materially misleading statements to investors, misappropriated<br />
investor funds, and participated in an unregistered offering. The Commission barred Slowey<br />
from association and from participating in any penny stock offering.<br />
(ii)<br />
Misrepresentation<br />
Q.1.c.(ii)<br />
In re Advanced Equities, Inc., Release No. 67878, 2012 SEC LEXIS 2958 (Sept. 18, 2012).<br />
The Commission accepted offers of settlement from Advanced Equities, Inc., a registered<br />
broker-dealer, and Badger and Daubenspeck, co-founders and registered principals of the Firm.<br />
The Commission alleged that, in connection with the offering of an alternative energy company<br />
in 2009, Badger repeatedly made misrepresentations about the company to potential investors.<br />
The Commission further alleged that Daubenspeck, who supervised Badger, witnessed Badger’s<br />
misstatements during internal sales calls yet failed to correct them or take steps to prevent<br />
Badger from making further misstatements to the Firm’ registered representatives and potential<br />
investors. Ultimately, the Firm raised $122 million in the offering.<br />
The Commission ordered Badger to cease and desist from future violations of Sections<br />
17(a)(2) and 17(a)(3) of the Securities Act of 1933 and to pay a $100,000 penalty, and barred<br />
him from association with the right to reapply after one year. The Commission ordered<br />
Daubenspeck to pay a $50,000 penalty and suspended him from association in any supervisory<br />
capacity for twelve months. The Commission censured the Firm and ordered it to cease and<br />
504
desist from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and to pay a<br />
$1,000,000 penalty. Additionally, the Firm undertook to hire an independent consultant to<br />
review and improve its policies and procedures relating to sales, due diligence, and supervisory<br />
practices, and to provide a copy of the Commission’s order to its customers. The Firm further<br />
undertook to implement a new internal training program covering sales practices, and to use its<br />
best efforts to locate purchasers for any of its customers wishing to sell shares of the company.<br />
All Respondents undertook to cooperate with the Commission, including in future related<br />
investigations or proceedings.<br />
In re Blimline, Release No. 68347, 2012 SEC LEXIS 3733 (Dec. 4, 2012).<br />
505<br />
Q.1.c.(ii)<br />
An administrative law judge entered an order by default against Blimline, an undisclosed<br />
and unlicensed principal of a registered broker-dealer. In a related criminal case, Blimline was<br />
convicted of conspiracy to commit mail fraud and was sentenced to 240 months in prison<br />
followed by three years of supervised release and ordered to pay restitution of $407,552,919.<br />
According to his factual statement from that proceeding, Blimline sold oil and gas investments<br />
using materially false representations and omissions. The ALJ barred Blimline from association<br />
and from participating in any penny stock offering.<br />
In re Buggy, Release No. 66205, 2012 SEC LEXIS 211 (Jan. 20, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Buggy, a former registered<br />
representative of a registered broker-dealer. In a prior criminal proceeding, Buggy pleaded<br />
guilty to one count each of mail fraud, wire fraud, and money laundering. The federal district<br />
court ordered him to pay $1,220,068 in restitution and sentenced him to 46 months in prison and<br />
three years of supervised release. The criminal indictment alleged that Buggy knowingly<br />
devised a scheme to defraud and obtain money from his clients by means of false and fraudulent<br />
pretenses. The Commission barred Buggy from association and from participating in any penny<br />
stock offering.<br />
Q.1.c.(ii)<br />
In re Cioffi, Release No. 67250, 2012 SEC LEXIS 1967 (June 25, 2012); In re Tannin, Release<br />
No. 67249, 2012 SEC LEXIS 1968 (June 25, 2012).<br />
The Commission accepted offers of settlement from Cioffi, a former senior managing<br />
director, portfolio manager, and member of the board of directors at a registered investment<br />
adviser, and Tannin, a former senior managing director, chief operating officer and portfolio<br />
manager at the Firm. Respondents were also former registered representatives associated with<br />
registered broker-dealers. In a related action brought by the Commission, a federal district court<br />
entered final judgments by consent against Respondents, permanently enjoining them from<br />
future violations of Section 17(a)(2) of the Securities Act of 1933. The Commission’s complaint<br />
alleged that, in connection with the offer or sale of interests in two hedge funds, the Respondents<br />
made misrepresentations including concerning the extent to which the Funds’ assets were backed
y subprime mortgages. The Commission barred Cioffi and Tannin from association, with the<br />
right to reapply after three years and two years, respectively.<br />
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012).<br />
506<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Comeaux, president and executive<br />
director of Stanford Group Company, a former dually registered broker-dealer and investment<br />
adviser. The Firm was a wholly-owned subsidiary of Stanford Group Holdings, Inc. (“SGH”),<br />
which was controlled by Allen Stanford, who also controlled Stanford International Bank, a<br />
private international bank (“SIB”). The Commission alleged that Comeaux, together with the<br />
registered representatives he supervised, recommended and sold certificates of deposits (“CDs”)<br />
that SIB had issued without a reasonable basis for making those recommendations. Additionally,<br />
the Commission alleged that Comeaux and the registered representatives made materially false<br />
and misleading representations concerning the CDs and failed to disclose material conflicts of<br />
interest. The Commission ordered Comeaux to cease and desist from future violations of Section<br />
17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and<br />
Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.<br />
It further barred him from association and from participating in any penny stock offering, and<br />
prohibited him from serving or acting as an employee, officer, director, member of an advisory<br />
board, investment adviser or depositor of, or principal underwriter for, a registered investment<br />
company or affiliated person of such investment adviser, depositor or principal underwriter.<br />
Comeaux agreed to additional proceedings to determine disgorgement and civil penalties and to<br />
cooperate with the Commission in further related proceedings or investigations.<br />
In re Dent, Release No. 68223, 2012 SEC LEXIS 3511 (Nov. 14, 2012).<br />
Q.1.c.(ii)<br />
An administrative law judge entered an order by default against Dent, a registered<br />
representative of a registered broker-dealer. In an earlier proceeding in federal district court,<br />
Dent was convicted of securities fraud and was sentenced to thirty months in prison followed by<br />
two years of supervised release and ordered to pay restitution of $126,000. The conviction<br />
related to creating losing trades in a customer account to offset losses in proprietary accounts that<br />
resulted from Dent’s unauthorized day trading in those accounts. The ALJ barred Dent from<br />
association.<br />
In re Folan, Release No. 66127, 2012 SEC LEXIS 1003 (Jan. 10, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Folan, a registered representative of<br />
a registered broker-dealer (the “Firm”) and a registered municipal securities dealer. In a related<br />
action brought by the Commission, a federal district court entered a judgment by consent<br />
permanently enjoining Folan from aiding and abetting future violations of Section 206(2) of the<br />
Investment Advisers Act of 1940. The Commission’s complaint alleged that in a 2006<br />
repurchase transaction between the Firm and a registered investment adviser, the investment
adviser provided materially misleading financial statements and other misleading statements to<br />
its clients. The Commission further alleged that Folan aided and abetted the investment<br />
adviser’s violations of Section 206(2). The Commission barred Folan from association and from<br />
participating in any penny stock offering, with the right to reapply after three years.<br />
In re Gengler, Release No. 67918, 2012 SEC LEXIS 3027 (Sept. 24, 2012).<br />
507<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Gengler, a former registered<br />
representative of registered broker-dealers. In an earlier action brought by the Commission, a<br />
federal district court entered a final judgment by consent against Gengler. The Commission’s<br />
complaint alleged that, from 2002 to 2007, Gengler sold personal mentoring, software, and class<br />
packages on securities trading to often inexperienced investors, and misrepresented to these<br />
investors that using the packages would result in extraordinary profits. The Commission further<br />
alleged that Gengler encouraged investors to engage in securities transactions and advised<br />
investors with respect to such transactions. The court permanently enjoined Gengler from future<br />
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.<br />
The Commission barred Gengler from association and from participating in any penny stock<br />
offering.<br />
In re Marks, Release No. 68275, 2012 SEC LEXIS 3616 (Nov. 20, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Marks, the chief executive officer<br />
and sole owner of a former registered investment adviser and associated person of a brokerdealer.<br />
In an earlier proceeding brought by the Commission, a federal district court entered a<br />
final judgment by consent against Marks, permanently enjoining him from future violations of<br />
Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8<br />
thereunder, and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The Commission’s<br />
complaint alleged that Marks negligently misrepresented the level of correlation and<br />
diversification among certain hedge funds of the investment adviser, made unsuitable investment<br />
recommendations to certain advisory clients, negligently failed to disclose that one hedge fund<br />
invested significantly in a purported sub-adviser’s fund and negligently provided misleading<br />
information to certain investors about the liquidity problems at another hedge fund. The<br />
Commission barred Marks from association and prohibited him from participating in any penny<br />
stock offering.<br />
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Martinez, the owner, CEO, and<br />
chief compliance officer of a former registered broker-dealer and state registered investment<br />
adviser. In a related civil action brought by the Commission, a federal district court entered a<br />
judgment by consent against Martinez, permanently enjoining him from violating Section 17(a)<br />
of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisors Act of 1940. The<br />
Commission’s complaint alleged that Martinez knowingly and recklessly misrepresented to the<br />
Firm’s advisory clients the safety and liquidity of a real estate fund, and further used his<br />
discretionary authority to invest substantial client assets into the fund. In total, Martinez and his<br />
co-defendant invested approximately $10.3 million of their advisory clients’ funds into the fund,<br />
in breach of their fiduciary duty given the unsuitability of the investment for their clients. The<br />
Commission barred Martinez from association and from participating in any penny stock<br />
offering.<br />
In re Ruiz, Release No. 66573, 2012 SEC LEXIS 792 (Mar. 12, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Ruiz, a registered representative<br />
associated with a registered broker-dealer who also controlled a limited liability company. The<br />
Commission alleged that Ruiz made materially false and misleading statements in the offer and<br />
sale of securities of his limited liability company. Ruiz told investors they were purchasing an<br />
equity interest in the company, and told some of them that the equity interest they were<br />
purchasing was preferred stock, but never issued membership interests to investors. Additionally,<br />
Ruiz told investors that the funds would be used to develop the company’s purported business,<br />
but in fact commingled them with his own and used much of them to fund personal expenses.<br />
The Commission ordered Ruiz to cease and desist from committing or causing violations or<br />
future violations of Section 17(a)(2) of the Securities Act of 1933 and Section 15(a) of the<br />
Securities Exchange Act of 1934, and his limited liability company to cease and desist from<br />
committing or causing violations or future violations of Section 17(a)(2) of the Securities Act.<br />
The Commission also censured Ruiz, barred him from association or from affiliation with any<br />
registered investment company or affiliated person of any investment adviser, depositor or<br />
principal underwriter, and barred him from participating in any penny stock offering, with a right<br />
to reapply after three years. The Commission ordered Ruiz to pay a $75,000 civil penalty and<br />
disgorgement of $112,500, plus post-judgment interest of $2,076.<br />
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Slowey, a former registered<br />
representative of a registered broker-dealer. In a related action brought by the Commission, a<br />
federal district court entered a judgment by consent against Slowey, permanently enjoining him<br />
from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section<br />
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission<br />
alleged that Slowey made materially misleading statements to investors, misappropriated<br />
investor funds, and participated in an unregistered offering. The Commission barred Slowey<br />
from association and from participating in any penny stock offering.<br />
508
Q.1.c.(ii)<br />
In re UBS Fin. Serv. Inc. of Puerto Rico, Release No. 66893, 2012 SEC LEXIS 1394 (May 1,<br />
2012).<br />
The Commission accepted an offer of settlement from UBS Financial Services, Inc. of<br />
Puerto Rico, a registered broker-dealer. According to the Commission, the Firm, through its<br />
chief executive officer and head of capital markets, misrepresented to its financial advisors the<br />
primary offering price and secondary market liquidity of non-exchange-traded, closed-end funds<br />
(“CEFs”) it offered. The Commission alleged that as early as May 2008, the Firm knew that the<br />
market for CEFs was imbalanced due to greater supply than demand, and that subsequent<br />
liquidity was largely dependent on the Firm’s support of the secondary market for CEFs. From<br />
2008 to 2009, the Firm encouraged its sales force and financial advisers to continue marketing<br />
CEFs to customers despite its knowledge of the market imbalance. After the Firm was directed<br />
by its parent company’s senior risk officer to reduce its inventory of CEFs, the Firm engaged in a<br />
practice designed to undercut customers’ sell orders such that the Firm’s CEF inventory would<br />
be sold first. The Firm did not disclose that it was reducing its inventory to support the<br />
secondary market or that customer sell orders would be subordinated to allow the Firm to sell its<br />
inventory first.<br />
The Commission censured the Firm and ordered it to cease and desist from future<br />
violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the<br />
Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The Commission ordered the Firm<br />
to disgorge $11,500,000 plus prejudgment interest of $1,109,730 and to pay a $14,000,000<br />
penalty. The Commission established a Fair Fund for the distribution of the settlement proceeds,<br />
and the Firm agreed not to seek any offset of any award of compensatory damages in any related<br />
investor action. The Firm further undertook to retain an independent consultant to review and<br />
improve its disclosures and trading policies and procedures related to CEFs, with annual reviews<br />
by the consultant to occur for three years from the date of the consultant’s initial report.<br />
In re Tak, Release No. 66147, 2012 SEC LEXIS 121 (Jan. 12, 2012).<br />
Q.1.c.(ii)<br />
The Commission accepted an offer of settlement from Tak, a registered representative<br />
with a registered broker-dealer. In an earlier proceeding brought by the Commission, a federal<br />
district court entered a final judgment by consent against Tak, permanently enjoining him from<br />
future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections<br />
10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The<br />
Commission’s complaint alleged that Tak raised over $9.8 million from 36 investors,<br />
misrepresenting to them that a registered broker-dealer would be selling interests in the<br />
investment fund he was offering and that the source of the fund’s distributions to investors would<br />
relate to the fund’s accrued net profits. Instead, the fund was an unregistered security, not sold<br />
through a broker-dealer, with no accrued net profits, and thus paid investor distributions with<br />
money from investors’ capital contributions. The Commission barred Tak from association and<br />
from participating in any offering of penny stock.<br />
509
Q.1.c.(ii)<br />
In re Western Pacific Capital Management, LLC, Release No. 67890, 2012 SEC LEXIS 2962<br />
(Sep. 19, 2012); In re Western Pacific Capital Management, LLC, Release No. 67891, 2012 SEC<br />
LEXIS 2963 (Sep. 19, 2012).<br />
The Commission accepted offers of settlement from Western Pacific Capital<br />
Management, LLC (“Western Pacific”), an investment advisor that was registered with the State<br />
of California from June 2004 to May 13, 2009, and registered with the Commission thereafter,<br />
and O’Rourke, Western Pacific’s founder, president, and sole control person. The Commission<br />
alleged that Western Pacific and O’Rourke, with scienter, failed to disclose to investors in an<br />
unregistered offering that Western Pacific would receive a 10% success fee for serving as a<br />
placement agent for the offering; that O’Rourke improperly used funds in an unregistered pooled<br />
investment vehicle he managed to resolve client disputes; and that O’Rourke misrepresented the<br />
pooled investment vehicle’s liquidity to its investors. The Commission ordered Western Pacific<br />
and O’Rourke to cease and desist from committing or causing any violations and future<br />
violations of Section 15(a) of the Exchange Act of 1934, and Sections 206(1), 206(2), 206(3),<br />
and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-(8) promulgated<br />
thereunder. Western Pacific and O’Rourke were each ordered to pay disgorgement of $482,745,<br />
prejudgment interest of $169,195.85, and a $130,000 civil penalty. Western Pacific’s<br />
registration was revoked. O’Rourke was barred from association, barred from participating in<br />
any offering of penny stock, and prohibited from serving as an employee, officer, director, board<br />
member, investment adviser, depositor or principal underwriter for a registered investment<br />
company, with a right to reapply after two years.<br />
Q.1.c.(ii)<br />
In re Yamashiro, Release No. 67789, 2012 SEC LEXIS 2839 (Sept. 5, 2012).<br />
The Commission accepted an offer of settlement from Yamashiro, a former registered<br />
representative of a registered broker-dealer and former associated person of a registered<br />
investment adviser. In a related criminal proceeding, Yamashiro pleaded guilty to two counts of<br />
wire fraud and one count of money laundering. Under the plea agreement, Yamashiro agreed to<br />
pay full restitution, estimated at $3,765,725, and faces a possible prison sentence of sixty-three to<br />
seventy-eight months. The indictment alleged that Yamashiro knowingly and with the intent to<br />
defraud participated in and executed a scheme to defraud his clients and obtain money and<br />
property from them by making materially false and misleading representations and promises.<br />
The Commission barred Yamashiro from association and from participating in any penny stock<br />
offering.<br />
(iii)<br />
Falsification of Documents<br />
Q.1.c.(iii)<br />
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012).<br />
The Commission accepted an offer of settlement from Blankenship, a former registered<br />
representative of a registered broker-dealer and investment adviser. In a related criminal action,<br />
Blankenship pleaded guilty to one count of mail fraud and one count of securities fraud. The<br />
510
criminal indictment alleged that Blankenship raised approximately $800,000 from customers and<br />
misrepresented that the funds would be used to purchase certain securities, when instead he<br />
diverted the funds to pay for personal and business expenses. Additionally, to hide his<br />
misconduct, Blankenship sent fraudulent account statements to customers. The Commission<br />
barred Blankenship from association and from participating in any penny stock offering.<br />
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012).<br />
511<br />
Q.1.c.(iii)<br />
The Commission accepted an offer of settlement from Eschbach, a former registered<br />
representative of a dually registered broker-dealer and investment adviser. In an earlier<br />
proceeding brought by the Commission, a federal district court entered a final judgment by<br />
consent against Eschbach, permanently enjoining her from future violations of the antifraud<br />
provisions of the federal securities laws. The Commission’s complaint alleged that Eschbach<br />
misappropriated over $3 million from several clients, concealed her misappropriation by issuing<br />
and mailing false and misleading account statements, and effected transactions in securities<br />
without the knowledge and outside the supervision or control of the broker-dealer with which she<br />
was associated. The Commission barred Eschbach from association and prohibited her from<br />
participating in any penny stock offering.<br />
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012).<br />
Q.1.c.(iii)<br />
The Commission accepted an offer of settlement from Finger, the CEO and majority<br />
owner of a registered broker-dealer and former registered representative of several other brokerdealers.<br />
In a related criminal proceeding, Finger pleaded guilty to one count of wire fraud. The<br />
federal district court sentenced him to 54 months in prison and three years of supervised release.<br />
The criminal indictment alleged that Finger caused significant trading losses in accounts that he<br />
managed and diverted funds to his personal benefit by charging excessive commissions. Finger<br />
concealed the losses and excessive commissions through falsified customer account statements.<br />
The Commission barred Finger from association and from participating in any penny stock<br />
offering.<br />
In re Madoff, Release No. 67512, 2012 SEC LEXIS 2367 (July 26, 2012).<br />
Q.1.c.(iii)<br />
The Commission accepted an offer of settlement from Peter Madoff, an attorney and<br />
former chief compliance officer of a registered broker-dealer and investment adviser. In a<br />
related criminal proceeding in state court, Respondent pleaded guilty to (1) conspiracy to (a)<br />
commit securities fraud; (b) falsify records of an investment adviser; (c) falsify records of a<br />
broker-dealer; (d) make false filings with the Commission; (e) commit mail fraud; (f) falsify<br />
statements in relation to documents required by ERISA; and (g) obstruct and impede the lawful<br />
governmental function of the IRS; and (2) falsifying records of an investment adviser. The<br />
criminal indictment alleged, inter alia, that Bernard Madoff, Respondent’s brother and the sole<br />
owner of the firm, engaged in a long-standing Ponzi scheme; that Respondent created false and
misleading entries in numerous documents to make it appear as though he performed various<br />
compliance reviews; that he created annual reports which falsely stated that he had performed a<br />
comprehensive compliance review of the firm’s operations; and that he created and caused to be<br />
filed with the Commission false and misleading Forms ADV. The Commission barred<br />
Respondent from association and from participating in any penny stock offering.<br />
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012).<br />
Q.1.c.(iii)<br />
The Commission accepted an offer of settlement from Sekaran, a manager and control<br />
person of an unregistered investment adviser and former associated person of a registered<br />
broker-dealer. In a related action brought by the Commission, a federal district court entered a<br />
judgment by consent against Sekaran, permanently enjoining him from future violations of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections<br />
206(1) and 206(2) of the Investment Advisers Act of 1940.<br />
In related criminal proceedings in federal district court, Sekaran pleaded guilty to one count of<br />
securities fraud. The Commission’s complaint alleged that Sekaran made material<br />
misrepresentations to clients, provided fabricated and misleading account statements to clients,<br />
and misappropriated client funds. The Commission barred Sekaran from association and from<br />
participating in any penny stock offering.<br />
(iv)<br />
Failure to Maintain Accurate Books and Records<br />
In re MidSouth Capital, Inc., Release No. 66828, 2012 SEC LEXIS 1254 (Apr. 18, 2012).<br />
Q.1.c.(iv)<br />
The Commission accepted an offer of settlement from MidSouth Capital, Inc., a registered<br />
broker-dealer, and Hill, the Firm’s largest shareholder, CEO, and Financial and Operations<br />
Principal. The Commission alleged that on seven occasions between December 2008 and<br />
October 2011, the Firm effected transactions in securities while failing to maintain sufficient net<br />
capital. During certain of these times, FINRA and/or the Commission warned the Firm that<br />
continuing to effect transactions in securities would violate Section 15(c)(3) of the Securities<br />
Exchange Act of 1934 and Rule 15c3-1 thereunder. Despite these warnings, the Firm did not<br />
suspend operations. FINRA sent three of the deficiency notifications directly to Hill, who had<br />
primary responsibility for addressing the Firm’s net capital obligations and was aware of the<br />
Firm’s past violations. The Firm also failed to file on a timely basis the required Rule 17a-11<br />
notifications with FINRA and the Commission regarding its net capital deficiencies. One<br />
deficiency arose because the Firm had improperly included “an aged unsecured receivable” from<br />
an affiliated entity in its net capital. In so doing, the Firm also failed to maintain accurate books<br />
and records. The Commission censured the Firm and ordered it to cease and desist from<br />
violating Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-11, and 17a-<br />
3 thereunder. The Commission ordered Hill to cease and desist from willfully aiding and<br />
abetting violations of the same provisions, suspended him from association for six months,<br />
prohibited him from acting as an employee, officer, or member of an advisory board, investment<br />
512
adviser or depositor of, or principal underwriter for, a registered investment company for six<br />
months, and ordered him to pay a $15,000 civil penalty.<br />
(v)<br />
Selling Away<br />
Q.1.c.(v)<br />
In re Mazuchowski, Release No. 67532, 2012 SEC LEXIS 2387 (July 30, 2012).<br />
The Commission accepted an offer of settlement from Mazuchowski, a/k/a Mazur, a former<br />
registered representative associated with a registered broker-dealer. The Commission alleged<br />
that Mazur willfully violated Section 15(a) of the Securities Exchange Act of 1934 by acting as<br />
an unregistered broker selling away from the firm with which he was associated. According to<br />
the Commission, Mazur solicited investors for private offerings involving two separate Chinese<br />
reverse merger companies. Mazur had reached an agreement with the companies whereby he<br />
would be compensated based on the dollar amount of investments he introduced to the deals.<br />
After the deals closed, Mazur executed backdated “consulting” agreements with the companies,<br />
which generically referred to consulting services he would provide rather than sales services.<br />
Mazur’s broker-dealer also executed the agreements despite not knowing about or supervising<br />
Mazur’s involvement in the deals. The companies then paid Mazur’s broker-dealer for his<br />
services and the broker-dealer retained 60% and 65% of the total compensation from the two<br />
deals, while Mazur retained the balance.<br />
The Commission ordered Mazur to cease and desist from committing future violations of<br />
Section 15(a), barred him from association and from participating in any offering of a penny<br />
stock with the right to apply for reentry after two years, and prohibited him from acting as an<br />
employee, officer, or member of an advisory board, investment adviser or depositor of, or<br />
principal underwriter for, a registered investment company, also with the right to apply for<br />
reentry after two years. Additionally, the Commission ordered Mazur to pay $126,800 in<br />
disgorgement plus $25,550 in prejudgment interest and a $25,000 civil penalty.<br />
d. Mutual Fund Trading and Disclosure Violations<br />
Q.1.d<br />
In re OppenheimerFunds, Inc., Release No. 67142, 2012 LEXIS 1765 (June 6, 2012).<br />
The Commission accepted offers of settlement from OppenheimerFunds, Inc. (“OFI”), a<br />
registered investment adviser, and OppenheimerFunds Distributor, Inc., a registered brokerdealer.<br />
The Commission alleged that Respondents misrepresented to financial advisors and fund<br />
shareholders the losses caused in two mutual funds by exposure to commercial mortgage-backed<br />
securities (“CMBS”). In particular, the Commission alleged that the funds gained exposure to<br />
CMBS through swap transactions involving substantial leverage. When the CMBS market<br />
collapsed in late 2008, large liabilities were incurred arising out of that leverage, resulting in<br />
significant fund net asset value (“NAV”) declines. The Commission alleged that in response to<br />
advisers’ and shareholders’ questions about the funds’ performance and NAV decline,<br />
Respondents made materially misleading statements that misrepresented the extent of the effect<br />
513
of CMBS exposure on the funds’ assets. The Commission further alleged that Respondents<br />
offered one of the funds’ shares under a materially misleading prospectus that did not adequately<br />
disclose the significant leverage associated with the swap transactions.<br />
The Commission censured Respondents and ordered them to cease and desist from future<br />
violations of Section 17(a)(2) and (3) of the Securities Act of 1933, Section 206(4) of the<br />
Investment Advisers Act of 1940 and related rules thereunder, and Section 34(b) of the<br />
Investment Company Act of 1940. The Commission further ordered OFI to pay a $24,000,000<br />
civil penalty and disgorge $9,879,706, representing management fees obtained during the<br />
relevant time period, plus prejudgment interest of $1,487,190. Respondents further undertook to<br />
cooperate fully with the Commission in further related investigations or proceedings.<br />
e. Trading Practice Violations<br />
(i)<br />
Insider Trading<br />
Q.1.e.(i)<br />
In re Bauer, Release No. 67205, 2012 SEC LEXIS 1865 (June 14, 2011).<br />
The Commission accepted an offer of settlement from Bauer, a former trader for several<br />
registered broker-dealers. In an earlier action brought by the Commission, a federal district court<br />
entered a final judgment by consent against Bauer. The Commission’s complaint alleged that<br />
Bauer traded in advance of at least nine pending mergers and acquisitions based on tips from a<br />
lawyer who had accessed material nonpublic information regarding the transactions from his<br />
firm’s computer system. Bauer traded on the tips in accounts for himself, the attorney, and an<br />
intermediary who passed the tips on from the attorney to Bauer. The final judgment permanently<br />
enjoined Bauer from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act<br />
of 1934 and Rules 10b-5 and 14e-3 thereunder, and ordered him to pay disgorgement of<br />
$30,812,796 and prejudgment interest of $859,135. The disgorgement order was partially<br />
satisfied and offset by a Final Order of Forfeiture entered in a related criminal proceeding in<br />
federal district court seizing various assets at the direction of the U.S. Attorney’s Office. In that<br />
proceeding, Bauer pleaded guilty to one count of securities fraud, conspiracy to commit<br />
securities fraud, conspiracy to commit money laundering, and obstruction of justice. The<br />
Commission barred Bauer from association and from participating in any offering of a penny<br />
stock.<br />
In re Brogger, Release No. 66594, 2012 SEC LEXIS 821 (Mar. 14, 2012).<br />
514<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Brogger, the president of<br />
SharesPost, Inc., which, following the Commission’s alleged conduct, acquired a registered<br />
broker-dealer. The Commission alleged that SharesPost willfully violated Section 15(a) of the<br />
Securities Exchange Act of 1934 and that Brogger caused this violation. The Commission<br />
alleged that SharesPost was engaged effecting transactions in securities for the account of others
without registering as a broker with the Commission. SharesPost held itself out to the public as<br />
an online service to help match buyers and sellers of pre-IPO stock, and charged commissions<br />
through affiliated broker dealers for effecting such transactions. SharesPost also used its website<br />
to sell interests in pooled investment vehicles that were managed by a SharesPost affiliate.<br />
SharesPost was ordered to pay an $80,000 civil penalty and Brogger was ordered to pay a<br />
$20,000 civil penalty.<br />
In re Drimal, Release No. 66314, 2012 SEC LEXIS 1001 (Feb. 2, 2012).<br />
515<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Drimal, a former trader for several<br />
registered broker-dealers. In an earlier action brought by the Commission, a federal district court<br />
entered a final judgment by consent against Drimal, enjoining him from future violations of<br />
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The<br />
Commission’s complaint alleged that Drimal was tipped material nonpublic information<br />
concerning three companies and that he traded on that information and tipped it to others. In a<br />
related criminal proceeding in federal district court, Drimal pleaded guilty to five counts of<br />
securities fraud and one count of conspiracy to commit securities fraud. The Commission barred<br />
Drimal from association and from participating in any penny stock offering.<br />
In re Echeverri, Release No. 66088, 2012 SEC LEXIS 1000 (Jan. 3, 2012).<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Echeverri, a former registered<br />
representative associated with registered broker-dealers. In a related action brought by the<br />
Commission, a federal district court entered a judgment by consent against Echeverri,<br />
permanently enjoining him from future violations of Section 10(b) of the Securities Exchange<br />
Act of 1934 and Rule 10b-5 thereunder. The Commission’s complaint alleged that Echeverri<br />
received material non-public information concerning the proposed acquisition of a company and,<br />
based on that information, purchased stock of the company. The Commission further alleged<br />
that Echeverri knew or should have known that the officer of the company who provided him<br />
with the information did so in breach of the duty of trust and confidence the officer owed to the<br />
company. Additionally, the complaint alleged that Echeverri tipped the information to five other<br />
people, and sold his stock of the company after the acquisition was announced for a $150,121<br />
profit. The Commission barred Echeverri from association and from participating in any penny<br />
stock offering.<br />
In re Fleishman, Release No. 67190, 2012 SEC LEXIS 1849 (June 12, 2012).<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Fleishman, a sales manager and<br />
registered representative with a broker-dealer. In an earlier action brought by the Commission, a<br />
federal district court entered a final judgment by consent against Fleishman, permanently<br />
enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934<br />
and Rule 10b-5 thereunder. In a related criminal proceeding in federal district court, Fleishman
was convicted of one count of conspiracy to commit securities fraud and one count of conspiracy<br />
to commit wire fraud. The criminal indictment alleged that Fleishman obtained material<br />
nonpublic information from public companies and tipped that information to clients, as well as<br />
facilitated communications between employees of public companies and clients knowing that<br />
material, nonpublic information would be divulged. The Commission barred Fleishman from<br />
association and from participating in any penny stock.<br />
In re Kimelman, Release No. 66626, 2012 SEC LEXIS 889 (Mar. 20, 2012).<br />
516<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Kimelman, a former trader at a<br />
registered broker-dealer. In a related action brought by the Commission, a federal district court<br />
entered a judgment by consent against Kimelman, permanently enjoining him from future<br />
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.<br />
In a related criminal action, Kimelman was convicted of one count of conspiracy to commit<br />
securities fraud and two counts of securities fraud. The Commission’s complaint alleged that<br />
Kimelman received material non-public information concerning the acquisition of a company<br />
and used the information to trade in the company’s securities. The Commission further alleged<br />
that Kimelman knew or should have known that the information was obtained in breach of a<br />
fiduciary or other duty of trust and confidence owed to the source of the information. The<br />
Commission barred Kimelman from association and from participating in any penny stock<br />
offering.<br />
In re Kueng, Release No. 66585, 2012 SEC LEXIS 815 (Mar. 13, 2012).<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Kueng, a former sales specialist of a<br />
dually registered broker-dealer and investment adviser. In an earlier proceeding brought by the<br />
Commission, a federal district court entered a final judgment by consent against Kueng,<br />
permanently enjoining her from future violations of the antifraud provisions of the federal<br />
securities laws. The Commission’s complaint alleged that Kueng received material nonpublic<br />
information regarding an issuer, and that she tipped information regarding the issuer’s<br />
acquisition to a trader at her firm and to her clients, resulting in trading in the issuer’s securities.<br />
The Commission barred Kueng from association and prohibited her from participating in any<br />
penny stock offering.<br />
In re Mindlin, Release No. 66246, 2012 SEC LEXIS 335 (Jan. 26, 2012)<br />
Q.1.e.(i)<br />
The Commission accepted offers of settlement from Spencer Mindlin, who was affiliated<br />
with a dually-registered broker-dealer and investment adviser, and Alfred Mindlin, a certified<br />
public accountant. The Commission’s complaint alleged that Spencer Mindlin, while working<br />
on his firm’s Exchange-Traded Funds Desk (“ETF Desk”), obtained material nonpublic<br />
information concerning the plans of certain firm employees to purchase and sell large amounts of<br />
securities on behalf of the firm concerning securities underlying an exchange-traded fund. The
Commission alleged that, on four occasions, the Mindlins traded securities underlying the<br />
exchange-traded fund while in possession of this non-public information, resulting in profits in<br />
excess of $57,000. The Mindlins were ordered to cease and desist from committing or causing<br />
any violations of the anti-fraud provisions of the federal securities laws, and to jointly and<br />
severally pay disgorgement of $57,481 and prejudgment interest of $10,081. Spencer Mindlin<br />
was also barred from association and from participating in any offering of penny stock,<br />
prohibited from serving as an employee, officer, director, board member, investment adviser,<br />
depositor or principal underwriter for a registered investment company, and ordered to pay a<br />
$25,000 civil penalty.<br />
In re Plate, Release No. 66313, 2012 SEC LEXIS 1005 (Feb. 2, 2012).<br />
Q.1.e.(i)<br />
The Commission accepted an offer of settlement from Plate, a former registered<br />
representative and proprietary trader at a registered broker-dealer. In two separate civil actions<br />
brought by the Commission in federal district court, judgments by consent were entered against<br />
Plate, permanently enjoining him from future violations of Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 thereunder. In related criminal proceedings in federal<br />
district court, Plate pleaded guilty to one count of conspiracy to commit securities fraud and one<br />
count of securities fraud. The Commission’s complaints alleged that Plate, while working as a<br />
trader for the Firm, was tipped material, nonpublic information regarding two issuers, and both<br />
traded in the securities of those issuers based on such information and tipped others. The<br />
Commission barred Plate from association and from participating in an offering of penny stock.<br />
(ii)<br />
Market Manipulation<br />
Q.1.e.(ii)<br />
In re Berger, Release No. 66365, 2012 SEC LEXIS 1006 (Feb. 9, 2012).<br />
The Commission accepted an offer of settlement from Berger, a former registered<br />
representative. In an earlier action brought by the Commission, a federal district court entered a<br />
final judgment by consent against Berger, permanently enjoining him from future violations of<br />
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission’s complaint alleged that,<br />
between 2005 and 2007, Berger and others engaged in a manipulative scheme to pump and dump<br />
the securities of at least eight U.S. microcap stocks of issuers primarily headquartered in China,<br />
and facilitated unregistered sales totaling $33 million of these securities. The Commission<br />
further alleged that Berger organized the pump and dump of one of the issuers’ shares. In a<br />
separate criminal proceeding, Berger pleaded guilty to one count of conspiracy to commit wire<br />
fraud and securities fraud, and was sentenced to two years in prison and ordered to forfeit<br />
$600,000. The Commission barred Berger from association.<br />
517
Q.1.e.(ii)<br />
In re Bravo, Release No. 67805, 2012 SEC LEXIS 2854 (Sept. 7, 2012).<br />
The Commission accepted an offer of settlement from Bravo, the chief operating officer,<br />
senior vice president, and head of equity trading of a registered broker-dealer, and secretary and<br />
assistant treasurer of a registered investment adviser. In a related action brought by the<br />
Commission, a federal district court entered a judgment by consent against Bravo, permanently<br />
enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b)<br />
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1), 206(2),<br />
and 206(3) of the Investment Advisers Act of 1940. The Commission alleged that Bravo and<br />
others engaged in a fraudulent scheme involving the initial public offering of and subsequent<br />
trading in the common stock of a company. The Commission alleged that, among other<br />
fraudulent acts, Bravo and others backdated transactions such that the company’s shares were<br />
sold to one of the investment adviser’s clients at higher prices, and otherwise illegally supported<br />
the price of the stock. The Commission barred Bravo from association and from participating in<br />
any penny stock offering.<br />
Q.1.e.(ii)<br />
In re Hold Brothers On-Line Investment Services, LLC, et. al., Release No. 67924, 2012 SEC<br />
LEXIS 3029 (Sep. 25, 2012).<br />
The Commission accepted an offer of settlement from Hold Brothers On-Line Investment<br />
Services, LLC (“Hold Brothers”), a registered broker-dealer; Hold, the president and co-founder<br />
of Hold Brothers; Vallone, the former CCO and CFO of Hold Brothers; Tobias, an associated<br />
person of Hold Brothers and the managing member of Demonstrate LLC (“Demonstrate”);<br />
Demonstrate, a company organized under Nevis law and owned by Hold; and Trade Alpha<br />
Corporate, Ltd (“Trade Alpha,”), a company organized under British Virgin Island Law and<br />
owned by Hold. The Commission alleged that from at least January 2009 through September<br />
2010 overseas traders who traded through Hold Brothers engaged in a manipulative trading<br />
strategy known as “spoofing” or “layering”. These overseas traders used accounts that were set<br />
up by Demonstrate and Alpha, and that were funded by Hold. Hold Brothers controlled the<br />
overseas traders by, among other things, determining and allocating buying power, establishing<br />
stop loss limits and dictating the profit distribution between Demonstrate and Trade Alpha and<br />
the traders.<br />
The Commission alleged that Hold Brothers failed to adequately monitor and investigate<br />
the trading despite red flags, including emails describing the trading strategy as an attempt to<br />
“push the price down, and then up” and complaints from trading exchanges relating to “massive”<br />
amounts of order cancelations. The Commission alleged that Hold Brothers lacked adequate<br />
surveillance systems and reasonable procedures to prevent or detect the manipulative layering<br />
trading by the overseas traders, that Hold failed to adequately supervise Vallone, and that Hold<br />
Brothers failed to file suspicious activity reports for suspicious trading and failed to preserve and<br />
furnish order information.<br />
518
The Commission ordered Demonstrate and Trade Alpha to cease and desist from<br />
committing or causing any violations and any future violations of Section 9(a)(2) of the<br />
Securities Exchange Act of 1934 and ordered Demonstrate to pay disgorgement of $1,258,333.<br />
The Commission censured Hold Brothers, ordered it to cease and desist from committing or<br />
causing any violations and any future violations of Section 9(a)(2) and Section 17(a) of the<br />
Exchange Act and Rules 17a-4 and 17a-8 thereunder, and ordered it to pay disgorgement of<br />
$629,167 plus post-Order interest of $9,285.22 and a $1,887,500 civil penalty plus post-Order<br />
interest of $9,285.22. The Commission ordered Hold, Vallone, and Tobias to cease and desist<br />
from committing or causing any violations and any future violations of Section 9(a)(2) of the<br />
Exchange Act and ordered each to pay a $75,000 civil penalty. Vallone and Tobias were barred<br />
from association, barred from participating in any offering of penny stock, and prohibited from<br />
serving as an employee, officer, director, board member, investment adviser, depositor or<br />
principal underwriter for a registered investment company, with a right to reapply in three years.<br />
Hold was barred from association, barred from participating in any offering of penny stock, and<br />
prohibited from serving as an employee, officer, director, board member, investment adviser,<br />
depositor or principal underwriter for a registered investment company, with a right to reapply in<br />
two years and barred from association in a supervisory capacity with a right to reapply in three<br />
years.<br />
In re Hunter Adams, Release No. 67019, 2012 SEC LEXIS 1564 (May 18, 2012).<br />
519<br />
Q.1.e.(ii)<br />
An administrative law judge entered a default order against Berkun, who was associated<br />
with a registered broker-dealer in various capacities. In a parallel criminal proceeding, Berkun<br />
was convicted of conspiracy to commit securities, mail and wire fraud and conspiracy to commit<br />
money laundering. The federal court ordered him to pay restitution of $3,684,199 and to serve<br />
seventy-two months in prison. The Commission alleged that Berkun and others instructed<br />
registered representatives to use various fraudulent sales practices designed to inflate the price<br />
and market demand for a penny stock and allowed the firm to sell the stock to customers at<br />
artificially high prices. Berkun also paid registered representatives additional, undisclosed<br />
compensation in connection with sales of the stock. The administrative law judge ordered<br />
Berkun to cease and desist from future violations of Sections 5(a), 5(c), and 17(a) of the<br />
Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5<br />
thereunder, and from aiding and abetting future violations of Section 15(c) of the Exchange Act,<br />
and Rules 15c1-2 and 15c1-8 thereunder.<br />
In re Lopez, Release No. 66638, 2012 SEC LEXIS 907 (Mar. 21, 2012).<br />
Q.1.e.(ii)<br />
The Commission accepted an offer of settlement from Lopez, a former registered<br />
representative of registered broker-dealers. In an earlier action brought by the Commission, a<br />
federal district court entered a final judgment by consent against Lopez. The Commission’s<br />
complaint alleged that Lopez sold numerous microcap stocks in unregistered offerings, and that<br />
he and others manipulated the markets of those stocks, yielding substantial gains for Lopez when<br />
he sold the stocks. The district court permanently enjoined Lopez from future violations of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission barred Lopez from<br />
association.<br />
(iii)<br />
Securities Offering Violations<br />
Q.1.e.(iii)<br />
In re Puttick, Release No. 66879, 2012 SEC LEXIS 2089 (Apr. 30, 2012).<br />
The Commission accepted an offer of settlement from Puttick, president of a formerly<br />
registered broker-dealer. In a related action brought by the Commission, a federal district court<br />
entered a final judgment by consent against Puttick, permanently enjoining him from future<br />
violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission’s complaint<br />
alleged that Puttick authorized registered representatives to sell interests in three real estate funds<br />
with respect to which there were no registration statements in effect or exemptions from<br />
registration requirements. The Commission suspended Puttick from association and from<br />
participating in any offering of a penny stock for twelve months.<br />
In re Ritchie, Release No. 66684, 2012 SEC LEXIS 1016 (Mar. 29, 2012).<br />
Q.1.e.(iii)<br />
The Commission accepted an offer of settlement from Ritchie, a registered representative<br />
associated with a registered broker-dealer. In an earlier proceeding brought by the Commission,<br />
a federal district court entered a final judgment by consent against Ritchie, permanently<br />
enjoining her from future violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The<br />
Commission alleged that Ritchie facilitated a scheme to distribute unregistered securities. The<br />
Commission barred Ritchie from association with the right to reapply after three years.<br />
In re Riviello, Release No. 66374, 2012 SEC LEXIS 466 (Feb. 10, 2012).<br />
Q.1.e.(iii)<br />
The Commission accepted an offer of settlement from Riviello, the majority owner of a<br />
registered broker-dealer. In an earlier action brought by the Commission, a federal district court<br />
entered a final judgment by consent against Riviello, permanently enjoining him from future<br />
violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the<br />
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission alleged that<br />
Ritchie knowingly or recklessly facilitated a fraudulent scheme to sell unregistered shares of a<br />
security. In an earlier criminal action in federal district court, Riviello pleaded guilty to one<br />
count of conspiracy to engage in monetary transactions in property derived from unlawful<br />
activity and was sentenced to eight months in prison and ordered to pay a forfeiture of $107,000.<br />
The Commission barred Riviello from association.<br />
520
(iv)<br />
Trading Rules Violations<br />
Q.1.e.(iv)<br />
In re Wolfson, Release No. 67450, 2012 SEC LEXIS 2266 (July 17, 2012); In re Wolfson,<br />
Release No. 67451, 2012 SEC LEXIS 2265 (July 17, 2012).<br />
The Commission accepted offers of settlement from J. Wolfson, a sole proprietor of a<br />
registered broker-dealer, Golden Anchor Trading II, LLC, a registered broker-dealer, and R.<br />
Wolfson, a market maker for Golden Anchor. The Commission alleged that Respondents,<br />
purported options market makers, violated the locate and close-out requirements of Regulation<br />
SHO under the Securities Exchange Act of 1934 by improperly relying on the market maker<br />
exception to avoid locating shares before effecting short sales. The Commission also alleged<br />
that Respondents engaged in a series of sham reset transactions that employed short-term, paired<br />
stock and options positions, which enabled them to circumvent their close-out obligations.<br />
Additionally, Respondents assisted other options market makers who were executing their own<br />
sham reset transactions by acting as a counterparty to the sham transactions. As a result of these<br />
activities, Respondents caused large persistent fail to deliver positions in SHO threshold<br />
securities. The Commission ordered Respondents to cease and desist from committing or<br />
causing any current or future violations of Exchange Act Rules 203(b)(1) and 203(b)(3). The<br />
Commission also suspended J. Wolfson from association and from participating in any offering<br />
of a penny stock for twelve months, and ordered him to pay disgorgement of $8,771,432,<br />
prejudgment interest of $2,153,568, and a $2,500,000 civil penalty. The Commission suspended<br />
R. Wolfson from association and from participating in any offering of a penny stock for four<br />
months, and ordered him and Golden Anchor, on a joint and several basis, to pay disgorgement<br />
of $722,589, prejudgment interest of $177,411, and a $200,000 civil penalty. The Commission<br />
also censured Golden Anchor.<br />
f. Failure to Supervise<br />
Q.1.f<br />
In re AXA Advisors, LLC, Release No. 66206, 2012 SEC Lexis 206 (Jan. 20, 2012).<br />
The Commission accepted an offer of settlement from AXA Advisors, LLC, a registered<br />
broker-dealer, in connection with allegations that the Firm failed reasonably to supervise a<br />
former registered representative of the Firm. The registered representative fraudulently induced<br />
customers to redeem securities, including variable annuities and mutual funds, by representing<br />
that the proceeds would be invested in other securities, when he instead misappropriated the<br />
proceeds. The registered representative at issue perpetrated his fraud in part during his disability<br />
leave. The Commission alleged that the Firm failed to implement adequate procedures regarding<br />
the review of redemptions by customers of variable annuities and that the Firm failed to establish<br />
reasonable procedures to supervise registered representatives who were on leave for an extended<br />
period of time, including absences due to disability. The Commission censured the Firm and<br />
ordered it to pay a $100,000 civil penalty. The Commission considered the remedial acts<br />
undertaken by the Firm, including improved systems for supervising customer redemptions of<br />
variable annuities, in entering into the settlement. Additionally, the Firm undertook to engage an<br />
521
independent compliance consultant to improve its supervisory and compliance practices for<br />
circumstances where registered representatives are on extended leave.<br />
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Biremis, a registered broker-dealer,<br />
Beck, the President and sole director of Biremis, and Kim, the Vice President of Biremis.<br />
Through Biremis and its affiliates, Beck and Kim operated a worldwide day trading business that<br />
included 4,000 to 5,000 day traders in over 30 different nations. The Commission alleged that<br />
Respondents violated Sections 15(b)(4)(E) and 17(a) of the Securities Exchange Act of 1934 and<br />
that the Firm violated Section 17(a) of the Exchange Act and Rules 17a-8 and 17a-4(b)(4).<br />
According to the Commission, Respondents failed to supervise reasonably certain associated day<br />
traders who used the Firm’s order system to engage in layering. The Commission further alleged<br />
that Respondents failed to establish procedures that would reasonably be expected to prevent and<br />
detect the manipulative trading and that Beck and Kim failed to respond to red flags indicative of<br />
it, including warnings from other U.S. broker-dealers that certain Biremis day traders were<br />
engaging in layering. Additionally, the Commission alleged that the Firm failed to file<br />
suspicious activity reports regarding the layering and failed to retain instant messages related to<br />
its broker-dealer business. Biremis and Beck had a lengthy prior disciplinary history. The<br />
Commission ordered that the Firm cease and desist from current or future violations of Section<br />
17(a) of the Exchange Act and Rules 17a-8 and 17a-4(b)(4) thereunder and revoked its<br />
registration. The Commission barred Beck and Kim from association and from participating in<br />
any offering of a penny stock, and ordered them to each pay a $250,000 civil penalty.<br />
In re 1st Discount <strong>Broker</strong>age, Inc., Release No. 66212, 2012 SEC LEXIS 220 (Jan. 23, 2012).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from 1st Discount <strong>Broker</strong>age, Inc., a<br />
registered broker-dealer, and its executive vice-president Fisher. The Commission alleged that<br />
Respondents violated Section 15(b)(4)(E) of the Securities Exchange Act of 1934 and Section<br />
203(e) and 203(f) of the Investment Advisers Act of 1940 by failing to supervise Park, a<br />
registered representative who conducted a Ponzi scheme. According to the Commission, the<br />
Firm did not have reasonable policies and procedures in place for compliance audits or for<br />
review of the “doing business as” business accounts of its registered representatives.<br />
Additionally, Fisher, who had been delegated responsibilities over the Firm’s heightened<br />
supervision committee, failed to conduct periodic reviews of registered representatives as was<br />
required by Firm procedure. The Commission alleged that had the Firm, through Fisher,<br />
conducted such reviews, it would have detected several red flags, such as a substantial influx of<br />
money from its customers into Park’s business account, inadequate or missing signage, a<br />
customer complaint of unauthorized trading, and declining commissions. The inadequate<br />
signage persisted for years, indicating a desire by Park to conceal his affiliation with the Firm<br />
from any of his Ponzi scheme victims who might complain. The Commission censured the Firm<br />
and ordered it to pay a $40,000 civil penalty. The Commission suspended Fisher from<br />
522
association in a supervisory capacity with the right to reapply after nine months and ordered him<br />
to pay a $10,000 civil penalty.<br />
In re JP Turner & Co., LLC, Release No. 67808, 2012 SEC LEXIS 2852 (Sep. 10, 2012).<br />
Q.1.f<br />
The Commission accepted offers of settlement from JP Turner & Company, LLC, a<br />
registered broker-dealer, and Mello, a co-founder, former president, and substantial stakeholder<br />
of the Firm. The Commission alleged that Respondents failed reasonably to supervise three<br />
registered representatives who churned the accounts of seven customers. The Commission<br />
further alleged that Respondents failed to establish procedures and systems reasonably designed<br />
to prevent and detect the churning. Although the Firm had a monitoring system to identify<br />
actively traded accounts based primarily on “return on investment” levels, the system imposed<br />
few requirements on, and provided no meaningful guidance to, supervisors reviewing these<br />
accounts. For instance, according to the Commission, the Firm’s system did not require contact<br />
with the customer even if the account was repeatedly flagged as actively traded. The<br />
Commission censured the Firm and ordered it to pay disgorgement of $200,000 plus<br />
prejudgment interest of $16,051 and a $200,000 penalty. The Firm also undertook to retain an<br />
independent consultant to review its written supervisory policies and procedures designed to<br />
prevent and detect churning. The Commission ordered Mello to pay a $45,000 penalty and<br />
suspended him from association in a supervisory capacity for five months.<br />
In re Rizzo, Release No. 67479, 2012 SEC LEXIS 2299 (July 20, 2012).<br />
Q.1.f<br />
The Commission accepted an offer of settlement from Rizzo, co-founder of a former<br />
registered investment adviser, and Hornbogen, its chief compliance officer. The Commission’s<br />
complaint alleged that Rizzo and Hornbogen failed reasonably to supervise Salutric, a registered<br />
representative and investment adviser who misappropriated $7 million from fifteen clients.<br />
Specifically, the Commission’s complaint alleged that Rizzo and Hornbogen failed to investigate<br />
numerous red flags such as forged client signatures and suspicious patterns of successive large<br />
withdrawals and deposits in client accounts, and that they ignored the advice of the firm’s<br />
attorney that they contact all clients in whose accounts the suspicious transactions were made.<br />
The Commission barred Rizzo and Hornbogen from association in a supervisory capacity,<br />
ordered Rizzo to pay $35,079 in disgorgement, $7,731 in prejudgment interest, and a $130,000<br />
civil penalty, and ordered Hornbogen to pay $15,592 in disgorgement, $3,467 in prejudgment<br />
interest and a $25,000 civil penalty.<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 2012.<br />
523
h. Procedural Issues<br />
(i)<br />
Jurisdiction and Time Bars<br />
No cases decided in 2012.<br />
(ii)<br />
Standard of Review<br />
. No cases decided in 2012.<br />
(iii)<br />
Due Process<br />
. No cases decided in 2012.<br />
(iv)<br />
Prior Disciplinary Histories<br />
.. No cases decided in 2012.<br />
(v)<br />
Selective Prosecution<br />
. No cases decided in 2012.<br />
(vi)<br />
Sanctions<br />
Q.1.h(vi)<br />
In re Morgan, Release No. 67974, 2012 SEC LEXIS 3138 (Oct. 3, 2012).<br />
An administrative law judge entered a default order against Morgan, an unregistered<br />
broker-dealer and fund manager with an unregistered firm, and Woodcock, an unregistered<br />
broker-dealer. In related criminal proceedings, Morgan pleaded guilty to defraud the United<br />
States and money laundering. The federal district court entered a final judgment against him and<br />
sentenced him to 121 months in prison. It further ordered him to pay total restitution, jointly and<br />
severally with others, of $17,360,850. In a related civil action brought by the Commission, a<br />
federal district court entered a final judgment against Morgan, permanently enjoining him from<br />
future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Sections 10(b)<br />
and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In a separate,<br />
related civil action brought by the Commission, a federal district court entered a final judgment<br />
by default against Woodlock, and ordered him to pay disgorgement of $7,758,346 plus<br />
prejudgment interest of $1,120,599 and a $130,000 penalty. The Commission had alleged that<br />
Morgan and Woodlock participated in a fraudulent scheme by offering and selling investments in<br />
a fictitious prime bank instrument trading program. The ALJ determined that collateral bar<br />
sanctions added to the Exchange Act by the Dodd-Frank Wall Street Reform and Consumer<br />
Protection Act, which authorized the Commission to suspend or bar individuals from association<br />
with an investment advisor, broker, dealer, municipal securities dealer, municipal advisor,<br />
transfer agent, or NRSRO without showing a specific nexus between the misconduct and the<br />
branch of the securities industry as to which the bar was sought, could be applied retroactively in<br />
524
all cases except as to the municipal advisor bar, because no such bar or similar provision had<br />
previously existed as to the municipal advisor registration.<br />
i. <strong>Broker</strong>/<strong>Dealer</strong> Registration Violations<br />
Q.1.i<br />
In re Alchemy Ventures, Inc., Release No. 67206, 2012 SEC LEXIS 1866 (June 15, 2012).<br />
The Commission accepted an offer of settlement from Alchemy Ventures, Inc., the<br />
unregistered parent to a registered broker-dealer, its president, Rogers, and its vice president,<br />
Hotovec, both of whom were also associated with the registered subsidiary. The Commission<br />
alleged that Alchemy received sponsored market access through a registered broker-dealer and<br />
passed that access to traders through a Canadian entity that solicited traders through its website<br />
and referred them to Alchemy. As part of this arrangement, Alchemy participated in the ordertaking<br />
and order-routing process, extended credit to traders in connection with securities<br />
transactions, and handled customer funds and securities. Alchemy received transaction-based<br />
compensation from, and split trader-generated profits with, the Canadian entity. The<br />
Commission further alleged that a Latvian trader who received sponsored market access used<br />
Alchemy’s account to further an illegal trading scheme involving account intrusion. The<br />
Commission ordered Alchemy to pay disgorgement of $28,503 plus prejudgment interest of<br />
$2,515 and a $75,000 penalty, and ordered Rogers and Hotovec to each pay a $35,000 penalty.<br />
The Commission further censured Respondents and ordered them to cease and desist from future<br />
violations of Section 15(a) of the Securities Exchange Act of 1934.<br />
In re Ambit Capital Pvt. Ltd., Release No. 68295, 2012 SEC LEXIS 3657 (Nov. 27, 2012)<br />
Q.1.i<br />
The Commission accepted an offer of settlement from Ambit Capital Pvt. Ltd., a brokerdealer<br />
registered with the Securities and Exchange Board of India and based in Mumbai, India.<br />
The Commission alleged that from at least January 2011 through at least October 2011, the Firm<br />
solicited and provided brokerage services to U.S. institutional investors without being registered<br />
as a broker-dealer as required by Section 15(a) of the Securities Exchange Act of 1934 or<br />
meeting the requirements for an exemption. Ambit systematically solicited U.S. institutional<br />
investors for the purposes of providing brokerage services through multiple visits to the United<br />
States to meet with investors, sending hundreds of research reports to investors and following up<br />
on those reports, and repeated telephone calls to at least one investor. The Commission censured<br />
the Firm and ordered it to pay disgorgement of $30,000 plus prejudgment interest of $910. The<br />
Commission did not impose a penalty based on the Firm’s cooperation in a Commission<br />
investigation and/or related enforcement action.<br />
525
Q.1.i<br />
In re Edelweiss Fin. Serv. Ltd., Release No. 68298, 2012 SEC LEXIS 3654 (Nov. 27, 2012)<br />
The Commission accepted an offer of settlement from Edelweiss Financial Services<br />
Limited, a financial services holding company registered with the Securities and Exchange<br />
Board of India and based in Mumbai, India. The Commission alleged that from at least 2007<br />
until July 2011, the Firm solicited and provided brokerage services to U.S. institutional investors<br />
without being registered as a broker-dealer as required by Section 15(a) of the Securities<br />
Exchange Act of 1934 or meeting the requirements for an exemption. Among other things,<br />
Edelweiss bought and sold securities of Indian issuers on Indian stock exchanges on behalf of<br />
U.S. investors, receiving transaction-based compensation of approximately $9.4 million. The<br />
Commission censured the Firm and ordered it to pay disgorgement of $540,000 plus<br />
prejudgment interest of $28,347. The Commission did not impose a penalty based on the Firm’s<br />
cooperation in a Commission investigation and/or related enforcement action.<br />
Q.1.i<br />
In re JM Fin. Institutional Sec. Private Ltd., Release No. 68297, 2012 SEC LEXIS 3655 (Nov.<br />
27, 2012)<br />
The Commission accepted an offer of settlement from JM Financial Institutional Securities<br />
Private Limited, a broker registered with the Securities and Exchange Board of India and based<br />
in Mumbai, India. The Commission alleged that from at least October 2007 until February 2012,<br />
the Firm solicited and provided brokerage services to U.S. institutional investors without being<br />
registered as a broker-dealer as required by Section 15(a) of the Securities Exchange Act of 1934<br />
or meeting the requirements for an exemption. Among other things, JM Financial bought and<br />
sold securities of Indian issuers on Indian stock exchanges on behalf of at least 91 U.S. investors,<br />
receiving transaction-based compensation of approximately $2.3 million. The Commission<br />
censured the Firm and ordered it to pay disgorgement of $425,000 plus prejudgment interest of<br />
$18,545. The Commission did not impose a penalty based on the Firm’s cooperation in a<br />
Commission investigation and/or related enforcement action.<br />
In re Motilal Oswal Sec. Ltd., Release No. 68296, 2012 SEC LEXIS 3656 (Nov. 27, 2012).<br />
Q.1.i<br />
The Commission accepted an offer of settlement from Motilal Oswal Securities Limited, a<br />
broker-dealer registered with the Securities and Exchange Board of India and based in Mumbai,<br />
India. The Commission alleged that from at least 2007 until April 2011, the Firm solicited and<br />
provided brokerage services to U.S. institutional investors without being registered as a brokerdealer<br />
as required by Section 15(a) of the Securities Exchange Act of 1934 or meeting the<br />
requirements for an exemption. Among other things, Motilal sponsored an annual conference in<br />
the U.S. to which it invited U.S. investors and representatives of Indian issuers, and also bought<br />
and sold securities of Indian issuers on Indian stock exchanges for U.S. investors in exchange for<br />
commissions and soft-dollar payments. The Commission censured the Firm and ordered it to<br />
pay disgorgement of $780,000 plus prejudgment interest of $41,594. The Commission did not<br />
526
impose a penalty based on the Firm’s cooperation in a Commission investigation and/or related<br />
enforcement action.<br />
In re Zhou, Release No. 67531, 2012 SEC LEXIS 2384 (July 30, 2012).<br />
Q.1.i<br />
The Commission accepted an offer of settlement from Zhou, a registered representative<br />
and president of a former registered broker-dealer. The Commission alleged that Zhou’s<br />
registered broker-dealer acted as a placement agent for a Chinese reverse merger company (the<br />
“Company”), and that Zhou facilitated the illicit payment of transaction-based compensation to<br />
unregistered brokers in connection with two private placement transactions for the Company.<br />
The Commission further alleged that Zhou facilitated the unregistered distribution and sale of<br />
restricted securities as payment to the unregistered brokers, and that Zhou traded in the securities<br />
of the Company on the basis of material non-public information. The Commission ordered Zhou<br />
to pay disgorgement of $20,900 plus prejudgment interest of $2,463 and a $50,000 penalty. The<br />
Commission further ordered Zhou to cease and desist from future violations of Sections 5(a),<br />
5(c), and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities<br />
Exchange Act of 1934 and Rule 10b-5 thereunder, barred him from association and from<br />
participating in an offering of penny stock, and prohibited him from employment with an<br />
investment adviser or investment company, with the right to reapply after three years.<br />
j. Miscellaneous<br />
Q.1.j<br />
In re eBX, LLC, Release 67969, 2012 SEC LEXIS 3150 (Oct. 3, 2012).<br />
The Commission accepted an offer of settlement from eBX, LLC, a registered broker<br />
dealer. The Commission alleged that the Firm violated Rules 301(b)(2) and 301(b)(10) of<br />
Regulation ATS. According to the Commission, the Firm ran an alternative trading system that<br />
outsourced its operation to a service provider. From at least 2008 through early 2011, the<br />
alternative trading system failed to protect the confidential trading information of its subscribers<br />
and failed to disclose to all its subscribers the uses that it allowed the service provider to make of<br />
their confidential trading information, including use of that information to benefit a separate<br />
order routing business that the service provider had. The ATS also failed to disclose these<br />
matters in its Form ATS. The Commission censured the Firm and ordered it to cease and desist<br />
from committing or causing current or future violations of Rules 301(b)(2) and 301(b)(10) of<br />
Regulation ATS and to pay a $800,000 civil penalty.<br />
In re Goldman, Sachs & Co., Release No. 67934, 2012 SEC LEXIS 3086 (Sept. 27, 2012).<br />
527<br />
Q.1.j<br />
The Commission accepted an offer of settlement from Goldman, Sachs & Co., a registered<br />
broker-dealer and municipal securities dealer. During the relevant time, the Firm employed<br />
Morrison as a municipal finance professional and vice president of investment banking in one of<br />
the Firm’s Massachusetts offices. The Commission alleged that Morrison made contributions to
the gubernatorial campaign of Cahill, then the treasurer of Massachusetts. In particular, the<br />
Commission alleged that Morrison assisted Cahill in various campaign functions, such as<br />
fundraising, reviewing the campaign budget, and providing legal advice, at times from his office<br />
using the Firm’s email address and telephone. Morrison also gave a friend $400 in cash and<br />
asked the friend to write a check to Cahill’s campaign in the friend’s name. The Commission<br />
alleged that Morrison’s actions constituted in-kind and indirect cash contributions to a political<br />
campaign attributable to the Firm, triggering a two-year ban on municipal securities business<br />
with issuers. Despite the ban, within two years after the contributions, the Firm participated as a<br />
senior manager, co-senior manager, or co-manager for a total of thirty negotiated underwriters by<br />
Massachusetts issuers. The Firm did not report these contributions, nor did it detect Morrison’s<br />
activities for a two-year period. The Commission censured the Firm and directed it to cease and<br />
desist from future violations of Section 15B(c)(1) of the Securities Exchange Act of 1934,<br />
MSRB Rules G-8, G-9, G-17, G-27, G-37(b) and G-37(e). The Commission further ordered the<br />
Firm to disgorge $7,558,942 in profits and pay a $3,750,000 penalty.<br />
In re MidSouth Capital, Inc., Release No. 66828, 2012 SEC LEXIS 1254 (Apr. 18, 2012).<br />
Q.1.j<br />
The Commission accepted an offer of settlement from MidSouth Capital, Inc., a registered<br />
broker-dealer, and Hill, the Firm’s largest shareholder, CEO, and Financial and Operations<br />
Principal. The Commission alleged that on seven occasions between December 2008 and<br />
October 2011, the Firm effected transactions in securities while failing to maintain sufficient net<br />
capital. During certain of these times, FINRA and/or the Commission warned the Firm that<br />
continuing to effect transactions in securities would violate Section 15(c)(3) of the Securities<br />
Exchange Act of 1934 and Rule 15c3-1 thereunder. Despite these warnings, the Firm did not<br />
suspend operations. FINRA sent three of the deficiency notifications directly to Hill, who had<br />
primary responsibility for addressing the Firm’s net capital obligations and was aware of the<br />
Firm’s past violations. The Firm also failed to file on a timely basis the required Rule 17a-11<br />
notifications with FINRA and the Commission regarding its net capital deficiencies. One<br />
deficiency arose because the Firm had improperly included “an aged unsecured receivable” from<br />
an affiliated entity in its net capital. In so doing, the Firm also failed to maintain accurate books<br />
and records. The Commission censured the Firm and ordered it to cease and desist from<br />
violating Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-11, and 17a-<br />
3 thereunder. The Commission ordered Hill to cease and desist from willfully aiding and<br />
abetting violations of the same provisions, suspended him from association for six months,<br />
prohibited him from acting as an employee, officer, or member of an advisory board, investment<br />
adviser or depositor of, or principal underwriter for, a registered investment company for six<br />
months, and ordered him to pay a $15,000 civil penalty.<br />
2. SEC Review of SRO Proceedings<br />
a. Sales Practice Violations<br />
No cases decided in 2012.<br />
528
. Unfair/Fraudulent Markups or Commissions<br />
No cases decided in 2012.<br />
c. Other Fraudulent Practices<br />
(i)<br />
Misrepresentation<br />
Q.2.c(i)<br />
In re Braff, Release No. 66467, 2012 SEC LEXIS 620 (Feb. 24, 2012).<br />
The Commission reviewed an appeal from a FINRA disciplinary decision by Braff, a<br />
former general securities representative, general securities principal, and options principal of<br />
various FINRA member firms. A FINRA hearing panel had found that Braff violated NASD<br />
Rule 3050(c) and NASD Rule 2110 by failing to provide written notice of his outside brokerage<br />
accounts to his associated firms and failing to provide written notice of his associated person<br />
status to the firms holding the outside brokerage accounts. The panel further found that he<br />
violated Rule 2110 by falsely stating on certain employment documents that he had no outside<br />
brokerage accounts. The hearing panel imposed a $15,000 fine and suspended Braff in all<br />
capacities for one year. Braff appealed to the National Adjudicatory Council (“NAC”), which<br />
affirmed the hearing panel’s findings of violation but increased the sanctions to a $25,000 fine<br />
and two-year suspension. Braff appealed, claiming that the sanctions imposed by the NAC were<br />
excessively harsh. The Commission sustained the NAC’s findings and sanctions, finding that<br />
Braff’s misconduct was egregious and that the sanctions were neither excessive nor oppressive.<br />
In re Mullins, Release No. 66373, 2011 SEC LEXIS 464 (Feb. 10, 2012).<br />
Q. 2.c(i)<br />
The Commission reviewed an appeal by J. Mullins and K. Mullins, former general<br />
securities representatives associated with a FINRA member firm, from a FINRA disciplinary<br />
action. FINRA had found that J. Mullins violated NASD Rule 2110 by converting customer<br />
property and breaching fiduciary obligations and NASD Rules 2330(a) and 2110 by misusing<br />
customer funds, and that both J. Mullins and K. Mullins violated NASD Rules 3110 and 2110 by<br />
making material misstatements to their firm on annual compliance questionnaires and NASD<br />
Rules 2370 and 2110 by borrowing funds from a customer without firm approval. The findings<br />
stemmed from Respondents’ handling of funds held by a charitable foundation. The Mullins also<br />
failed to disclose to their firm that they held positions with the Foundation as Foundation vice<br />
president, in the case of J. Mullins, and as foundation Secretary and Treasurer, in the case of K.<br />
Mullins. J. Mullins misused Foundation funds for his own benefit. Respondents also had a<br />
personal relationship with the founder of the foundation that included assisting her with her<br />
personal needs such as grocery shopping and running errands. FINRA barred J. Mullins in all<br />
capacities. It suspended K. Mullins in all capacities for six months, fined her $15,000, and<br />
ordered her to requalify as a sanction for the material misstatements. It further suspended her for<br />
an additional three months, fined her $5,000 and ordered her to requalify as a sanction for<br />
529
orrowing customer funds. The National Adjudicatory Council affirmed the hearing panel’s<br />
findings of violation and the sanctions.<br />
The Commission sustained the findings of violation in part, and vacated FINRA’s<br />
findings that (a) J. Mullins violated NASD Rule 2330 by misusing customer funds, (b) J. Mullins<br />
and K. Mullins violated NASD Rule 3110 by failing to disclose information to their firm, and (c)<br />
J. Mullins and K. Mullins violated NASD Rules 3110 and 2110 by failing to disclose their status<br />
as trustees of the foundation or its account. The Commission sustained the bar against J. Mullins<br />
but modified the sanctions against K. Mullins. In particular, the Commission vacated K.<br />
Mullins’ six month suspension, $15,000 fine and order to requalify sanction and ordered instead<br />
a four month suspension, $10,000 fine and requalify order for failing to disclose information to<br />
her firm. The Commission identified as mitigating factors that K. Mullins took responsibility for<br />
her misstatements, appeared sincerely remorseful, and cooperated fully with FINRA’s<br />
investigation. It further noted that the record indicated that branch personnel were generally<br />
aware that K. Mullins was close to the founder of the foundation and helped her with the<br />
foundation, lending some support to her argument that she was not engaged in a course of<br />
conduct designed to deceive her firm.<br />
(ii)<br />
Falsification of Documents<br />
. No cases decided in 2012.<br />
(iii)<br />
Failure to Maintain Accurate Books and Records<br />
No cases decided in 2012.<br />
(iv)<br />
Selling Away<br />
No cases decided in 2012.<br />
d. Financial Responsibility Violations<br />
(i)<br />
Segregation of Customer Funds<br />
No cases decided in 2012.<br />
(ii)<br />
Regulation T Violations<br />
No cases decided in 2012.<br />
e. Trading Practice Violations/Market Manipulation<br />
No cases decided in 2012.<br />
530
f. Failure to Supervise<br />
Q.2.f<br />
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012).<br />
The Commission sustained FINRA’s imposition of sanctions against a former FINRA<br />
member firm and its president and CEO. FINRA had found that the Firm violated Section 5 of<br />
the Securities Act of 1933 and NASD Conduct Rule 2110 by engaging in the sale of unregistered<br />
securities, and NASD Conduct Rules 3010 and 2110 by failing to maintain adequate written<br />
supervisory procedures and to supervise reasonably registered representatives engaging in<br />
unregistered sales. FINRA found that the Firm’s system of supervision consisted solely of<br />
relying on transfer agents and clearing firms to ensure that its unregistered sales complied with<br />
securities laws, and that the minimal written procedures the Firm had lacked meaningful<br />
guidance setting forth “reasonable inquiry” procedures for registered representatives to follow<br />
when customers sought to sell unregistered stock. FINRA fined the Firm $80,000, fined its<br />
president and CEO $50,000 and suspended him in all principal capacities for two years, and<br />
assessed costs. The Commission sustained FINRA’s ruling, noting that the Applicants’ prior<br />
AWC involving similar violations of Section 5 was an aggravating factor.<br />
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).<br />
Q.2.f<br />
The Commission sustained the decision and penalties imposed by FINRA’s National<br />
Adjudicatory Council against World Trade Financial Corp., a registered broker-dealer, Michel,<br />
its president, Adams, its trade desk supervisor, and Brickell, its registered representative. The<br />
NAC had upheld a FINRA hearing panel’s findings that the Firm had sold, on behalf of three<br />
customers, shares of an unregistered offering in the over-the-counter market in the absence of a<br />
valid registration exemption. The hearing panel found that the Firm did not conduct adequate<br />
due diligence regarding the registration status of the securities, and instead improperly relied on<br />
the transfer agent’s erroneous conclusion that the securities qualified for an exemption from<br />
registration under Rule 144 of the Securities Act of 1933. The firm did not have written<br />
procedures addressing the circumstances under which its registered representatives should<br />
initiate an inquiry into the registration status of shares its customers propose to sell, and Adams,<br />
who supervised Brickell, did not require Brickell to make any inquiry as to the stocks at issue<br />
here even though he know that two firm customers were selling large blocks of recently issued<br />
stock and that both customers worked for a stock promoter. The hearing panel suspended Michel<br />
forty-five days, and suspended both Adams and Brickell for thirty days. It further imposed fines<br />
of $45,000 against the Firm (for the registration and related supervisory violations), $30,000<br />
against Michel (for supervisory violations), $20,000 against Adams (for supervisory violations),<br />
and $15,000 against Brickell (for the registration violations). The NAC upheld the sanctions, as<br />
did the Commission, which noted that Respondents’ actions caused 2.3 million shares of an<br />
unknown stock to be sold to investors without registration or exemption, and that the sanctions<br />
imposed serve both general and specific deterrence.<br />
531
g. Registration Violations<br />
Q.2.g<br />
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).<br />
The Commission sustained the decision and penalties imposed by FINRA’s National<br />
Adjudicatory Council against World Trade Financial Corp., a registered broker-dealer, Michel,<br />
its president, Adams, its trade desk supervisor, and Brickell, its registered representative. The<br />
NAC had upheld a FINRA hearing panel’s findings that the Firm had sold, on behalf of three<br />
customers, shares of an unregistered offering in the over-the-counter market in the absence of a<br />
valid registration exemption. The hearing panel found that the Firm did not conduct adequate<br />
due diligence regarding the registration status of the securities, and instead improperly relied on<br />
the transfer agent’s erroneous conclusion that the securities qualified for an exemption from<br />
registration under Rule 144 of the Securities Act of 1933. The hearing panel suspended Michel<br />
forty-five days, and suspended both Adams and Brickell for thirty days. It further imposed fines<br />
of $45,000 against the Firm (for the registration and related supervisory violations), $30,000<br />
against Michel (for supervisory violations), $20,000 against Adams (for supervisory violations),<br />
and $15,000 against Brickell (for the registration violations). The NAC upheld the sanctions, as<br />
did the Commission, which noted that Respondents’ actions caused 2.3 million shares of an<br />
unknown stock to be sold to investors without registration or exemption, and that the sanctions<br />
imposed serve both general and specific deterrence.<br />
h. Failure to Cooperate with FINRA Investigation/Failure to Comply<br />
with FINRA Requests for Financial Information<br />
No cases decided in 2012.<br />
i. Failure to Honor Arbitration Award/Failure to Pay Fines and<br />
Costs/Failure to Comply with Sanctions Imposed<br />
No cases decided in 2012.<br />
j. Procedural Issues<br />
(i)<br />
Evidence<br />
No cases decided in 2012.<br />
(ii)<br />
Due Process<br />
No cases decided in 2012.<br />
(iii)<br />
Jurisdiction and Time Bars<br />
No cases decided in 2012.<br />
532
(iv)<br />
Discovery<br />
No cases decided in 2012.<br />
(v)<br />
Sanctions<br />
No cases decided in 2012.<br />
(vi)<br />
Right to Counsel<br />
No cases decided in 2012.<br />
k. Statutory Disqualification<br />
Q.2.k<br />
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012).<br />
The Commission considered an appeal by Asensio & Company, Inc., a Delaware<br />
corporation, of FINRA’s denial of the Firm’s application for FINRA membership. The Firm’s<br />
only representative, who was also the Firm’s chairman, chief executive officer, president, chief<br />
financial officer, chief compliance officer, executive representative, general securities principal,<br />
financial and operations principal and anti-money-laundering officer, was subject to a statutory<br />
disqualification as a result of a 2006 FINRA decision barring him from association. FINRA<br />
denied the new membership application because it found that the Firm failed to demonstrate it<br />
was capable of complying with federal securities laws and FINRA rules, that it had an adequate<br />
supervisory system, or that it and its associated persons had all required licenses and<br />
registrations. The Commission dismissed the review proceeding, finding that the specific<br />
grounds upon which FINRA based its decision existed in fact, and that FINRA’s determination<br />
to deny the Firm’s application was in accordance with FINRA Rules.<br />
In re Bowen, Release No. 68266, 2012 SEC LEXIS 3604 (Nov. 19, 2012).<br />
Q.2.k<br />
The Commission considered an application for relief from a statutory disqualification<br />
brought by FINRA and a member firm on behalf of Bowen, a former registered representative of<br />
a registered broker-dealer. The SEC had barred Bowen from association, with the right to<br />
reapply after two years, for misrepresenting and omitting material information in his<br />
communications with clients to induce them to purchase CMOs. It had also ordered him to pay<br />
disgorgement of $33,664 plus prejudgment interest of $31,258 and a $5,000 civil penalty. The<br />
Commission approved the application in reliance on the representations made by FINRA and the<br />
firm concerning the proposed supervision of Bowen and the scope of his proposed employment,<br />
which was to be limited to transacting business with institutional accounts and other FINRA<br />
member firms.<br />
533
Q.2.k.<br />
In re McCaffrey, Release No. 66844, 2012 SEC LEXIS 1279 (Apr. 23, 2012).<br />
The Commission approved FINRA’s application on behalf of a member firm for relief from<br />
a statutory disqualification against McCaffrey. McCaffrey had been barred from association in<br />
2005 with the right to reapply for association in a supervisory capacity after fifteen months. The<br />
bar stemmed from the failure to supervise an employee who published fraudulent research<br />
reports and established unrealistic price targets on several companies. The Firm sought approval<br />
to hire McCaffrey as head of an equities division and supervisor of five direct reports. In support<br />
of the application, FINRA and the Firm made various representations concerning a plan for the<br />
heightened supervision of McCaffrey, if reinstated. The Commission approved the application<br />
based on FINRA’s and the Firm’s representations.<br />
l. Reporting Violations<br />
In re Tucker, Release No. 68210, 2012 SEC LEXIS 3496 (Nov. 9, 2012).<br />
534<br />
Q.2.l<br />
The Commission sustained FINRA’s sanctions against Tucker, a former registered<br />
representative of a FINRA member firm. FINRA had found that over a period of seven years,<br />
Tucker failed to disclose on his Forms U4 that he completed for eleven member firms three<br />
judgments, two bankruptcies, and federal and state tax liens. FINRA determined that Tucker<br />
willfully violated NASD IM-1000-1 and Conduct Rule 2110, suspended him from associating<br />
with any member firm for two years and required that, at the conclusion of his suspension he requalify<br />
as a corporate securities limited representative. In addition, FINRA found that because<br />
Tucker’s violations were willful and material, it concluded that Tucker was statutorily<br />
disqualified. The Commission found in relevant part that Tucker’s failures to disclose the<br />
judgments, bankruptcies and liens were egregious, and that the sanctions were consistent with<br />
FINRA’s Sanction Guidelines.<br />
m. Net Capital Violations<br />
No cases decided in 2012.<br />
n. Miscellaneous<br />
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012).<br />
Q.2.n<br />
The Commission considered an appeal by Asensio & Company, Inc., a Delaware<br />
corporation, of FINRA’s denial of the Firm’s application for FINRA membership. The Firm’s<br />
only representative, who was also the Firm’s chairman, chief executive officer, president, chief<br />
financial officer, chief compliance officer, executive representative, general securities principal,<br />
financial and operations principal and anti-money-laundering officer, was subject to a statutory
disqualification as a result of a 2006 FINRA decision barring him from association. FINRA<br />
denied the new membership application because it found that the Firm failed to demonstrate it<br />
was capable of complying with federal securities laws and FINRA rules, that it had an adequate<br />
supervisory system, or that it and its associated persons had all required licenses and<br />
registrations. The Commission dismissed the review proceeding, finding that the specific<br />
grounds upon which FINRA based its decision existed in fact, and that FINRA’s determination<br />
to deny the Firm’s application was in accordance with FINRA Rules.<br />
In re Murphy, Release No. 66433, 2012 SEC LEXIS 564 (Feb. 21, 2012).<br />
Q.2.n<br />
The Commission granted FINRA’s motion to dismiss an appeal by Murphy, a former<br />
registered general securities representative and principal with a FINRA member firm, of<br />
FINRA’s disciplinary sanctions. Murphy failed to timely file a brief in support of his application<br />
for review, and failed to respond to FINRA’s motion. The Commission determined that Murphy<br />
had abandoned his appeal and dismissed him from the proceedings.<br />
R. <strong>Broker</strong>-<strong>Dealer</strong> Employment <strong>Litigation</strong> and Arbitration<br />
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Schwarzwaeler, 2012 WL 3264361 (3d Cir. Dec.<br />
26, 2012).<br />
A financial advisor challenged an arbitration award requiring her to repay her former<br />
employer, a broker-dealer, pursuant to the terms of a promissory note executed at the outset of<br />
her employment. The arbitration panel had determined the advisor was not entitled to offset the<br />
amounts owed on the promissory note with additional compensation she claimed she was owed,<br />
because the advisor released any such claim to additional compensation by virtue of her<br />
settlement of a prior action against the broker-dealer pursuant to the Employee Retirement<br />
Income Security Act, 29 U.S.C. §§ 1001, et. seq. (“ERISA”). The advisor argued in the district<br />
court that the ERISA settlement preserved her right to assert defenses in any action for the<br />
unpaid balance of the promissory note, including a claim for potential setoff. The district court<br />
agreed with the advisor, denied the employer’s application to confirm the arbitration award, and<br />
vacated the award. On appeal, the U.S. Court of Appeals for the Third Circuit reversed the<br />
district court’s decision. The Third Circuit Court concluded that the arbitration panel’s decision<br />
could be rationally derived from the parties’ agreements and submissions to the panel, and<br />
therefore should not be disturbed.<br />
R.<br />
535
R.<br />
Wachovia Securities, LLC .v Brand, 671 F.3d 472 (4th Cir. 2012).<br />
A broker-dealer commenced a FINRA arbitration against former employees for allegedly<br />
conspiring with a competitor and misappropriating confidential and proprietary information. On<br />
the final day of the hearing, the employees moved to recover their attorneys’ fees pursuant to the<br />
South Carolina statute, the Frivolous Civil Proceeding Act (“FCPA”). Notwithstanding the<br />
broker-dealer’s objection that this statute required thirty days’ notice and a separate hearing, the<br />
panel in its award against the broker-dealer awarded $1,111,553.85 for attorneys’ fees under the<br />
FCPA. The broker-dealer moved in the district court to vacate the award, arguing that the panel<br />
manifestly disregarded the law and was guilty of misconduct by failing to comply with the notice<br />
and hearing provisions of the FCPA. The district court disagreed and found that the panel had a<br />
sufficient record to decide the issue of attorneys’ fees and that nothing in the record suggested<br />
misconduct by the panel. On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed,<br />
explaining that arbitrators do not need to follow state procedural requirements, even when<br />
relying upon state substantive law, because arbitrators are given broad discretion on procedure.<br />
Further, the court found no support for the argument that the panel manifestly disregarded the<br />
law, because the panel was not required to apply state procedural law.<br />
Waterford Inv. Servs., Inc. v. Bosco, 682 F.3d 348 (4th Cir. 2012).<br />
A broker-dealer sought to enjoin a customer arbitration commenced against a brokerdealer<br />
and a financial advisor concerning an alleged Ponzi scheme that occurred when the<br />
financial advisor was associated with a different broker-dealer. The broker-dealer alleged that it<br />
should not be forced to arbitrate claims arising from the financial advisor’s conduct while he was<br />
employed with another firm. On cross-motions for summary judgment, the district court denied<br />
the requested injunction, holding that the broker-dealer’s extensive connections with the<br />
financial advisor’s prior firm established that the financial advisor was an “associated person” of<br />
the broker-dealer at the time the alleged Ponzi scheme occurred. Both broker-dealers had<br />
common directors, officers and employees, shared the same office, used the same trading desk,<br />
shared overhead costs, and had the same majority owner. The U.S. Court of Appeals for the<br />
Fourth Circuit affirmed the district court’s decision. Because the financial advisor’s superiors at<br />
his former firm were also officers of the broker-dealer, the Court held that the broker-dealer<br />
could have exercised control, whether direct or indirect, over the financial advisor at the relevant<br />
time. As such, the financial advisor was an associated person of the broker-dealer, and the<br />
broker-dealer could be compelled to arbitrate the investors’ claims under FINRA rules.<br />
Hudson v. Merrill Lynch Int’l Fin. Inc., 2012 WL 5877960 (E.D. La. Nov. 20, 2012).<br />
In an arbitration involving a broker-dealer and its employee, a financial advisor, the panel<br />
granted the financial advisor compensation he claimed was he owed. Both parties sought to<br />
R.<br />
R.<br />
536
enforce the award in the district court, but disagreed as to whether the required payment to the<br />
financial advisor constituted wages for tax purposes. The district court held that, because the<br />
arbitration award labeled the payment as “damages,” the payment should not be considered<br />
wages. The court ordered the broker-dealer to pay the award in a lump sum and the employee<br />
was responsible for paying any applicable taxes on the awarded amount.<br />
Merrill Lynch, Pierce, Fenner & Smith v. Smolcheck, 2012 WL 4056092 (S.D. Fla. Sept. 17,<br />
2012).<br />
Two financial advisors sought to confirm an arbitration award for $10,250,000 against<br />
their former employer, a broker-dealer. The broker-dealer, in turn, moved to vacate. First, the<br />
broker-dealer argued that the chairperson was impartial and failed to disclose that her husband<br />
had a law practice specializing in suits against financial services companies, had obtained a large<br />
award against the broker-dealer, and had made disparaging comments about the broker-dealer to<br />
the press. The district court concluded, however, that the broker-dealer knew these facts at the<br />
time of the arbitration, notwithstanding their non-disclosure by the chairperson, because printouts<br />
from the website of the law practice pre-dating the arbitration, and a copy of the prior award<br />
against the broker-dealer were found in the files of the broker-dealer’s attorney. Despite this<br />
knowledge, the broker-dealer did not challenge the chairperson for bias prior to the arbitration.<br />
Although the court did not find that these facts constituted a waiver, the court held that the<br />
alleged bias was too remote and speculative to warrant vacatur. The district court also rejected<br />
the broker-dealer’s arguments that the panel engaged in misconduct or exceeded its authority by<br />
limiting the broker-dealer’s presentation of the case and imposing sanctions without notice or a<br />
hearing. The court stated that the panel had a reasonable basis for its actions and, therefore,<br />
refused to vacate the award on these grounds.<br />
Marina v. Edward D. Jones & Co., 2012 WL 3885305 (D. Nev. Sept. 6, 2012).<br />
A financial advisor sued his former employer, a broker-dealer, under the American with<br />
Disabilities Act. The broker-dealer moved to compel arbitration pursuant to an arbitration<br />
provision in the advisor’s employment agreement. The district court compelled arbitration,<br />
because the arbitration provision clearly and unambiguously provided that any dispute would be<br />
submitted to arbitration, including claims for discrimination.<br />
Oliviera v. Citigroup North America, Inc., 2012 WL 1831230 (M.D. Fla. May 18, 2012).<br />
A group of former financial analysts commenced a putative class action against a<br />
financial services company for allegedly violating the Fair Labor Standards Act (“FLSA”) by<br />
misclassifying financial analysts as exempt employees. The company sought to compel<br />
arbitration based upon an arbitration policy acknowledged by the former analysts. The former<br />
R.<br />
R.<br />
R.<br />
537
analysts did not challenge the applicability of the arbitration policy, but instead challenged the<br />
collective action waiver contained in the policy and argued that such a waiver of class action<br />
rights is unenforceable. The district court recognized binding Eleventh Circuit precedent that<br />
class action waivers may be enforced and compelled arbitration.<br />
Osborne v. Wells Fargo Advisors, LLC, 2012 WL 2952533 (M.D. Fla. July 19, 2012)<br />
A broker-dealer filed an arbitration claim with FINRA to recover payment on two<br />
promissory notes executed by its former employee. The employee responded by commencing an<br />
action in state court seeking a declaration regarding the notes. The broker-dealer removed that<br />
state court action and subsequently moved to compel arbitration of that action. The district court<br />
compelled arbitration, holding that the Form U-4 executed by the employee contained a valid<br />
and enforceable arbitration clause. The court further held that actions relating to promissory<br />
notes were arbitrable under applicable FINRA rules.<br />
Blackwell v. Bank of America Corp., 2012 WL 1229673 (D.S.C. March 22, 2012).<br />
A former employee of a broker-dealer filed a pro se complaint against the broker-dealer’s<br />
parent company for wrongful discharge by the broker-dealer. The parent company moved to<br />
dismiss on the ground that the former employee executed a Form U-4 with an arbitration<br />
provision and that any claim for wrongful discharge may only be submitted to arbitration. The<br />
former employee argued that he should be permitted to proceed in court in light of (1) a FINRA<br />
rule that he argued exempted from arbitration disputes arising out of “insurance business<br />
activities” and (2) Dodd-Frank Financial Reform Act amendments to the Sarbanes-Oxley Act<br />
that exempted from arbitration disputes involving whistleblowers. The magistrate judge rejected<br />
these arguments. The employee failed to allege any nexus between his employment dispute and<br />
any insurance business activities. In addition, the Dodd-Frank Act could not retroactively affect<br />
the relevant arbitration agreement, which was executed prior to that legislation. The magistrate<br />
judge, therefore, recommended granting the parent company’s motion to dismiss, which was<br />
adopted by the district court.<br />
White Pacific Securities, Inc. v. Mattinen, 2012 WL 952232 (N.D. Cal. March 19, 2012).<br />
A broker-dealer sought to enjoin a customer arbitration where the investors were not<br />
customers of the broker-dealer. The investors contended that they were customers of a registered<br />
representative of the broker-dealer and, therefore, could bring an arbitration against the brokerdealer<br />
under FINRA Rule 12200, which relates to disputes between the customer and an<br />
“associated person of a member.” The court agreed with the investors and denied the brokerdealer’s<br />
request for a preliminary injunction. The broker-dealer had failed to establish any<br />
likelihood of success on the merits of its claims because the weight of evidence -- including that<br />
R.<br />
R.<br />
R.<br />
538
(i) the representative was registered with FINRA through the broker-dealer, (ii) the investors<br />
dealt with other employees of the broker-dealer in connection with their investments, and (iii) the<br />
representative used the broker-dealer’s e-mail server, address, and phone number -- all supported<br />
a conclusion that the representative met the definition of an “associated person” under FINRA<br />
Rule 12100(r).<br />
Alakozai v. Chase Inv. Servs. Corp., 2012 WL 748684 (C.D. Cal. March 1, 2012).<br />
A group of financial advisors and trainees commenced a putative class action against a<br />
securities brokerage firm alleging violations of the Fair Labor Standard Act (“FLSA”) and<br />
seeking restitution of unpaid wages and improper wage reductions. The firm moved to compel<br />
arbitration pursuant to arbitration agreements with each named plaintiff. Plaintiffs did not<br />
dispute the existence of the arbitration agreements, but challenged the applicability of the<br />
agreement to the class action claims asserted. The district court held that, pursuant to FINRA<br />
Rule 13024, the firm could not enforce its arbitration agreement against a member of a certified<br />
or putative class until class certification is denied, the class is decertified, the member is<br />
excluded from the class by the court, or the member elects to not participate or withdraw from<br />
the class. Because none of these prerequisites applied, the court denied the motion to compel<br />
arbitration.<br />
Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012).<br />
An arbitration panel denied the claim of an employee that his former employer, a brokerdealer,<br />
violated the Uniformed Services Employment and Reemployment Rights Act<br />
(“USERRA”) and discriminated against him based upon his deployment to active duty in the<br />
United States Armed Forces. The employee subsequently sought to vacate the award, asserting<br />
that the panel was unfair or impartial, that the award violated the policy behind USERRA, and<br />
that the panel manifestly disregarded the law. The district court, however, affirmed the award.<br />
The court found that the alleged instances of unfairness or impartiality, such as friendly<br />
exchanges between the panel and defense counsel and a six-month gap in the proceeding due to<br />
scheduling issues, were innocuous and minor. The court also determined that there was no<br />
requirement for the panel to provide a reasoned award when neither party had requested one, and<br />
the panel did not improperly consult a treatise on USERRA where the employee’s counsel had<br />
submitted the treatise to the panel in the first place. Further, the district court found no policy<br />
under USERRA to which the award was contrary, nor could the district court find any support<br />
for the argument that the panel manifestly disregarded the law.<br />
R.<br />
R.<br />
539
R.<br />
LaVoice v. UBS Fin. Servs., Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012).<br />
A broker-dealer moved to compel arbitration of a putative class action filed by a former<br />
employee based on alleged violations of the Fair Labor Standards Act (“FLSA”) and equivalent<br />
state labor statutes. The financial advisor opposed the motion on the ground that his class-wide<br />
claims were not subject to arbitration. While the court noted that a recent Supreme Court<br />
decision has called into question Second Circuit precedent governing arbitrability of class<br />
claims, the court concluded that the financial advisors’ claims were subject to arbitration under<br />
either precedent because the employee failed to establish that the practical effect of compelling<br />
arbitration would provide him with no remedy. The court concluded that it made practical sense<br />
to pursue the putative class representative’s claim individually in arbitration because the<br />
financial advisor sought a six figure recovery individually and had the opportunity recover<br />
attorneys’ fees in arbitration. The court further disregarded the financial advisor and his<br />
counsel’s “self-serving and irrelevant” position that they would not pursue the action in<br />
arbitration and refused to devalue the financial advisor’s claims based upon an unsupported<br />
estimate of the percentage likelihood of recovery. As such, the court compelled arbitration.<br />
Pemberton v. Citgroup Global Markets, 268 P.3d 11 (Kan. App. 2012).<br />
A broker-dealer obtained an arbitration award against a former employee for failure to<br />
pay the balance on a promissory note at the termination of the employee’s employment. The<br />
award also found in favor of the broker-dealer on the former employee’s counter-claims for<br />
unpaid commissions. The employee, pro se, sought to vacate the award. The trial court denied<br />
the motion to vacate and confirmed the award. On appeal, the Court of Appeals of Kansas<br />
affirmed the trial court’s holding that the record below did not support the employee’s arguments<br />
that the arbitration agreement was procured by undue means, that the arbitration proceeding was<br />
unfair, or that the award violated public policy. The appellate court further determined that there<br />
was no basis to vacate the award where the arbitrators and counsel for the broker-dealer were not<br />
licensed attorneys in the state of Kansas. Finally, the court held that the employee’s remaining<br />
arguments sought review of the merits of his counter-claim, and that a claim that a party should<br />
have prevailed on the merits of a claim in arbitration is not a basis for vacating an arbitration<br />
award under Kansas law.<br />
Gomez v. Brill Sec., Inc., 943 N.Y.S.2d 400 (N.Y. App. Div. 2012) (3-2 Decision) (Sweeney, J.,<br />
dissenting).<br />
In a putative class action brought in state court by employees of a broker-dealer alleging<br />
violations of New York employment statutes relating to wages and commissions, the brokerdealer<br />
moved to dismiss on res judicata grounds and to compel arbitration. The employees<br />
previously had asserted the same class-wide claims, along with a class claim for a violation the<br />
R.<br />
R.<br />
540
Federal Fair Labor Standards Act (“FLSA”), in federal court. After the federal district court<br />
compelled arbitration on the FLSA claim and stayed the state law claims in that action, the<br />
employees voluntarily withdrew the state law claims and essentially re-filed them in state court.<br />
Reviewing the motion court’s denial of the broker-dealer’s motions, the appellate court held that<br />
res judicata was inapplicable because the prior federal action did not result in a decision on the<br />
merits. The court further held that the state law claims were not subject to arbitration on a classwide<br />
basis pursuant to FINRA Rule 13204(d). Distinguishing the federal district court’s decision<br />
in the prior federal action compelling arbitration on the FLSA class-wide claim, the court posited<br />
that the district court stayed the state law claims because the state law claims, unlike the FLSA<br />
claim, could be brought on a class-wide basis and, therefore, could not be arbitrated. The<br />
dissent, in contrast, argued that the employees should not have brought the state law claims on a<br />
class-wide basis, concluding that pleading the claims on a class-wide basis was an improper<br />
attempt to avoid arbitration.<br />
541
TABLE OF AUTHORITIES<br />
Page<br />
21st Century Sys. v. Perot Sys. Gov’t & Servs., 284 Va. 32 (2012). ............................................. 355<br />
Aaes v. 4G Cos., 2012 U.S. Dist. LEXIS 37356 (S.D. Tex. Mar. 20, 2012) ................................ 352<br />
Abdelnour v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 29 Mass. L. Rep. 540 (Mass.<br />
Super. Ct. 2012). ............................................................................................................................... 454<br />
Abeyrama v. J.P. Morgan Chase Bank, 2012 U.S. Dist. LEXIS 87847 (C.D. Cal. July 22,<br />
2012) .................................................................................................................................................. 430<br />
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 2012 WL 3584278<br />
(S.D.N.Y. Aug. 17, 2012). ............................................................................................................... 378<br />
Acosta-Castillo v. Guzman-Lora, 2012 WL 3963019 (D. Puerto Rico Sept. 11, 2012) .............. 151<br />
Acticon AG v. China North East Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012). ............ 381<br />
Adams v. Rothstein, No. 11-61688-CIV, 2012 WL 1605098 (S.D. Fla. May 8, 2012). .............. 376<br />
Alakozai v. Chase Inv. Servs. Corp., 2012 U.S. Dist. LEXIS 30759 (C.D. Cal. Mar. 1,<br />
2012) .................................................................................................................................................. 421<br />
Alakozai v. Chase Inv. Servs. Corp., 2012 WL 748684 (C.D. Cal. March 1, 2012). ................... 539<br />
Alberts v. Razor Audio, Inc., 2012 U.S. Dist. LEXIS 20386 (E.D. Cal. Feb. 16, 2012) .............. 300<br />
Allstate Ins. Co. v. CitiMortgage Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012). ........ 391, 471<br />
Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011) ........ 113, 407<br />
Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, No. 12 C 4642, 2012 WL<br />
5389734 (N.D. Ill. Nov. 2, 2012) ............................................................................................. 45, 465<br />
Am. Int’l Grp., Inc. v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.-<br />
Backed Sec. Litig.) .............................................................................................................................. 47<br />
Amarosa v. AOL Time Warner, Inc., 409 Fed. App’x 412 (2d Cir. 2011) (unpublished) ........... 110<br />
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012) ...................... 64, 140<br />
Anderson v. AON Corp., 674 F.3d 895 (7th Cir. 2012). ................................................................ 409<br />
Anderson v. McGrath, 2012 U.S. Dist. LEXIS 156625 (D. Ariz. Nov. 1, 2012) ................ 128, 295<br />
i
Andrade v. Ewanouski, 2012 Mass. App. Unpub. LEXIS 236 (Mass. App. Ct. Mar. 1,<br />
2012) .................................................................................................................................................. 431<br />
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012). ............................ 435, 455<br />
Andrade v. Ewanouski, 962 N.E.2d 245 (Mass. App. Ct. 2012). .................................................. 412<br />
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (C.A.2 N.Y., 2012).. 168, 214, 238, 458<br />
Anthony v. Princeton Trading Group, Inc., 2012 Ohio 1834 (Ohio Ct. App., Cuyahoga<br />
County Apr. 26, 2012) ...................................................................................................................... 426<br />
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012) ................ 214, 223<br />
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12,<br />
2012) ................................................................................................................................. 216, 221, 225<br />
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012) ....................... 205, 362<br />
Applestein v. Medivation, Inc., 861 F. Supp. 2d 1030 (N.D. Cal. 2012) ........................................ 86<br />
Arfa v. Mecox Lane Ltd., 2012 Fed. Sec. L. Rep. (CCH) 96,753 (S.D.N.Y. Mar. 1,<br />
2012) .................................................................................................................................................. 251<br />
Armstrong v. Am. Pallet Leasing Inc., No. C07-4107-MWB, 2012 WL 3906205 (N.D.<br />
Iowa Sept. 7, 2012) ............................................................................................................................. 45<br />
Armstrong v. SEC, 476 F. App’x 864 (D.C. Cir. 2012) ................................................................. 347<br />
Aronson v. Advanced Cell Tech., Inc., 2012 U.S. Dist. LEXIS 140750 (D. Mass. July 16,<br />
2012) .................................................................................................................................................. 245<br />
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Jan. 26,<br />
2012) ......................................................................................................................................... 310, 344<br />
Automotive Indus. Pension Trust Fund v. Textron, Inc., 682 F.3d 34 (1 st Cir. 2012) ......... 101, 167<br />
Ayco Co., L.P. v. Frisch, 2012 U.S. Dist. LEXIS 2112 (N.D.N.Y Jan. 9, 2012) ......................... 418<br />
Azure Ltd. v. I-Flow Corp., 143 Cal.Rptr.3d 136 (Cal. App. June 21, 2012). .............................. 397<br />
Bajaj v. Fisher Asset Mgmt, LLC, 2012 WL 1293169 (D. Del. Apr. 10, 2012). .......................... 392<br />
Bajaj v. Fisher Asset Mgmt., LLC, 2012 U.S. Dist. LEXIS 50524 (D. Del. Apr. 10, 2012). ...... 443<br />
Baker Hughes Inc. v. BNY Mellon Capital Markets LLC, 2012 WL 5634397 (S.D. Tex.<br />
Nov. 4, 2012) ..................................................................................................................... 60, 430, 433<br />
ii
Baker v Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 N.Y. Misc. LEXIS 1123<br />
(N.Y. Sup. Ct. Mar. 9, 2012). .......................................................................................................... 455<br />
Bamert v. Pulte Home Corp., No. 6:08-CV-2120-ORL-22, 2012 WL 3292875 (M.D.<br />
Fla. Aug. 10, 2012). ........................................................................................................... 52, 134, 466<br />
Banco Indus. de Venez. v. CDW Direct, L.L.C., 2012 U.S. Dist. LEXIS 125277<br />
(S.D.N.Y. Sept. 4, 2012) .................................................................................................................. 322<br />
Bank Hapoalim B.M. v. Bank of Am. Corp., 2012 WL 6814194 (C.D. Cal. Dec. 21,<br />
2012). ................................................................................................................................................. 410<br />
Barbara v. Marinemax, Inc., 2012 U.S. Dist. LEXIS 171975 (E.D.N.Y. Dec. 4,<br />
2012) .................................................................................................................................................. 317<br />
Barbara v. MarineMax, Inc., No. 12-CV-0368, 2012 WL 6025604 (E.D.N.Y. Dec.<br />
4, 2012) ................................................................................................................................................ 69<br />
Baroi v. Platinum Condo. Dev., LLC, No. 09-CV-00671, --- F.Supp.2d ----, 2012<br />
WL 2847819 (D. Nev. July 11, 2012) .........................................................................................3, 304<br />
Barrett v. J.P. Morgan Sec. Inc., 2012 WL 4754171 (FINRA Sept. 24, 2012) ............................. 61<br />
Barros v. UBS Trust Co. of P.R., 2012 U.S. Dist. LEXIS 133233 (D.P.R. Sept. 17, 2012) ........ 417<br />
Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., No. 652996/2011,<br />
2012 WL 5187653 (N.Y. Sup. Ct., N.Y. County Oct. 18, 2012). ................................................. 474<br />
BCJJ, LLC v. Lefevre, 2012 WL 2590473 (M.D. Fla. July 3, 2012). ........................................... 396<br />
Bear, Stearns & Co. v. Int’l Capital & Mgmt. Co., 952 N.Y.S.2d 106 (N.Y. App.<br />
Div. 2012). ........................................................................................................................................ 396<br />
Beckman v. Ener1, Inc., 2012 WL 512651 (S.D.N.Y. Feb. 15, 2012) .......................................... 178<br />
Belmont Holdings Corp. v. Suntrust Banks, Inc., No. 1:09-cv-1185, 2012 WL<br />
4096146 (N.D. Ga. Aug. 28, 2012) ................................................................................................... 24<br />
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug.<br />
28, 2012)................................................................................................................................... 466, 467<br />
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa.<br />
Jan. 5, 2012) ............................................................................................................................. 233, 283<br />
Benezra v. Zacks Inv. Research, Inc., 2012 U.S. Dist. LEXIS 47769 (M.D.N.C. Mar.<br />
30, 2012)............................................................................................................................................ 419<br />
iii
Bennett v. Sprint Nextel Corp., No. 099-2122-EFM, 2011 WL 4553055 (D. Kan.<br />
Sept. 29, 2011) .................................................................................................................................. 114<br />
Bensinger v. Denbury Res. Inc., 2012 U.S. Dist. LEXIS 140801 (E.D.N.Y Sept. 28,<br />
2012) .................................................................................................................................................. 117<br />
Berman v. Morgan Keegan & Co., Inc., 455 F. App'x. 92 (2nd Cir. 2012) ......................... 220, 311<br />
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012) ........................ 415, 440<br />
Biremis Corp. and Peter Beck, FINRA Case No. 2010021162202 (June 20, 2012) ................... 145<br />
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist.<br />
LEXIS 30988 (E.D.N.Y. Mar. 8, 2012) ................................................................................. 418, 442<br />
Bixler v. Next Fin. Group, Inc., 858 F. Supp. 2d 1136 (D. Mont. 2012) ...................................... 423<br />
Blackwell v. Bank of America Corp., 2012 WL 1229673 (D.S.C. March 22, 2012). .................. 538<br />
Blakeslee v. PHC, Inc. (In re PHC, Inc. S'holder Litig.), 2012 U.S. Dist. LEXIS<br />
44616 (D. Mass. Mar. 30, 2012) ...................................................................................................... 115<br />
Blitz v. AgFeed Indus., Inc., 2012 WL 1192814 (M.D. Tenn. Apr. 10, 2012) ............................. 181<br />
BNP Paribas Mortg. Corp. v. Bank of America, N.A., 866 F. Supp. 2d 257<br />
(S.D.N.Y. 2012) ................................................................................................................................ 224<br />
Bo Young Cha v. Kinross Gold Corp., 2012 WL 2025850 (S.D.N.Y. May 31, 2012) ................ 176<br />
Boca Raton Firefighters and Police Pension Fund v. Bahash, 2012 WL 6621391<br />
(9th Cir. December 20, 2012) .......................................................................................................... 149<br />
Bonnant v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 467 Fed. Appx. 4 (2d Cir. 2012). ...... 438<br />
Bonomo v. NOVA Fin. Holdings, Inc., 2012 WL 2196305 (E.D. Pa. June 15, 2012) .................. 194<br />
Boudinot v. Shrader, No. 09 CIV. 10163 LAK, 2012 WL 489215 (S.D.N.Y. Feb. 15,<br />
2012). ................................................................................................................................................. 368<br />
Boulware v. Baldwin, No. 11–CV–762, 2012 WL 1412698 (D. Utah Apr. 23,<br />
2012) ............................................................................................................................. 3, 155, 203, 375<br />
Bradley v. Miller, No. 10-CV-760, 2012 WL 4447454 (S.D. Ohio Sept. 25, 2012). .................. 371<br />
Brady v. Kosmos Energy Ltd., 2012 WL 6204247 (N.D. Tex. July 10, 2012) .................... 212, 473<br />
Brashear v Pelto, 94 A.D.3d 1189 (N.Y. App. Div. 3d Dep't 2012) ............................................ 425<br />
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. Apr. 19, 2012) ..... 165, 196, 290<br />
iv
Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean<br />
Ltd., 2012 U.S. Dist. LEXIS 46202 (S.D.N.Y. Mar. 30, 2012) ............................................ 120, 159<br />
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D.<br />
Id. Jul. 12, 2012) ...................................................................................................................... 187, 386<br />
Bristol County Ret. Sys. v. Allscripts Healthcare Solutions, Inc., 2012 WL<br />
5471110 (N.D. Ill. Nov. 9, 2012) .................................................................................................... 181<br />
Brockway v. Evergreen Int’l Trust, 2012 WL 5458464 (4th Cir. Nov. 9, 2012).......................... 203<br />
Brodzinsky v. Frontpoint Partner LLC, No. 11CV10 WWE, 2012 WL 1468507<br />
(D. Conn. Apr. 26, 2012) .................................................................................................. 68, 107, 248<br />
Brown v. China Integrated Energy, Inc., 875 F.Supp. 2d 1096 (C.D. Cal. 2012)......... 22, 213, 475<br />
Bruce v. Gore, et al., 2012 WL 987556, N.D. Tex. Mar. 22, 2012). ............................................ 463<br />
Bruce v. Suntech Power Holdings Co., 2012 WL 5927985 (N.D. Cal. Nov. 13, 2012) .............. 185<br />
Burger v. Hartley, 2012 U.S. Dist. LEXIS 129783 (S.D. Fla. Sept. 12, 2012). ........................... 354<br />
Butterworth v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 140209 (N.D. Ala.<br />
Sept. 28, 2012). ................................................................................................................................. 452<br />
Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 6644397 (C.D.Cal.,2012) ............. 156<br />
Cabacoff v. Wells Fargo Bank, N.A., No. 12-CV-56-PB, 2012 WL 5392545<br />
(D.N.H. Nov. 5, 2012). ..................................................................................................................... 366<br />
Calderon Serra v. Banco Santander Puerto Rico, No. 10-1906 GAG, 2012 WL<br />
3067609 (D. Puerto Rico Jul. 30, 2012). ......................................................................................... 366<br />
Cambridge Place Inv. Mgmt. Inc. v. Morgan Stanley & Co., Inc., 2012 WL<br />
5351233 (Mass. Sup. Ct. Sept. 28, 2012) ........................................................................................ 218<br />
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,234 (S.D.N.Y. Dec. 17, 2012) ................................................................................................. 277<br />
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y.<br />
Dec. 17, 2012). ......................................................................................................................... 159, 385<br />
Capital Ventures Int’l v. UBS Sec. LLC, 2012 U.S. Dist. LEXIS 140663 (D. Mass.<br />
Sept. 28, 2012) .................................................................................................................................. 246<br />
Carlucci v. Han, No. 12-CV-451, --- F. Supp. 2d ---, 2012 WL 3242618 (E.D. Va.<br />
Aug. 7, 2012) ................................................................................................ 4, 44, 158, 379, 406, 409<br />
Carter v. Holdman, 95 So. 3d 560 (La. Ct. App. 2012) ........................................................ 230, 457<br />
v
Carter v. TD Ameritrade Holding Corp., 721 S.E.2d 256 (N.C. Ct. App. 2012) ......................... 426<br />
Caruthers v. Underhill, 287 P.3d 807 (Ariz. Ct. App. 2012). ....................................................... 397<br />
Casper v. Jinan, 2012 WL 3865267 (S.D.N.Y. Sept. 6, 2012) ..................................................... 175<br />
Cather v. Isom, 2012 U.S. Dist. LEXIS 1687 (D. Utah Jan. 5, 2012)........................................... 308<br />
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL<br />
6044787 (N.D. Cal. Dec. 5, 2012) .......................................................................... 198, 202, 301, 303<br />
Cerone v. Bank of Am., 2012 U.S. Dist. LEXIS 76952 (D.N.J. June 4, 2012). ............................ 444<br />
CFTC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 109747 (N.D. Ill.<br />
Aug. 6, 2012) .................................................................................................................................... 331<br />
Chechele v. Elstain, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).......................................... 70, 141<br />
Chechele v. Morgan Stanley, --- F.Supp.2d ---, 2012 WL 4490730 (S.D.N.Y.<br />
Sept. 26, 2012). ................................................................................................................................... 76<br />
Chechele v. Morgan Stanley, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012) .............................. 142<br />
Chechele v. Scheetz, 466 Fed. Appx 39 (2nd Cir. 2012)......................................................... 64, 139<br />
Chechele v. Sperling, 2012 WL 1038653 (S.D.N.Y. Mar. 29, 2012) ........................................... 141<br />
Cheng v David Learner Assoc., Inc., 35 Misc. 3d 1238A (N.Y. Sup. Ct. 2012) .......................... 429<br />
Chester County Emps.’ Ret. Fund v. White, 2012 WL 1245724 (N.D. Ill. Apr. 13, 2012) ......... 182<br />
Chipman v. Aspenbio Pharma, Inc., 2012 WL 4069353 (D. Colo. Sept. 17, 2012) .................... 155<br />
Cho v. UCBH Holdings, Inc., 2012 U.S. Dist. LEXIS 123234 (N.D. Cal. Aug. 29,<br />
2012) ................................................................................................................................. 236, 302, 465<br />
Citigroup Global Markets, Inc., FINRA Case No. 2008012808101 (May 15, 2012).................. 146<br />
Citigroup Global Mkts., Inc. v. Berghorst, 2012 U.S. Dist. LEXIS 76459 (S.D.<br />
Fla. Jan. 20, 2012)............................................................................................................................. 453<br />
City of Bristol Pension Fund v. Vertex Pharm., 2012 WL 6681907 (D. Mass. Dec.<br />
21, 2012)................................................................................................................................... 172, 468<br />
City of Pontiac Gen. Emp.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D.<br />
Mich. 2012) ................................................................................................................ 82, 165, 195, 288<br />
City of Pontiac Gen. Emps. Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d<br />
359 (S.D.N.Y. 2012)......................................................................................................................... 190<br />
vi
City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 844 F. Supp. 2d<br />
498 (S.D.N.Y. 2012)......................................................................................................................... 173<br />
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., No. 11-2340-RDR, 2012<br />
WL 3010992 (N.D. Cal. July 23, 2012) ................................................................... 88, 187, 201, 301<br />
City of Royal Oak Retirement System v. Itron, Inc., 2012 WL 3966310 (E.D.<br />
Wash. Sept. 11, 2012)....................................................................................................................... 157<br />
City of St. Clair Shores Gen. Employees' Ret. Sys. v. Lender Processing Servs.,<br />
Inc., 2012 Fed. Sec. L. Rep (CCH) 96,790 (M.D. Fla. Mar. 30, 2012)...................................... 309<br />
City of St. Clair Shores General Employees’ Retirement System v. Lender<br />
Processing Services, Inc., 2012 WL 1080953 (M.D. Fla. March 30, 2012)................................. 167<br />
City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Hospira, Inc., 2012 WL 1339678<br />
(N.D. Ill. Apr. 18, 2012) ................................................................................................................... 183<br />
Cobalt Multifamily Investors I, LLC v. Arden, No. 06 CV 6172 (KMW)(MHD),<br />
2012 WL 3838834 (S.D.N.Y. Aug. 14, 2012) .................................................................................. 30<br />
Cody v. Sec. Exchange Comm., 693 F.3d 251 (1st Cir. 2012) ......................................................... 60<br />
Cole v. Patricia A. Meyer & Assoc., APC, 206 Cal. App. 4th 1095 (Cal. App. 2012) ................ 101<br />
Collins v. Chi. Inv. Group, LLC, 2012 U.S. Dist. LEXIS 37217 (D. Nev. Mar. 19, 2012). ........ 450<br />
Commodities Futures Trading Comm’n v. Sentinel Mgmt. Grp., 2012 U.S. Dist.<br />
LEXIS 46198 (N.D. Ill. Mar. 30, 2012) .......................................................................................... 290<br />
Compsource Okla., Bd. of Tr. of the Elec. Workers Local No. 26 Pension Trust<br />
Fund v. BNY Mellon, N.A., 2012 WL 6864701 (E.D. Okla. Oct. 25, 2012). ................................ 471<br />
Compucredit Corp., et al., v. Greenwood, 132 S. Ct. 665 (2012). ................................................ 413<br />
Corre Opportunities Fund, LP v. Emmis Commc’n Corp., 2012 U.S. Dist. LEXIS<br />
124298 (S.D. Ind. Aug. 31, 2012) ................................................................................................... 121<br />
Costello ex rel. Comdisco Litig. Trust v. Grundon, 651 F.3d 614 (3d Cir. 2011) ........................ 110<br />
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012) ............................ 63, 138, 400<br />
Curry v. Hansen Med., Inc., 2012 WL 3242447 (N.D. Cal. Aug. 10, 2012) ............... 200, 236, 302<br />
Daniels v. Morgan Asset Mgmt., Inc., 2012 WL 3799150 (6th Cir. Aug. 31, 2012) ................... 204<br />
Darwin v. Taylor, 2012 WL 5250400 (D. Colo. Oct. 23, 2012) ................................................... 188<br />
Datto Inc. v. Broadband, 856 F. Supp. 2d 359 (D. Conn. 2012) ................................................... 247<br />
vii
Davey v. First Command Fin. Servs., 2012 U.S. Dist. LEXIS 11481 (N.D. Tex.<br />
Jan. 31, 2012). ................................................................................................................................... 436<br />
Deborah G. Mallow IRA Sep Inv. Plan v. Aubrey K. McClendon, 2012 U.S. Dist.<br />
LEXIS 78479 (W.D. Okla. June 6, 2012) .............................................................................. 122, 188<br />
Delgado v. Center on Children, Inc., No. 10–2753, 2012 WL 2878622 (E.D. La.<br />
July 13, 2012)................................................................................................................................2, 115<br />
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass.<br />
Mar. 8, 2012) ............................................................................................................................ 417, 442<br />
Denenberg v. Rosen, 941 N.Y.S.2d 38 (N.Y. App. Div. 2012). .................................................... 399<br />
Department of Enforcement v. Daniel James Gallagher, Complaint No.<br />
2008011701203, 2012 FINRA Discip. LEXIS 61 (Nat’l Adj. Council, Dec. 12,<br />
2012). ................................................................................................................................................. 485<br />
Department of Enforcement v. Hedge Fund Capital Partners, LLC, and Howard<br />
G. Jahre, Complaint No. 2006004122402, 2012 FINRA Discip. LEXIS 42 (Nat’l<br />
Adj. Council, May 1, 2012). ............................................................................................................ 486<br />
Department of Enforcement v. Hugh Vincent Murray III, Discip. Proc. No.<br />
2008016437801, 2012 FINRA Discip. LEXIS 64 (Office of Hearing Officers,<br />
Oct. 25, 2012). .................................................................................................................................. 486<br />
Department of Enforcement v. Wedbush Securities, Inc. and Edward William<br />
Wedbush, Discip. Proc. No. 20070094044, 2012 FINRA Discip. LEXIS 59<br />
(Office of Hearing Officers, Aug, 2, 2012)..................................................................................... 488<br />
Department of Market Regulation v. Robert N. Drake, Discip. Proc. No.<br />
20060053785-02, 2012 FINRA Discip. LEXIS 48 (Office of Hearing Officers,<br />
May 3, 2012). .................................................................................................................................... 488<br />
Desteph v. Commissioner, Connecticut Dept. of Banking, No. CV105015042S,<br />
2012 WL 953741 (Conn. Super. Ct. Feb. 29, 2012)........................................................................... 6<br />
DesyaFosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D.Nev.,2012. July 11, 2012) ...... 154<br />
Desyatnikov v. Credit Suisse Grp., Inc., No. 10-CV-1870(DLI)(VVP), 2012 WL<br />
1019990 (E.D.N.Y. Mar. 26, 2012) .................................................................................. 29, 157, 472<br />
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP<br />
(MANx), 2012 WL 2161498 (C.D. Cal. June 1, 2012) ................................................... 48, 296, 334<br />
Digges v. State of Texas, No. 05–10–00239–CR, 2012 WL 2444543 (Tex. Ct.<br />
App. June 28, 2012) .............................................................................................................................. 5<br />
viii
D-J Eng'g Inc. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 6678 (D. Kan. Jan. 20, 2012) ......... 424<br />
Dobina v. Weatherford Int’l Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,081<br />
(S.D.N.Y. Nov. 7, 2012) .................................................................................................................. 275<br />
Dobina v. Weatherford Int’l Ltd., 2012 WL 5458148 (S.D.N.Y. Nov. 7, 2012). ........................ 461<br />
Dodona I LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012) .............. 252, 319<br />
Donoghue v. Bulldog Investors Gen. P’ship, 696 F.3d 170 (2d Cir. 2012) ........................... 65, 140<br />
Donoghue v. Morgan Stanley High Yield Fund, 2012 WL 6097654 (S.D.N.Y.<br />
Dec. 7, 2012). .................................................................................................................................... 390<br />
Dorn v. Berson, No. 09-CV-2717 ADS AKT, 2012 WL 1004907 (E.D.N.Y. Mar.<br />
1, 2012). ............................................................................................................................ 367, 384, 389<br />
Dottore v. Huntington Nat’l Bank, 2012 U.S. App. LEXIS 9185 (6th Cir. May 4, 2012) .......... 415<br />
Dunleavy v. Gannon, 2012 WL 259382 (D. N.J. Jan. 26, 2012). .................................................. 467<br />
Dunn v. Dunn, 281 P.3d 540 (Kan. Ct. App. 2012). ...................................................................... 411<br />
Eagletech Commc’ns, Inc. v. Bryn Mawr Inv. Group, Inc., 79 So. 3d 855 (Fla.<br />
App. 2012)................................................................................................................................ 356, 377<br />
Easton Cap. Partners, LP v. Rush, No. 09 Civ. 1307(LLS), 2011 WL 3809927<br />
(S.D.N.Y. Aug. 26, 2011) ................................................................................................................ 111<br />
Elliot v. China Green Agricultures, Inc., No. 3:10-CV-0648-LRH-WGC, 2012<br />
WL 5398863 (D. Nev. Nov. 2, 2012) ....................................................................................... 49, 305<br />
Embraceable You Designs, Inc. v. First Fid. Grp. Ltd., 2012 Fed. Sec. L. Rep.<br />
(CCH) 97,217 (C.D. Cal. Dec. 3, 2012) ....................................................................................... 299<br />
Embraceable You Designs, Inc. v. First Fidelity Group, Ltd., No. 09–cv–03271,<br />
2012 WL 6012852 (C.D. Cal. Dec. 3, 2012) .................................................................................. 103<br />
Mercer v. Gupta, -- F. Supp. 2d --, 2012 WL 3095300 (S.D.N.Y. July 27, 2012)......................... 75<br />
Erichsen v. RBC Capital Mkts., LLC, 2012 U.S. Dist. LEXIS 93641 (E.D.N.C.<br />
July 5, 2012) ...................................................................................................................................... 419<br />
Estate of Campana v. Comerica Bank & Trust, N.A., 2012 U.S. Dist. LEXIS 1490<br />
(N.D. W. Va. Jan. 4, 2012)............................................................................................................... 419<br />
F.D.I.C. v. Countrywide Fin. Corp., 2012 WL 5900973 (C.D. Cal. Nov. 21, 2012). .................. 470<br />
Facciola v. <strong>Greenberg</strong> <strong>Traurig</strong> <strong>LLP</strong>, 2012 WL 1021071 (D. Ariz. Mar. 20, 2012) ........... 212, 333<br />
ix
Farber v. Goldman Sachs Group, Inc., No. 10 Civ. 873(BSJ)(GWG), 2011 WL<br />
666396 (S.D.N.Y. Feb. 16, 2011) .................................................................................................... 111<br />
Fazzari v. Hilbrant (In re Hilbrant), 2012 Bankr. LEXIS 5001 (Bankr. W.D.N.C.<br />
Oct. 24, 2012) ................................................................................................................................... 351<br />
FDIC v. Banc of America Securities LLC, 2012 WL 2904310 (D. Nev. July 16,<br />
2012). ................................................................................................................................................. 473<br />
FDIC v. Morgan Stanley & Co., No. H-11-4187, 2012 WL 401203 (S.D. Tex.<br />
Feb. 7, 2012) .................................................................................................................................44, 45<br />
Fed. Hous. Fin. Agency v. Ally Fin. Inc., No. 11 Civ. 7010 (DLC), 2012 WL<br />
6616061 (S.D.N.Y. Dec. 19, 2012) ................................................................................................... 33<br />
Fed. Hous. Fin. Agency v. Bank of Am. Corp., No. 11 Civ. 6195 (DLC), 2012 WL<br />
6592251 (S.D.N.Y. Dec. 18, 2012) ................................................................................................... 33<br />
Fed. Hous. Fin. Agency v. Barclays Bank PLC, 2012 U.S. Dist. LEXIS 165138<br />
(S.D.N.Y. Nov. 19, 2012) ................................................................................................................ 276<br />
Fed. Hous. Fin. Agency v. JP Morgan Chase & Co., 2012 WL 5395646<br />
(S.D.N.Y. Nov. 5, 2012) ........................................................................................................... 19, 190<br />
Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep.<br />
(CCH) 97,075 (S.D.N.Y. Nov. 5, 2012) ....................................................................................... 275<br />
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC), 2012<br />
WL 5451188 (S.D.N.Y. Nov. 8, 2012). ................................................................................... 31, 387<br />
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,079 (S.D.N.Y. Nov. 8, 2012) ................................................................................................... 276<br />
Fed. Hous. Fin. Agency v. SG Americas., Inc., No. 11 Civ. 6203 (DLC), 2012 WL<br />
5931878 (S.D.N.Y. Nov. 27, 2012) ................................................................................................... 32<br />
Fed. Hous. Fin. Agency v. SG Americas., Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,210 (S.D.N.Y. Nov. 27, 2012) ................................................................................................. 277<br />
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y.<br />
2012) .................................................................................................... 11, 31, 256, 267, 275, 278, 403<br />
Fed. Hous. Fin. Agency v. Morgan Stanley, No. 11 Civ. 6739 (DLC), 2012 WL<br />
5868300 (S.D.N.Y. Nov. 19, 2012) ................................................................................................... 32<br />
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012) ............................... 27, 382, 408<br />
Ferguson v. Purvis, No. 11–cv–573, 2012 WL 1029388 (S.D. Ind. Mar. 26, 2012) ....................... 2<br />
x
Feyko v. Yuhe Int’l Inc., 2012 WL 682882 (C.D. Cal. Mar. 2, 2012) ........................................... 186<br />
Fid. <strong>Broker</strong>age Servs. LLC v. Brown, 2012 U.S. Dist. LEXIS 141960 (S.D. Cal.<br />
Sept. 28, 2012). ................................................................................................................................. 437<br />
Fid. First Home Mortg. Co. v. Williams, 2012 Md. App. LEXIS 135 (Md. Ct.<br />
Spec. App. Nov. 27, 2012) ............................................................................................................... 237<br />
Filho v. Safra Nat’l Bank, 2012 U.S App. LEXIS 15309 (2d Cir. July 25, 2012) ....................... 413<br />
Filing v. Phipps, No. 11–4157, 2012 WL 5200375 (6 th Cir. Oct. 23, 2012) ................................ 102<br />
Finkel v. Am. Oil & Gas, Inc., 2012 WL 171038 (D. Colo. Jan. 20, 2012). ................................. 395<br />
Finn v. Barney, 471 F. App’x 30 (2d Cir. 2012) ............................................................................ 238<br />
FINRA Dep’t of Enforcement v. Brookstone Secs., Inc., Antony Lee Turbeville,<br />
Christopher Dean Kline, and David William Locy, FINRA Disciplinary<br />
Proceeding No. 2007011413501 (May 31, 2012) .......................................................................... 146<br />
FINRA Dep’t of Enforcement v. Genesis Securities, LLC and William C. Yeh,<br />
FINRA Disciplinary Proceeding No. 2009021082501 (May 15, 2012) ....................................... 147<br />
FINRA Dep’t of Enforcement v. Richard J. Buswell and Herbert S. Fouke, FINRA<br />
Disciplinary Proceeding No. 2009017275301 (Jan. 4, 2012) ........................................................ 148<br />
Fischer Lime and Cement Co. v. Morgan Keegan & Co., Inc., No. 08-04856,<br />
2012 WL 6759349 (FINRA Dec. 28, 2012) ..................................................................................... 25<br />
Fisher Asset Mgmt., LLC v. Rider, 2012 U.S. Dist. LEXIS 20703 (S.D. Ohio Feb.<br />
17, 2012)............................................................................................................................................ 446<br />
Fisher v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 179691 (D. Kan.<br />
Dec. 17, 2012). .................................................................................................................................. 452<br />
Fornell v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 108677 (M.D. Fla.<br />
Aug. 3, 2012). ................................................................................................................................... 452<br />
Fornell v. Morgan Keegan & Co., 2012 WL 3155727 (M.D. Fla. Aug. 3, 2012). ...................... 395<br />
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 322<br />
(S.D.N.Y. 2012) ......................................................................................................................... 12, 172<br />
Fosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D. Nev. Jul. 11, 2012) ........................... 202<br />
Fragin v. Mezei, 2012 U.S. Dist. LEXIS 119064 (S.D.N.Y. Aug. 22, 2012)............................... 321<br />
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011) ...................................................................... 110<br />
xi
Frank v. Elgamal, 2012 Del. Ch. LEXIS 62 (Del. Ch. Mar. 30, 2012) ........................................ 345<br />
Frederick v. Mechel OAO, 475 F. App’x 353 (2d Cir. 2012) ............................................... 168, 238<br />
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2012 U.S. App. LEXIS 24847<br />
(11th Cir. Dec. 4, 2012).................................................................................................................... 432<br />
Freedom Envtl. Servs., Inc. v. Borish, 2012 WL 2505723 (M.D. Fla. June 20, 2012) ................ 109<br />
Freedom Investors Corp. v. Kahal Shomrei Hadath, 2012 U.S. Dist. LEXIS<br />
15129 (S.D.N.Y. Feb. 7, 2012). ....................................................................................................... 443<br />
Freidus v. ING Grp. N.V., No. 09-1049-LAK, 2012 WL 4857543 (S.D.N.Y. Oct.<br />
11, 2012)..................................................................................................................................... 34, 378<br />
French v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 18233 (D. Vt. Feb.<br />
14, 2012)............................................................................................................................................ 418<br />
Fried v. Stiefel Labs., Inc., 2012 U.S. Dist. LEXIS 122507 (S.D. Fla. June 8, 2012) ................. 354<br />
Fulton County Employees Retirement System v. MGIC Inv. Corp., 675 F.3d 1047<br />
(C.A.7 (Wis., 2012) .......................................................................................................................... 170<br />
Fulton County Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047 (7th Cir. 2012) ................... 241<br />
Gallman v. Sovereign Equity Grp., Inc., No. AW-11-2750, 2012 WL 1820556 (D.<br />
Md. May 15, 2012) ............................................................................................................................. 44<br />
Gammel v. Hewlett-Packard Co., 2012 WL 5945089 (C.D. Cal. Aug. 29, 2012) .............. 172, 200<br />
Garcia v. Wachovia Corp., 699 F.3d 1273 (11th Cir. 2012) ......................................................... 416<br />
Garden City Emples. Ret. Sys. v. Anixter Int’l Inc., 2012 Fed. Sec. L. Rep. (CCH)<br />
96,780 (N.D. Ill. Mar. 29, 2012) ................................................................................................... 289<br />
Gardner v. Major Automotive Companies, 2012 WL 1230135 (E.D.N.Y. April 12, 2012). ...... 476<br />
Gardner v. The Major Auto. Co., 2012 U.S. Dist. LEXIS 118191 (E.D.N.Y Aug.<br />
21, 2012)............................................................................................................................................ 118<br />
Gardner v. The Major Auto. Cos., 2012 U.S. Dist. LEXIS 51821 (E.D.N.Y Apr.<br />
12, 2012)............................................................................................................................................ 119<br />
Gault v. SRI Surgical Express, Inc., 2012 U.S. Dist. LEXIS 151409 (N.D. Fla.<br />
Oct. 22, 2012) ................................................................................................................................... 338<br />
Gen. Ret. System of City of Detroit v. Onyx Capital Advisors, LLC, No. 10-CV-<br />
11941, 2012 WL 1018949 (E.D. Mich. Mar. 26, 2012)................................................................. 371<br />
xii
George v. China Auto. Sys., Inc., 2012 WL 3205062 (S.D.N.Y. Aug. 8, 2012) ................... 76, 175<br />
George v. China Auto. Sys., Inc., No. 11 CIV. 7533 KBF, 2012 WL 4493107<br />
(S.D.N.Y. Sept. 25, 2012). ................................................................................................................. 76<br />
Gerardo Gerson & Rivadavia, S.A. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS<br />
128128 (S.D. Fla. Sept. 10, 2012). .................................................................................................. 453<br />
Gilmore v. Gilmore, No. 11-4091-CV, 2012 WL 5935341 (2d Cir. Nov. 28, 2012). .................. 365<br />
GMO Trust v. ICAP Plc, 2012 U.S. Dist. LEXIS 150074 (D. Mass. Oct. 18, 2012) ................... 228<br />
Goldberg v. 401 North Wabash Venture, LLC, No. 09 C 6455, --- F.Supp.2d ----,<br />
2012 WL 4932653 (N.D. Ill. Oct. 16, 2012) ....................................................................................... 1<br />
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Bayou Grp.,<br />
LLC, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012) .................................................. 228, 438<br />
Goldman v. City of Reno, 2012 U.S. Dist. LEXIS 167902 (D. Nev. Nov. 26, 2012) .................. 424<br />
Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Cuyahoga<br />
County Aug. 9, 2012) .............................................................................................................. 237, 361<br />
Gomez v Brill Sec., Inc., 95 A.D.3d 32 (N.Y. App. Div. 1st Dep't 2012) ..................................... 425<br />
Gomez v. Brill Sec., Inc., 943 N.Y.S.2d 400 (N.Y. App. Div. 2012) (3-2 Decision)<br />
(Sweeney, J., dissenting). ................................................................................................................. 540<br />
Gondeck v. A Clear Title & Escrow Exch., LLC, 2012 U.S. Dist. LEXIS 151210<br />
(N.D. Ill. Oct. 22, 2012) ................................................................................................................... 331<br />
Gordon v. Sonar Capital Mgmt. LLC, 2012 WL 1193844 (S.D.N.Y. Apr. 9, 2012) ................... 176<br />
Gottlieb v. Willis, 2012 U.S. Dist. LEXIS 159343 (D. Minn. Nov. 7, 2012) ............................... 123<br />
Gould v. Winstar Communs., Inc., 692 F.3d 148, 2012 U.S. App. LEXIS 18426<br />
(2d Cir. July 19, 2012)...................................................................................................................... 144<br />
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL<br />
3916652 (N.D. Ind. Sept. 7, 2012) ......................................................................................... 222, 226<br />
Grail Semiconductor, Inc. v. Stern, 2012 WL 5903817 (S.D.Fla. Nov.26, 2012). ...................... 474<br />
Grant v. Houser, 2012 WL 519120 (E.D.La.,2012. February 15, 2012) ..................... 158, 234, 414<br />
Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., 962 N.E.2d 221<br />
(Mass. App. Ct. 2012). ..................................................................................................................... 396<br />
xiii
Griffin v. Morgan Stanley Smith Barney, LLC, 2012 Ill. App. Unpub. LEXIS 2297<br />
(Ill. App. Ct. 1st Dist. Sept. 19, 2012) ............................................................................................. 427<br />
Grodko v. Central European Dist. Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012) ............... 179<br />
Groom v. Bank of Am., 2012 U.S. Dist. LEXIS 2374 (M.D. Fla. Jan. 9, 2012) ........................... 337<br />
Hansalik v. Wells Fargo Advisors, 2012 Cal. App. Unpub. LEXIS 3145 (Cal.<br />
App. 2d Dist. Apr. 25, 2012). .......................................................................................................... 457<br />
Hantz Fin. Servs. v. Monroe, 2012 Mich. App. LEXIS 147 (Mich. Ct. App. Jan. 24, 2012)...... 431<br />
Harding v. Midsouth Bank N A, 2012 U.S. Dist. LEXIS 143984 (W.D. La. Oct. 3, 2012) ........ 419<br />
Hardisty v. Moore, No. 11 CV 1591 AJB BLM, 2012 WL 1564533 (S.D. Cal.<br />
May 2, 2012). .................................................................................................................................... 374<br />
Hemenway v. Bartoletta, 2012 WL 1252691 (M.D. Fla. April 13, 2012) .................................... 167<br />
Hickory Sec. Ltd. v. Republic of Argentina, 2012 WL 3291796 (2d Cir. Aug. 14, 2012). .......... 381<br />
Hicks v. State of Georgia, 315 Ga. App. 779, 728 S.E.2d 294 (Ga. Ct. App. 2012)........................ 6<br />
Hidalgo-Velez v. San Juan Asset Mgmt., Inc., 2012 WL 4427077 (D.P.R. Sept. 24, 2012) ....... 205<br />
Highland Capital Mgmt. v. Ryder Scott Co., 2012 Tex. App. LEXIS 2674 (Tex.<br />
App. 2012)......................................................................................................................................... 356<br />
Highland Capital Mgmt., L.P. v. Ryder Scott Co., 2012 WL 6082713 (Tex. App. Dec. 6,<br />
2012). ................................................................................................................................................. 380<br />
Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Group, Inc., No. 11 Civ.<br />
5832 AJN, 2012 WL 3542196 (S.D.N.Y. Aug. 15, 2012). ............................................................ 369<br />
Ho v. Duoyuan Global Water Inc., No. 10 Civ. 7233, 2012 WL 3647043 (S.D.N.Y. Aug.<br />
24, 2012).................................................................................................... 16, 162, 192, 231, 262, 269<br />
Hohenstein v. Behringer Harvard REIT I, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20,<br />
2012) ......................................................................................................................................... 181, 469<br />
Holladay v. CME Group, No. 11-CV-8226, 2012 WL 5845621 (N.D. Ill. 2012). ...................... 363<br />
Holland v. TD Ameritrade, Inc., 2012 U.S. Dist. LEXIS 22470 (E.D. Cal. Feb. 22, 2012) ........ 421<br />
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012) .... 346, 355<br />
Howard v. Nano, No. 11 CV 366 MCR CJK, 2012 WL 3668045 (N.D. Fla. Aug. 25,<br />
2012) .................................................................................................................................................... 92<br />
xiv
Hubbard v. BankAtlantic Bancorp, Inc., No. 11-14703, 2012 WL 6013216 (11th Cir.<br />
Dec. 3, 2012) ...................................................................................................................... 67, 242, 383<br />
Hudson v. Merrill Lynch Int’l Fin. Inc., 2012 WL 5877960 (E.D. La. Nov. 20, 2012)............... 536<br />
Huppe v. WPCS Int’l Inc., 670 F.3d 214 (2d Cir. 2012) ......................................................... 63, 139<br />
Hutchins v. NBTY, Inc., No. CV 10-2159 LDW, 2012 WL 1078823 (E.D.N.Y. Mar. 30,<br />
2012) ........................................................................................................................... 68, 157, 193, 249<br />
I.B.E.W. Local 697 Pension Fund v. Int’l Game Tech., Inc., 2012 WL 5199742 (D. Nev.<br />
Oct. 19, 2012). .................................................................................................................................. 394<br />
IBEW Local 98 Pension Fund v. Best Buy Co., 2012 Fed. Sec. L. Rep. (CCH) 96,779<br />
(D. Minn. Mar. 20, 2012) ................................................................................................................. 292<br />
IBEW Local 98 Pension Fund v. Cent. Vt. Pub. Serv. Corp., 2012 U.S. Dist. LEXIS<br />
36784 (D. Vt. Mar. 19, 2012) ................................................................................................. 116, 279<br />
Iconix Brand Group Inc. v. Merrill Lynch, Pierce Fenner & Smith Inc., 2012 WL<br />
6097440 (2d Cir. Dec. 10, 2012) ....................................................................................................... 60<br />
In re 1st Discount <strong>Broker</strong>age, Inc., Release No. 33-66212A, 2012 SEC LEXIS<br />
220 (Jan. 23, 2012). ......................................................................................................... 359, 481, 522<br />
In re Adams, Securities Exchange Act of 1934 Release No. 67019, 2012 SEC<br />
LEXIS 1564 (May 18, 2012) .................................................................................................. 134, 342<br />
In re Advanced Battery Technologies, Inc. Securities <strong>Litigation</strong>, 2012 WL<br />
3758085 (S.D.N.Y. Aug. 29, 2012) ................................................................................................. 162<br />
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757<br />
(S.D.N.Y. Aug. 29, 2012) ....................................................................................................... 262, 270<br />
In re Advanced Equities, Inc., Release No. 34-67878, 2012 SEC LEXIS 2958<br />
(Sept. 18, 2012). ....................................................................................................................... 483, 504<br />
In re Alchemy Ventures, Inc., Release No. 67206, 2012 SEC LEXIS 1866 (June<br />
15, 2012)............................................................................................................................................ 525<br />
In re Allen, Release No. 67744, 2012 SEC LEXIS 2775 (Aug. 12, 2012). .................................. 501<br />
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012<br />
U.S. Dist. LEXIS 22065 (C.D. Cal. Feb. 22, 2012) ......................................................................... 85<br />
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012<br />
WL 137457 (C.D. Cal. Jan. 17, 2012) ............................................................................................... 85<br />
xv
In re Allstate Life Ins. Co. Litig., 2012 U.S. Dist. LEXIS 72900 (D. Ariz. May 24, 2012) ........ 293<br />
In re Almost Family Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,737 (W.D. Ky.<br />
Feb. 9, 2012) ..................................................................................................................................... 288<br />
In re Am. Apparel, Inc. S’holders Litig., 855 F. Supp. 2d 1043 (C.D. Cal. 2012) ....................... 295<br />
In re Am. Int’l Grp., Inc. Sec. Litig., 2012 WL 345509 (S.D.N.Y. Feb. 2, 2012). ....................... 391<br />
In re Ambit Capital Pvt. Ltd., Release No. 68295, 2012 SEC LEXIS 3657 (Nov. 27,<br />
2012) .................................................................................................................................................. 525<br />
In re American Apparel, Inc. Shareholder <strong>Litigation</strong>, 855 F.Supp.2d 1043<br />
(C.D.Cal.,2012. January 13, 2012 ) ................................................................................................. 156<br />
In re American Funds Securities <strong>Litigation</strong>, 479 Fed.Appx. 782 (C.A.9 Cal., 2012) ................. 171<br />
In re Anadigics, Inc., 484 F. App’x 742 (3d Cir. 2012) ................................................................. 240<br />
In re Apollo Group Inc. Securities Litig., 2012 WL 1378677 (D. Ariz. Apr. 20, 2012).............. 470<br />
In re Apollo Group, Inc. Sec. Litig., Nos. CV-10-1735-PHX-JAT, CV-10-2044-PHX-<br />
JAT, CV-10-2121-PHX, JAT, 2012 WL 2376378 (D. Ariz. June 22, 2012) ................................. 84<br />
In re Apollo Grp. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,924 (D. Ariz.<br />
June 22, 2012) ................................................................................................................................... 294<br />
In re Apollo Grp., Inc., Sec. Litig., 2012 WL 4513608 (D. Ariz. Oct. 2, 2012). .......................... 393<br />
In re A-Power Energy Generation Sys. Sec. Litig., 2012 U.S. Dist. LEXIS 79417 (C.D.<br />
Cal. May 31, 2012) ........................................................................................................................... 298<br />
In re Application of Midas Sec., LLC, Release No. 34-66200, 2012 SEC LEXIS 199 (Jan.<br />
20, 2012)............................................................................................................................................ 480<br />
In re Application of World Trade Financial Corp., Release No. 66114, 2012 SEC LEXIS<br />
56 (Jan. 6, 2012). .............................................................................................................................. 479<br />
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012). .. 533, 534<br />
In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Sec.<br />
Act , 2012 WL 6644623 (S.D.N.Y. 2012) ....................................................................................... 159<br />
In re Austin Capital Mgmt. Ltd., Sec. & Employee Ret. Income Sec. Act (ERISA) Litig.,<br />
No. 09 M.D. 2075, 2012 WL 6644623 (S.D.N.Y. Dec. 21, 2012) .................................................. 34<br />
In re Austin Capital Mgmt., Ltd., Sec. & ERISA Litig., 2012 WL 6644623 (S.D.N.Y. Dec.<br />
21, 2012)............................................................................................................................................ 208<br />
xvi
In re Axa Advisors, LLC, Release No. 34-66206, 2012 SEC LEXIS 206 (Jan. 20,<br />
2012). ................................................................................................................................ 358, 479, 521<br />
In re Bank of Am. Corp. Sec., Derivative, and Emp. Ret. Income Sec. Act (ERISA) Litig.,<br />
281 F.R.D. 134 (S.D.N.Y. 2012) ....................................................................................................... 14<br />
In re Bank of America Corp. Sec., Deriv. and Employee Ret. Income Sec. Act Litig. No.<br />
09 MD 2058, 2012 WL 1353523 (S.D.N.Y. 2012) ........................................................................ 106<br />
In re Bank of America Corp. Securities, Derivative, and Employment Retirement Income<br />
Security Act (ERISA) <strong>Litigation</strong>, 2012 WL 1353523 (S.D.N.Y. April 12, 2012)......................... 161<br />
In re Barriger, Release No. 66142, 2012 SEC LEXIS 105 (Jan. 26, 2012). ................................ 501<br />
In re Bauer, Release No. 67205, 2012 SEC LEXIS 1865 (June 14, 2011). ................................. 514<br />
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012) ............................................. 108, 402<br />
In re Bear Stearns Cos. Sec., Derivative, and ERISA Litig., 2012 WL 5465381 (S.D.N.Y.<br />
Nov. 9, 2012). ................................................................................................................................... 390<br />
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746<br />
(S.D.N.Y. 2012) ............................................................................................................. 9, 35, 253, 402<br />
In re Berger, Release No. 66365, 2012 SEC LEXIS 1006 (Feb. 9, 2012). .................................. 517<br />
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012). ... 361, 485, 522<br />
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012). .............. 502, 510<br />
In re Blimline, Release No. 68347, 2012 SEC LEXIS 3733 (Dec. 4, 2012). ............................... 505<br />
In re Bogar, Securities Exchange Act of 1934 Release No. 67769, 2012 SEC LEXIS<br />
2786 (Aug. 31, 2012)........................................................................................................................ 134<br />
In re Boston Scientific Corp. Securities <strong>Litigation</strong>, 686 F.3d 21 (C.A.1 Mass., 2012) ................ 167<br />
In re Bowen, Release No. 68266, 2012 SEC LEXIS 3604 (Nov. 19, 2012)................................. 533<br />
In re BP P.L.C. Sec. Litig., 852 F. Supp. 2d 767 (S.D. Tex. 2012) .............................. 195, 212, 287<br />
In re BP P.L.C. Securities Litig., 853 F. Supp.2d 767 (S.D. Tex. 2012). ..................................... 464<br />
In re BP p.l.c. Securities <strong>Litigation</strong>, 843 F.Supp.2d 712 (S.D.Tex.,2012. February<br />
13, 2012)........................................................................................................................... 164, 235, 286<br />
In re Braff, Release No. 66467, 2012 SEC LEXIS 620 (Feb. 24, 2012). ..................................... 529<br />
In re Bravo, Release No. 67805, 2012 SEC LEXIS 2854 (Sept. 7, 2012).................................... 518<br />
xvii
In re Brogger, Release No. 66594, 2012 SEC LEXIS 821 (Mar. 14, 2012). ............................... 514<br />
In re Brown, Release Nos. 66469 & 3376, 2012 SEC LEXIS 636 (Feb. 27, 2012).... 340, 360, 482<br />
In re Buggy, Release No. 66205, 2012 SEC LEXIS 211 (Jan. 20, 2012). .................................... 505<br />
In re Campbell, Release No. 67770, 2012 SEC LEXIS 2790 (Aug. 31, 2012). ........................... 502<br />
In Re Carter’s Inc. Securities <strong>Litigation</strong>, 2012 WL 3715241 (N.D. Ga. Aug. 28, 2012) ............ 166<br />
In re Celera Corp. S’holder Litig., 2012 Del. Ch. LEXIS 66 (Del. Ch. Mar. 23, 2012). ............ 345<br />
In re Central European Dist. Corp. Sec. Litig., 2012 WL 5511711 (D.N.J. Nov. 14, 2012) ...... 179<br />
In Re Checking Account Overdraft Litig., 2012 U.S. App. LEXIS 15781 (11th Cir. Mar.<br />
11, 2012)............................................................................................................................................ 416<br />
In Re Checking Account Overdraft Litig., 674 F.3d 1252 (11th Circ. 2012) ................................ 416<br />
In Re Checking Account Overdraft Litig., 685 F.3d 1269 (11th Cir. 2012). ................................ 416<br />
In re China Educ. Alliance, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,804 (C.D. Cal.<br />
Apr. 6, 2012) ..................................................................................................................................... 297<br />
In re China Intelligent Lighting & Elecs. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,008<br />
(C.D. Cal. Sept. 5, 2012) .................................................................................................................. 298<br />
In re China Intelligent Lighting & Electronics, Inc. Sec. Litig., CV 11-2768 PSG SSX,<br />
2012 WL 3834815 (C.D. Cal. Sept. 5, 2012).................................................................................... 48<br />
In re China Valves Tech. Sec. Litig., No. 11 CIV. 0796 LAK, 2012 WL 4039852<br />
(S.D.N.Y. Sept. 12, 2012) ......................................................................................... 35, 264, 272, 460<br />
In Re China Valves Technology Securities <strong>Litigation</strong>, 2012 WL 4039852 (S.D.N.Y. Sept.<br />
12, 2012)............................................................................................................................................ 163<br />
In re Chiu, Release Nos. 6647 & 3367, 2012 SEC LEXIS 639 (Feb. 27, 2012).......................... 341<br />
In re Cioffi, Release No. 67250, 2012 SEC LEXIS 1967 (June 25, 2012); In re Tannin,<br />
Release No. 67249, 2012 SEC LEXIS 1968 (June 25, 2012)........................................................ 505<br />
In re CMED Sec. Litig., 2012 WL 1118302 (S.D.N.Y. Apr. 2, 2012) .......................................... 177<br />
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012). .................. 499, 506<br />
In re Commodity Exch. Inc., 2012 U.S. Dist. LEXIS 181487 (S.D.N.Y. Dec. 21, 2012)............ 325<br />
In re Computer Sciences Corp. Sec. Litig., 2012 WL 3779349 (E.D. Va. Aug. 29, 2012) ......... 194<br />
xviii
In re Computer Sciences Corporation Securities <strong>Litigation</strong>, 2012 WL 3779349 (E.D.Va.<br />
Aug. 29, 2012) .................................................................................................................................. 158<br />
In re Constellation Energy Group, Inc., 2012 U.S. Dist. LEXIS 44036 (D. Md. Mar. 28,<br />
2012) .................................................................................................................................................. 284<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal<br />
2012) .................................................................................................................................................... 21<br />
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062<br />
(C.D. Cal. 2012) .......................................................................................... 21, 47, 407, 408, 410, 411<br />
In re CRM Holdings, Ltd. Sec. Litig., No. 10-Civ. 975 RPP, 2012 WL 1646888 (S.D.N.Y.<br />
May 10, 2012) ..................................................................................................................................... 73<br />
In re CRM Holdings, Ltd., 2012 U.S. Dist. LEXIS 66034 (S.D.N.Y. May 10, 2012) ................. 256<br />
In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012) .................................................................4, 42<br />
In re Dent, Release No. 68223, 2012 SEC LEXIS 3511 (Nov. 14, 2012). ................................... 506<br />
In re Detling, Release No. 66161, 2012 SEC LEXIS 142 (Jan. 17, 2012) ................................... 340<br />
In re Diamond Foods Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,216 (N.D. Cal.<br />
Nov. 30, 2012) .................................................................................................................................. 303<br />
In Re Diamond Foods, Inc., 2012 U.S. Dist. LEXIS 74129 (N.D. Cal. May 29, 2012) .............. 126<br />
In re Diamond Foods, Inc., Sec. Litig., 281 F.R.D. 405 (N.D Cal. 2012) ........................... 184, 186<br />
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012) ..................................... 13, 403<br />
In re Dot Hill Sys. Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. Sept. 2, 2008). .......... 477<br />
In re Drimal, Release No. 66314, 2012 SEC LEXIS 1001 (Feb. 2, 2012). .................................. 515<br />
In re eBX, LLC, Release 67969, 2012 SEC LEXIS 3150 (Oct. 3, 2012). ..................................... 527<br />
In re Echeverri, Release No. 66088, 2012 SEC LEXIS 1000 (Jan. 3, 2012). .............................. 515<br />
In re Edelweiss Fin. Serv. Ltd., Release No. 68298, 2012 SEC LEXIS 3654 (Nov. 27,<br />
2012) .................................................................................................................................................. 526<br />
In re Electronic <strong>Broker</strong>age Systems, LLC, FINRA Proc. Nos. 20110270289 (ARCA), and<br />
20110302093 and 20110270122 (NYSE), NYSE Disc. Action 2012-4, 2012 NYSE Disc.<br />
Action LEXIS 4 (May 1, 2012). ...................................................................................................... 497<br />
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012). .................... 502, 511<br />
xix
In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 2012 WL 6184269 (D. Mass.<br />
Dec. 10, 2012). .................................................................................................................................. 389<br />
In re Facebook, Inc. IPO Securities and Derivative <strong>Litigation</strong>, 2012 WL 6061862<br />
(S.D.N.Y. Dec. 6, 2012). ......................................................................................................... 174, 468<br />
In re Fannie Mae 2008 ERISA Litig., No. 09 Civ. 1350 PAC, 09 MDL 2013 PAC, 2012<br />
WL 5198463 (S.D.N.Y. Oct. 22, 2012) ............................................................................................ 77<br />
In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y.<br />
Aug. 30, 2012) ......................................................................................................................... 263, 271<br />
In re Fannie Mae 2008 Sec. Litig., 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012). ........... 162, 209<br />
In re Ferrer, Securities Exchange Act of 1934 Release No. 66892, 2012 SEC LEXIS<br />
1403 (May 1, 2012) .......................................................................................................................... 135<br />
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012). ....................... 500, 511<br />
In re Finisar Corp. Derivative Litig., No. C-06-07660 RMW, 2012 WL 2873844 (N.D.<br />
Cal. July 12, 2012) ..................................................................................................................... 87, 127<br />
In re First Solar Derivative Litig., No. CV-12-00769-PHX-DGC, 2012 WL 6570914 (D.<br />
Ariz. Dec. 17, 2012) ........................................................................................................................... 84<br />
In re Fleishman, Release No. 67190, 2012 SEC LEXIS 1849 (June 12, 2012). .......................... 515<br />
In re Folan, Release No. 66127, 2012 SEC LEXIS 1003 (Jan. 10, 2012).................................... 506<br />
In re Gables Mgmt., LLC, 473 B.R. 352 (Bankr. D. Idaho 2012) ..................................................... 4<br />
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012) ........................... 10, 36, 161<br />
In re Gen. Elec. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012) ...................................... 105, 250<br />
In re Gengler, Release No. 67918, 2012 SEC LEXIS 3027 (Sept. 24, 2012). ............................. 507<br />
In re Gentiva Sec. Litig., 281 F.R.D. 108 (E.D.N.Y. 2012) ........................................................... 173<br />
In re Genzyme Corp., 2012 WL 1076124 (D. Mass. March 30, 2012) ................................ 150, 244<br />
In re GMR Securities <strong>Litigation</strong>, 2012 WL 5457534 (S.D.N.Y. Nov. 8, 2012). .......................... 478<br />
In re Goldfarb, 96 A.D.3d 12 (N.Y. App. Div. 2d Dep’t 2012) .................................................... 100<br />
In re Goldman Sachs Execution & Clearing, L.P., FINRA Proc. No. 20110270059, 2012<br />
NYSE Disc. Action LEXIS 5 (July 23, 2012). ............................................................................... 496<br />
xx
In re Goldman, Sachs & Co., FINRA Proceeding No. 20110270394, NYSE Disc. Action<br />
2012-12; 2012 NYSE Disc. Action LEXIS 3 (April 4, 2012). ...................................................... 497<br />
In re Goldman, Sachs & Co., FINRA Proceeding Nos. 20110270256, 20110270345,<br />
20110270250, NYSE Disc. Action 2012-1, 2012 NYSE Disc. Action LEXIS 1 (Jan. 9,<br />
2012). ................................................................................................................................................. 498<br />
In re Goldman, Sachs & Co., Release No. 67934, 2012 SEC LEXIS 3086 (Sept. 27,<br />
2012). ................................................................................................................................................. 527<br />
In re Groupon Derivative Litig., No. 12-CV-5300, 2012 WL 3133684 (N.D. Ill. July 31,<br />
2012) ........................................................................................................................................... 20, 182<br />
In re H. Clayton Peterson, Release No. 3391, Release No. 67282, Release No. 34-67282,<br />
Release No. AE-3391, 2012 WL 2411469 (June 27, 2012) ............................................................ 92<br />
In re Heckmann Corp. Sec. Litig., 869 F. Supp.2d 519 (D. Del. 2012). ....................................... 463<br />
In re Hold Brother Execution Services, LLC, FINRA Proc. Nos. 20110270318,<br />
20110270169, and 20110297129, NYSE Disc. Action 2012-8, 2012 NYSE Disc. Action<br />
LEXIS 8 (Oct. 5, 2012). ................................................................................................................... 495<br />
In re Hold Brothers On-Line Inv. Servs., LLC, Release No. 34-67924, 2012 SEC<br />
LEXIS 3029 (Sept. 25, 2012). ................................................................................................ 484, 518<br />
In re HP Derivative Litig., 2012 U.S. Dist. LEXIS 137640 (N.D. Cal. Sept. 25, 2012) ............. 129<br />
In re Hunter Adams, Release No. 67019, 2012 SEC LEXIS 1564 (May 18, 2012). ................... 519<br />
In re IMAX Sec. Litig., 2012 WL 3133476 (S.D.N.Y. Aug. 1, 2012). .......................................... 390<br />
In re Indymac Mortg.-Backed Sec. Litg., 286 F.R.D. 226 (S.D.N.Y. 2012). ............................... 469<br />
In re IndyMac Mortgage-Backed Sec. Litig., No. 09 Civ. 4583, 2012 WL 3553083<br />
(S.D.N.Y. Aug. 17, 2012) ........................................................................................... 16, 37, 261, 269<br />
In re Int’l Mgmt. Assocs., LLC, 2012 WL 2105908 (Bankr. N.D. Ga. Apr. 3, 2012). ................. 386<br />
In re ITT Educational Services, Inc. and Securities and Shareholder Derivatives Litig.,<br />
859 F. Supp. 2d 572 (S.D.N.Y. 2012) .................................................................................... 160, 256<br />
In re Jiangbo Pharm., Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,958 (S.D. Fla.<br />
Aug. 1, 2012) .................................................................................................................................... 309<br />
In re Jiangbo Pharmaceuticals, Inc., Securities <strong>Litigation</strong>, 2012 WL 3150085 (S.D.Fla.<br />
2012) .................................................................................................................................................. 164<br />
In re Jilaine H. Bauer, Esq., Release No. 68214, 2012 WL 5493356 (Nov. 13, 2012) ................. 93<br />
xxi
In re JM Fin. Institutional Sec. Private Ltd., Release No. 68297, 2012 SEC LEXIS 3655<br />
(Nov. 27, 2012) ................................................................................................................................. 526<br />
In re John Jantzen, Release No. 472, 2012 WL 5422022 (Nov. 6, 2012) ...................................... 93<br />
In re JP Morgan Auction Rate Sec. Mktg. Litig., 867 F. Supp. 2d 407 (S.D.N.Y. 2012) ............ 254<br />
In re JP Morgan Auction Rate Securities (ARS) Marketing <strong>Litigation</strong>, 867 F. Supp. 407<br />
(S.D.N.Y. 2012) ................................................................................................................................ 160<br />
In re JP Turner & Co., LLC, Release No. 34-67808, 2012 SEC LEXIS 2852 (Sept. 10,<br />
2012). ................................................................................................................................................. 483<br />
In re JP Turner & Co., LLC, Release No. 67808, 2012 SEC LEXIS 2852 (Sep. 10, 2012). ...... 523<br />
In re Kimelman, 94 A.D.3d 148 (N.Y. App. Div. 2d Dep’t 2012) .................................................. 99<br />
In re Kimelman, Release No. 66626, 2012 SEC LEXIS 889 (Mar. 20, 2012). ............................ 516<br />
In re Kueng, Release No. 66585, 2012 SEC LEXIS 815 (Mar. 13, 2012). .................................. 516<br />
In re K-V Pharm. Co. Sec. Litig., 2012 WL 1570118 (E.D.Mo. May 3, 2012)............................ 183<br />
In re L & L Energy, Inc. Securities <strong>Litigation</strong>, 2012 WL 6012787 (W.D.Wash.,2012<br />
December 03, 2012) ......................................................................................................................... 148<br />
In re Labineri, Release No. 66318, 2012 SEC LEXIS 404 (Feb. 3, 2012)................................... 503<br />
In re Leaddog Capital Mkts., LLC, 2012 SEC LEXIS 2918 (Sept. 14, 2012).............................. 343<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052<br />
(S.D.N.Y. Oct. 15, 2012)......................................................................................................... 266, 274<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 4866504 (S.D.N.Y. Oct. 15, 2012). ........... 405<br />
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 6584524 (S.D.N.Y. Dec. 18, 2012). ........... 404<br />
In re Lehman Bros. Sec. and ERISA Litig., 2012 WL 6603321 (S.D.N.Y. Dec. 17,<br />
2012) ......................................................................................................................................... 161, 208<br />
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011) ..................... 112<br />
In re Lehman Bros. Sec. Litig., 2012 U.S. Dist. LEXIS 148177 (S.D.N.Y. Oct. 15, 2012). ....... 323<br />
In re Lehman Bros. Secs. & Erisa Litig., 2012 U.S. Dist. LEXIS 90796 (S.D.N.Y. June<br />
29, 2012)............................................................................................................................................ 443<br />
In re Lehman Brothers and ERISA Litig., No. 09 Civ. 6040, 2012 WL 4866504 (S.D.N.Y.<br />
Oct. 15, 2012) ..................................................................................................................................... 18<br />
xxii
In re Level 3 Commc’ns Sec. Litig., 667 F.3d 1331 (10th Cir. 2012) ........................................... 242<br />
In re Level 3 Communications, Inc. Securities <strong>Litigation</strong>, 667 F.3d 1331 (C.A.10 Colo.<br />
2012) .................................................................................................................................................. 172<br />
In re Longtop Fin. Techs. Ltd. Sec. Litig., 2012 U.S. Dist. LEXIS 91004 (S.D.N.Y.<br />
June 28, 2012) ................................................................................................................................... 258<br />
In re Lopez, Release No. 66638, 2012 SEC LEXIS 907 (Mar. 21, 2012). ................................... 519<br />
In re Luna, Securities Exchange Act of 1934 Release No. 67864, 2012 SEC LEXIS 2948<br />
(Sept. 14, 2012) ................................................................................................................................. 136<br />
In re Madoff, Release No. 67512, 2012 SEC LEXIS 2367 (July 26, 2012). ................................ 511<br />
In re Marks, Release No. 68275, 2012 SEC LEXIS 3616 (Nov. 20, 2012). ................................ 507<br />
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012)....................... 499, 507<br />
In re Massey Energy Co. Sec. Litig., 2012 U.S. Dist. LEXIS 42563 (S.D. W. Va. Mar. 28,<br />
2012) .................................................................................................................................................. 285<br />
In re Mazuchowski, Release No. 67532, 2012 SEC LEXIS 2387 (July 30, 2012). ..................... 513<br />
In re McCaffrey, Release No. 66844, 2012 SEC LEXIS 1279 (Apr. 23, 2012). .......................... 534<br />
In re Med. Capital Sec. Litig., 842 F. Supp. 2d 1208 (C.D. Cal. 2012). ....................................... 398<br />
In re MELA Sciences, Inc. Sec. Litig., 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012) ....... 163, 192<br />
In re Merck & Co. Inc., Vytorin / Zetia Sec. Litig., 2012 WL 4482041 (D.N.J. Sept. 25,<br />
2012) .................................................................................................................................................. 109<br />
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2012 WL 6840532 (D. N.J. Dec. 20,<br />
2012). ................................................................................................................................................. 405<br />
In re Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,239 (D.N.J. Dec. 20, 2012).................. 283<br />
In re Merck & Co., 2012 U.S. Dist. LEXIS 123800 (D.N.J. Aug. 29, 2012) ............................... 282<br />
In re Merck & Co., Inc. Securities, Derivative & “ERISA” <strong>Litigation</strong>, 2012 WL 3779309<br />
(D.N.J. Aug. 29, 2012) ..................................................................................................................... 152<br />
In re Merrill Lynch Auction Rate Sec. Litig., Nos. 09 MD 2030 (LAP), 10 Civ. 0124<br />
(LAP), 2012 WL 1994707 (S.D.N.Y. June 4, 2012) ........................ 37, 61, 215, 221, 224, 251, 387<br />
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Proc. No. 20110270034,<br />
NYSE Disc. Action 2012-7, 2012 NYSE Disc. Action LEXIS 7 (Sept. 13, 2012). .................... 495<br />
xxiii
In re MGM Mirage Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,787 (D. Nev. Mar. 26,<br />
2012) .................................................................................................................................................. 304<br />
In re MGM Mirage Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. June 21, 2008). ....... 476<br />
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012). .......... 358, 531<br />
In re MidSouth Capital, Inc., Securities Exchange Act of 1934 Release No. 66828, 2012<br />
SEC LEXIS 1254 (Apr. 18, 2012) .......................................................................... 138, 341, 512, 528<br />
In re Mindlin, Release No. 66246, 2012 SEC LEXIS 335 (Jan. 26, 2012) .................................. 516<br />
In re Mona Lisa at Celebration, LLC, 472 B.R. 582 (Bankr. M.D. Fla. 2012) ................................ 5<br />
In re Montford & Co., 2012 SEC LEXIS 1264, SEC Initial Decision Release No. 457<br />
(Apr. 20, 2012) .................................................................................................................................. 342<br />
In re Morgan Stanley & Co., LLC, FINRA Proceeding No. 20110270171, 2012 NYSE<br />
Disc. Action LEXIS 6 (Aug. 10, 2012). .......................................................................................... 496<br />
In re Morgan, Release No. 67974, 2012 SEC LEXIS 3138 (Oct. 3, 2012). ................................. 524<br />
In re Mullins, Release No. 66373, 2011 SEC LEXIS 464 (Feb. 10, 2012). ................................. 529<br />
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., --- F. Supp. 2d ---, 2012<br />
WL 2450161 (D. Md. June 26, 2012) ........................................................... 20, 43, 44, 81, 284, 405<br />
In re Murphy & Durieu, FINRA Proc. No. 20110270062, NYSE Disc. Action 2012-9,<br />
2012 NYSE Disc. Action LEXIS 9 (Oct. 15, 2012). ...................................................................... 495<br />
In re Murphy, Release No. 66433, 2012 SEC LEXIS 564 (Feb. 21, 2012). ................................. 535<br />
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio<br />
2012) ................................................................................................ 217, 221, 229, 327, 328, 350, 388<br />
In re Netflix, Inc., Sec. Litig., 2012 WL 1496171 (N.D. Cal. Apr. 27, 2012)............................... 186<br />
In re Northfield Labs., Inc. Sec. Litig., 2012 WL 2458445 (N.D. Ill. June 26, 2012). ................ 393<br />
In re Novatel Wireless Sec. Litig., No. 08CV1689 AJB RBB, 2012 WL 5463214 (S.D.<br />
Cal. Nov. 8, 2012)...................................................................................................................... 89, 114<br />
In re Novell, Inc. S'holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).116, 243, 315<br />
In re Oppenheimer Champion Fund Sec. Fraud Class Actions, 2012 U.S. Dist. LEXIS<br />
35243 (D. Colo. Mar. 15, 2012). ..................................................................................................... 435<br />
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo.<br />
2012) .......................................................................................................................23, 49, 50, 306, 408<br />
xxiv
In re OppenheimerFunds, Inc., Release No. 67142, 2012 LEXIS 1765 (June 6, 2012). ............. 513<br />
In re Passaro, Release No. 68477, 2012 SEC LEXIS 4023 (Dec. 19, 2012). .............................. 503<br />
In re Pfizer Inc. Sec. Litig., 282 F.R.D. 38 (S.D.N.Y. 2012) ........................................................... 72<br />
In re Plate, Release No. 66313, 2012 SEC LEXIS 1005 (Feb. 2, 2012). ..................................... 517<br />
In re Premo, 2012 SEC LEXIS 4036 (Dec. 26, 2012). .................................................................. 344<br />
In re Proshares Trust Sec. Litig., No. 09 Civ. 6935, 2012 WL 3878141 (S.D.N.Y. Sept. 7,<br />
2012) ................................................................................................................................... 17, 263, 272<br />
In re Puttick, Release No. 66879, 2012 SEC LEXIS 2089 (Apr. 30, 2012). ................................ 520<br />
In re QA3 Fin. Corp., 466 B.R. 142 (Bankr. D. Neb. Jan. 18, 2012) ............................................ 293<br />
In re Quantek Asset Mgmt., Release Nos. 9326, 3408, & 30085, 2012 SEC LEXIS 1654<br />
(May 29, 2012).................................................................................................................................. 343<br />
In re Ramsey, Release No. 66744, 2012 SEC LEXIS 1117 (Apr. 5, 2012). ................................. 503<br />
In re Refco Inc. Sec. Litig., 859 F. Supp. 2d 644 (S.D.N.Y. 2012) ...................................... 206, 317<br />
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (2d Cir. 2012) ............................ 7, 149, 241, 460<br />
In re Ritchie, Release No. 66684, 2012 SEC LEXIS 1016 (Mar. 29, 2012). ............................... 520<br />
In re Rizzo, Release Nos. 67479 & 3436, 2012 Fed. Sec. L. Rep. (CCH) 80,127<br />
(July 20, 2012). ................................................................................................................ 360, 482, 523<br />
In re Rough Rice Commodity Litig., 2012 U.S. Dist. LEXIS 17773 (N.D. Ill. Feb. 9,<br />
2012) .................................................................................................................................................. 329<br />
In re Royal Bank of Scotland Grp. plc Sec. Litig., No. 09 Civ. 300 (DAB), 2012 WL<br />
3826261 (S.D.N.Y. Sept. 4, 2012) ..................................................................................................... 37<br />
In re Ruiz, Release No. 66573, 2012 SEC LEXIS 792 (Mar. 12, 2012). ...................................... 508<br />
In re Satyam Computer Servs. Ltd. Sec. Litig., 2013 WL 28053 (S.D.N.Y. Jan. 2, 2013) .......... 108<br />
In re Schering-Plough Corp./ENHANCE Sec. Litig., No. CIV. 8-397 DMC/JAD, 2012<br />
WL 4482032 (D.N.J. Sept. 25, 2012) ....................................................................................... 42, 109<br />
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012). .................... 504, 512<br />
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012). ...................... 504, 508<br />
In re Smith & Wesson Holding Corp. Sec. Litig. 669 F.3d 68 (1 st Cir. 2012) .............................. 101<br />
xxv
In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012) ................... 189, 238<br />
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977<br />
(S.D.N.Y. Aug. 15, 2012) ....................................................................................................... 260, 268<br />
In re Still Water Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. Apr. 3,<br />
2012) .................................................................................................................................................. 119<br />
In re Stillwater Capital Partners Inc. Litig., 851 F. Supp. 2d 556 (S.D.N.Y. 2012) ................... 207<br />
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012) .. 206, 254, 319<br />
In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277 (S.D.N.Y. 2012) ................... 255<br />
In re Sturm, Ruger & Co. Sec. Litig., 2012 WL 3589610 (D. Conn. Aug. 20, 2012). ................. 389<br />
In re Tak, Release No. 66147, 2012 SEC LEXIS 121 (Jan. 12, 2012). ........................................ 509<br />
In re Thornburg Mortg. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,218 (D.N.M.<br />
Nov. 26, 2012) .................................................................................................................................. 307<br />
In re Thornburg Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2012 WL 6004176<br />
(D. N.M. Nov. 26, 2012) ................................................................................................... 51, 395, 471<br />
In re Thornburg Mortg., Inc., --- F.Supp.2d ---, 2012 WL 6004176 (D.N.M. Nov. 26,<br />
2012) ................................................................................................................................... 91, 395, 471<br />
In re Tucker, Release No. 68210, 2012 SEC LEXIS 3496 (Nov. 9, 2012). ................................. 534<br />
In re UBS AG Sec. Litig., No. 07-11225-RJS, 2012 WL 4471265 (S.D.N.Y. Sept. 28,<br />
2012) ................................................................................................................................... 38, 266, 273<br />
In re UBS Fin. Serv. Inc. of Puerto Rico, Release No. 66893, 2012 SEC LEXIS 1394<br />
(May 1, 2012).................................................................................................................................... 509<br />
In re UBS Fin. Svcs. Inc. of P.R., Securities Exchange Act of 1934 Release No. 66893,<br />
2012 SEC LEXIS 1394 (May 1, 2012) ........................................................................................... 137<br />
In re Urban, Release No. 3366, 2012 SEC LEXIS 346 (Jan. 26, 2012). ...................................... 359<br />
In re Urban, Release No. 34-66259, 2012 SEC LEXIS 346 (Jan. 26, 2012). .............................. 481<br />
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ---, 2012 WL 6634351 (9th Cir. Dec.<br />
21, 2012)............................................................................................................................. 66, 103, 150<br />
In re Veriphone Holdings, Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,238 (9th<br />
Cir. Dec. 21, 2012). .......................................................................................................................... 241<br />
In re Vivendi Univ., S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012) ................................. 52<br />
xxvi
In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012). ................................ 404<br />
In re Vivendi Universal, S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012)9, 38, 250, 385, 404<br />
In re Wachovia Equity Sec. Litig., 2012 WL 2774969 (S.D.N.Y. June 12, 2012). ...................... 391<br />
In re Wachovia Preferred Sec. & Bond/Notes Litig., 2012 WL 2589230 (S.D.N.Y. Jan. 3,<br />
2012). ................................................................................................................................................. 392<br />
In re Wal-Mart Stores, Inc. S'holder Derivative Litig., 2012 U.S. Dist. LEXIS 167923<br />
(W.D. Ark. Nov. 27, 2012) .............................................................................................................. 125<br />
In re Wells Fargo Sec., LLC, Release No. 67649, 2012 SEC LEXIS 2626 (Aug. 14,<br />
2012). ................................................................................................................................................. 500<br />
In re Wells Real Estate Inv. Trust Sec. Litig., 2012 U.S. Dist. LEXIS 156173 (N.D. Ga.<br />
Sept. 26, 2012) .................................................................................................................................. 130<br />
In re Western Pacific Capital Management, LLC, Release No. 67890, 2012 SEC LEXIS<br />
2962 (Sep. 19, 2012); In re Western Pacific Capital Management, LLC, Release No.<br />
67891, 2012 SEC LEXIS 2963 (Sep. 19, 2012). ............................................................................ 510<br />
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012) ............................... 19, 280<br />
In re Wilmington Trust Securities <strong>Litigation</strong>, 852 F.Supp.2d 477 (D.Del.,2012 March 29,<br />
2012) .................................................................................................................................................. 151<br />
In re Wilmington Trust. Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012) ....................................... 41<br />
In re Wolfson, Release No. 67450, 2012 SEC LEXIS 2266 (July 17, 2012); In re Wolfson,<br />
Release No. 67451, 2012 SEC LEXIS 2265 (July 17, 2012). ....................................................... 521<br />
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).357, 531, 532<br />
In re Yamashiro, Release No. 67789, 2012 SEC LEXIS 2839 (Sept. 5, 2012). ........................... 510<br />
In re Zhou, Release No. 67531, 2012 SEC LEXIS 2384 (July 30, 2012)..................................... 527<br />
In the Matter of Aladdin Capital, Adm. Proc. File No. 3-15134, 33 Act Release No. 9374,<br />
2012 SEC LEXIS 3911 (Dec. 17, 2012) ........................................................................................... 57<br />
In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-15098, 33<br />
Act Release No. 9368, 2012 SEC LEXIS 3569 (Nov. 16, 2012) .................................................... 57<br />
In the Matter of JP Turner & Company, LLC and William L. Mello, 2012 WL 3903395<br />
(S.E.C. Release No. 3-15014, Sept. 10, 2012) .................................................................................. 59<br />
In the Matter of Michael Bresner; Ralph Calabro; Jason Konner; and Dimitrios<br />
Koustoubos, 2012 WL 3903387 (S.E.C. Release No. 3-15015, Sept. 10, 2012) ........................... 61<br />
xxvii
In the Matter of Wells Fargo <strong>Broker</strong>age Services, LLC, Adm. Proc. File No. 3-14982, 33<br />
Act Release No. 9349, 2012 SEC LEXIS 2626 (Aug. 14, 2012) .................................................... 58<br />
Indus. Tech. Ventures LP v. Pleasant T. Rowland Revocable Trust, 2012 WL 777313<br />
(W.D.N.Y. Mar. 8, 2012). ................................................................................................................ 392<br />
Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC, No. Civ. 12-254<br />
(RHK/JSM), 2012 U.S. Dist. LEXIS 96263 (D. Minn. July 12, 2012) .......................................... 46<br />
Ipcon Collections LLC v. Costco Wholesale Corp., 698 F.3d 58 (C.A.2 N.Y., 2012) ................. 168<br />
Ireland v. Lear Capital, Inc., 2012 U.S. Dist. LEXIS 171544 (D. Minn. Dec. 4, 2012) ............. 420<br />
Israni v. Bittman, 473 Fed. Appx. 548 (9th Cir. 2012) .................................................................... 66<br />
Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. March 30, 2012) .............. 161, 254<br />
Jayhawk Capital Mgmt., LLC v. LSB Indus., Inc., 2012 WL 4210462 (D. Kan. Sept. 19,<br />
2012). ................................................................................................................................................. 380<br />
Jirak v. Eichten, No. A11-1388, 2012 WL 2505748 (Minn. Ct. App. July 2, 2012). .................. 363<br />
Johannsen v. Morgan Stanley Credit Corp., 2012 U.S. Dist. LEXIS 5367 (E.D. Cal. Jan.<br />
11, 2012)............................................................................................................................................ 421<br />
Jones v. U.S. Bank Nat’l Ass’n, No. 10 CV 0008, 2012 WL 899247 (N.D. Ill. Mar. 15,<br />
2012). ................................................................................................................................................. 371<br />
Joseph v. Mieka Corp., 282 P.3d 509 (Colo. App. 2012) .............................................................. 218<br />
Kaltenbacher v. Morgan Keegan & Co., 84 So. 3d 1127 (Fla. Dist. Ct. App. 2012). ................. 398<br />
Karam v. Corinthian Colleges, Inc., 2012 U.S. Dist. LEXIS 44153 (C.D. Cal. Jan. 30,<br />
2012) .................................................................................................................................................. 296<br />
Karpov v. Insight Enterprises, Inc., 471 Fed.Appx. 607 (C.A.9 Ariz., 2012) .............................. 171<br />
Katz v. China Century Dragon Media, Inc., No. LA CV11-02769 JAK (SSx), 2012 WL<br />
6644353 (C.D. Cal. Dec. 18, 2012) .......................................................................... 47, 297, 398, 470<br />
Katz v. Pershing, LLC, 672 F.3d 64 (1st Cir. 2012) ....................................................................... 227<br />
Kerr v. Exobox Techs. Corp., 2012 WL 201872 (S.D. Tex. Jan. 23, 2012) ................................. 352<br />
Kim v. Kearney, 838 F. Supp. 2d 1077 (D. Nev. 2012). ................................................................ 353<br />
King Cnty. v. IKB Deutsche Industriebank AG, 863 F. Supp. 2d 288 (S.D.N.Y. 2012) .............. 320<br />
xxviii
King Cnty. Wash. v. Merrill Lynch & Co., 2012 U.S. Dist. LEXIS 87734 (W.D. Wash.<br />
June 25, 2012) ................................................................................................................................... 305<br />
Kinnett v. Strayer Educ., Inc., No. 10-CV-2317-T-23MAP, 2012 WL 933285 (M.D. Fla.<br />
Jan. 3, 2012) ....................................................................................................................... 91, 243, 308<br />
Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir. 2012). .......................................................... 364<br />
Kool Radiators, Inc. v. Evans, 278 P.3d 310 (Ariz. Ct. App. 2012). ............................................ 397<br />
Kovtun v. Vivus, Inc., 2012 WL 4477647 (N.D. Cal. Sept. 27, 2012) .......................................... 199<br />
Krasner v. Rahfco Funds LP, 2012 U.S. Dist. LEXIS 134351 (S.D.N.Y. Aug. 9, 2012) ........... 260<br />
Krieger v. Atheros Communs., Inc., 2012 U.S. Dist. LEXIS 74214 (N.D. Cal. May 29,<br />
2012) .................................................................................................................................................. 127<br />
Kuriakose v. Fed. Home Loan Mortg. Corp., 2012 WL 4364344 (S.D.N.Y. Sept. 24,<br />
2012) .................................................................................................................................................. 191<br />
Kyung Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D.Cal. Aug. 29, 2012) .................. 165<br />
L.A. Mun. Police Emp. Ret. Sys. v. Cooper Indus., 2012 Fed. Sec. L. Rep. (CCH)<br />
97,054 (N.D. Ohio Oct. 16, 2012) ................................................................................................ 289<br />
La. Mun. Police Emps.’ Ret. Sys. v. KPMG, <strong>LLP</strong>, 2012 WL 3780344 (N.D. Ohio Aug. 31,<br />
2012). ................................................................................................................................................. 407<br />
Lakeview Inv., LP v. Schulman, 2012 WL 4461762 (S.D.N.Y. Sept. 27, 2012). ......................... 209<br />
Lamm v. State St. Bank & Trust Co., 2012 U.S. Dist. LEXIS 135008 (S.D. Fla. Aug. 21,<br />
2012) .................................................................................................................................................. 339<br />
Lane v. Page, 272 F.R.D. 581 (D.N.M. 2011) ................................................................................ 114<br />
Langley v. Jones, No. 11-CV-774-PK, 2012 WL 2019522 (D.Or. May 18, 2012)...................... 375<br />
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012) ............................. 213, 473<br />
Latour v. Citigroup Global Mkts., Inc., 2012 U.S. Dist. LEXIS 35976 (S.D. Cal. Mar. 15,<br />
2012). ................................................................................................................................................. 448<br />
Lau v. Mezei, No. 10 CV 4838(KMW), 2012 WL 3553092 (S.D.N.Y. Aug. 16, 2012)39, 261, 268<br />
LaVoice v. UBS Fin. Servs., Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012)............................ 540<br />
LaWarre v. Fifth Third Sec., Inc., 2012 Ohio 4016 (Ohio Ct. App., Sept. 5, 2012). ................... 362<br />
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012)............... 217, 227<br />
xxix
Lenartz v. Am. Superconductor Corp., Civ. No. 11-10582, 2012 WL 3039735 (D. Mass.<br />
July 26, 2012).................................................................................................. 8, 28, 67, 150, 245, 383<br />
Lerner v. Immelt, No. 10 Civ. 1807 DLC, 2012 WL 2197456 (S.D.N.Y. June 15, 2012) ............ 75<br />
Levin v. Barry Kaye & Assocs., Inc., 858 F.Supp.2d 914 (S.D. Ohio 2012) ............................3, 235<br />
Levinson v. Westport Nat’l Bank, 2012 WL 4490432 (D. Conn. Sept. 28, 2012)........................ 384<br />
Levitt v. Brooks, 669 F.3d 100 (2d Cir. 2012). ................................................................................. 63<br />
Levy v. Huszagh, No. 11-CV-3321, 2012 WL 4512038 (E.D.N.Y. Sept. 28, 2012)...................... 68<br />
Lewy v. Skypeople Fruit Juice, Inc., 2012 U.S. Dist. LEXIS 128416 (S.D.N.Y. Sept. 7,<br />
2012) ................................................................................................................................. 232, 264, 271<br />
Lewy v. SkyPeople Fruit Juice, Inc., No. 11 CIV. 2700 PKC, 2012 WL 3957916<br />
(S.D.N.Y. Sept. 10, 2012). ........................................................................................................ 39, 163<br />
Liberty Media Corp., LMC v. Vivendi Universal, S.A., 842 F. Supp. 2d 587 (S.D.N.Y.<br />
2012) .................................................................................................................................................. 207<br />
Lickiss v. Financial Industry Regulatory Authority, 208 Cal. App. 4th 1125 (2012) .................. 144<br />
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, No. 11 Civ. 398, 2012 WL<br />
4616958 (S.D.N.Y. Sept. 28, 2012)............................................................................ 18, 39, 265, 273<br />
Liverett v. Island Breeze Int’l, Inc., 2012 U.S. Dist. LEXIS 111621 (D.S.C. Aug. 9, 2012) ...... 351<br />
Lobaito v. Chase Bank, 2012 U.S. Dist. LEXIS 107344 (S.D.N.Y. July 30, 2012). ................... 432<br />
Longfield v Financial Tech. Partners, 2012 N.Y. Misc. LEXIS 5497 (N.Y. Sup. Ct. Nov.<br />
28, 2012)............................................................................................................................................ 456<br />
Lopes v. Viera, 2012 WL 691665 (E.D. Cal. Mar. 2, 2012). ......................................................... 379<br />
Louisiana Mun. Police Emps. Ret. Sys. v. Cooper Indust. PLC, 2012 U.S. Dist. LEXIS<br />
148542 (N.D. Ohio Oct. 16, 2012) .................................................................................................. 125<br />
Louisiana Pacific Corp. v. Money Market 1 Institutional Investment <strong>Dealer</strong>, 285 F.R.D.<br />
481 (N.D. Cal. Sept. 10, 2012). ....................................................................................................... 477<br />
Luciani v. Luciani, No. 10-CV-2583 JM WVG, 2012 WL 4953110 (S.D. Cal. Oct. 17,<br />
2012) ........................................................................................................................................... 89, 379<br />
Lumen v. Anderson, 280 F.R.D. 451 (W.D. Mo. 2012) ................................................................. 229<br />
Ly v. Solin, Inc., 2012 WL 6561557 (D.D.C. Dec. 17, 2012). ....................................................... 467<br />
xxx
M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y.<br />
2012 .................................................................................................................................. 216, 219, 225<br />
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012) ....22, 49, 104, 197, 304<br />
Marina v. Edward D. Jones & Co., 2012 WL 3885305 (D. Nev. Sept. 6, 2012)......................... 537<br />
Martinek v. Diaz, No. 11 C 7190, 2012 WL 2953183 (N.D. Ill Jul. 18, 2012). ........................... 372<br />
Mass. Mut. Life Ins. Co. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 121702 (C.D.<br />
Cal. Aug. 17, 2012) .......................................................................................................................... 298<br />
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass.<br />
2012) ......................................................................................................................................... 245, 409<br />
Mastick v. TD Ameritrade, Inc., 209 Cal. App. 4th 1258 (Cal. App. 2d Dist. 2012) ................... 428<br />
Matter of Bear, Stearns & Co., Inc. v. Int’l Capital & Mgt. Co. LLC, 99 A.D.3d 402<br />
(N.Y. App. Div. 1st Dep't 2012). ..................................................................................................... 437<br />
Matter of Citi International Financial Services LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125821 (March 19, 2012). .................... 494<br />
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125369 (Jan. 18, 2012).......................... 494<br />
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P126482 (May 22, 2012)......................... 492<br />
Matter of David Lerner Associates, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P191729 (Oct. 22, 2012). ........................ 489<br />
Matter of Goldman, Sachs & Co., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P125974 (April 12, 2012). ...................... 493<br />
Matter of Guggenheim Securities, LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P187302 (Oct. 11, 2012). ........................ 490<br />
Matter of Hold Brothers On-Line Investment Services, LLC, FINRA Press Release,<br />
available at: http://www.finra.org/Newsroom/NewsReleases/2012/P178687 (Sept. 25,<br />
2012). ................................................................................................................................................. 490<br />
Matter of Hudson Valley Capital Management, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P196921 (Nov. 8, 2012). ......................... 489<br />
Matter of Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P177007 (Sept. 24, 2012). ....................... 491<br />
xxxi
Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Press Release, available<br />
at: http://www.finra.org/Newsroom/NewsReleases/2012/P127129 (June 21, 2012). .................. 492<br />
Matter of Pruco Securities, LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P197541 (Dec. 26, 2012). ....................... 488<br />
Matter of Rodman & Renshaw LLC, FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P154856 (Aug. 22, 2012). ....................... 491<br />
Matters of Citigroup Global Markets, Inc., Goldman, Sachs & Co., J.P. Morgan<br />
Securities LLC, Merrill Lynch, Pierce , Fenner & Smith, Inc., Morgan Stanley & Co.,<br />
FINRA Press Release, available at:<br />
http://www.finra.org/Newsroom/NewsReleases/2012/P197554 (Dec. 27, 2012). ....................... 487<br />
McCrary v. Stifel, Nicolaus & Co., Inc., 687 F.3d 1052 (C.A.8 Mo., 2012) ....................... 170, 440<br />
McDowell v. Lopez, No. 2 CA–CV 2011–0073, 2012 WL 376690 (Ariz. Ct. App. Feb. 7,<br />
2012) ...................................................................................................................................................... 6<br />
McGee v. S-Bay Dev. LLC, 2012 Fed. Sec. L. Rep (CCH) 96,751 (M.D. Fla. Mar. 8,<br />
2012) .................................................................................................................................................. 309<br />
McGee v. S-Bay Dev., LLC, No. 11-CV-1091-T-27TGW, 2012 WL 760797 (M.D. Fla.<br />
Mar. 8 2012). ..................................................................................................................................... 376<br />
McIntyre v. Chelsea Therapeutics Int’l, Ltd., 2012 WL 3962522 (W.D.N.C. Aug. 16,<br />
2012) .................................................................................................................................................. 181<br />
McKenna v. Smart Techs. Inc., No. 11 Civ. 7673 (KBF), 2012 WL 3589655 (S.D.N.Y.<br />
Aug. 21, 2012) ........................................................................................................................... 40, 255<br />
Mercer v. Gupta, 880 F. Supp. 2d 486 (S.D.N.Y. 2012) ............................................................... 142<br />
Meridian Horizon Fund, L.P. v. Tremont Group Holdings, Inc., 2012 WL 4049953<br />
(S.D.N.Y Sept. 14, 2012) ................................................................................................................. 163<br />
Meridian Horizon Fund, LP v. KPMG, 487 Fed.Appx. 636 (C.A.2 N.Y., 2012) ............... 168, 312<br />
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Schwarzwaeler, 2012 WL 3264361 (3d<br />
Cir. Dec. 26, 2012). .......................................................................................................................... 535<br />
Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Case No. 2008014187701 (June 28,<br />
2012) .................................................................................................................................................. 145<br />
Merrill Lynch, Pierce, Fenner & Smith v. Smolcheck, 2012 WL 4056092 (S.D. Fla. Sept.<br />
17, 2012)............................................................................................................................................ 537<br />
xxxii
Merrill Lynch, Pierce, Fenner & Smith v. Smolchek, 2012 U.S. Dist. LEXIS 134089<br />
(S.D. Fla. Sept. 17, 2012). ................................................................................................................ 454<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Res., Inc., 47 A.3d 1 (App. Div.),<br />
cert denied, 56 A.3d 395 (N.J. 2012). ............................................................................................. 400<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super.<br />
45 (App.Div. 2012) .......................................................................................................... 425. 435, 456<br />
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Schwarzwaelder, 2012 U.S. App. LEXIS<br />
16845 (3d Cir. Aug. 13, 2012). ........................................................................................................ 439<br />
Merrill, Lynch, Fenner, Pierce & Smith Inc., FINRA Case No. 2009018601702 (Aug. 29,<br />
2012) .................................................................................................................................................. 145<br />
Messier v. Merrill Lynch Int'l Fin., Inc., 2012 Conn. Super. LEXIS 3140 (Conn. Super.<br />
Ct. Dec. 28, 2012). ............................................................................................................................ 455<br />
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 Del. Ch. LEXIS 287 (Del. Ch.<br />
Dec. 20, 2012) ................................................................................................................................... 346<br />
Meyer v. St. Joe Co., 2012 U.S. Dist. LEXIS 3861 (N.D. Fla. Jan. 23, 2012) ............................. 309<br />
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., No. 11-cv-00624-<br />
WYD-MJW, 2012 WL 6645097 (D. Colo. Dec. 19, 2012) .................................................... 50, 154<br />
Michael Douglas Venable, FINRA Case No. 2010021688101 ..................................................... 147<br />
Mill Bridge V, Inc. v. Benton, No. 11-1184, 2012 WL 4017804 (3d Cir. Sept. 13, 2012) ... 65, 239<br />
Miraglia v. Human Genome Science Inc., 2012 WL 987502 (D. Md. Mar. 22, 2012)................ 180<br />
Mitchell v. Cantor Fitzgerald, L.P., 2012 N.Y. Misc. LEXIS 5418 (N.Y. Sup. Ct. Nov.<br />
21, 2012)............................................................................................................................................ 429<br />
MJK Partners, LLC v. Husman, 877 F.Supp.2d 596 (N.D. Ill. 2012)........................................... 372<br />
Monk v. Johnson & Johnson, 2012 U.S. Dist. LEXIS 71425 (D.N.J. May 22, 2012) ................. 281<br />
Mordecai v. Morgan Keenan & Co., Inc., No. 11-04320, 2012 WL 2504038 (FINRA<br />
June 18, 2012) ..................................................................................................................................... 25<br />
Morgan Keegan & Co. v. Garrett, 2012 U.S. App. LEXIS 22057 (5th Cir. Oct. 23, 2012). ...... 439<br />
Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012). ......................... 389<br />
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22492 (9th Cir. Oct. 25, 2012). ........ 441<br />
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012) 415, 442<br />
xxxiii
Morgan Keegan & Co. v. Louise Silverman Trust, 2012 U.S. Dist. LEXIS 3870 (D. Md.<br />
Jan. 12, 2012). ................................................................................................................................... 444<br />
Morgan Keegan & Co. v. Pessel, 2012 U.S. Dist. LEXIS 60465 (D. Colo. May 1, 2012). ........ 451<br />
Morgan Keegan & Co. v. Sturdivant, 2012 U.S. Dist. LEXIS 120295 (S.D. Miss. Aug.<br />
24, 2012)............................................................................................................................................ 445<br />
Morgan Stanley & Co., LLC v. The Core Fund, 2012 U.S. Dist. LEXIS 115760 (M.D.<br />
Fla. July 11, 2012). ........................................................................................................................... 437<br />
MTA, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 Ala. LEXIS 167 (Ala.<br />
Dec. 7, 2012) ..................................................................................................................................... 424<br />
Musikantow v. Deutsche Bank AG, 2012 Ill. App. Unpub. LEXIS 1108 (Ill. App. Ct. 1st<br />
Dist. May 11, 2012) .......................................................................................................................... 427<br />
MV Ins. Consultants, LLC v. NAFH Nat'l Bank, 87 So. 3d 96 (Fla. Dist. Ct. App. 3d Dist.<br />
2012) .................................................................................................................................................. 428<br />
MVP Asset Mgmt. (USA) LLC v. Vestbirk, 2012 Fed. Sec. L. Rep. (CCH) 96,938 (E.D.<br />
Cal. July 11, 2012) ............................................................................................................................ 300<br />
N. Atl. Sec., LLC v. Me. Office of Sec., 2012 Me. Super. LEXIS 111 (Me. Super. July 10,<br />
2012) .................................................................................................................................................. 310<br />
N. Miami Beach Gen. Emp. Ret. Fund v. Parkinson, No. 10 C 6514, 2012 WL 4180566<br />
(N.D. Ill. Sept. 19, 2012) .................................................................................................................... 82<br />
N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ. 5310 (DAB), 2012<br />
WL 1076143 (S.D.N.Y. Mar. 29, 2012) .................................................................................. 41, 253<br />
NASDAQ OMX PHLX, Inc. v. PennMont Sec., 52 A.3d 296 (Pa. Super. Ct. 2012). ................... 363<br />
NASDAQ OMX PHLX, Inc. v. Pennmont Securities, 52 A.3d 296 (Pa. 2012) ............................. 143<br />
Nat’l Credit Union Admin. Bd. v. RBS Sec. Inc., Nos. 11-2340, 11-2649, 2012 WL<br />
3028803 (D. Kan. July 25, 2012) ................................................................................................24, 51<br />
NDX Advisors, Inc. v. Advisory Fin. Consultants, Inc., 2012 U.S. Dist. LEXIS 176977<br />
(N.D. Cal. Dec. 12, 2012) ................................................................................................................ 422<br />
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir.<br />
2012) ............................................................................................................................... 6, 26, 169, 377<br />
NECA–IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10 Civ. 440 (LAK)(HBP),<br />
2012 WL 3191860 (S.D.N.Y. Feb. 9, 2012) ..................................................................................... 40<br />
xxxiv
Nee v. Fin. Indus. Regulatory Auth., Inc., 2012 WL 832665 (Mass. Super. Feb. 17, 2012). ...... 413<br />
Negrete v. Allianz Life Ins. Co. of N. Am., Nos. CV 05-6838 CAS (MANx), CV 05-8908<br />
CAS (MANx), 2012 WL 6737390 (C.D. Cal. Dec. 28, 2012). ..................................................... 372<br />
New Jersey Carpenters Health Fund v. RALI Series 2006—Q01 Trust, 477 Fed.Appx.<br />
809 (2d Cir. 2012)................................................................................................................................. 8<br />
Niitsoo v. Alpha Natural Res. Inc., 2012 WL 5395812 (S.D.W.V. Nov. 5, 2012)....................... 211<br />
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012) ..................................... 27, 102, 382, 400<br />
Nova Leasing, LLC v. Sun River Energy, Inc., 2012 WL 3778332 (D. Colo. Aug. 31,<br />
2012) ................................................................................................................................. 155, 337, 375<br />
Ohlfs v. Charles Schwab & Co., 2012 U.S. Dist. LEXIS 7737 (D. Colo. Jan. 24, 2012). ........... 451<br />
Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012). ..................... 539<br />
Oklahoma Firefighters Pension and Retirement System v. Capella Educ. Co., 873<br />
F.Supp.2d 1070 (D. Minn. 2012) ............................................................................................ 153, 292<br />
Oliviera v. Citigroup North America, Inc., 2012 WL 1831230 (M.D. Fla. May 18, 2012). ....... 537<br />
Orlan v. Spongetech Delivery Sys., Inc., Sec. Litig., Nos. 10–CV–4093 (DLI)(JMA), 10–<br />
CV–4104 (DLI)(JMA), 2012 WL 1067975 (E.D.N.Y. Mar. 29, 2012) ................................. 29, 249<br />
Osborne v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 100205 (M.D. Fla. July<br />
19, 2012)............................................................................................................................................ 424<br />
Osborne v. Wells Fargo Advisors, LLC, 2012 WL 2952533 (M.D. Fla. July 19, 2012) ............. 538<br />
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12,<br />
2012) ................................................................................................................................. 430, 434, 447<br />
Ouwinga v. Benistar 419 Plan Services, Inc., 694 F.3d 783 (6th Cir., 2012) ..................... 149, 365<br />
Oxbow Calcining USA Inc. v. Am. Indus. Partners, 96 A.D.3d 646 (N.Y. App. Div.<br />
2012). ................................................................................................................................................. 411<br />
Pa. Pub. Sch. Emps.’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y.<br />
2012). .................................................................................................................................. 12, 259, 403<br />
Pa. Public School Emps.’ Ret. Sys. v. Bank of Am. Corp., 2012 WL 2847732 (S.D.N.Y.<br />
July 11, 2012).................................................................................................................................... 193<br />
Padilla v. Winger, No. 2:11CV897DAK, 2012 WL 1379228 (D. Utah Apr. 20, 2012)................ 52<br />
xxxv
Palazzo v. Fifth Third Bank, 2012 Ky. App. Unpub. LEXIS 585 (Ky. Ct. App. Aug. 17,<br />
2012) .................................................................................................................................................. 426<br />
Panther Partners Inc., v. Ikanos Commc’ns Inc., 681 F.3d 114 (2d Cir. 2012) ................ 8, 26, 458<br />
Passatempo v. McMenimen, 461 Mass. 279, 960 N.E.2d 275 (2012)............................................... 5<br />
Pastimes, LLC v. Clavin, 274 P.3d 714 (Mont. 2012). .................................................................. 399<br />
Pemberton v. Citgroup Global Markets, 268 P.3d 11 (Kan. App. 2012). ........................... 457, 540<br />
Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions,<br />
Inc., No. CIV. 10-898 CCC, 2012 WL 3113981 (D.N.J. July 31, 2012) ............................... 43, 282<br />
People v. <strong>Greenberg</strong>, 2012 WL 1582779 (N.Y. App. Div. May 8, 2012) .................................... 209<br />
Peters v. JinkoSolar Holding Co., 2012 WL 946875 (S.D.N.Y. Mar. 19, 2012) ......................... 177<br />
Peyser v. Kirshbaum, 2012 U.S. Dist. LEXIS 176873 (S.D.N.Y. Dec. 11, 2012 ........................ 418<br />
Phelps v. Stomber, 883 F. Supp. 2d 188 (D.D.C. 2012). ............................................................... 105<br />
Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012). ............. 368<br />
Pipefitters Local 636 Defined Benefit Plan v. Tekelec, 2012 Fed. Sec. L. Rep. (CCH)<br />
96,788 (D.N.J. May 22, 2012) ...................................................................................................... 281<br />
Pipefitters Local No. 636 Defined Ben. Plan v. Zale Corp., 2012 WL 5985075 (C.A.5<br />
Tex., 2012) ........................................................................................................................................ 169<br />
Pitkin v. Ocwen Fin. Corp., 2012 WL 5986480 (D. Md. Nov. 27, 2012). ................................... 412<br />
Plaintiffs’ S’holders Corp., v. Southern Farm Bureau Life Ins. Co., 2012 U.S. App.<br />
LEXIS 16713 (11th Cir. Aug. 10, 2012) ......................................................................................... 417<br />
Plumber’s Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-<br />
10446-RGS, 2012 WL 4480735 (D. Mass. Oct. 1, 2012) ................................................................ 27<br />
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 679<br />
F.3d 952 (C.A.7 Ind., 2012) ............................................................................................................. 170<br />
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin.<br />
Holdings Ltd., No. 11 Civ. 5097, 2012 WL 3283481 (S.D.N.Y. Aug. 13, 2012) .......................... 15<br />
Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan<br />
Acceptance Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,744 (E.D.N.Y. Feb. 23, 2012) .............. 248<br />
xxxvi
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan<br />
Acceptance Corp. I, No. 08 VC 1713(ERK)(WDW), 2012 WL 4053716 (E.D.N.Y. Sept.<br />
14, 2012).............................................................................................................................................. 29<br />
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan<br />
Acceptance Corp., No. 08 CV 1713 (ERK)(WDW), 2012 WL 601448 (E.D.N.Y. Feb. 23,<br />
2012) .................................................................................................................................................... 30<br />
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,<br />
2012 U.S. Dist. LEXIS 141626 (D. Mass. Oct. 1, 2012) ...................................................... 247, 401<br />
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 11 Civ. 4904 JPO, 2012 WL<br />
1868874 (N.D. Cal. May 22, 2012) .......................................................................................... 87, 201<br />
Police Ret. Sys. v. Intuitive Surgical, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,832 (N.D.<br />
Cal. May 22, 2012) ........................................................................................................................... 301<br />
Poptech L.P. v. Stewardship Inv. Advisors, LLC, 849 F. Supp. 2d 249 (D. Conn.<br />
2012) ................................................................................................................................. 104, 107, 315<br />
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,766<br />
(D. Conn. Mar. 19, 2012) ................................................................................................................. 247<br />
Prefontaine v. Research In Motion Ltd., 2012 WL 104770 (S.D.N.Y. Jan. 5, 2012) .................. 178<br />
Premium of America v. Save POA, 2012 U.S. Dist. LEXIS 139745 (D. Md. Sept. 27,<br />
2012) .................................................................................................................................................. 124<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., --- F.Supp.2d ---, 2012<br />
WL 4714799 (S.D.N.Y. Sept. 27, 2012) ........................................................................................... 77<br />
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799<br />
(S.D.N.Y. Sept. 27, 2012) .............................................................................. 191, 265, 273, 461, 462<br />
Prissert v. Emcore Corp., --- F.Supp.2d ---, 2012 WL 4504512 (D.N.M. Sept. 28, 2012) .. 91, 307<br />
Prudential Ins. Co. of Am. v. J.P. Morgan Secs., LLC, No. 12-CV-3489 (WHW), 2012<br />
U.S. Dist. LEXIS 181464 (D.N.J. Dec. 12, 2012). ......................................................................... 370<br />
Prudential Ins. Co. v. J.P. Morgan Securities, LLC, 2012 WL 6771977 (D.N.J. Dec. 20,<br />
2012). ................................................................................................................................................. 475<br />
Pub. Emples. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 280 F.R.D. 130 (S.D.N.Y.<br />
2012) ........................................................................................................................................... 13, 251<br />
Pub. Emps. Ret. Ass’n of N.M. v. Clearlend Secs., 2012 WL 2574819 (D.N.M. June 29,<br />
2012). ................................................................................................................................................. 395<br />
xxxvii
Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972 (8th Cir. 2012). .............................. 459<br />
Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972 (C.A.8 Mo., 2012) ....... 171<br />
Puente v. ChinaCast Educ. Corp., 2012 WL 3731822 (C.D. Cal. Aug. 22, 2012) ...................... 185<br />
Purser v. Coralli, 2012 WL 5875600 (N.D.Tex.,2012. November 21, 2012).............................. 166<br />
Puskala v. Koss Corp., 799 F. Supp. 2d 941 (E.D. Wis. 2011) ..................................................... 113<br />
Questar Capital Corp. v. Gorter, 2012 U.S. Dist. LEXIS 163380 (W.D. Ky. Nov. 14,<br />
2012). ................................................................................................................................................. 446<br />
R.Q. Constr., Inc. v. Ecolite Concrete U.S.A., Inc., 2012 WL 6091408 (S.D. Cal. Dec. 7,<br />
2012). ................................................................................................................................................. 394<br />
Rabbani v. DryShips, Inc., No. 4:12CV130 RWS, 2012 WL 5395787 (E.D. Mo. Nov. 6,<br />
2012) ................................................................................................................................... 46, 196, 286<br />
Rabin v. McClain, 2012 U.S. Dist. LEXIS 58441 (W.D. Tex. Apr. 26, 2012) ................... 352, 370<br />
Rahman v. Kid Brands Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012) ..................... 280<br />
Rahman v. Kid Brands, Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012) .................... 232<br />
Rathje v. Horlbeck Capital Mgmt., LLC, 2012 Ill. App. Unpub. LEXIS 1794 (Ill. App.<br />
Ct. 2d Dist. July 26, 2012) ............................................................................................................... 427<br />
Red River Res. v. Marine Sys., 2012 U.S. Dist. LEXIS 90959 (D. Ariz. June 29, 2012) ............ 294<br />
Redding v. Montana First Judicial Dist. Court, 365 Mont. 316, 281 P.3d 189 (2012) ................... 5<br />
Redwen v. Sino Clean Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,933 (S.D.N.Y.<br />
June 4, 2012) ..................................................................................................................................... 257<br />
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (C.A.6 Ky., 2012)170, 214, 220, 222, 408,<br />
Reuter v. Cutcliff (In re Reuter), 686 F.3d 511 (8th Cir. 2012). .................................................... 389<br />
Reyes v. WMC Mortgage Corp., No. C 11-01988 CW, 2012 WL 1067560 (N.D. Cal.<br />
Mar. 28, 2012)................................................................................................................................... 373<br />
Richman v. Goldman Sachs Grp., Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,926<br />
(S.D.N.Y. June 21, 2012) ........................................................................................................ 258, 362<br />
Robert L. Franklin Trustee of Global Liquidating Trust v. Consus Ethanol, LLC, No. 11-<br />
CV-4062-TWT, 2012 WL 3779093 (N.D. Ga. Aug. 29, 2012). ................................................... 376<br />
Robert L. McCrary v. Steifel, Nicolaus & Co. Inc.,687 F.3d 1052 (8th Cir. 2012) ....................... 59<br />
xxxviii
Rochester Laborers Pension Fund v. Monsanto Co., 2012 WL 3143914 (E.D. Mo. Aug.<br />
1, 2012) ..................................................................................................................................... 197, 292<br />
Roland v. Green, 675 F.3d 503 (5th Cir. 2012) .............................................................................. 204<br />
Rosenthal v. New York University, 482 Fed.Appx. 609 (2d Cir. 2012) .......................................... 64<br />
Ross Sinclaire & Assoc., v. Premier Senior Living, LLC, et al., 2012 WL 2501115 (N.D.<br />
Cal. June 27, 2012) ........................................................................................................................... 422<br />
Ross v. Career Educ. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,068 (N.D. Ill. Oct. 30,<br />
2012) .................................................................................................................................................. 291<br />
Ross v. Lloyds Banking Group, PLC, No. 11 Civ. 8530, 2012 WL 4891759 (S.D.N.Y.<br />
Oct. 16, 2012) .................................................................................................................. 106, 267, 275<br />
Roth ex rel. Leap Wireless Int’l, Inc. v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524<br />
(S.D.N.Y. 2012) .................................................................................................................................. 74<br />
Roth v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524 (S.D.N.Y. 2012)................................ 141<br />
RS-ANB Fund, LP v. KMS SPE LLC, 2012 WL 1288762 (D. Idaho April 16, 2012).................. 153<br />
S&S NY Holdings, Inc. v. Able Energy, Inc., 2012 U.S. Dist. LEXIS 105892 (S.D.N.Y.<br />
July 27, 2012).................................................................................................................................... 259<br />
S.E.C. v. Cuban, 798 F. Supp. 2d 783 (N.D. Tex. 2011) ............................................................... 112<br />
S.E.C. v. Delphi Corp., No. 11–2624, 2012 WL 6600324 (6 th Cir. Dec. 18, 2012) ..................... 102<br />
S.E.C. v. Ehrenkrantz King Nussbaum, Inc., No. 05 CV 4643 (E.D.N.Y. Mar. 15, 2012) .......... 105<br />
S.E.C. v. Gabelli, 653 F.3d 49 (2d Cir. 2011) ................................................................................. 110<br />
S.E.C. v. Gagnon, No. 10–CV–11891, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012) ..........2, 107<br />
S.E.C. v. Greenstone Holdings, Inc., No. 10 Civ. 1302, 2012 WL 1038570 (S.D.N.Y.<br />
Mar. 28, 2012)................................................................................................................................... 106<br />
S.E.C. v. Merkin, No. 11–23585, 2012 WL 5245561 (S.D. Fla. Oct. 3, 2012) ............................ 105<br />
S.E.C. v. Merklinger, 489 Fed. Appx. 937, 2012 WL 3064777 (6 th Cir. July 30, 2012). ................ 1<br />
S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867 (N.D. Tex. 2011)................................................. 112<br />
S.E.C. v. Morgan Keegan & Co., Inc., 678 F.3d 1233 (11 th Cir. 2012) ........................................ 103<br />
S.E.C. v. Morriss, No. 12-CV-80, 2012 WL 6822346 (E.D. Mo. Sept. 21, 2012 ............................ 3<br />
xxxix
S.E.C. v. Mowen, No. 09–CV–00786, 2012 WL 2120249 (D. Utah June 11, 2012) ....................... 4<br />
S.E.C. v. Pentagon Capital Mgmt. PLC, 844 F.Supp.2d 377 (S.D.N.Y. 2012)............................ 106<br />
S.E.C. v. Schooler, No. 12–CV–2164, --- F. Supp. 2d ---, 2012 WL 4761917 (S.D. Cal.<br />
Oct. 5, 2012).......................................................................................................................................... 1<br />
S.E.C. v. Sentinel Mgmt. Group, Inc., No. 07 C 4684, 2012 WL 1079961 (N. D. Ill. Mar.<br />
30, 2012)................................................................................................................................................ 2<br />
S.E.C. v. Shields, No. 11–CV–02121, 2012 WL 3886883 (D. Colo. Sept. 6, 2012)........................ 1<br />
S.E.C. v. Smart, 678 F.3d 850 (10 th Cir. 2012) ............................................................................... 103<br />
S.E.C. v. Wilde, No. SACV 11–0315, 2012 WL 6621747 (C.D. Cal. Dec. 17, 2012) ................. 104<br />
Safadi v. Citibank, N.A., 2012 U.S. Dist. LEXIS 142773 (N.D. Cal. Oct. 2, 2012) .................... 422<br />
Saltz v. First Frontier, L.P. 485 Fed.Appx. 46 (C.A.2 N.Y., 2012) .............................................. 169<br />
Saunders v. Principal Residential Mortgage, Inc., No. 11-cv-1817 (VLB), 2012 WL<br />
4321974 (D. Conn. Sept. 20, 2012). ................................................................................................ 367<br />
Sawant v. Ramsey, 2012 WL 3265020 (D. Conn. Aug. 9, 2012) .................................................. 189<br />
Sawyer v. Horwitz & Assocs., 2012 U.S. Dist. LEXIS 11850 (S.D. Cal. Jan. 30, 2012)............. 448<br />
Schneider v. Kingdom of Thailand, 688 F.3d 68 (2d Cir. 2012) ................................................... 414<br />
Schwarz v. Wells Fargo Advisors, LLC, 2012 PA Super 265 (Pa. Super. Ct. 2012).................... 456<br />
Scott v. ZST Digital Networks, Inc., No. CV 11-03531, 2012 WL 4459572 (C.D. Cal.<br />
Aug. 7, 2012) ............................................................................................................................. 22, 296<br />
Scottrade, Inc., FINRA Case No. 2010021776501 (May 11, 2012) ............................................. 147<br />
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D.<br />
Ariz. May 14, 2012). ....................................................................................................... 421, 433, 447<br />
Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 2012 WL 3597179 (M.D. Pa. Aug.<br />
20, 2012)............................................................................................................................................ 180<br />
SEC Police & Fire Prof’ls of Am. Ret. Fund v. Pfizer, Inc., 2012 U.S. Dist. LEXIS 16782<br />
(D.N.J. Feb. 10, 2012) ...................................................................................................................... 280<br />
SEC v. Acord, <strong>Litigation</strong> Release No. 22282A, 2012 WL 1894129 (Mar. 12, 2012) .................... 95<br />
SEC v. Adondakis, <strong>Litigation</strong> Release No. 22325, 2012 WL 1894169 (Apr. 10, 2012) ................ 96<br />
xl
SEC v. Alternative Green Technologies, Inc., 2012 U.S. Dist. LEXIS 142154 (S.D.N.Y.<br />
Sept. 24, 2012) .................................................................................................................................. 322<br />
SEC v. Apuzzo, 2012 U.S. App. LEXIS 16510 (2d Cir. Aug. 8, 2012)....... 312, 314, 324, 327, 335<br />
SEC v. Bankatlantic Bancorp, 285 F.R.D. 661 (S.D. Florida June 26, 2012). ............................. 477<br />
SEC v. BankAtlantic Bancorp, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,901 (S.D. Fla.<br />
May 29, 2012) ................................................................................................................................... 338<br />
SEC v. Bankatlantic Bancorp, Inc., 2012 WL 1936112 (S.D. Fla. May 29, 2012)............. 203, 477<br />
SEC v. Bankosky, No. 12 Civ. 1012 HB, 2012 WL 1849000 (S.D.N.Y. May 21, 2012) .............. 73<br />
SEC v. Bauer, No. 03-C-1427, 2012 WL 2217045 (E.D. Wis. June 15, 2012).............................. 83<br />
SEC v. Berlacher, No. Civ. A. 07-03800, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012) ........ 79, 393<br />
SEC v. Berrettini, No. 10-CV-01614, 2012 WL 5557993 (N.D. Ill. Nov. 15, 2012) .................... 83<br />
SEC v. Black, 2012 U.S. Dist. LEXIS 145587 (N.D. Ill. Oct. 9, 2012) ........................................ 291<br />
SEC v. Brown, 878 F. Supp. 2d 109 (D.D.C. 2012). ...................................................................... 401<br />
SEC v. Clay Cap. Mgmt., <strong>Litigation</strong> Release No. 22464, 2012 WL 3801333 (Aug. 31,<br />
2012) .................................................................................................................................................... 98<br />
SEC v. Compania Int’l Financiera S.A., et al., <strong>Litigation</strong> Release No. 22378, 2012 WL<br />
1943783 (May 29, 2012) .................................................................................................................... 97<br />
SEC v. Compania Internacional Financiera, No. 11 Civ. 4904, 2012 WL 1856491<br />
(S.D.N.Y. May 22, 2012) ................................................................................................................... 73<br />
SEC v. Cutillo, <strong>Litigation</strong> Release No. 2299, 2012 WL 189144 (Mar. 20, 2012) .......................... 95<br />
SEC v. CytoCore, Inc., <strong>Litigation</strong> Release No. 22260, 2012 SEC LEXIS 537 (Feb. 16,<br />
2012) .................................................................................................................................................... 94<br />
SEC v. Dafoitis, 874 F. Supp. 2d 870 (N.D. Cal. 2012) ................................................................. 335<br />
SEC v. Delphi Corp., No. 11-2624, 2012 WL 6600324 (6th Cir. Dec. 18, 2012).......................... 66<br />
SEC v. Dunn, <strong>Litigation</strong> Release No. 22439, 2012 WL 3224452 (Aug. 8, 2012) .......................... 98<br />
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 3096646 (D. Nev. July 30, 2012) ............. 90<br />
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 475653 (D. Nev. Feb. 14, 2012) ............... 89<br />
xli
SEC v. Ehrenkrantz King Nussbaum, Inc., 05 CV 4643 (DRH) (GRB), 2012 U.S. Dist.<br />
LEXIS 35228 (E.D.N.Y. Mar. 15, 2012) ............................................................................... 133, 316<br />
SEC v. Espuelas, 2012 U.S. Dist. LEXIS 154465 (S.D.N.Y. Oct. 26, 2012) ............................... 324<br />
SEC v. Familant, 2012 U.S. Dist. LEXIS 179007 (D.D.C. Dec. 19, 2012) ................................. 314<br />
SEC v. Flanagan, <strong>Litigation</strong> Release No. 22524, 2012 WL 5360953 (Oct. 31, 2012) .................. 99<br />
SEC v. Goble, 682 F.3d 934 (11th Cir. May 29, 2012) ................................................. 131, 143, 313<br />
SEC v. Greenstone Holdings, Inc., 2012 SEC LEXIS 3639 (S.D.N.Y. 2012) ............................. 325<br />
SEC v. Grendys, 840 F. Supp. 2d 36 (D.D.C. 2012) ...................................................................... 313<br />
SEC v. Gruss, 859 F. Supp. 2d 653 (S.D.N.Y. 2012) ..................................................................... 320<br />
SEC v. Gupta, 281 F.R.D. 169 (S.D.N.Y. 2012) ........................................................................71, 99<br />
SEC v. Hardin, <strong>Litigation</strong> Release No. 22297, 2012 WL 1894142 (Mar. 19, 2012) ..................... 95<br />
SEC v. Huff, 455 F. App’x 882 (11th Cir. 2012) ............................................................................ 242<br />
SEC v. ICP Asset Mgmt., LLC, <strong>Litigation</strong> Release No. 22477, 2012 SEC LEXIS 2848<br />
(S.D.N.Y. Sept. 10, 2012) ................................................................................................................ 135<br />
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012) .............. 287, 326, 406<br />
SEC v. Jantzen, <strong>Litigation</strong> Release No. 22273, 12012 SEC LEXIS 693 (Mar. 1, 2012) ............... 94<br />
SEC v. Juno Mother Earth Asset Mgmt., 2012 Fed. Sec. L. Rep. (CCH) 96,748<br />
(S.D.N.Y. Mar. 2, 2012) ................................................................................................................... 318<br />
SEC v. Keung, <strong>Litigation</strong> Release No. 22284, 2012 WL 1894130 (Mar. 12, 2012) ...................... 94<br />
SEC v. Khan, <strong>Litigation</strong> Release No. 22364, 2012 WL 1894207 (May 10, 2012) ........................ 97<br />
SEC v. King Chuen Tang, No. C-09-05146 JCS, 2012 WL 10522 (N.D. Cal. Jan. 3, 2012) ........ 86<br />
SEC v. Kiselak Capital Grp., LLC, 2012 WL 369450 (N.D. Tex. Feb. 3, 2012). ........................ 393<br />
SEC v. Kovzan, 2012 WL 4819011 (D. Kan. Oct. 10, 2012). ....................................................... 478<br />
SEC v. Li, Release No. 3379, <strong>Litigation</strong> Release No. 22324, 2012 WL 1894168 (Apr. 9,<br />
2012) .................................................................................................................................................... 92<br />
SEC v. LoBue, <strong>Litigation</strong> Release No. 22519, 2012 WL 5267548 (Oct. 25, 2012) ....................... 98<br />
SEC v. Longoria, <strong>Litigation</strong> Release No. 22308, 2012 WL 189153 (Mar. 27, 2012) .................... 96<br />
xlii
SEC v. Madoff, <strong>Litigation</strong> Release No. 22407, 2012 SEC LEXIS 2040 (S.D.N.Y.<br />
June 29, 2012) ................................................................................................................................... 132<br />
SEC v. McGee, --- F.Supp.2d ---, 2012 WL 4025409 (E.D. Pa. Sept. 13, 2012) ........................... 80<br />
SEC v. Morgan Keegan & Co., 678 F.3d 1233, 2012 U.S. App. LEXIS 8966 (11th Cir.<br />
2012) ......................................................................................................................................... 132, 230<br />
SEC v. Mudd, No. 11 Civ. 09202, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10,<br />
2012) ........................................................................................................................................... 53, 321<br />
SEC v. Neves, <strong>Litigation</strong> Release No. 22462, 2012 SEC LEXIS 2759 (S.D. Fla. Aug. 29,<br />
2012) .................................................................................................................................................. 137<br />
SEC v. O’Meally, No. 06 Civ, 6483, 2012 U.S. Dist. LEXIS 76072 (S.D.N.Y. May 30,<br />
2012) .................................................................................................................................................... 54<br />
SEC v. Obus, 693 F.3d 276 (2d Cir. 2012) ....................................................................................... 65<br />
SEC v. One or More Unknown Purchasers of Sec. of Global Indus., Ltd., No. 11 Civ.<br />
6500 RA, 2012 WL 5505738 (S.D.N.Y. Nov. 9, 2012) ................................................................... 78<br />
SEC v. Pentagon Capital Management, 844 F. Supp. 2d 377 (S.D.N.Y. Feb. 14, 2012) .............. 54<br />
SEC v. Perry, No. CV111309R, 2012 U.S. Dist. LEXIS 136596 (C.D. Cal., Sept. 24,<br />
2012) .................................................................................................................................................... 56<br />
SEC v. Peterson, <strong>Litigation</strong> Release No. 22404, 2012 WL 2457467 (June 28, 2012) ................... 97<br />
SEC v. Radius Capital Corp., No. 2:11-cv-116-FtM-29DNF, 2012 U.S. Dist. LEXIS<br />
26648 (M.D. Fla. Mar. 1, 2012)......................................................................................................... 57<br />
SEC v. Sells, No. C11-4941CW, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal., Aug. 10,<br />
2012) ........................................................................................................................................... 56, 336<br />
SEC v. Sentinel Management Group, No. 07 C 4684, 2012 U.S. Dist. LEXIS 57579 (N.D.<br />
Ill. Mar. 30, 2012) ............................................................................................................................... 55<br />
SEC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 57579 (N.D. Ill. Mar. 30, 2012) ...... 330<br />
SEC v. Stoker, 865 F. Supp. 2d 457 (S.D.N.Y. 2012) ...................................................................... 53<br />
SEC v. Treadway, <strong>Litigation</strong> Release No. 22251, 2012 SEC LEXIS 433 (Feb. 3, 2012)..... 93, 327<br />
SEC v. True N. Fin. Corp., No. 10-3995, 2012 U.S. Dist. LEXIS 161044 (D. Minn., Nov.<br />
9, 2012) ....................................................................................................................................... 55, 332<br />
SEC v. Wealth Mgmt., LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,814 (E.D. Wis. Apr. 24,<br />
2012) .................................................................................................................................................. 332<br />
xliii
SEC v. Wilde, 2012 U.S. Dist. LEXIS 183252 (C.D. Cal. Dec. 17, 2012) ................................... 335<br />
SEC v. Woodruff, <strong>Litigation</strong> Release No. 22271, 2012 SEC LEXIS 664 (Feb. 28, 2012) ............ 94<br />
SEC v. Wyly, 860 F. Supp. 2d 275 (S.D.N.Y. 2012). ..................................................................... 367<br />
Sec. Exch. Comm’n v. Kovzan, 807 F. Supp. 2d 1024 (D. Kan. 2011) ......................................... 115<br />
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 477 B.R. 351 (Bankr.<br />
S.D.N.Y. June 20, 2012) .................................................................................................................. 257<br />
Sec. Police and Fire Prof’l of Am. Ret. v. Pfizer, Inc., No. 10-CV-3105 MCA, 2012 WL<br />
458431 (D.N.J. Feb. 10, 2012)........................................................................................................... 79<br />
Securities and Exchange Commission, In the Matter of Michael Bresner, Ralph Calabro,<br />
Jason Konner, and Dimtrios Koustoubos, Administrative Proceeding File No. 3-15015,<br />
December 18, 2012 ............................................................................................................................. 59<br />
Securities and Exchange Commission, v. Wealth Mgmt., 2012 WL 1424683 (E.D. Wis.<br />
Apr. 24, 2012) ..................................................................................................................................... 61<br />
Security Police and Fire Professionals of America Retirement Fund v. Pfizer, Inc. ................... 152<br />
Seymour Topple v. Steven Andrew Jennings, 2012 WL 1898052 (FINRA May 16, 2012) .......... 62<br />
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012) .. 215, 224, 231<br />
Shah v. GenVec, Inc., 2012 WL 1478792 (D. Md. Apr. 26, 2012) ............................................... 180<br />
Shenk v. Karmazin, 868 F. Supp. 2d 299 (S.D.N.Y. 2012) ............................................................ 106<br />
Sher v. Goldman Sachs, 2012 U.S. Dist. LEXIS 56596 (D. Md. Apr. 19, 2012)......................... 433<br />
Shields v. Murdoch, 2012 U.S. LEXIS 133453 (S.D.N.Y. Sept. 18, 2012).................................. 117<br />
Short v. Conn. Cmty. Bank, N.A., 2012 U.S. Dist. LEXIS 42617 (D. Conn. Mar. 28, 2012) ...... 316<br />
Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012) 423, 449<br />
SMA Irrevocable Trust v. R. Capital Advisors, LLC, No. 4:11CV00697 ERW, 2012 WL<br />
5194332 (E.D. Mo. Oct 19, 2012) ..................................................................................................... 46<br />
Smilovits v. First Solar, Inc., 2012 WL 6574410 (D.Ariz.,2012) ................................ 153, 184, 295<br />
Smith ex rel. Apollo Group, Inc. v. Sperling, No. CV 11-722 PHX JAT, 2012 WL<br />
3064261 (D. Ariz. July 26, 2012) ...................................................................................................... 84<br />
Smith v. Robbins & Myers, Inc., 2012 U.S. Dist. LEXIS 164868 (S.D. Ohio Nov. 19,<br />
2012) .................................................................................................................................................. 123<br />
xliv
Solow v. Citigroup, Inc., 2012 U.S. Dist. LEXIS 70022 (S.D.N.Y. May 18, 2012) .................... 257<br />
Soloway v Morgan Stanley Smith Barney, LLC, 34 Misc. 3d 1217A (N.Y. Sup. Ct. 2012)........ 429<br />
Solymar Inv., Ltd., v. Banco Santander S.A., 672 F.3d 981 (11th Cir. 2012) ............................... 417<br />
Son Ly v. Sonlin, Inc., No. 12-CV-1004 (EGS), 2012 WL 6561557 (D.D.C. Dec. 17,<br />
2012). ................................................................................................................................................. 365<br />
Space Coast Credit Union v. Barclays Capital, Inc., 2012 U.S. Dist. LEXIS 38488<br />
(S.D.N.Y. Mar. 19, 2012) ................................................................................................................. 252<br />
Spungin v. GenSpring Family Offices, LLC, 2012 U.S. Dist. LEXIS 113962 (S.D. Fla.<br />
May 25, 2012). .................................................................................................................................. 454<br />
St. Louis Police Retirement System v. Clinton H. Severson, 2012 U.S. Dist. LEXIS<br />
152392 (N.D. Cal., Oct. 23, 2012)................................................................................................... 128<br />
Stanchart Secs. Int'l v. Gavaldon, 2012 U.S. Dist. LEXIS 163631 (S.D. Cal. Nov. 9,<br />
2012). ................................................................................................................................................. 449<br />
Stanchart Secs. Int'l, Inc. v. Galvadon, 2012 U.S. Dist. LEXIS 153046 (S.D. Cal. Oct. 24,<br />
2012). ................................................................................................................................................. 449<br />
Star Int’l Co. v. Fed. Reserve Bank of N.Y., 2012 U.S. Dist. LEXIS 165289 (S.D.N.Y.<br />
Nov. 19, 2012) .................................................................................................................................. 324<br />
State v. Marsh & McLennan Companies, Inc., 2012 WL 6212518 (Or. Dec. 13, 2012) ............. 217<br />
Steamfitters Local 449 Pension Fund v. Cent. European Dist. Corp., 2012 WL 3638629<br />
(D.N.J. Aug. 22, 2012) ..................................................................................................................... 179<br />
Steinhardt v. Howard-Anderson, No. C. A. 5878-VCL, 2012 WL 29340 (Del. Ch. Jan. 6,<br />
2012) .................................................................................................................................................. 100<br />
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012) .................................................. 210, 392<br />
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012). .......................................................... 392<br />
Stichting Pensioenfonds ABP v. Countrywide Financial Corp., 802 F. Supp. 2d 1125<br />
(S.D.N.Y. 2011) .............................................................................................. 112, 194, 211, 282, 412<br />
Stone v. Agnico-Eagle Mines Ltd., 280 F.R.D. 142 (S.D.N.Y. 2012) ........................................... 174<br />
Stone v. Bear, Stearns & Co., 872 F. Supp. 2d 435 (E.D. Pa. 2012). ........................................... 444<br />
Stoody-Broser v. Bank of Am., 2012 WL 1657187 (N.D. Cal. May 10, 2012) ............................ 213<br />
Stout St. Funding LLC v. Johnson, 873 F. Supp. 2d 632 (E.D. Pa. 2012) ........................... 233, 357<br />
xlv
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9 th Cir. 2012)......... 102, 378, 383, 401<br />
Stratton v. XTO Energy Inc., 2012 WL 407385 (Tex. App. Feb. 9, 2012). .................................. 396<br />
Stuckey v. Online Res. Corp., ---F.Supp.2d ---, 2012 WL 5467522 (S.D. Ohio Nov. 9,<br />
2012) .................................................................................................................................................... 82<br />
Sunrise Trust v. Morgan Stanley & Co., 2012 U.S. Dist. LEXIS 148485 (D. Nev. Oct. 16,<br />
2012). ................................................................................................................................................. 450<br />
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 1551703 (S.D.<br />
Tex. Apr. 30, 2012) ............................................................................................................................ 81<br />
Susman v Commerzbank Capital Mkts. Corp., 95 A.D.3d 589 (N.Y. App. Div. 1st Dep't<br />
2012) .................................................................................................................................................. 431<br />
Swanson v. Weil, 2012 US. Dist. LEXIS 138182 (D. Colo. Sept. 26, 2012) ................................ 122<br />
Szulik v. TAG Virgin Islands, Inc., 858 F. Supp. 2d 532 (E.D.N.C. 2012). .................................. 406<br />
Szymborski v. Ormat Tech., Inc., 2012 WL 4960098 (D. Nev. Oct. 16, 2012). ........................... 394<br />
TAGG Mgmt. v. Lehman, 842 F. Supp. 2d 575 (S.D.N.Y. 2012). ................................................. 368<br />
Talley v. Mann, No. CV 11-05003, 2012 WL 946990 (C.D. Cal. Feb. 14, 2012) ......................... 85<br />
Tapang v. Wells Fargo Bank, N.A., No. CV-12-02183-LHK, 2012 WL 3778965 (N.D.<br />
Cal. Aug. 30, 2012). ......................................................................................................................... 374<br />
Taylor v. Cmty. Bankers Sec., LLC, 2012 U.S. Dist. LEXIS 179266 (S.D. Tex. Dec. 19,<br />
2012) .................................................................................................................................................. 420<br />
Taylor v. Kissner, No. 11-1184, 2012 WL 4461528 (D. Del. Sept. 27, 2012) ............................... 79<br />
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 282 F.R.D. 216<br />
(D. Ariz. 2012) .................................................................................................................................. 153<br />
Thomas v. Westlake, 204 Cal. App. 4th 605 (Cal. App. 4th Dist. 2012)....................................... 428<br />
Thorpe v. Ameritas Inv. Corp., 2012 U.S. Dist. LEXIS 134049 (E.D.N.C. Sept. 19, 2012)234, 285<br />
Thrivent Fin. for Lutherans v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71376<br />
(C.D. Cal. Feb. 17, 2012) ................................................................................................................. 334<br />
Tim Haug v. VSR Fin. Servs. Inc., 2012 WL 259180 (FINRA Jan. 17, 2012) ............................... 62<br />
Tong v. Dunn, 2012 NCBC 16 (N.C. Super. Ct. 2012) .................................................................. 347<br />
xlvi
Touchstone Grp., LLC v. Rink, 2012 Fed. Sec. L. Rep. (CCH) 97,241 (D. Colo. Dec. 21,<br />
2012) .................................................................................................................................................. 306<br />
Touchtone Group, LLC v. Rink, 2012 WL 6652850 (D.Colo. 2012) ............................................ 154<br />
Tsereteli v. Residential Asset Securitization Trust, 283 F.R.D. 199 (S.D.N.Y. 2012) ................... 15<br />
Tucker v. Soy Capital Bank & Trust Co., 974 N.E.2d 820 (7th Cir. 2012) .................................. 349<br />
Tuminello v. Richards, 2012 U.S. Dist. LEXIS 30827 (W.D. Wash. Mar. 8, 2012). .................. 451<br />
Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490 (S.C. Ct. App.<br />
July 11, 2012).................................................................................................................................... 426<br />
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9,<br />
2012) ......................................................................................................................................... 414, 438<br />
U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., 2012 WL 3100778 (N.D. Tex. July 31,<br />
2012). ................................................................................................................................................. 463<br />
U.S. Commodity Futures Trading Comm’n v. Sarvey, 2012 U.S. Dist. LEXIS 16881<br />
(N.D. Ill. Feb. 10, 2012) ................................................................................................................... 329<br />
U.S. v. Contorinis, 692 F.3d 136 (2d Cir. 2012) .........................................................................64, 69<br />
U.S. v. Fleishman, 2012 U.S. Dist. LEXIS 65165 (S.D.N.Y. May 7, 2012) ................................ 350<br />
U.S. v. Gupta, 2012 WL 1066804 (S.D.N.Y. Mar. 27, 2012) ......................................................... 72<br />
U.S. v. Gupta, 2012 WL 1066817 (S.D.N.Y. Mar. 27, 2012). ........................................................ 71<br />
U.S. v. Gupta, 848 F. Supp. 2d 491 (S.D.N.Y. 2012) ................................................................71, 77<br />
U.S. v. Hagen, 468 F. App’x 373 (4th Cir. 2012) ........................................................................... 348<br />
U.S. v. McGee, --- F.Supp.2d ---, 2012 WL 4025342 (E.D. Pa. Sept. 13, 2012) ........................... 80<br />
U.S. v. Ovist, No. 11-CV-00076-BR, 2012 WL 5830296 (D. Or. Nov. 16, 2012)......................... 90<br />
U.S. v. Rajaratnam, No. 09 CR 1184 RJH, 2012 WL 362031 (S.D.N.Y. Jan. 31, 2012)69, 99, 142<br />
U.S. v. Sklena, 692 F.3d 725 (7th Cir. 2012) .................................................................................. 349<br />
U.S. v. Skowron III, 839 F. Supp. 2d 740 (S.D.N.Y. 2012) ............................................................. 70<br />
U.S. v. Sutton, 2012 U.S. Dist. LEXIS 75103 (E.D. Mo. Jan. 17, 2012) ...................................... 353<br />
U.S. v. Whitman, No. 12 CR 125 JSR, 2012 WL 5505080 (S.D.N.Y. Nov. 14, 2012).................. 78<br />
xlvii
UBS Fin. Servs. v. Carilion Clinic, 2012 U.S. Dist. LEXIS 106120 (E.D. Va. July 30,<br />
2012). ................................................................................................................................................. 445<br />
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31,<br />
2012). ........................................................................................................................................ 434, 447<br />
Underland v. Alter, No. 10-3621, 2012 WL 2912330 (E.D. Pa. July 16, 2012) ................... 43, 284<br />
Union Asset Mgmt. Holding A.G. v. Dell, Inc., 669 F.3d 632 (5th Cir. 2012). ............................ 388<br />
United Food and Commercial Workers Union, 281 F.R.D. 641 (W.D. Okla. 2012)..................... 23<br />
United States v. Behrens, 644 F.3d 754 (8th Cir. 2011) ................................................................ 111<br />
United States v. Johnson, 413 Fed. App’x 151 (11th Cir. 2011) ................................................... 111<br />
Urman v. Novelos Therapeutics Inc., 867 F. Supp. 2d 190 (D. Mass. 2012) ............................... 244<br />
UTHE Tech. Corp. v. Aetrium, Inc., 2012 U.S. Dist. LEXIS 139538 (N.D. Cal. Sept. 27,<br />
2012). ................................................................................................................................................. 434<br />
Uthe Tech. Corp. v. Aetrium, Inc., No. C 95-02377 WHA, 2012 WL 4470536 (N.D. Cal.<br />
Sept. 27, 2012). ................................................................................................................................. 374<br />
Valley Forge Renaissance, L.P. v. Greystone Servicing Corp., Inc., No. 09-CV-00131,<br />
2012 WL 1340802 (S.D. Ind. Apr. 18, 2012). .................................................................................... 2<br />
Velecela v. WMC Mortgage Corp., No. 3:11-cv-1720 AWT, 2012 WL 5868125 (D.<br />
Conn. Nov. 19, 2012). ...................................................................................................................... 367<br />
Viking Global Equities LP et al. v. Porsche Automobil Holding SE et al., No. 650435/11,<br />
2012 WL 6699216 (N.Y. App. Div., 1st Dep't Dec. 27, 2012). .................................................... 474<br />
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 4955 (N.D. Ill. Jan. 17,<br />
2012). ................................................................................................................................................. 446<br />
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 74288 (N.D. Ill. May 30,<br />
2012) .................................................................................................................................................. 420<br />
Wachovia Bank Nat’l Assoc. v. Beane, 725 S.E.2d 715 (S.C. App. 2012). .................................. 386<br />
Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012). ...................................... 388, 436, 536<br />
Wade v. WellPoint, Inc., ---F.Supp.2d ---, 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012). .. 83, 164<br />
Wallace v. IntraLinks Holdings, Inc., 2012 WL 1108572 (S.D.N.Y. Apr. 3, 2012) .................... 176<br />
Warchol v. Green Mountain Coffee Roasters, Inc., No. 10 Civ. 227, 2012 WL 256099<br />
(D.Vt. Jan. 27, 2012) ......................................................................................................... 78, 151, 279<br />
xlviii
Warwick v. Morgan Keenan & Co., Inc., No. 10-02682, 2012 WL 689087 (FINRA Feb.<br />
23, 2012).............................................................................................................................................. 25<br />
Washtenaw Cnty. Employees’ Ret. Sys. v. Princeton Review, Inc., No. Civ. 11-11359-<br />
RGS, 2012 WL 727125 (D. Mass. Mar. 6, 2012) ............................................................ 28, 166, 200<br />
Waterford Inv. Serv., Inc. v. Lewis Bosco, 682 F.3d 348 (4th Cir. 2012) ............ 240, 414, 439, 536<br />
Waveland Capital Partners, LLC v. Tommerup, 840 F. Supp. 2d 1243 (D. Mont. 2012). .......... 450<br />
Wealth Rescue Strategies, Inc. v. Thompson, 2012 U.S. Dist. LEXIS 157355 (S.D. Tex.<br />
Nov. 2, 2012). ................................................................................................................................... 445<br />
Wehrs v. Benson York Group, Inc., No. 07 C 3312, 2011 WL 4435609 (N.D. Ill. Sept. 23,<br />
2011) .................................................................................................................................................. 113<br />
Weinstein v. McClendon, 2012 WL 2994291 (W.D. Okla. July 20, 2012)................................... 188<br />
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012). ................... 436, 444<br />
Westley v. Oclaro, Inc., 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012) ....................................... 199<br />
Westley v. Oclaro, Inc., ---F.Supp.2d ---, 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012) ............ 88<br />
White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19,<br />
2012) ......................................................................................................................................... 423, 448<br />
White Pacific Securities, Inc. v. Mattinen, 2012 WL 952232 (N.D. Cal. March 19, 2012). ....... 538<br />
Wiand v. Lee, 2012 WL 6923664 (M.D. Fla. Dec. 13. 2012). ....................................................... 411<br />
Wiederhorn v. Merkin, 952 N.Y.S.2d 478 (N.Y. App. Div. 2012). .............................................. 399<br />
Wierzba v. E*Trade Fin. LLC, 471 Fed. Appx. 709 (9th Cir. 2012)............................................. 442<br />
Wilson v. Wells Fargo Advisors, LLC, 2012 WL 5240815 (D. Del. Sept. 25, 2012) .................. 210<br />
Winifred B. Loria et. al. v. Elmer Wayne Bullis Arnold Dorman Next Fin. Group, Inc.,<br />
2012 WL 1795777 (FINRA May 7, 2012)........................................................................................ 62<br />
Wolfe v. AspenBio Pharma, Inc., 2012 U.S. Dist. LEXIS 130490 (D. Colo. Sept. 13,<br />
2012) .................................................................................................................................................. 306<br />
Wolfe v. Aspenbio Pharma, Inc., 2012 WL 4040344 (D. Colo. Sept. 13, 2012) .......................... 155<br />
Wolfe v. Bellos, No. 11–CV–02015, 2012 WL 652090 (N.D. Tex. Feb. 28, 2012) ......................... 3<br />
Wootten v. Fisher Invs., 688 F.3d 487 (8 th Cir. 2012). .......................................................... 431, 440<br />
xlix
Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012) .......................... 86, 198, 300<br />
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012) ............................................................... 150, 219<br />
Wu v. Stomber, 883 F. Supp. 2d 233 (D.D.C. 2012). ..................................................................... 105<br />
XL Specialty Ins. Co. v. Level Global Investors, L.P., 874 F. Supp. 2d 263 (S.D.N.Y.<br />
2012) .................................................................................................................................................... 74<br />
Yannotti v. U.S., 475 Fed. Appx. 784 (2d Cir. 2012). .................................................................... 364<br />
Yary v. Voigt, No. 11-694 (JNE/FLN), 2011 WL 6791003 (D. Minn. Dec. 27, 2011) ................ 113<br />
Yenidunya Invs., Ltd. v. Magnum Seeds, Inc., 2012 WL 538263 (E.D. Cal. Feb. 17, 2012). ...... 394<br />
Young v. Pacific Biosciences of Cal., Inc., Fed. Sec. L. Rep. P 96,800, 2012 WL 851509<br />
(N.D.Cal. Mar. 13, 2012). ................................................................................................................ 472<br />
Zazzali v. Hirschler Fleischer, P.C., 2012 U.S. Dist. LEXIS 118090 (D. Del. Aug. 21,<br />
2012) ......................................................................................................................................... 326, 370<br />
Zazzali v. Swenson, 852 F.Supp.2d 438 (D. Del. 2012). ................................................................ 369<br />
l
RESEARCH CONTRIBUTIONS BY FIRM<br />
Miller Canfield,<br />
Paddock & Stone I. SECURITIES LITIGATION............................................................<br />
A. Definition of a Security ........................................................................<br />
Latham & Watkins B. Liabilities under the Securities Act of 1933........................................<br />
1. Section 11 .................................................................................<br />
Vinson &<br />
Elkins <strong>LLP</strong> B. Liabilities under the Securities Act of 1933........................................<br />
2. Section 12 .................................................................................<br />
Foley & Lardner B. Liabilities under the Securities Act of 1933........................................<br />
3. Section 17 .................................................................................<br />
<strong>Greenberg</strong> <strong>Traurig</strong> C. Liabilities under the Securities Exchange Act of 1934 ......................<br />
1. Section 10(b) and Rule 10b-5 ..................................................<br />
a. Churning .......................................................................<br />
b. Suitability .....................................................................<br />
Loeb & Loeb c. Insider Trading .............................................................<br />
Miller Canfield,<br />
Paddock & Stone C. Liabilities under the Securities Exchange Act of 1934 ......................<br />
d. Misrepresentations/Omissions ....................................<br />
<strong>Greenberg</strong> <strong>Traurig</strong> e. Standing ........................................................................<br />
f. Affirmative Defenses...................................................<br />
Foley & Lardner C. Liabilities under the Securities Exchange Act of 1934 ......................<br />
2. Section 14 .................................................................................<br />
3. Section 15(c) .............................................................................<br />
i
4. Section 16(b).............................................................................<br />
5. Section 17 .................................................................................<br />
6. Section 18 .................................................................................<br />
7. Section 19(b).............................................................................<br />
8. Margin Violations ....................................................................<br />
<strong>Greenberg</strong> <strong>Traurig</strong> D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995 ........<br />
1. Pleading ....................................................................................<br />
Neal Gerber &<br />
Eisenberg <strong>LLP</strong> D. Liabilities under the Securities <strong>Litigation</strong> Reform Act of 1995<br />
2. Appointment of Lead Plaintiff/Class Counsel........................<br />
3. Safe Harbor/Bespeaks Caution Defense .................................<br />
E. Liabilities under the Uniform Standards Act of 1999 ........................<br />
Miller Nash <strong>LLP</strong> F. Liabilities under State Statutory and Common Law ..........................<br />
1. Blue Sky Laws..........................................................................<br />
2. Consumer Protection and Other Statutes ................................<br />
3. Common Law Fraud ................................................................<br />
4. Breach of Fiduciary Duty and Other<br />
Common Law Claims ..............................................................<br />
Keesal, Young<br />
& Logan G. Liabilities Involving Clearing <strong>Broker</strong>s ................................................<br />
H. Secondary Liability...............................................................................<br />
1. Respondeat Superior ................................................................<br />
2. Control Person ..........................................................................<br />
3. Aiding & Abetting....................................................................<br />
4. Conspiracy ................................................................................<br />
5. Failure to Supervise..................................................................<br />
Loeb & Loeb I. Private Rights of Action for Violations of SRO Rules ......................<br />
J. RICO......................................................................................................<br />
ii
<strong>Greenberg</strong> <strong>Traurig</strong> K. Damages and Other Relief in Private Actions ....................................<br />
1. Damages as Element of Claim ................................................<br />
2. Measure of Damages ................................................................<br />
Maynard Cooper & Gale 3. Punitive Damages .....................................................................<br />
Latham & Watkins K. Damages and Other Relief in Private Actions ....................................<br />
4. Attorneys’ Fees and Costs .......................................................<br />
L. Contribution, Indemnification..............................................................<br />
M. Statute of Limitations ...........................................................................<br />
1. Federal Securities Claims ........................................................<br />
2. State Securities Claims ............................................................<br />
3. RICO .........................................................................................<br />
4. SRO Rules ................................................................................<br />
Bressler, Amery<br />
& Ross N. Arbitration .............................................................................................<br />
1. Scope .........................................................................................<br />
2. Eligibility/Limitations ..............................................................<br />
3. Jurisdiction/Estoppel ................................................................<br />
4. Motions to Vacate or to Enjoin ...............................................<br />
a. Punitive Damages ........................................................<br />
b. Attorneys’ Fees ............................................................<br />
c. Other .............................................................................<br />
<strong>Greenberg</strong> <strong>Traurig</strong> O. Practice and Procedures........................................................................<br />
1. Rule 9(b) of the Fed. R. Civ. P. ...............................................<br />
2. Rule 11 of the Fed. R. Civ. P. ..................................................<br />
3. Rule 23 of the Fed. R. Civ. P. ..................................................<br />
4. Venue, Pendent Jurisdiction Removal<br />
and Other Issues .......................................................................<br />
5. Discovery ..................................................................................<br />
Foley & Lardner P. Failure to Supervise ..............................................................................<br />
1. SEC Enforcement Actions .......................................................<br />
2. NASDR Enforcement Actions ................................................<br />
iii
3. NYSE Enforcement Actions ....................................................<br />
Bingham McCutchen Q.<br />
S.E.C. <strong>Litigation</strong> Affecting <strong>Broker</strong>-<strong>Dealer</strong>s........................................<br />
1. Direct S.E.C. Proceedings .......................................................<br />
a. Sales Practice Violation...............................................<br />
b. Unfair/Fraudulent Markups or Commissions ............<br />
c. Other Fraudulent Practices ..........................................<br />
(i) Misappropriation .............................................<br />
(ii) Misrepresentation ............................................<br />
(iii) Falsification of Documents .............................<br />
(iv)<br />
Failure to Maintain Accurate Books<br />
and Records .....................................................<br />
d. Regulation T Violations ..............................................<br />
e. Trading Practice Violations.........................................<br />
(i) Insider Trading ................................................<br />
(ii) Market Manipulation.......................................<br />
(iii) Securities Offering Violations ........................<br />
f. Failure to Supervise .....................................................<br />
g. Failure to Honor Arbitration Award/<br />
Failure to Pay Fines and Costs/Failure<br />
to Comply with Sanctions Imposed ............................<br />
h. Procedural Issues .........................................................<br />
(i) Jurisdiction and Time Bars .............................<br />
(ii) Standard of Review .........................................<br />
(iii) Due Process .....................................................<br />
(iv) Prior Disciplinary Histories ............................<br />
(v) Selective Prosecution ......................................<br />
(vi) Sanctions ..........................................................<br />
i. Registration Violations ................................................<br />
Bingham McCutchen Q.<br />
S.E.C. <strong>Litigation</strong> Affecting <strong>Broker</strong>-<strong>Dealer</strong>s........................................<br />
j. Miscellaneous ..............................................................<br />
2. S.E.C. Review of SRO Proceedings .......................................<br />
a. Sales Practice Violations .............................................<br />
(i) Churning ..........................................................<br />
(ii) Suitability .........................................................<br />
(iii) Unauthorized Trading .....................................<br />
b. Unfair/Fraudulent Markups or Commissions ............<br />
c. Other Fraudulent Practices ..........................................<br />
(i) Misrepresentation ............................................<br />
(ii) Falsification of Documents .............................<br />
iv
(iii) Failure to Maintain Accurate Books<br />
and Records .....................................................<br />
d. Financial Responsibility Violations............................<br />
(i) Segregation of Customer Funds .....................<br />
(ii) Regulations T Violations ................................<br />
e. Trading Practice Violations/Market<br />
Manipulation ................................................................<br />
f. Failure to Supervise .....................................................<br />
g. Registration Violation .................................................<br />
h. Failure to Cooperate with NASD<br />
Investigation/Failure to Comply with<br />
NASD Requests for Financial Information ................<br />
i. Failure to Honor Arbitration Award/<br />
Failure to Pay Fines and Costs/Failure to Comply<br />
with Sanctions Imposed...............................................<br />
j. Procedural Issues .........................................................<br />
(i) Evidence...........................................................<br />
(ii) Due Process .....................................................<br />
(iii) Jurisdiction and Time Bars .............................<br />
(iv) Discovery .........................................................<br />
(v) Sanctions ..........................................................<br />
(vi) Right to Counsel ..............................................<br />
k. Statutory Disqualification ...........................................<br />
l. Miscellaneous ..............................................................<br />
Stradley Ronon<br />
Stevens & Young R. <strong>Broker</strong>-<strong>Dealer</strong> Employment <strong>Litigation</strong> and Arbitration .....................<br />
v